NOC - Northrop Grumman Corporation

Operator: Good day, ladies and gentlemen. And welcome to Northrop Grumman's Third Quarter 2025 Conference Call. Today's call is being recorded. My name is Bella, and I will be your conference operator today. I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Bella, and good morning, everyone, and welcome to Northrop Grumman's third quarter 2025 conference call. Before we start, matters discussed on today's call, including guidance, and outlooks for 2025 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures, that are reconciled to our GAAP results in our earnings release. In addition, we will refer to a presentation that is posted to our Investor Relations website. On the call today are Kathy Warden, our Chair, CEO, and President, and Ken Crews, our CFO. At this time, I would like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone and thank you for joining our call. Disciplined execution of our business strategy has continued to position us well as global defense demand grows and our customers transform the way they acquire capability. We continue to prioritize providing technology leadership to our customers through innovation in both the way we do business and the capabilities we deliver. In doing so, we are building a strong backlog of future business. We are also performing well on our current programs building the capacity for sustainable growth and transforming our operations by embracing digital technologies to deliver with speed, quality, and affordability. The Northrop Grumman team delivered another strong quarter of performance amidst a dynamic global environment. We achieved mid-single-digit growth, expanded our segment operating margin, and grew free cash flow year over year. These results are aligned to our long-term financial outlook. The investments we have been making in capacity and capability over the last six years enable us to deliver with urgency against our customers' highest priority. In fact, we achieved an exceptionally strong book to bill of 1.17 in the quarter. Our organic growth rate was 5% year over year and our international growth rate was 32%. It is also worth noting that apart from our space segment, where we continue to have a challenging compare related to the wind down of two large programs, revenue growth was approximately 9%. Despite strong growth in the quarter, we are revising our full-year revenue guidance down due to delayed timing on certain awards and programs. In addition, the team delivered another outstanding quarter of operating performance. Segment operating margin increased to 12.3% in Q3 which drove a 10% year over year increase in earnings per share. We also increased our free cash flow by 72% year over year and are on track to meet our full-year guidance. In the quarter, we made significant strides across multiple programs to position our company for the future. Last month, the second B-21 aircraft entered flight test. Another significant milestone for the program. As we continue to gain momentum. This starts a new phase of the test program, transitioning from general flight performance evaluation to integrating weapons and mission systems. Our testing campaign also involves multiple B-21 aircraft undergoing ground tests prior to flying. Which is validating performance and minimizing risks. With the progress we've made, we remain on track to receive the LRIP Lot three and Lot five Advanced Procurement Awards later this year. We continue discussions with the Air Force on the framework for an agreement to accelerate the B-21 production rate. If an agreement is reached, as previously disclosed, we expect to deploy additional investment to achieve the increased rate with the opportunity to earn improved returns. We've also made important progress on missile defense programs. That can support emerging requirements. In the quarter, we received a multibillion-dollar extension on the ground-based Midcourse Defense Weapon Systems contract. This contract award extends our period of performance through 2030 to provide new GMD capability. GWS is an integrated system designed to protect the U.S. from long-range ballistic missile threats. System enhancements include integrating the next-generation interceptor into the GMD system, updating launch equipment, and advancing the communication capabilities between the GWS and the interceptor fleet. In addition, IBCS continues to be an effective and ready-now solution to meet the global air and missile defense mission. In this quarter, IBCS successfully completed live fire test events for both Poland and the U.S. Army customers. Continuing its record of strong performance in operational tests, with these latest events, IBCS is now 32 for 32 in successful flight tests. We are also advancing the capability to introduce cloud and mobile technology into IBCS. As well as enhanced artificial intelligence. We have demonstrated our ability to rapidly adapt to changing mission requirements adding new operations capabilities through software in a matter of hours to effectively defeat evolving threats. I have previously outlined the investments we've made in solid rocket motor capacity and capabilities over the last several years. Leveraging those investments in the quarter our Gen63 XL rocket boosters played a crucial role in powering a ULA Vulcan rocket that delivered the third batch of Amazon Kuiper satellites to orbit. With additional launches in backlog, the Kuiper program is poised to be a key growth driver for the company going forward. Additionally, we've self-funded investments in tactical solid rocket motor capabilities that have enabled us to pursue and win second source opportunities. Recently, we were selected by the Navy as a second supplier for the SM-6 missile. This is one of several initiatives including the 21 inches motor award that we discussed on our last call that we've undertaken to enhance our SRM competitiveness and broaden our market presence. There are many notable accomplishments from the quarter, but let me now take a step back for a moment. And talk about the transformation that is underway in the Department of War and how they acquire capability and what they seek from an industry partner like Northrop Grumman. I noted earlier that we are innovating. Both in the capabilities we deliver and the ways we work. We are bringing proposals forward to accelerate our program. Embrace new technology, and partner more effectively. We also continue to invest in American factories and workers where we design and build the most advanced systems and technologies in support of our nation's warfighters. Over the past two years, we've allocated over 4% of sales towards capital expenditures, well above industry averages. This investment is essential in providing the capacity to meet demand for next-generation aircraft capabilities, ramping up production in munitions and propulsion, laying the foundation for significant growth in microelectronics, and expanding production facilities to deliver hundreds of satellites and aircraft. We have also invested over $2 billion in the infrastructure and development of our enterprise-wide digital ecosystem. That continues to yield phenomenal results. As we test and prove that digital models have extremely high correlation with the physical products we are delivering. This is game-changing for the way we design, build and produce our products. It opens paths for more affordable solutions for our customers and more predictable and improved returns for our shareholders. And as we look even further over the horizon to five or ten years into the future and beyond, our team of world-class engineers is undertaking research and development and pushing technology boundaries today that will support our competitiveness tomorrow. Over the past two years, we've invested over $2.1 billion in IRAD to maintain our technology leadership and for continuous innovation to disrupt the market and ourselves with the objective of maintaining long-term sustainable advantage for our warfighters and policymakers. As I mentioned earlier, we are exploring creative ways to bring solutions to market faster, and focusing on priority areas such as the development and fielding of multifunction sensors, new and innovative ways to incorporate AI into our solutions, and developing fielding new smarter weapon systems that bring unmatched superiority on the battlefield. To name just a few. The themes we are seeing in the U.S. are also true in the international market. Our allies are committed to modernizing their armed forces and investing in deterrent capabilities. In the current geopolitical environment, has increased the urgency for them to act now. This is being reflected in a significant increase in defense spending that is expected to carry well into the next decade. Allied nations are prioritizing investments in air and missile defense, ground-based airborne ISR, and other advanced weapon systems to enhance their ability to deter, and defend against conflict. This growing demand presents substantial opportunities for our company. And we are well positioned to deliver solutions that meet the evolving needs of our customers worldwide. These factors contributed to our international sales growing 20%, year to date. Before I turn to 2026, let me address the U.S. Government shutdown. It is unclear how long it might persist but we are hopeful it will be resolved in the near term. Assuming it is, we do not anticipate any significant impact on our financial results. In the meantime, we remain focused on executing our programs and delivering on our commitments. Looking longer term, there continues to be strong bipartisan support for national security priorities with robust levels of investment provided through reconciliation, and being considered for FY 2026 appropriations. We believe this continued commitment to funding will result in a long tail of demand as resources are allocated and invested into the industrial base. Our confidence in these underlying trends reaffirms our outlook and positions us well for sustained growth. As we look ahead to the New Year, I'd like to take a moment to provide you with some color on how we're thinking about 2026. We expect mid-single-digit organic sales growth. Supported by growth in all four of our segments. This top-line growth will in turn enable us to also grow segment operating income. We expect a segment OM rate in the low to mid 11% range. Lastly, as we look at cash, we are reaffirming our existing outlook range for '26 free cash flow of $3.1 billion to $3.5 billion. I'd note that these estimates are not inclusive of a potential win on SAXX or an acceleration of the B-21 production rate. And as usual, we plan to provide formal guidance during our Q4 earnings call in January. In summary, I'd like to emphasize our unwavering commitment to our technology-focused business strategy. Which continues to drive our profitable growth. We're experiencing an unprecedented demand environment and our capital deployment strategy is enabling us to meet this demand. And prepare us for opportunities in the future. As we move forward, our primary focus remains disciplined execution of our strategy, and creating lasting value for both our customers and our shareholders. So now let me hand it over to Ken to provide more detail on the quarter's financial results. Ken Crews: Thank you, Kathy, and good morning, everyone. As you just heard from Kathy, we delivered another strong quarter of financial performance. Let's begin on Slide four, which shows our top-line results for the quarter. Third-quarter sales were $10.4 billion, up 4% compared to the prior year. And up 5% on an organic basis. We continue to expect further acceleration in Q4 with all segments returning to growth, both sequentially and on a year-over-year comparison. Aeronautics generated third-quarter sales of $3.1 billion, up 6% compared to the prior year. Higher sales were driven by the ramp on Takimo and higher volume on the F-35 program. Partially offset by lower sales on FA-18 as the program winds down. Sales at DS were exceptionally strong in Q3, accelerating to nearly $2.1 billion. Sales were higher across the DS portfolio, including on ammunition and weapons programs, IBCS, and Sentinel. In total, DS sales grew by 14% compared to Q3 of last year, and by 19% organically. Mission Systems continues to deliver unmatched technological innovation at a rapid rate. This is reflected by further growth on restricted microelectronic programs in Q3 which led the segment to another quarter of double-digit sales growth. Sales were also higher at Marine Systems and on international programs, building on the strong momentum from the first half of the year. And at Space Systems, Q3 sales grew on a sequential basis again this quarter rising to $2.7 billion. On a year-over-year basis, sales were down mid-single digits as expected, and we have now nearly lapped the top-line headwinds we've been experiencing on two programs for the past eighteen months. Looking forward, we believe that space is poised to return to growth given our positioning and opportunities in this arena. Moving to the bottom line on Slide five. Operational performance was outstanding again in quarter three. Segment operating income increased by 11% year over year. And our segment operating margin rate increased 80 basis points to 12.3%. AS operating income dollars were relatively flat compared to a year ago, and operating margin rate was 9.7%. This was driven by strong operating performance on mature production programs, as well as lower net profitability adjustments. As we do every quarter, we review our estimate to complete the LRIP phase of the B-21 program. And made no significant changes to the previously recognized loss. However, we experienced higher than expected costs to produce the EMD flight test aircraft which increased our estimate to manufacture the LRIP units. This increase was largely offset by a reduction in our expected loss on remaining LRIP lots due to a contract restructure that occurred during the quarter. Turning to DS. Quarter three margins improved to 11.4% driven by strong operational performance and higher net favorable EAC adjustments. While the Q2 margin outperformance was driven by Sentinel, this quarter's strength was broad-based with higher margin rates in each of the business areas. Mission Systems operating income increased 32%. And their Q3 segment OM rate increased nearly 300 basis points to 16.7%. This performance was enabled by intentional steps this team has taken to drive efficiencies, mitigate risk, and increase factory utilization. Which drove a $68 million favorable EAC adjustment in the restricted advanced microelectronics portfolio. And Space Systems also had a solid quarter of operational performance generating a margin rate of 11%. The strong bottom-line results drove higher earnings per share as shown on Slide June diluted earnings per share were $7.67 an increase of 10% compared to 2024. In addition to strong segment results, mark-to-market gains on marketable securities increased by $0.35 compared to Q3 of last year. These benefits along with higher net pension income partially offset by higher corporate unallocated expenses and a higher federal tax rate as previously disclosed. As we reflect on our performance to date and expectations for Q4, we have a few updates to our company-level guidance as shown on slide seven. For sales, we are adjusting our outlook to a range of $41.7 billion to $41.9 billion reflecting approximately 8% Q4 growth at the midpoint. We continue to expect a ramp in Q4 sales in all four segments, but at a slightly lower rate compared to our prior expectations. Importantly, we are maintaining our segment operating income dollar guidance range despite the lower sales volume. This results in a segment OM rate that is roughly 10 basis points higher than our prior guidance at the midpoint as a testament to the team's continued focus on disciplined program execution and driving efficiencies throughout the business. Moving to earnings per share. We are increasing our guidance by $0.65 now to a range of $25.65 to $26.05. The increase is driven by several factors. First, we are lowering our expectations for other corporate unallocated expenses to $250 million a reduction of $30 million driven by lower unallowable costs. Secondly, we have slight revisions to our expectations for pension income and the effective tax rate, each providing a modest boost to EPS. And as I mentioned, we experienced a return on marketable securities in the quarter which totaled roughly $80 million. Given market volatility, we have not assumed the entire Q3 gain in our full-year guidance expectations. Rounding out our company-level guidance is cash flow. We are reaffirming our free cash flow expectations of $3.05 billion to $3.35 billion. Third-quarter free cash flow of $1.3 billion was well ahead of the past few years. And we continue to expect the largest quarter of cash generation in the fourth quarter. Consistent with our seasonal pattern. In addition, the unique factors driving year-end cash as outlined during the Q2 call remain intact. Including lower Q4 cash tax payments, higher milestone payments, inventory liquidations at AS. For the year, our guidance represents 22% annual free cash flow growth at the midpoint making a third consecutive year free cash flow growth greater than 20%. Turning to segment level guidance on Slide eight. We are reaffirming our top-line guidance for DS and Space as they performed in line with our expectations in Q3. And we have not changed our view on their sales ramp in Q4. For Aeronautics, we are lowering top-line guidance to the high $12 billion range. As we outlined on our Q2 earnings call, the second half ramp at AS is based on higher B-21 volume, ramp on new program wins including Takimo, and normal production volume that is seasonally weighted towards the end of the year. And while all these factors remain intact, are projecting a modestly lower sales level due to delayed timing on certain programs. In addition, we are increasing our expectations for intercompany sales. Driven by higher activity on restricted programs throughout the portfolio. These are partially offset by an increase to our sales guidance expectations at MS based on the strength of their year-to-date results and expectations for continued growth in Q4. As a result, we now expect MS sales in the mid-twelve billion dollars range. With respect to segment operating margin rates, we have one update this quarter related to DS. As I mentioned, they delivered another strong quarter of operational performance and as a result, we are increasing the OM rate expectation to the high 10% range. Before concluding my prepared remarks, I wanted to build on Kathy's comments regarding our 2026 outlook. First, sales growth next year is expected to be more balanced across each of the segments. With each contributing to growth. Secondly, operating income is expected to grow compared to 2025. And we don't anticipate a repeat of the large EA adjustments we experienced this year on B-21, Sentinel, and microelectronics. Adjusting for these items, our outlook for low to mid 11% margins would represent an increase compared to 2025. I'd also like to share our latest projections for 2026 net pension income based on current market conditions. As we typically do this time of year, we've included a 2026 pension income sensitivity grid on Slide 10. Year to date through September, asset returns were just north of 9%. Slightly better than our initial expectations. And discount rates were down 25 basis points. This combination will result in a modest increase to 2026 net pension income compared to our prior projections. Depending on where we end the year. Importantly, our pension plans remain fully funded and we continue to project minimal cash contributions over the next several years. So in conclusion, we believe we are well positioned for a broad range of new opportunities. We remain focused on growing our business delivering strong operational performance and generating cash flows that allow us to execute our business strategy. With that, let's open the call for Q and A. Operator: We do request for today's session that you please limit to one question and one follow-up. Your first question comes from the line of Kristine Liwag with Morgan Stanley. Your line is now open. Please go ahead. Kristine Liwag: Hi, good morning everyone. Good morning. Kathy, Ken, for the FAXX and the B-21 acceleration, can you provide more color on what that could mean for your 2026 outlook and what's included? Kathy Warden: So Kristine, as I noted in my comments, we at this point have not included either in our 2026 outlook. FXX clearly would come with increased revenue from what we have provided in that outlook. We expect that it would be somewhat dilutive to overall company earnings just because it would be development revenue, which tends to be lower margin than our overall. But it is a cost-plus program. So we expect reasonable returns if we were to win that program. And it would require some investment. So the CapEx we would determine based on our profile to build out and prepare for execution. Over the long run, we expect if we were to win that program that it would be accretive to the company. And very much look forward to the opportunity. On B-21 ramp, similar circumstances, we have not included that in our outlook. It would be upside to revenue. It would increase our amount of sales which in the early phases on production are at the zero margin. And we would expect to need to invest in that ramp through CapEx. But again, over the long term as we've said before, we would expect to have increased returns to the cost of that additional investment. And so we would update our guidance if and when we have clarity on either of those opportunities. Kristine Liwag: Great, super helpful. And for a follow-up, can I ask something about the supply chain? Rare Earths continue to be a watch item for the industry. Can you talk a little bit more about your sorting strategy, how to mitigate supply chain risks and if there are any watch items that could potentially affect your 2026 outlook? Kathy Warden: Yes. Fortunately, our team has the two foundries in The United States where we design, produce and package microelectronics. So our dependency there on rare earths has been mitigated by looking through our supply chain and getting well ahead of our sources of supply to ensure that we can produce those electronics. We are very pleased that the U.S. Government is actively working to set up additional sources of supply including in The U.S. And working partnerships with our allies for them to also invest in these capabilities in their country. This will just create more sources for us to draw upon and make The U.S. more competitive in being able to provide these microelectronics for national security purposes into the future. Kristine Liwag: Thank you very much. Kathy Warden: Thank you. Operator: Your next question comes from the line of Ronald Epstein with Bank of America Merrill Lynch. Please go ahead. Ronald Epstein: Yes. Hey, good morning all. Kathy Warden: Good morning. Ronald Epstein: Kathy, can you maybe pull back the curtain a little bit more on B-21? I mean, how is it going with a potential increase in the build rate on that aircraft and so on and so forth? Because if that were to play out, it is material for you guys. Kathy Warden: Yes. So we are in active discussions with the customer that would enable that acceleration of production rate. And as I noted in our Q2 call that the dollars to support that acceleration are included in the reconciliation bill. So the actual production rates, the timing and ultimately the outcome of those negotiations with the Air Force would define what that financial profile looks like. It's too early for me to speculate on that. We are in the midst of those discussions. They've been held up a bit because of the government shutdown. And the availability of resources to continue those discussions during this time. But we expect those to resume. And we still expect that in the coming months, we would have more clarity on what that acceleration might look like. Ronald Epstein: Got you. Then maybe as a quick follow on, your prepared remarks, talked about some program award delays. What's driving that? The administration has been pushing hard for speed on acquisitions. So just curious where that's coming from? Kathy Warden: I think with any new administration, it takes time to come in and make determinations of where to allocate resources and then to do the appropriate reviews and governance to make those decisions. We are certainly seeing in recent weeks, the government shutdown having some impact on the government's ability to move quickly to make decisions and have the right resources available. So we're all hopeful that the shutdown can come to a quick resolution and that we can resume work on some of these important decisions that would open up spend plans and ultimate awards that will come from the government as they seek to move forward quickly. Ronald Epstein: Got it. All right. Thank you very much. Operator: Your next question comes from the line of Seth Seifman with JPMorgan. Please go ahead. Seth Seifman: Hey, thanks very much and good morning. Kathy Warden: Good morning. Seth Seifman: Kathy, I wonder if you could talk a little bit about the opportunity in Golden Dome and missile defense in space. And you've been doing some work with the FDA. But if you could talk about the sort of the state of maturity and state of technology on missile readiness satellite or missile warning satellites. And if you see the current kind of tracking layer SDA or HPTSS being kind of the nucleus of what's ultimately going to drive missile warning for Golden Dome or is it going to come from elsewhere? Kathy Warden: Well, let me start by saying that we're very pleased to see the urgency the administration is placing on protecting the homeland and the set of opportunities that that creates. It's a very broad-based set of opportunities. The architecture and spend plan for Golden Dome are not public, so I won't comment on those specifically. But we do understand the challenges of creating a missile defense, both warning layer and set of interceptors that would defend the homeland. And we are providing some high fidelity operational analysis that can help the customer understand those requirements as well as ourselves as we define what our offerings might look like. We see this being a number of components to an architecture that range from existing programs where they may have there may be additional opportunity to new programs. And I think you'll see more clarity coming from the department as they share more information on that architecture and spend plan in the coming months. Seth Seifman: Okay, great. Thanks. And then just as a quicker follow-up, maybe I think you mentioned earlier if the government shutdown ends relatively soon, that we shouldn't see much impact, but we're sometimes it seems like we're in unusual times. At what point does the duration of the shutdown become more of a concern in terms of something that where we might see an impact? Kathy Warden: Yes. As I mentioned, the guidance that we updated for 2025 includes what we can foresee including some of the delays that we talked about on program awards and timing. But at the same time, we are assuming that this only goes a few more weeks. Say around mid-November. If it goes beyond that, we may start to see some additional delays in getting funding on contract, or even delays in receiving payment before year-end that could impact our cash flows for the year. We don't anticipate it at this time, but it's certainly something we're monitoring and so we're very hopeful as I said that the government will agree to reopen soon even if under a continuing resolution. Seth Seifman: Thanks very much. Kathy Warden: Thank you. Operator: Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead. Sheila Kahyaoglu: Good morning, and thank you. Kathy, maybe if we could talk about the aero outlook for 2025. It seems down slightly but B-21 award timing seems unchanged. So what was the shift there? And what was delayed in terms of certain awards? And we think about that recapture in 2026? And just on B-21, how do we think about the free cash flow impact as it relates to CapEx? In 2026? Ken Crews: Sheila, this is Ken. I'll take that one. In terms of AF, the drivers across the 2025 sales profile, it was really product it was timing of production activity. So don't view it as lost sales, but just timing of sales. The other aspect is on B-21 as we made the adjustment, the top-line implications regarding percentage of completion method that created some additional top-line headwinds for both the quarter and the year. As we think about 2026, we continue to see the strength in B-21 continuing to be a grower a contributor to AS' growth. In terms of the free cash flow with B-21, again, we're holding our overall guidance for 2026. When we think about the future in cash flow is we'll provide more clarity because as Kathy mentioned, we are in the midst of multiple discussions that will ultimately the cash flow of the program and that will be driven by as we come to conclusions and understanding if we do on the ramp and rate discussion. Operator: Great. Your next question comes from the line of Ken Herbert with RBC. Please go ahead. Ken Herbert: Yes. Hi, good morning, Kathy and Ken. I wanted to ask on IBCS. Kathy, you continue to call out success with that program. It sounds like it's ramping in Poland. You've got some installations ramping here. How do you think about that program and the growth into 2026 in particular? But then also we're hearing that that program in particular is very well suited perhaps for some of the Golden Dome applications. Can you just comment on those discussions and how you view IBCS in particular with that opportunity? Kathy Warden: Yes. We are very bullish on IBCS growth opportunities both domestically. As you pointed out, it is a system that is able to integrate disparate sensors and kinetic effectors to enable visibility of the battlefield and then to provide us a fire control system that has application for protecting our homeland, just as it has application for international partners in that same vein. So we've talked previously about having over a dozen countries now that have expressed varying levels of interest in the program. Particularly as we look at the success that we've now demonstrated in Poland, as I spoke about in our comments today, that is a live fire example of how IBCS can be used in a homeland protection scenario. And of course, The U.S. has forward deployed the system and I talked about the operation tests that it is performed for forward deployment in both INDOPACOM and the European theater. Ken Herbert: Can you talk about when we could expect other incremental orders internationally in particular as you talk to those 12 countries? Kathy Warden: Yes. We expect those to phase in over a multiyear period, but starting in 2026 and we do expect IBCS to be a significant double-digit growth driver for us in next year's outlook. Ken Herbert: Great. Thank you, Kathy. Operator: Thank you. Your next question comes from the line of Scott Deuschle with Deutsche Bank. Please go ahead. Scott Deuschle: Hey, good morning. Kathy Warden: Good morning, Scott. Scott Deuschle: Ken, could you give any quantitative detail on the 2B21 financial items in the quarter between the higher EMD flight test costs and the contract restructure. It sounds like it was close to zero on the net amount, but just curious how large the gross numbers were for each of those two items? Ken Crews: Yes, Scott, you're correct. In terms of the cost growth that we baked in from lessons learned on the B-21 LRIP offset by the restructure activity. It is from a materiality perspective very low number. So it essentially washes themselves. Scott Deuschle: Okay. And then Kathy, sorry if I missed this, but can you give us any sense for how international book to bill has trended on a year-to-date basis? Kathy Warden: Yes. International book to bill remains very solid. As I noted, we have 20% sales growth year to date. And our international book to bill coming into the year was 1.4. And this year, ton of Ken Crews: So this year we started off at about 1.45 Scott. And when you look at quarter two and quarter three, it is timing dependent. So overall, roughly slightly lower than one but we built a strong backlog last year that's leading to the growth this year, as Kathy mentioned. Scott Deuschle: We had 20% year over year growth or year to date growth then on top of that, we had about 30% growth within the quarter alone. Scott Deuschle: Okay, great. Thank you very much. Operator: Your next question comes from the line of Richard Safran with Seaport. Please go ahead. Richard Safran: Good morning, everyone. Thank you. So, I think it was last month Secretary of Defense made some comments about requesting industry make significant capacity increases in missile production. I think this is going well beyond just Golden Dome. I was kind of curious what this means for Northrop Grumman you have any plans to undertake further capacity increases that might require incremental CapEx? And is there any timeline associated with planned increases? Kathy Warden: Yes, Rich. Thanks for the question. As I've outlined, a few of our calls over the last six quarters or so, we have already invested in expanding capacity that includes for our tactical missile solid rocket motors where we've more than doubled capacity and we are already breaking ground on another facility that would bring more capacity online in about two years. Right now, we have more capacity than we have orders. And so we are in the process to being qualified on additional missile systems, as I talked about in today's call. We have been awarded a couple and we are in the process of qualification for a handful more and those would utilize that capacity we've already brought online. We foresee continued demand growth, which is why we've broken ground on yet another facility. In addition, we are building out our capacity for larger solid rocket motors. We've talked about that for multiple purposes, U.S. national security applications, but also commercial applications in base launch as I spoke about today with our Gen 63 XL rocket motors that are fueling the ULA launches for the Kuiper satellites. And so we are already through a significant amount of Northrop Grumman funded investment in that capacity. We do have some that you will see committed in our CapEx numbers 2026-2027 as well. Richard Safran: Okay. And then quickly here, I saw you made a bit of an announcement on Lumberjack I'm wondering if you discuss what the opportunity set for this program is? What's the domestic international potential? And when this program might have an impact on the P and L? Kathy Warden: Yes. Lumberjack is an exciting new offering. We are developing that out of our mission system segment and it is a ground-launched opportunity for counter UAS. It has communications sensors. It is targetable and we see this as an advancement of our small microelectronic processing capabilities and communication, put onto an innovative platform that we've worked with partners for to keep the cost very low and keep it competitive for what we see as the attributable market. We have introduced this capability. It's about a TRL six now, and we are working to find our first customers for it, but we also see there has be international opportunity. We clearly need to go through export for the product line, but those are all steps ahead that we look to continue through 2025 into 2026. Richard Safran: Well, thank you very much for that. Operator: Thank you. Your next question comes from the line of Gavin Parsons with UBS. Please go ahead. Gavin Parsons: Thank you. Good morning. Kathy Warden: Good morning. Gavin Parsons: Kathy, you pointed out that you guys spend more on CapEx than most of your peers in the industry. I mean, does that enable more than maybe mid-single-digit growth over the long term? Kathy Warden: We believe that it can. We certainly have invested with the intention of driving significant growth. And that has started to come to fruition in some of our segments you saw. DS in particular with a very solid growth rate last year and it is reflective of that investment. Was just talking about not only in the capacity for munitions and tactical missiles, but also the research and development that we're doing on new and innovative solutions or additions to solutions we already have like IBCS, the investment we're making in modernizing that. So I think it's a good case study of where we have put that investment in and been able to generate those higher levels of growth. And of course, we're working to do that across all of our segments. Operator: Great. Thank you. Your next question comes from the line of Robert Stallard with Vertical Research. Please go ahead. Robert Stallard: Thanks so much. Good morning. Kathy Warden: Good morning. Robert Stallard: Kathy, wanted to follow-up on your initial comments. One of the members of the administration had said recently that they thought that U.S. Defense companies should do a little more research and little fewer stock buybacks. I was wondering if this is essentially a trial balloon or whether there are active discussions with the customer about this? Kathy Warden: We certainly have discussions with the customer where they have shared their desire for industry to see the growth opportunities. That would lead us to invest and that those would be profitable growth opportunities and we share in that sentiment. And as I have shared with you today, I've also shared with the leaders in the Department of War that we have been doing that. That those higher levels of investment above the industry average were because we saw that same vision that if we invested, we would have greater opportunity for growth. And returns. And so I've articulated that we have a number of discussions underway, B-21 acceleration and other new areas that is the core of the conversation that we and I believe my industry peers are having with the department. Robert Stallard: Okay. And then a quick follow-up to that though, I may be wrong, but it would appear fairly new though that they would be perhaps putting some restrictions around returns to shareholders. How would you feel about that? Kathy Warden: We have not had any discussions with members of the administration that would suggest that that is their intent. I think that we all are aligned meaning my company and our customers that the best mechanism is to incentivize that investment through the opportunities for a clear demand signal that reflects in sales growth and increased returns. And that if those conditions exist, it's in our best interest and we will continue to do what we have done. Which is invest in that future. Robert Stallard: Okay, that's great. Thank you very much. Operator: Your next question comes from the line of Scott Mikus with Melius Research. Please go ahead. Scott Mikus: Good morning, Kathy and Ken. Just a quick question on B-21. You kind of referenced that the reconciliation funding, think there's $4.5 billion there. Is for the acceleration of the production rate. So just to be clear, would actually increasing the program of record to 150 or 200 units via completely separate negotiation potentially with additional financial benefits for the firm? Kathy Warden: Yes. That would be a separate discussion. The decision has not yet been made by the department. And if it were to be made, then it would factor into an additional look at what the long-term opportunity is on the program. Scott Mikus: Okay, thanks. I'll stick with one. Kathy Warden: Great. Thank you. Operator: Your next question comes from the line of Myles Walton with Wolfe Research. Please go ahead. Myles Walton: Thanks. Good morning, Stealth. In terms of the fourth quarter implied sequential revenue growth, looks like Aero is carrying most of that load. Are there extra working days in the fourth quarter that maybe help the overall double-digit sequential revenue growth and or within Aeronautics is there something that you think releases here in the fourth quarter that maybe wasn't releasing in the third quarter? Ken Crews: So to answer your question around additional working days, there is one additional working day in Q4. However, that's not the primary driver. As we discussed in my prepared remarks and even last quarter, the real growth that is driving the ramp for AS is driven really by three factors. The first one is with the awards that we discussed in our prepared remarks, there will be inventory liquidations that drive that increased revenue. At the same time, just natural progression of new program wins in production like Takamo. And then the last factor is going to be on their mature production programs just real timing associated with supplier performance and material deliveries. And so yes, while there is an extra working day, it's really driven by the three factors that I mentioned. Myles Walton: Okay. And no impact from the Boeing strike or anything like that? Ken Crews: On F-18? No impacts. Myles Walton: Okay, great. Thank you. Kathy Warden: You're welcome. Operator: Your next question comes from the line of Peter Arment with Baird. Please go ahead. Peter Arment: Yes. Good morning, Kathy, Ken. And Kathy, could you give us an update on just kind of the long-term production ramp plans in Solid Rocket Motors? I know you've kind of looking investing quite a bit there, but there's also a lot of defense sort of tech upstarts or space tech upstarts. Just how those kind of those upstarts are factoring into kind of your plans or whether they're just on different different levels in terms of the solid rocket motor output? Thanks. Kathy Warden: Yes, Peter. I would say that we are focused on qualifying ourselves to be a provider on weapons where we have not historically been a provider. And that capacity investment that I mentioned earlier in the call is enabling us to be ready now as those decisions are made to bring our production online. For many of the other companies that are looking to enter this space, it's going to take them time. To build the capacity to get qualified on these weapons and to enter the space. So our focus has been to continue to be ahead in being able to provide optionality to the Department of War as well as our primes who are looking for additional sources of supply. Peter Arment: Appreciate it. And just a quick follow-up. On B-21, just to be clear, is lots three in your 2026 guidance? We know it's not in 2025, correct? Kathy Warden: So the Lot three award and the Lot five advanced procurement is anticipated to be received in the 2025. The vast majority of the expenditures of sales recognition would not start until 2026. Peter Arment: Thanks, Kathy. Appreciate it. Operator: Your next question comes from the line of Michael Ciarmoli with Truist Securities. Please go ahead. Michael Ciarmoli: Hey, good morning guys. Thanks for taking the questions. Maybe just one question, two items. I guess, Kathy, Beacon, it looks like the testing is ramping up there. You've got six partners now. So just trying to think about how that impacts future financial performance contributions to growth? And then maybe the same vein on the microelectronics, it looks like you're opening up some of your capacity for industry. Does that give a little bit more of a boost to MS margins going forward if you kind of soak up some of that excess overhead? Kathy Warden: Let me start with Beacon. We are very excited about this capability. It is opening up opportunities for us to partner and have demonstrated capability not only leveraging the platform work that we have been doing to demonstrate acceleration of our ability to build autonomous systems, but also the integration of the capabilities inside the platform that give us its mission capability. And that's what Beacon is helping us to do to look at innovation and autonomy, weapons integration, mission systems integration, all of which then support a mission capable platform. And those investments that we are making are in alignment and in conjunction with partners, as you mentioned, and large numbers of partners. We are not at this stage picking winners. We're simply understanding the marketplace and the capabilities that we can bring to bear, because we expect a number of new competitions in this space. Including U.S. Services, the Air Force, the Navy, and now the Army, but international partners that are looking to build upon their combat collaborative aircraft fleet. With regard to your second around microelectronics, we have opened up our foundries to additional customers as more and more U.S. companies are looking to have domestic sources. Our two foundries produce some of the most advanced microelectronics in the world. And we are happy to offer that capacity more broadly. Since we have done that, we've had significant interest and so we are in the process of working through that pipeline. We already do about $1 billion a year for sales to ourselves and existing customers largely in the national security space. So we'd be building on that foundation as we move forward with additional customers, including commercial customers. Michael Ciarmoli: Got it. Helpful. Thank you. Operator: Thank you. Your next question comes from the line of Doug Harned with Bernstein. Please go ahead. Doug Harned: Yes. Thank you. Good morning. Kathy Warden: Good morning, Doug. Doug Harned: So can you give us an update on Sentinel? It's going through this whole restructuring process. You've talked about it before. And basically trying to understand as the timing for IOC has moved back, how does that affect your thinking and when you would be going into production mode? And then also are there any aspects of the restructuring or the issues they've had that tied in any Northrop Grumman performance? And then on the other side, does this open up potentially some opportunities for expanded work scope for you? Kathy Warden: There's a lot to unpack there. Let me start by saying that we are partnering with the Air Force on an execution framework to complete the restructure of the program. In the meantime, we are working on executing the program and there have been a number of key decisions that the Air Force has announced recently, like creating new silos rather than re Minute Maiden three silos. Or the resumption of work on the design of those silos. So all have a positive impact on our ability to move cost and schedule more aggressively. We also in the program restructured are looking to establish a new program baseline, which will define the timing of events including completion of the development program, but when we would start production. And that's subject to future communications because it is in work as part of that restructure. But the important thing is that we continue to make good progress on the program. So we had announced in this last quarter that we completed the full-scale qualification test the Stage two solid rocket motor that's part of the missile. We also just yesterday announced that we completed the critical design review for the Sentinel Launch Support System and that paves the way for all of our system build, test and qualification that underpins Sentinel program. So we're really encouraged with how things are progressing both in alignment with the U.S. Government on how do we accelerate the program from the non-maturity baseline but also executing on the milestones that are right in front of us. Doug Harned: Because also there's some substantial new money coming in, in the '26 budget. And is that funding that you expect would go more to Air Force, I'm probably using the wrong language here, but logistics building out what the silo profile could look like? Or do you expect some of that money to be coming to Northrop Grumman and perhaps add to growth? Kathy Warden: On this program, we see likely both to need funding. The U.S. government contribution spans well beyond the U.S. Air Force in terms of support from the Army Corps of Engineers, for example, and other government entities. And so they likely would need portions of that funding to support their work scope on the program. But we do expect the industry team also to support them in executing those funds that have been provided in reconciliation. Doug Harned: Very good. Thank you. All right. We're going to have to leave it there. I'll turn it over to Kathy here for closing comments. Kathy Warden: Great. Well, thank you all for joining our call today. I'm pleased with the momentum we have rounding out 2025. Our focus will be on having a strong finish to the year. And we really look forward to updating you again in the New Year and providing some clear 2026 guidance in our call in January. So until then, be safe. Operator: Ladies and gentlemen, thank you all for joining and you may now disconnect. Everyone have a great day.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's Second Quarter 2025 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. At this time, all participants are in a listen-only mode. I would like to turn the call over to your host, Mr. Todd Ernst, Vice President Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's second quarter 2025 conference call. Before we start, matters discussed on today's call, including guidance and outlooks for 2025 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. In addition, we will refer to a presentation that is posted to our investor relations website. On the call today are Kathy Warden, our Chair, CEO, and President, and Ken Crews, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone, and thank you for joining us. As you saw from this morning's earnings release, we delivered a strong second quarter. The breadth and depth of our company's portfolio and our ability to respond with speed to our customers' needs continues to drive robust growth as evidenced by our strong backlog. In addition, our revenue increased 9% compared to the first quarter, with higher sequential sales in all four segments. The team also delivered outstanding operating performance this quarter as demonstrated by an 11.8% segment operating margin. As we look towards the second half of the year, we expect continued ramp on franchise programs and normal operational seasonality to support accelerating growth. We also expect segment margins to remain strong consistent with our first half performance, excluding the B-21 charge. This is driven by performance, favorable mix, and international growth. Based on the strength of our second quarter results and confidence in our second half outlook, we are increasing our guidance for segment operating income, earnings per share, and free cash flow. The US and our allies are making significant investments in defense capabilities, and we continue to see growing demand and opportunity for our broad range of product offerings. Whether in the space, air, land, fiber, or undersea domain, our technologies, and our ability to integrate hardware and software for mission solutions are core to what customers need today. Domestically, these investments in defense are highlighted by the recently enacted reconciliation bill and FY26 budget request, which represents a combined 22% increase in procurement and RDT&E over fiscal year 2025. This includes investments in Northrop Grumman programs and new potential growth areas. The demand acceleration for our products extends outside the United States. In the second quarter, our international sales grew by 18% year over year and are up 14% year to date. We have a strong international book to bill for aircraft, weapons, missile defense, and airborne systems. In Europe, we see significant opportunities for IVCS and weapon systems. In the Middle East, where I joined the president in May, there are several multibillion-dollar opportunities in integrated air and missile defense, munitions, E-2D, ArGM ER, and ground-based radars. As part of our international strategy, we have extensive partnerships to support local industrial-based growth. With a commitment to continue innovating and investing in capacity, and a strong global demand signal from our customers, we are confident in our long-range potential growth. One area of expected growth that I'll highlight today is air and missile defense. With products such as IDCS and GPI, we're positioned as a key capability provider for missile defense to customers around the globe. As we look to Golden Dome for America, we see Northrop Grumman playing a crucial role in supporting the administration's goal to move with speed and have initial operating capability in place within the next few years. This includes current products that can be brought to bear like IVCS, Gator, Triton, and programs in a restricted portfolio just to name a few. It will also include new innovations like space-based interceptors, which we're testing now. We have the ability to work across the entire architecture and we bring the scale, innovation, and research and development expertise that we can apply to each layer of this critical homeland defense initiative. Golden Dome is just one example of how the administration is pushing for differentiating capabilities at speed and scale to achieve peace through strength. Importantly, they've recognized the need to remove barriers for industry and government that prevent us from moving faster. We are already seeing the benefits of this to include our work on Sentinel and B-21. On Sentinel, we made significant progress on the program in the second quarter. In close partnership with the Air Force, we reached agreement on a restructure approach which will lead to reestablishment of the program baseline. The work suspension on most aspects of the command and launch portion of the program was lifted, and we've resumed work on launch facility requirements and design. We continue to ramp on the program and make progress through development, testing, and risk reduction activities. Our second quarter results include strong Sentinel growth as well as a positive earnings adjustment, reflecting the agreements we reached with our customer and improved confidence in achieving various performance incentives. We expect Sentinel revenue momentum to continue and for the program to be a meaningful contributor to our growth in the second half of the year. In partnership with the Department of Defense, we continue to work on acceleration options for the program. We are confident in our ability to execute all phases of the program and deliver this critical capability for our nation. On the B-21 program, it continues to be well supported by the defense department and congress. The value and importance of a stealth strategic bomber was certainly shown with Operation Midnight Hammer. The Air Force has recently confirmed it is committed to the successful fielding of the B-21 and its infrastructure necessary to support an increased yearly production capacity. Through reconciliation, the B-21 received an additional $4.5 billion to increase production capacity. This builds on the efforts that we and the Air Force have made previously to prepare for a more rapid production ramp. We are in discussions with the Air Force regarding potential for an accelerated production ramp on the program. While the ultimate outcome of these discussions remains uncertain, we currently expect any agreement to accelerate production ramp would require further investment by the company to expand production capacity along with the opportunity to earn improved return on the LRIP and NTE production lot. With the pace of change and advancements in technology, coupled with our customers' push for speed, we are constantly working to introduce new technologies and concepts to address our customers' needs. Beacon, which is highlighted on the cover of our slide deck, is one example of how we approach this. With Beacon, which we revealed in the second quarter, we've taken decades of autonomy experience and 500,000 autonomous flight hours to create a flying mission test bed. We bring software from companies of all sizes together with our flight software and hardware. Beacon will accelerate autonomous mission capabilities for our pet customers by allowing a variety of industry partners to move faster. Because of the work Northrop has done and is doing on autonomy, our investment in Beacon also supports the administration's call for more next-generation autonomous systems. Before wrapping my remarks, I want to highlight the importance of our strategy to invest in the business. Speed of bringing technology to market is important in this environment, and capacity is an important enabler to rapidly fielding capability. The capital investments we've made and that we continue to make allow us to meet this demand from our customers, remain competitive, and lay the groundwork for our future growth. In the area of solid rocket motors, we have invested a billion dollars over the past six years, significantly improving our capacity and flexibility across multiple facilities. This includes investments at the Allegheny Ballistic Laboratory facility in West Virginia for small motors, in Elkton, Maryland for medium-sized and hypersonic motors, both of which support growth in our tactical weapons business at DS. As a result of this investment, we were recently selected by the US Navy to provide the 21-inch second stage solid rocket motor for its extended range missile program. We developed and demonstrated this capability in less than a year. In the space segment, our investments at the Bakken facility for large rocket motors support the build-out of the Kuiper satellite constellation. Overall, we expect to increase our total annual solid rocket motor production rate from 13,000 units today to 25,000 by 2029. We will continue to make strategic investments in our business to ensure we have the scale and capabilities needed to support our customers effectively. This includes emerging missile defense opportunities such as Golden Dome for America and second source qualification for several tactical missiles. At the same time, we remain committed to returning capital to shareholders. This includes returning approximately 100% of our free cash flow to our shareholders through dividends and share repurchases this year. We repurchased nearly $900 million in stock in the first half of the year. In the second quarter, we announced a 12% increase in our quarterly dividend, marking our 22nd consecutive annual increase. This increase is supported by the strong growth in free cash flow at the company. Reflecting our focus on delivering long-term value to shareholders, over the past ten years, we've increased our dividend at approximately 11% compounded annual growth rate. In summary, I'd like to thank our team for an excellent quarter. We have an outstanding portfolio, robust global demand and funding environment that supports it, and a high-performing team. This all leads to a strong outlook for our company. I'll now turn to Ken to share more details on our second quarter financial results and our outlook. Ken? Ken Crews: Thank you, Kathy, and good morning, everyone. I'll begin my comments with top-line results for the quarter. As shown on slide four in the earnings deck, second-quarter sales were $10.4 billion, up 1% year over year. Sequentially, Q2 sales were up 9% compared to Q1, with all segments contributing to this meaningful growth. Our organic sales were $10.3 billion, up 2% year over year, reflecting the divestiture of the training services business which closed ahead of schedule at the end of May. Aeronautics second-quarter sales increased by 2% year over year, due to higher volume on B-21 and TACOMO, partially offset by lower restricted sales. At DS, sales grew by 7% on a GAAP basis, driven by the Sentinel program, from higher ammunition sales. The training services business generated $40 million of sales in Q2 before the transaction closed. So on an organic basis, DS sales increased 9% compared to the prior year. Mission Systems was our fastest-growing segment in Q2, with sales up by 14% year over year. This was driven in part by liquidation of inventory on restricted awards which we had originally expected in Q1, and higher volume on marine programs. At Space, Q2 sales were lower primarily due to the previously communicated wind-down of work on two programs, reflecting $283 million of year-over-year headwinds. Turning to slide five, operational performance for the quarter was strong. Segment operating income was higher by 11% compared to Q2 of last year, and our segment operating margin rate increased 100 basis points year over year to 11.8%. AS operating income was up 3% compared to the prior year, with a Q2 operating margin rate of 10.3%. This portfolio continues to have a mix of mature production programs and newer development programs, and with coupled with strong program execution and disciplined cost management, it provides a formula for AS to deliver healthy margin rates. Defense Systems had a standout quarter of margin performance, with the Q2 margin rate improving to 12.7%. This performance was driven by the recognition of a favorable EAC adjustment on the E&D phase of the Sentinel program, primarily based on expectations for achieving certain contract incentives. Mission Systems' second-quarter margins expanded to 14%, and operating income increased 22% year over year. This quarter's margin reflects improved production efficiencies and performance across airborne radar programs. At Space Systems, operating income dollars were reflective of the lower sales volume, partially offset by improved program performance. Operating margin rate was 10.6%, up 50 basis points from Q2 of last year, driven by higher net EAC adjustments. Moving to earnings per share, slide six shows year-over-year EPS comparison. In total, second-quarter diluted earnings per share was $8.15, an increase of 28% compared to the second quarter of 2024. This was driven by two factors: higher sales and improved segment performance, which contributed $0.80 of year-over-year benefit, and a gain of $1.04 recognized on the divestiture of the training services business. Next, I'll provide updates on our forward outlook, starting with segment-level guidance on slide seven. For sales, we are maintaining our top-line outlook at AS and DS of low $13 billion and low $8 billion respectively. Aeronautics sales reflect mid-single-digit annual growth, driven by the continued ramp on B-21 and TACOMO, as well as higher volume on F-35 and D2. We continue to expect DS will achieve double-digit sales growth this year, driven by Sentinel, IVCS, and higher volume in our weapons business stemming from 2024 award volume. At Mission Systems, we are increasing our sales expectations to low to mid $12 billion, based on the strength of their year-to-date results and continued growth on domestic and international programs throughout their portfolio, including airborne and ground-based radar, EW, and restricted programs. At Space, we now project sales of mid to high $10 billion, reflective of the award decision on the ESS program. With respect to operating margin rate, we are maintaining our margin rate expectations for AS, MS, and Space. At DS, we are increasing our margin rate expectations to mid-10%, based on their notable Q2 results. At the company level, as shown on slide eight, we are narrowing the range of our top-line outlook and expect organic sales growth of approximately 3% for the year. Our outlook projects sales in the second half of the year to be higher than in the first half by approximately $2.5 billion. This increase in revenue is driven by a few factors. First, we expect the TRIAD programs on B-21, Sentinel, and Columbia to collectively deliver roughly $750 million in higher second-half sales. B-21 LRIP lot three and lot five advanced procurement are expected to be awarded in Q4. These awards will also include a significant amount of revenue recognition due to inventory liquidations for materials purchased to support production schedules. Meanwhile, the Sentinel and Columbia programs are expected to continue to ramp, including higher material receipts and subcontractor deliveries in the second half of the year. Another element of second-half growth is the ramp on new recently awarded programs, including TACIMO, IBCS, international ground-based radars, and multiple ammunition programs. Collectively, these new programs are expected to contribute nearly $700 million of higher second-half sales. Lastly, Q4 has historically been our strongest quarter of revenue generation, driven by production schedules and timing of materials. We expect this normal seasonality to continue this year, contributing roughly $1 billion of higher second-half sales. Altogether, we expect Q3 sales to be up 3% to 4% compared to Q2, with further acceleration in Q4, positioning us to deliver on our full-year sales guidance. For segment operating income, we are increasing the guidance range by $50 million at the midpoint, driven by higher margins at DS that I previously described. This reflects the company-level segment OM rate of almost 11.4% in the second half. I reemphasize that excluding the B-21 EAC adjustment in Q1, first-half margins were also 11.4%. MS is expected to be the driver of margin dollar growth in the second half. The MS profile is enabled by continued strong program performance, higher international sales, and seasonal volume increases to higher margin production later in the year. With respect to earnings per share, we are increasing our guidance range driven by higher segment operating income. This increase in operational performance is being partially offset by nonoperating items. While the reconciliation bill recently signed into law includes several provisions that benefit cash flow, it also modifies the treatment of certain R&D tax credits that increase our estimated tax rate. As a result, we now expect a tax rate of high 17% for the year. Given the bill was approved in July, we expect an effective Q3 tax rate of approximately 21% to reflect the cumulative impacts to date. We are reaffirming our guidance for corporate unallocated expenses and expect roughly $100 million of expense in both Q3 and Q4 due to timing of state taxes and normal seasonality. Taking all those elements into account, we are increasing our EPS guidance by $0.05 and now expect a range of $25 to $25.40. Lastly, with respect to cash, we are increasing our 2025 guidance range and now expect free cash flow of $3.05 billion to $3.35 billion. This increase is driven by the revision to section 174 in the tax code related to the treatment of R&D expenditures, partially offset by the application of the corporate minimum tax. In the quarter, we generated $637 million in free cash flow, a significant improvement compared to the first quarter. We continue to expect the largest quarter of cash generation in the fourth quarter, consistent with our seasonal pattern and sales ramp. In addition, there are a few other unique items driving higher Q4 cash flows. First, as previously noted, reduced cash tax payments this year. Second, we have a higher than average level of milestone payments in the second half, including contract closeout payments at Space. Lastly, we expect a significant benefit from inventory liquidations, particularly in Aeronautics in Q4. In summary, we had an outstanding quarter of operational financial performance. Sales, margins, earnings per share, and cash all increased neatly from Q1, with momentum that we expect to continue in the second half of the year. These results demonstrate the value of the Northrop Grumman portfolio as well as our continued focus on disciplined program performance. We remain focused on delivering on our full-year commitments while executing our business strategy and deploying our capital in value-creating ways. With that, we'll open the call to questions. Thank you. Operator: Please limit yourself to one question and one follow-up. One moment for questions. Our first question comes from Doug Harned with Bernstein. You may proceed. Doug Harned: Hey, good morning. Thank you. Good morning. Good morning. You know, you had a really strong quarter for margins as you described, really, really good performance. But when you look at the guidance increase for the year, it's pretty small. I mean, if you look at least where I think many of us were expecting this to come out, the Q2 was really positive. Can you explain how that works given that you're also talking about maintaining this positive momentum from Q2 into the second half? Ken Crews: Absolutely, Doug. Thank you for the question. As mentioned in my comments, we did have very strong segment operating performance within the quarter as you mentioned. One nonoperational item that offset that was the change regarding tax reform. Overall, tax reform was a positive for providing opportunities for people, things of that nature. However, due to general limitations on certain credits, as well as deductions related to certain R&D expenditures, the offset on operational performance was driven by that. It increased our effective tax rate. But overall, I would like to highlight the strong performance of the operations. If you look across the segments, very strong performance in line with expectations where we need them to deliver in order to meet the guidance range that we provided. Doug Harned: And then if I look forward and you look at the 2026 budget, it says sort of laid out the combination of the administration's proposal plus reconciliation. There are big additions in funding for B-21 and Sentinel. What we're trying to understand is if you look at that very strong funding profile, when and how might we see an impact in your revenues and earnings in those two programs? Kathy Warden: So, Doug, as you know, the overall budget environment is favorable for defense with the potential of a double-digit increase in FY26 when you take the FY26 budget as well as reconciliation. We do expect reconciliation, although it can be spent over a multiyear period, to be loaded towards the front end of that period with programs like B-21 and Sentinel, as you know, that are receiving significant increases, B-21 $4.5 billion in funding and reconciliation, Sentinel a couple billion, and E-2, which you didn't mention, but a billion and a half. We do expect those expenditures to be spread over a multiyear period but certainly provide tailwinds going into 2026 and that those expenditures would begin as early as this year. Operator: Thank you. Our next question comes from Gavin Parsons with UBS. You may proceed. Gavin Parsons: Thanks. Good morning. Good morning. Kathy, I believe you said any agreement to accelerate B-21 further would require further investment on your part, but it would also include the ability to earn improved returns. I was hoping you could just go into a little bit more detail on that and if that would allow you to reopen pricing on the LRIP or if that's only on future lots. Kathy Warden: Thanks. Yes, Gavin. So the important takeaway here is that the reconciliation bill now provides the funding for the expansion of production capacity for the B-21. We have entered into discussions as they have alluded to before. We were already working with the Air Force on plans to accelerate production capacity, and now we are in discussions about how those funds will be used to make that happen. We are looking to get a fair and equitable business arrangement where we would be incentivized to invest in that production capacity. With that, we come the opportunity to earn improved returns on both the remaining lots of LRIP and the NTE units, which as you know already have some price in TE, but also have the ability to adjust based on inflation and other factors. Taking all of that into consideration, we're in discussions now. We should have more clarity in the coming months, and we'll certainly share that with you as the business arrangement comes together. Gavin Parsons: Thank you. Operator: Our next question comes from Ronald Epstein with Bank of America. You may proceed. Ronald Epstein: Yeah. Hey. Excuse me. Hey. Good morning, guys. Hi, Ron. Maybe if you could talk a little bit more about your international business. You said there was, what, 18% international sales growth in the quarter. Any details you could share with international backlog growth or how we should think about that? How do you expect the growth to continue as NATO ex the US starts to ramp up their spending towards that 3.5% goal for the core defense piece that they've all sort of agreed to? Kathy Warden: Yes. So as you know, there is a generational shift in defense spending that's underway in Europe. We had seen that reflected in very strong book to bill, 1.4, in international. Now what we're seeing is that those awards are reflected in the strong sales growth that I mentioned, 18% year over year, 14% year to date. As we look going forward, we expect those commitments that NATO countries have made to increase defense spending and general national security spending to 3.5% to 5% respectively of GDP, to continue to provide a basis for this strong awards and sales growth within the company. It's broad-based. It's certainly weapons and ammunition, but it's also integrated air and missile defense, E-2, Triton, sensors. Looking across our portfolio, three of our four sectors, MS, BS, and AS, all have a very strong international pipeline. Ronald Epstein: Got it. And then if I can just a quick follow-up. In the quarter, you guys took a positive VAC on Sentinel, and I think that surprised everybody. I can't speak for everybody, obviously, but it surprised us for sure because of the press around Sentinel. You talked a little bit about it in your prepared remarks. Can you call back again any more on that kind of how that happens and what it means? Kathy Warden: Yes. First, we are making some substantial progress on the Sentinel weapon system, the milestones that we've talked about on prior calls about test milestones, and continued maturation of design. There's one segment, the command and launch segment where we had been paused on work while the Air Force was working through a restructure and revisit of both the approach and then working to rebaseline the entire program. Yet all during that time, good progress was being made on all other aspects of the program and that continues. Now, we have been restarted on that work in the command and launch segment and we've made really good progress in the second quarter. I highlighted in my prepared remarks some of that progress has come from a just open discussion about alternatives and options to accelerate the Sentinel program and working jointly with the department to evaluate and implement those changes and get specificity around the program plan forward has helped us to be able to move more quickly and remove barriers to performance. So I think it's really just a transformation in how the program is operating over these last couple of quarters. That will provide us that strength and stability going forward as a joint team between the government Northrop Grumman and all of our teammates. That has improved our outlook for the program meeting its milestones, and we're just really encouraged with how it's progressing. Ronald Epstein: Great. Thank you very much. Operator: Thank you. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle: Hey. Good morning. Good morning. Kathy, can you share your latest framework and how we should be thinking about growth at Space Systems over the next couple of years? How do you see the segment's growth comparing to the market as a whole? Obviously, a lot going on in terms of NASA budgets, DOD budgets, etcetera, in space. So just kind of a muddled picture for investors. Curious for some clarity from yourself. Thank you. Kathy Warden: Yes, Scott. I would agree that it is the most dynamic of our market segments that we're operating in right now. Both with NASA budgets in question, of course, the congress has provided support to continuing programs like Artemis and specifically SLS and HALO, which is where we currently have work with NASA. I would remind you, NASA is only about 3% of our overall sales as a company, so not a big driver of our space revenues, but nonetheless important missions that we're supporting. We also see changes in the Department of Defense architectures and those reflected in some pauses and reconsideration of acquisition strategies ongoing right now. But if I cut through all of that noise in the near term, we do believe based on just you're gonna continue to grow after a couple year period of relative flatness from the US Department of Defense on space and we have expect Golden Zone for America to be a significant driver of increased budget that would be available to our space sector. Everything from space-based interceptors to the broader support to a golden zone for America architecture. Overall, we are optimistic that our space business has significant opportunity ahead. We'd continue to grow after this year where we had talked about the business would be down but start to regrow into 2026, and we still have that expectation. Scott Deuschle: Very helpful. Thank you. Operator: Thank you. Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed. Kristine Liwag: Hey. Good morning, everyone. Good morning. Hi. So, Kathy, you know, NATO spending is increasing. That said, our European allies have been focused on growing its indigenous capabilities and shift away from the US in the longer term. In your prepared remarks, you talked about partnerships with some of your European players and having capacity. Lockheed has a partnership with Rheinmetall on missiles. How do you make sure that Northrop Grumman would have a long-term foothold in these markets once local capabilities catch up and they expand out their capabilities and capacity? Kathy Warden: It really is about partnering as you noted and I noted in my prepared remarks. We have product lines that really lend themselves to working with local industry. For example, IDCS is an architecture where we provide hardware and software, but the key element of that architecture is that it can integrate indigenous systems that are part of the country's current air and missile defense whether that be sensors or shooters. The ability to do that locally sits within their industrial base. So we can bring partners in to facilitate an example of that is in the UK where we're working with Marshall or in the Republic of Korea where we've just signed a similar agreement with Hanwha. We really look at these local partnerships as a way to not only bring the best capability to the country but support the local industrial base. I've also talked in the past about co-production where we have expertise, but it's best for a local industrial partner to actually build the capability. Munitions is a key example of this, and we just in the quarter signed another agreement, this one with a Lithuanian provider. That helps us to transfer knowledge and expertise through a license, but for them to actually have the ongoing ability to produce locally. Kristine Liwag: Thanks, Kathy. Maybe as a follow-up, you talked about the B-21 procurement acceleration, the restructuring of Sentinel, and the increasing orders internationally. These all showcase the strength of your portfolio. Taking a step back, when you've looked at where you've seen the most dollar changes for program funding, which three programs are you most excited about today? The change versus maybe where expectations were a year ago? Kathy Warden: So the three that I'm most excited about are three that I mentioned that are in our portfolio today. That would be B-21 with the additional $4.5 billion mainly focused on production capacity expansion. That's something that we have been working on for a while, and it's good to see it reflected in the reconciliation bill and to now be in discussions with the Air Force about implementing and bringing that vision to reality for the good of the Air Force. The second is Sentinel, where we have not needed additional budget increases this year, but now are seeing the opportunity in FY26 to really accelerate the program and begin working with reduction activities that will lead to schedule and cost improvement potentially on the program. That's very exciting. Finally, E-2D, which has a billion and a half additional funding to support the program being extended partly for the Homeland Defense Mission, but also partly just as the only production capability that can match the E-3 and to be a replacement for that capability. Those are three of our existing programs, but I'm equally excited about Golden Dome for America, which is a new set of opportunities, very significant funding there as you know in the reconciliation bill. Our opportunity to pursue some of that work. Kristine Liwag: Great. Thank you. Operator: Thank you. Our next question comes from Robert Stallard with Vertical Research. You may proceed. Robert Stallard: Thanks so much. Good morning. Good morning. Kathy, just want to dig into this Sentinel situation. It sounds like it's improved for you for sure. But as I understood it, a lot of problems are on the silos. Is there some sort of breakout here where you can carry on an accelerated rate with the missile defense, essentially, and then silos are completely independent? Or is this still a pacing item for you? Can the customer just buy the missiles regardless? Kathy Warden: The way we look at it is all three segments of the program need to move forward, and that's what is most exciting about what happened in the second quarter. We actually made progress such that the work was turned back on for the launch facilities or as you referenced them, the silos themselves. We are back into designing those and really nailing down with the Air Force the appropriate requirements that will lead us to be able to move faster and potentially reduce costs on the program from the baseline that emerged coming out of the non-McCurdy. That is the work that we're doing right now to bring that leg of the program in alignment with the others. While we have continued to make good progress on the missile and the support and sustaining equipment, we are focused now on bringing the command and launch to that same level. Robert Stallard: Okay. That's great. Just a quick look at Ken. I was wondering if you could give us an idea of the annualized impact of this change to the R&D tax credit in terms of the P&L tax charge and also the cash. Thank you. Ken Crews: Yes. So when we think about cash flow in the future, you should anticipate approximately $200 million of cash tax benefit over the next few years. In terms of the ETR impact relative to our P&L side, it was roughly about $50 million. Robert Stallard: That's great. Thank you very much. Operator: Thank you. Next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu: Good morning, Kathy, Ken, Todd. Maybe, Kathy, two-part question on defense for you. First, just on the revenue growth profile you called out solid rocket motors increasing to 25,000 by 2029 versus 13,000 today. Can you just talk about how Defense Systems' revenue growth profile changes based on weapons commentary and international growth outlook? Second, similar questions on Sentinel to Ron and Rob. How does the maturation of the command and launch segment change the E&D margin profile for defense through the end of the decade when production starts? Kathy Warden: Great. Let me start with your first question. I do want to remind everyone that the 13,000 solid rocket motors to 25,000 is inclusive of small, medium, and large. Small and medium predominantly for our defense systems business and large for our space business, and we've been investing in all three. The work on small and medium leads to increased opportunities for our tactical weapons both second source of missiles that we are not currently a provider as well as growth on those that we are. In addition, we have multiple programs where we are the prime. An attack weapon, a weapon, Argum ER, and those will likely contribute significantly to growth. Each of those have an international and a domestic component, so growth in US spending and expected for international. The last piece that we don't talk a lot about is hypersonic. We built the hypersonic integration facility in Elkton, Maryland and we are also providing Rocket Motors for those weapons as well and expect that to be an area of growth well into the future. We have said in the past and I still believe it to be the case, the defense systems is likely to have our highest exchange growth rate over these next several years. Largely fueled by weapon systems, as well as our integrated air and missile defense, and I talked about the strength of that portfolio. Shifting to your second question on Sentinel and the EMT margin profile, as we looked at the program in the second quarter, and the agreement that we reached with the customer on how the restructure will be accomplished, but then also beyond the restructure, the pathway to rebaseline and completing E&D that is those agreements are what led us to have confidence to increase our overall booking rate. Based on our expectation for realizing incentive on the program during that phase. Our confidence increased based on increased certainty that we have through that agreement reached with the government. Now that certainty also translates into a better platform for the integrated Air Force and Northrop Grumman team to execute on the program. The turn back on of the design work on command and launch the pathway for taking the missile through design and testing and completing those milestones. All of which are leading us to have higher confidence and the ability to complete the E&D phase of the program. Sheila Kahyaoglu: Do we still think about the Defense Systems as a 10% margin business on a go-forward basis then? Kathy Warden: We're not ready to provide any guidance beyond this year, but certainly, we raised our guidance for the segment for this year, and the drivers for that increased confidence certainly are fundamental. They are not one-time items. I would have you wait until we give you some guidance for 2026, but my expectation says that defense systems continue to perform very well and that the tailwinds for both international growth and the which is a mix factor and performance are both leaning favorably for them. Thank you. Operator: Our next question comes from Seth Seifman with JPMorgan. You may proceed. Seth Seifman: Thanks very much and good morning. I think you may have touched on the answers to these questions, but when you've talked about the out years before, Kathy, you've said B-21 was going to grow but probably remain a high single-digit percentage of company sales. Likewise, for Sentinel, it at mid-single-digit. But now that we see this funding in the reconciliation bill, I don't know if it's possible to revise that outlook and, likewise for what it does for the $4 billion of cash flow in 2028. Kathy Warden: Depending on the final agreement for the production on B-21, we do now believe it could exceed the 10% of our total revenue in the future, but it's really early to provide any more definitive outlook. As I said, in the next couple of months, as we have clarity on the entire business arrangement, we would update that. The same is really true for our cash flow outlook as we think about the investments that we would make as part of this arrangement, the improvements and incentives that we would expect we will look at all of that in combination to be able to update you. It is our expectation that in the long run, these investments result in both better profitability and cash flow. With Sentinel and how large it could become as part of the portfolio, I don't see it reaching that 10% of revenue in the next couple of years despite the additional funding that we've received, but certainly as we move into the production phase of the program. Which is now still several years out, I would expect at that time, we might revisit whether it becomes a larger part of the portfolio. Seth Seifman: Great. Thanks very much. Operator: Our next question comes from Richard Safran with Seaport Research Partners. You may proceed. Richard Safran: Kathy, Ken, Todd, good morning. Good morning. I got a two-part question for you on the contracting environment. First, I want to know if you could discuss the contracting environment generally with the new administration if you're seeing an improvement in terms and conditions and things like incentives, like award fees. Second, you've been talking a lot about the growth in international, which has been terrific. But I'm kind of wondering if you're seeing more DCS versus SMS or just in general, is this FMS gonna be the Thanks. Kathy Warden: Sure. Let me start with what we're seeing in contracting. There are certainly reviews underway both driven by executive order and congressional review to look at acquisition reform, and it would be early to comment on the outcome of any of those. We are seeing this administration have a perspective that speed is important, and we need to break down barriers. Some of those may be barriers in the contract itself, others might just be the way that we're operating on programs, and that has been very positive and you see that reflected in our Q2 performance but also our outlook as we've talked about a couple of programs here today. Fundamentally, in my view, is a net positive even outside of formal acquisition reform or changes in contracting. With international, we continue to see a mix of direct commercial sales and SMS and we expect that to continue. Certainly, on more complex efforts where the US government involvement is key not only in the technology that is being deployed and shared with our allies, SMS is most appropriate. But as I've talked about in munitions and other areas that we are selling off of hot production lines, DCS certainly is a more expeditious way of working with customers. We don't expect a significant change in our mix between DCS and SMS. Richard Safran: Well, thanks very much. Operator: Thank you. Our next question comes from Jason Gursky with Citi. You may proceed. Jason Gursky: Hey, good morning, everybody. Good morning. Hey, Cathy. I was wondering if you could spend a bit more time talking about one of the phrases you used in your opening remarks on making some investments in some new areas for the company and just kind of curious what was on your mind when you made that comment. Kathy Warden: Certainly highlighted one today, and that's with Beacon where we are creating a mission test bed. This isn't something we typically would have done in the past. Where we're inviting other industry partners to come and benefit from the knowledge that we've gained by having over 500,000 hours of autonomous vehicles operating and the data off of those. This idea of being able to provide very high fidelity physics-based models is something our company does very well. Many small companies don't have that insight and yet they have good ideas. On software or hardware that can be applied and need to be tested and run up against those threat scenarios and operating conditions to see how they will perform. Beacon is a test bed that allows that to happen, and we've signed a number of partners to come and work with us in that integrated environment so we can learn together. Really inform ourselves and the government on what the right mix and set of solutions are for autonomous vehicles. That's just one example. It gives you an indication of the things that we are investing in, and these aren't large investments, but they are important investments that really unlock for us the opportunity to partner in new ways and provide value to the government in new ways. Jason Gursky: Okay. Great. Maybe as a close follow-up to that, Northrop has obviously been very successful in what I would describe as kind of large exquisite systems to date. There seems to be this growing view that in the future, the future of warfare and the systems that we're gonna need are gonna be plus exquisite. Maybe more accretable than we have seen in the past. I'm just curious to know what your strategic approach is to new purchasing patterns and new systems and does Northrop stand the chance here to do it all, be involved in unmanned autonomous and attritable mass. As well as the large exquisite systems and how do you go about layering in the more lower end of tradable systems into your overall revenue. Mix and the ability to execute profitably on programs. Kathy Warden: A few thoughts on that. First, I don't believe that it will be an either-or on explicit systems versus lower capability, but also lower cost systems. I think it's gonna be a combination. Usually, a combination of those systems working together. Part of the expertise that we bring is how to have that whole family of systems work effectively. The second is that I believe Northrop already has been the ability to work on both ends of that spectrum in our aerospace business, in our space business, and certainly the mission systems and weapons that go on platform of varying sizes, complexity, and cost. Yes, we are pursuing that whole continuum. I'd say with the exception of very low cost. Where you aren't basically incorporating mission systems or weapons, and they are meant to be fully attributable. Unit. The broad spectrum that our DOD clients are talking about, we are operating across most of it. The investments that I talked about, like Beacon, are a unique way of doing that. We're not trying to sell hardware in that case or even software. What we are doing is partnering to come up with the best-integrated solution and it will likely be us and other players coming together in a teaming construct to then bid and deliver the units themselves. That really is the change here in the way that we're thinking about going to market, but the systems that we would provide are across that entire continuum of value. Jason Gursky: Great. Thank you very much. Operator: Thank you. Our next question comes from David Strauss with Barclays. You may proceed. David Strauss: Good morning. Thank you. Good morning. Morning. Kathy, could you give a rundown on F-35, the status there, how you're going across your different efforts there? I think there's been some news in the press about a delay in the next-gen radar on F-35. Just an update there. Kathy Warden: Yes. We're doing well on supporting the production needs for the current platform. Of course, that includes the center fuselage and other related components out of AS, then the APAD APG-81 radar. As we look forward, we are involved in the modernization program. There's not a lot I can say about that program due to its classification, but simply to say that we have an excellent radar in the APG-81 today on the aircraft, and we are working toward the fielding of APG-85 in the future. There'll be more details to come about that capability, but I would really just suggest that overall, we are progressing well in partnership with both Lockheed Martin and the joint program office for the F-35 to deliver on those modernization efforts for the program. David Strauss: Okay. Thanks for that. As a follow-up on B-21 and the potential for an increase in the production ramp there. Whereas in Q1, there was this charge to potentially accommodate additional production, as things stand here today with additional money and reconciliation, if you were to agree with the Air Force on increased production, you wouldn't anticipate a further charge on the program. You would expect that to be covered as part of whatever arrangement you reach with the Air Force. Kathy Warden: As I said in my prepared remarks, and we had in the 10-Q, we recognized that accelerating the production ramp will likely require future investment by the company, and our discussions with the Air Force are to accompany that with the opportunity to earn improved return on the program to get a return on that increased investment that we would be making. David Strauss: Okay. Thank you very much. Operator: Thank you. Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton: Thanks. Good morning. Good morning. Maybe just a kind of first clarification. I think the R&D capitalization reversal you said is a couple hundred million dollar benefit. Is that in addition to the absence of the $250 million headwind from capitalization you're previously anticipating in the 2025 guidance? Ken Crews: Regarding our future cash in the let me break it down into two pieces. Number one is in terms of our road map, in terms of cash flow, nothing has changed from the previous commentary that I've made regarding hey, we're continuing to focus on managing risk, managing opportunities, making sure that we're rationalizing investments to get the guidance in the baseline case. The only change has been an additional benefit of $200 million due to the additional benefits from tax reform, cash tax benefits. Beyond that, we have opportunities as we've mentioned, whether it's new development programs, whether it's opportunities around B-21 investments, as well as the value creation that comes with those in terms of providing for long-term cash flow in the future. We'll provide updates in the future, for our normal process in terms of what the out years look like as we understand and get further in discussions and understand various awards. Myles Walton: Okay. Kathy, maybe the question for you. You mentioned the opening remarks, but around space-based interceptors that you were testing currently. Are you actually testing on orbit? Space-based interceptors currently? Is it a directed energy or kinetic approach at this point that you're testing? Kathy Warden: These are ground-based tests today, and we are in competition, obviously, so not a lot of detail that I can provide here. It is the capability that we believe can be accelerated and into the time frame that the administration is looking for. Myles Walton: Got it. Okay. Thank you. Operator: Alright, Jeff. Gonna have to leave it there. Kathy Warden: Right. So let me close by thanking the Northrop Grumman team for another really strong quarter of performance. The team just continues to deliver for our customers when they need us most. Many of our most valued abilities are unknown to the world because of classification, but this quarter, the results of our work were on full display and really proud of how the team stepped up to support the US government. We remain strong on our outlook for the company as both global demand as well as domestic. All of that allows us to deliver value for each of you as our stakeholders and shareholders, and I thank you for your continued interest and for joining us on our call today. Thanks again. Ken Crews: Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman Corporation's First Quarter 2025 Conference Call. This call is being recorded. My name is Josh, and I will be your operator today. At this time, all parties, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Josh, and good morning, everyone. Before we start today, matters discussed on today's call, including guidance and outlooks for 2025 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release, and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. In addition, we'll refer to a presentation that is posted to our Investor Relations website. On the call today are Kathy Warden, our Chair, CEO and President, and Ken Crews, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone. Thank you for joining us today for our first quarter earnings conference call. A lot has happened since our last call in January. We're looking forward to providing you an update on the quarter, and our expectations for the year. We are operating in a rapidly evolving world, and we are managing through a dynamic US defense budget environment. With a first-of-its-kind full-year continuing resolution. Within this environment, we continue to see strong demand signals from our global customers, resulting in another record backlog in the first quarter of $92.8 billion, and that's inclusive of strong international bookings. As we indicated in mid-February, we've experienced delays in certain awards, which resulted in a slower sales ramp in the first quarter than we previously anticipated. We expect this to improve throughout the year. Margin rates, setting aside the B-21 adjustment, were in line with expectations. We have updated our 2025 financial guidance and we are reaffirming our outlook for sales and free cash flow. With a growing backlog and progress on award timing, we have confidence in achieving our outlook and remain focused on delivering transformative capabilities for our customers. I'd like to take a minute to discuss the B-21 profit adjustment made in the quarter. As you saw in the earnings release, we recognized an additional $477 million pretax loss. This is largely relating to higher manufacturing costs primarily resulting from a process change we made to enable higher production as well as increases in the projected material costs, some of which are related to macroeconomic impacts on material prices. While I'm disappointed with this financial impact, we continue to make solid progress on the program. Demonstrating performance objectives through tests, and we are progressing through the first two lots of production. With significant learning behind us, we are ready to deliver the Air Force this highly capable strategic deterrent. During the quarter, we continued to make significant progress on other key programs as well. On Sentinel, the US Air Force and Northrop Grumman Corporation completed a successful static fire test of the stage one solid rocket motor for the missile in March. This critical milestone for the weapon system further validates the motor's design and paves the way for the production and deployment of a safe, secure, and reliable strategic deterrent. We are also continuing to work with the customer to identify cost and schedule efficiencies. As they evaluate requirements to balance capability, affordability, and schedule for the program. In January, the US Army awarded us a nearly $500 million contract for IBCS. Under this award, Northrop Grumman Corporation will expand software development and include additional AI and model-based systems engineering capabilities. To allow more rapid integration, for the Army, and our international partners. Earlier this month, we announced the opening of a state-of-the-art production and integration facility in Alabama to support accelerated modernization plans for air and missile defense systems, including IBCS. With this investment, it doubles the size of the previous facility footprint, leverages Northrop Grumman Corporation's digital ecosystem, and gives us the ability to scale production, and field new capabilities at speed. Also, we received nearly $300 million in awards in the first quarter from the U.S. Navy to produce two additional Triton aircraft and associated support services. We are also making good progress on delivering Tritons to Australia. The first of four was delivered last year, and the second and third aircraft have completed testing with the US Navy prior to delivery to the Royal Australian Air Force this year. Triton is playing a critical role surveilling high-priority areas of interest in multiple regions. It was just announced last week that Triton will soon be deployed from Southern Japan to commence surveillance and information-gathering operations. I'd like to take the next few minutes to provide our view of the market outlook for both the industry in general and Northrop Grumman Corporation more specifically. For our industry, demand ultimately stems from the global threat environment. Over the past decade, this environment has grown increasingly complex with the reemergence of peer adversaries. Making the pace of innovation and production crucial for deterrence. As a result, our global customers are increasing their investments in national security. In the US, we continue to see signs that defense spending will increase. Driven by a few ongoing developments. The first is the finalization of a continuing resolution for the 2025 defense budget. This CR comes with several provisions that set it apart from previous ones. The most notable of which are an increase in the top line over FY24 and increased flexibility with spending accounts. Meanwhile, there is a push for additional funding through the reconciliation process. Which could add up to $150 billion to the defense budget to be allocated over multiple years. Both the House and the Senate have passed initial legislation that lays the groundwork for this additional funding. We believe much of this will be used to support investments to maintain our nation's edge against evolving global threats. Lastly, the administration continues to prepare their fiscal year 2026 budget request. And we are encouraged by recent commentary that suggests a continued strong commitment to national security funding at levels higher than prior projections. The administration has highlighted key priority areas such as the triad, missile defense, and weapon systems, all of which are aligned to core capabilities of Northrop Grumman Corporation. Additionally, the significant increase in defense investment outside the US is leading to a growing pipeline of requests for our products across Europe, Asia Pacific, and the Middle East. As countries seek to protect their sovereign territories, and deter aggression. In Q1, our international sales represented approximately 14% of total sales. We have broadened our customer base, and increased the number of products that we can sell internationally, and established new partnerships globally to enhance our addressable market. As a result, we continue to see our opportunities to increase our international sales over the coming years. And we are making steady progress in this area. With a first-quarter international book-to-bill of 1.45 times. And international sales up 11% in the quarter. International bookings were driven in part by over a billion dollars in international awards in mission systems. Also in the quarter, Poland signed a $745 million letter of acceptance for 200 Argum ER missiles adding to the growth potential for our defense systems business. We continue to see a broad pipeline of opportunities in the areas of air and missile defense, airborne ISR and C2 systems, and ammunition across multiple markets including newly emerging opportunities in the Middle East. Our strategy is to compete and win in global markets through technology differentiation. Bringing innovation and capability beyond what commercial alternatives can provide. To further our ability to innovate and deliver we invested $13.5 billion in R&D and infrastructure. As a result, we now have the ability to scale, design, and produce while fielding new capabilities at speed. We also have a track record of delivering defense technology that stays ahead of the pacing threats. For example, our technology is inside 90% of US national security space satellites. We're a leader in low observable technology, having produced the first stealth bomber, the B-2, and now its successor, the B-21. We've delivered more than 1.3 million solid rocket motors, and we are a leader in mission systems where we produce over a million secure microchips per year, some of which are a thousand times faster than the microchips in your smartphone. As we look to the future, we are leveraging our own hardware and software capabilities to develop the next generation of systems and we're also partnering with leading companies in areas such as AI. To ensure our customers have the most advanced capabilities. In the world. In conclusion, given our key franchise program, record backlog, strong competitive position, and global market dynamics, we continue to project significant potential ahead. Our focus remains on our strategy of driving innovation, expanding our market presence, and optimizing performance to deliver profitable, sustainable growth. We are committed to our long-term vision of creating value for our shareholders meeting our customer needs, and staying ahead in an ever-evolving global market landscape. So with that, I'm gonna turn the call over to Ken to discuss our first-quarter results and our updated guidance. Ken? Ken Crews: Thank you, Kathy, and good morning, everyone. I'll begin by covering our top-line results on slide four in our earnings deck. First-quarter sales were $9.5 billion, down 7% compared to the prior year. And included two fewer working days compared to Q1 2024. Sales in the quarter were also impacted by multiple contracting delays and timing of material receipts. This sales profile was contemplated in our expectations that we shared in February. However, as Kathy outlined, we updated our estimates to complete the LRIP phase of the B-21 program late in the quarter. Lowered sales by nearly $100 million. As a result, Q1 sales were slightly below our expectations, however, we are still on the path to achieve our full-year sales guidance. In total, aeronautic sales were down 8% year over year, due to lower B-21 sales, and timing of production and material on mature programs, including F-35. DS first-quarter sales increased by $68 million or 4% primarily due to the continued ramp on the Sentinel program, and higher volume on certain military ammunition programs. Mission system sales continue to expand up $148 million driven by numerous programs throughout their portfolio. Higher sales on Sabre, EW, international ground-based radar, and marine programs all contributed to the 6% growth. And space sales were lower primarily due to previously communicated wind down of work on two programs. Which totaled approximately $230 million of year-over-year headwinds as well as from lower volume on CRS and FDA satellite programs. Moving to the bottom line. Our first-quarter segment operating income results are shown on slide five. As previously discussed, AS adjusted their estimate to complete the phase of the B-21 program. The total loss provision was $477 million across the five LRIP lots. Which had the effect of lowering our company Q1 segment operating margin rate to 6%. At DS, first-quarter 2025 segment operating income grew by 15%, and their margin rate improved to 9.9%. This improvement was driven by higher volume, improved performance, and an increase in net favorable EACs. Admission systems, quarter one operating margin decreased 4% due to lower volume on certain fixed-price restricted production programs, and investments made in connection with restricted business opportunities. These reductions were partially offset by higher net EAC adjustments. And at Space, first-quarter segment operating income was driven by lower sales volume, partially offset by improved program performance. Notably, Space's net favorable EACs improved to $29 million in Q1, leading to an 11% operating margin rate. Outside of the B-21 adjustment, segment operating income was consistent with the first quarter of 2024 and net favorable EACs were higher by over 30% year over year. This performance is driven by disciplined program execution, our focus on driving cost efficiencies in our business. Moving to year-over-year EPS compare on slide six. Earnings per share were lower primarily due to the adjustment on B-21. Which totaled $2.74 per share, on an after-tax basis. Lower sales volume and as expected higher corporate unallocated expense, also contributed to the combined $0.25 of year-over-year headwind. Before covering our updated guidance for 2025, I want to take a moment to talk about Q1 cash flow. Consistent with our seasonal pattern and expectations, first-quarter results reflected a usage of cash. Operating cash outflow of $1.5 billion reflected an increase in vendor payments as well as lower billings and collections compared to our prior year. We also invested nearly $300 million in capital expenditures during the period. We continue to expect cash flow to gradually ramp throughout the year, with the largest quarter of cash generation in Q4 consistent with our historical performance. And from a capital deployment perspective, we repaid $1.5 billion of notes that matured in January. As we indicated on our Q4 earnings call. We also returned nearly $800 million to shareholders in the form of dividends and share repurchases. Turning to company guidance on slide seven. We continue to expect $42 billion to $42.5 billion in 2025 sales. Representing 3% to 4% organic growth. Looking forward, we expect mid-single-digit sequential growth in Q2, followed by a sales ramp in the second half of the year, driven by awards booked in Q4 2024, the timing of subcontractor deliveries and material receipts, as well as from new program awards. With respect to evolving trade policy, the vast majority of our supply chain is sourced from domestic suppliers. After a thorough review of our supply chain, we have a good understanding of the risk areas, and are taking mitigation actions where possible to address them. Full-year segment operating income and EPS guidance have been updated to reflect the B-21 adjustment, also had the effect of lowering our estimated tax rate for the year to high 16%. And we are reaffirming our 2025 free cash flow guidance range of $2.85 billion to $3.25 billion. At the segment level, we are reaffirming our sales expectation at each of our segments. We continue to expect mid-single-digit growth at AS and MS, driven by continued ramp on B-21, TACOMO, and multiple programs across our diverse MS portfolio. We expect DS will achieve double-digit organic sales growth this year, driven by IVCS backlog, Sentinel, and higher volume in our weapons business. The divestiture of the training service business is on track to close midyear. Assume early Q3 for your modeling purposes. And we continue to project space sales of roughly $11 billion enabled by continued production on existing programs and new competitive wins in the restricted domain. We have updated our OM rate expectations at AS, and now expect an OM rate of low to mid-6%. Are reaffirming our margin rate expectations for the other segments, and with each projected to increase from 2024 actual results. We expect a gradual ramp in overall segment margin rates, over the coming quarters driven by MS. This profile is enabled by continued strong program performance, execution of cost-saving initiatives, and seasonal volume shifts to higher margin production programs later in the year. To conclude, our portfolio is well aligned to customer priorities. And we will continue to drive efficiencies manage risk, and elevate performance to deliver profitable growth over the long term. This will enable us to execute our capital deployment strategy, which prioritizes investing in innovation and capacity to meet our customer needs. While returning cash to shareholders. With that, we are ready to begin Q&A. Operator: Our first question comes from Kristine Liwag with Morgan Stanley. You may proceed. Kristine Liwag: Hey, good morning, everyone. Kathy Warden: Good morning, Kristine. Welcome back. Kristine Liwag: Thank you. So, Kathy, maybe on the B-21, what milestone should we watch for to track the risk retirement of the program? And regarding the macro environment, you put in for the charges, how should we think about this regarding tariffs? Could there be a risk that you could see further charges on the program? Kathy Warden: Thanks, Kristine. So let me start by talking about the phases of the program and where we are in performance. We are completing the EMD phase of the program, and are in the stages of tests that prove out the objectives of the aircraft being met through those performance test milestones, and the government has released information as we progress through the test program to help provide some transparency that the aircraft is performing in line with the model performance and the test objective. We also have started low-rate initial production, and as we've talked about, we are working through the first two lots of production in LRIP, and we had even started long lead up through lots four. We've built a good bit of experience now in building the aircraft. And as we have progressed through the build process, we made the determination working with the Air Force to reduce risk as we scaled to the program of record which will happen at the end of LRIP, and even to position us now to ramp above the program of record. And those manufacturing changes and associated costs that we talked about being reflected this quarter are results of that learning in the process of scaling. But it's good to have that learning now understood and behind us before we ramp further through LRIP and then eventually into full-rate production. We also have the sustainment and modernization still ahead on the program. We've talked in previous calls about having started some work on modernization and we are building out the capability to train and sustain on the aircraft as well. So those will fit gradually face them over these next several years. And there isn't change based on what we're reporting this quarter in that profile for the program. Kristine Liwag: Great. Thank you, Kathy. And maybe could follow-up on AI. You mentioned earlier that, you know, you're seeing opportunities there. Can you provide more color on where you see Northrop Grumman Corporation's strategic strengths are in AI versus commercial players or new disruptive players? How much of a game-changer are your capabilities in this? Kathy Warden: Yes. So we have been investing in artificial intelligence as it's known today. But for decades, we've been incorporating the concepts of distilling large amounts of information through automation into actionable software that helps enable a user to do everything from flying an aircraft with our autonomous aircraft to the billing large amounts of information for targeting to helping to assimilate situational awareness and make decisions on how to pair sensors and shooters like with the IDCS program, which I mentioned in my prepared remarks. All of these applications of artificial intelligence help us to make our sensors, our software more valuable for the user and to do more in short periods of time to prepare that information for the user to act more quickly. And so that is a mission expertise that we possess and the building of that software and the integration of artificial intelligence techniques is something that our team understands how to do. But as that technology matures, we absolutely can partner with other companies who are investing usually for commercial applications and bring their platforms in to facilitate our software development. And that's largely what we're doing in the partnership that we have with companies like NVIDIA. Kristine Liwag: Great. Thank you very much. Ken Crews: Thank you. Operator: Our next question comes from Robert Stallard with Vertical Research. You may proceed. Robert Stallard: Thanks so much. Good morning. Kathy Warden: Good morning. Robert Stallard: Kathy, in your prepared remarks, you noted that it's pretty unstable situation with your US customer at the moment. Did you give us the expectation that you hope things or expect things to improve from here? But some of the commentary from the Pentagon suggested there's gonna be significant head counts, and there's obviously still the potential risk of the doge. So what gives you the confidence that this situation, this process problem is gonna improve from here? Kathy Warden: Well, thanks, Rob. There definitely is uncertainty in the environment, and it's in multiple forms. The one that I referred to in my prepared remarks was delays in getting new awards and those positions being made. What I would say is we are starting to see those award decisions move forward and that was the reason for my comment that we expect that to improve here in the second quarter and throughout the year. We are not seeing direct impact from the government's reduction of personnel in our ability to still deliver on programs and get through the milestones that we have on program. We are watching that. Certainly, we wanna make sure that the government oversight is sufficient and there, but I also believe there is room for efficiencies and we expect that in some ways, the government will be able to continue their work. Even as they experience less personnel. And finally, I would just say that we are looking towards the budget to provide clarity on the administration's priorities. But what we are hearing is that there is strong alignment to the areas of capability that Northrop Grumman Corporation provides, and we also are expecting the increases in top line that I talked about in my prepared remarks. So we'll be watching all of that closely as it unfolds over the coming months. Robert Stallard: Okay. Thanks, Kathy. Just a quick one for Ken. On the B-21 EAC adjustment, what's the anticipated cash impact from this? Is it basically the same number but spread over time? Ken Crews: Yes. So the right way to think about the cash impact due to the incremental charge is no material impact to 2025. Of the incremental charge, it will be spread primarily through 2026, 2027, and 2028. Robert Stallard: Thank you very much. Ken Crews: Thank you. Operator: Next question comes from Ronald Epstein with Bank of America. You may proceed. Ronald Epstein: Hey. Yeah. Good morning. Yeah. If we dig a little deeper on the B-21. If we peel back the onion, what changed from a quarter ago to now to make you feel like you had to do this now? And I guess that gets at how confident can we be that this is it? Right? I mean, think we've all watched the industry for a while, and it seems like these charges tend to have a tail. And that's the big fear. So are we gonna get one of these every year? I mean, how should we think about it and be confident that this is it? Kathy Warden: The drivers of the charge were related to a process change and that process change support the accelerated production rates that I referenced. And so in that way, it's a very defined change, and we now understand and have the learning from making that change, and that's not something we will need to do again. This positions us to ramp to the quantities needed in full-rate production. And even as I noted, we can ramp beyond the quantity in the program of record, which is something that we and the government decided was important. For the optionality, to support the scenarios that they have been looking at to increase the current bill rate. The second part of the charge that I mentioned is related to the quantity of general procurement materials as well as the price. And there, we had underestimated the amount of consumption of those materials as well as the price increase that we are seeing. And so in many ways, this is a reflection of the macroeconomic environment coupled with the learning that comes through building the aircraft now having multiple under our belt and the adjustment this quarter has the benefit now of having those first two lots progressing through production. So we don't expect these learning to repeat themselves. But, of course, we've been transparent that there remain both risks and opportunities on the program as we complete the first five LRIPs. Most of the change that we have experienced and that have resulted in now the close to $2 billion of charges on the program are due to inflationary factors and so we have done our best to execute well on what we can control and at the same time reflect both macroeconomic risks in our EAC. So we have updated those. But we will continue to monitor and mitigate those inflationary pressures as we experience them. Ronald Epstein: Got it. Got it. And then maybe as a follow-up on Sentinel, you know, it's another program that's kinda made some headlines. How confident should we feel about the profitability on that given the potential changes to that program? Kathy Warden: On Sentinel, we continue to progress well through the development phase of the program, and we as I said, have progressed in design maturity and even testing of the missile. And so we continue to grow in confidence in the design of the system that we are building. We are partnering with DOD and the Air Force to restructure the program. And as part of that restructuring, we are working with the Air Force on options to reduce the overall cost and schedule on the program and have identified opportunities to them to do so. What we look at in that restructuring is to ensure that the changes in requirements are adequately reflected in the design and ultimately in the contract and we'll be working to do that with the government. And I will just remind you that Sentinel is a cost-plus program, and we have not yet estimated the cost associated with LRIP from a contractual standpoint. Ronald Epstein: Got it. Alright. Thank you very much. Kathy Warden: Yep. Operator: Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu: Good morning, Kathy and Ken. And Todd. Maybe just a broader question again starting out with tariffs because it's been a hot topic this morning. How do we think about the tariff impact on the overall Northrop Grumman Corporation portfolio and just international relationships how that changes your potential opportunity set under the current administration. Kathy Warden: So Sheila, let me start with what we believe to be the impact of tariffs on our portfolio. We do direct source a small part of our supply chain, about 5% of our total spend, so less than a billion dollars annually. And it's from countries out of the US, primarily in Europe. When we look at the second and third tiers of our supply chain, we have purchasing agreements in place. With the vast majority of those that extend over a long period of time. And we have done an assessment and believe that most of the costs that we might incur due to trade policy are incorporated and covered under our contracts with the US government. So we do not see at this point in time a significant risk to our company related to the trade policies as we understand them today. We're gonna continue to monitor that closely, and we're already taking action to account for and mitigate the risk that we do see, particularly in the availability of certain components that we need for delivering on our program. Sheila Kahyaoglu: Great. And maybe if I could ask one specific twelve point nine percent in the quarter. They lag the midpoint of your guidance of mid-fourteens. How do we think about the drivers of that? You mentioned investments and mix of microelectronics. So how do we think about the improvement in MS profitability? Ken Crews: Sure. Thanks for the question, Sheila. So as we mentioned in my prepared remarks, we made an investment that would generate significant value over the long term. While we're paying the initial investment cost plus our required rate. Return. That was known. So we knew of that we put our guidance forward at the mid fourteen percent range. So as we think forward with mission systems, what is driving the margin profile in the future is the ramp particularly on their mature accretive margin programs throughout the year. As well as mission systems is making significant progress on efficiencies in the business. And so as we harvest those efficiencies, it will impact our rates, which then, you know, flow through to the programs driving that improved margin profile in the second half of the year. Sheila Kahyaoglu: Thank you. Ken Crews: Thank you. Operator: Next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle: Hey. Good morning. Good morning. Good morning. Ken, are you reiterating the previous free cash flow targets for 2026, 2027, and 2028? Ken Crews: Yes. So let me touch on that. We are, at this moment, holding the guidance ranges that we provided or the multiyear guidance ranges for cash flow. And we are absolutely focused on performance and rationalizing investment to execute within those ranges, Scott. Scott Deuschle: Okay. And 2028, still good for the four billion? Ken Crews: Yes. At this point, we're holding all guidance. Scott Deuschle: Okay. And then just on this, for 2026 and 2027, would it be reasonable to think that you're biased toward the lower end of the prior range given these B-21 costs or rather mitigating offsets that we should be mindful of? Ken Crews: Permite is the majority of the impact is 2026, 2027, and 2028, but I wanna highlight the fact that we are over those periods. Right? When we put the ranges together, we account for various risks and be within those ranges. Thank you. Operator: Thank you. Our next question comes from Seth Seifman with JPMorgan. You may proceed. Seth Seifman: Hey, thanks very much and good morning. Kathy Warden: Good morning. Seth Seifman: Yeah. Not sure how specific as possible to get on B-21, but if we think about the you know, quantifying the portion of the charge related to the process charge versus the portion related to higher cost. And also would the process charge have been made if there was not an intention to create some optionality about moving to a higher production rate. Kathy Warden: So, Seth, I can't quantify because of the classification of the program what relates exactly to the process change versus the procurement material. But the first is larger than the second, which is why from a disclosure, we talk about them in that order. And in response to your question of whether we would have made that process change, if not for the need to reduce risk, as we scale to the program of record and then ultimately to position us to grow beyond the program of record, we would not have made those changes at this time if not for those considerations. But we are glad that we have made them. Because that learning only would have compounded if we would have waited later in the program and had a higher production volume. We also believe that providing this optionality to the government now as they are looking at force structure was an important enabler to their derisking of options beyond the program of record. So I don't at all regret that we did this and that we did it now. And it is a good thing for the program overall to have this learning behind us. Seth Seifman: Okay. Great. I'll leave it there for this morning. Thanks very much. Kathy Warden: Thank you. Operator: Thank you. Our next question comes from Michael Ciarmoli with Truist Securities. You may proceed. Michael Ciarmoli: Hi, Hey. Good morning, guys. Thanks for taking the question. Just hate to do it, but to stay on the B-21. What Kathy, what's the process change at the request of the customer working with them to ramp faster and ultimately to deliver above the current stated volume. And then, you know, just on the consumption of the material, was that you know I think you called out that you were you had more consumption of material. Was that more just kinda thinking about scrap and waste in the process? Kathy Warden: Yes. So we did make the decision joint with the Air Force to make the process changes. And as I said, it really was to reduce risk as we scaled to the program of record and to provide for options beyond the program of record. The Air Force is continuing to evaluate those options and we'll look for more information as the budget request is finalized. In part of your question, you also are asking about whether we saw some of the material costs increases as a result of scrap and rework, to some degree, it's really about the consumption of the material necessary in the build process, but some of that absolutely is the amount of scrap and waste that we have in the process and the estimate that we made on that early in the program versus the actual performance. Michael Ciarmoli: Got it. Helpful. And just if I may, I think previously you called out maybe $200 million in supply costs that have been removed. I mean, how are you thinking about that number maybe with the evolution of tariffs and, you know, potentially tighter access to materials. Does that $200 million in cost continue to stay out of the system, you think? Kathy Warden: So we've talked about $200 million enterprise-wide of cost efficiencies, and we do see a path to keep that cost out of the system and continue to build on it. We are driving cost out not just through supplier engagement in constructing more efficient supplier utilization and pricing, but also through things like facility optimization, the implementation of our digital ecosystem, which is driving rework out of our system. And so those things are the bigger driver of that $200 million cost efficiency. But, certainly, supplier efficiency is part of it, and we don't expect that to be impacted by tariff. Michael Ciarmoli: Great. Guys. Appreciate it. Operator: Our next question comes from Doug Harned with Bernstein. You may proceed. Doug Harned: Thank you. Good morning. Good morning. On the B-21, if we look beyond the five initial LRIPs here, I guess, first, the changes that you're talking about and the costs that are coming through. Should we expect any impact in the next nineteen airplanes, which you've talked about before? And then also as you think about the larger program of record, I mean, the Air Force has talked about a hundred airplanes, but I have to if I think back, I can't remember in the last thirty years that we saw a major aircraft procurement program actually end up increasing beyond the initial program of record. So is there somewhere we would we would see that? Are there have there been announcements, or should we expect something in the budget? Kathy Warden: Yes, Doug. So let me answer the first part of your question. First about the NTE units. So bottom line upfront, we continue to expect the NTE aircraft to be profitable. The loss largely relates to those higher manufacturing costs that I talked about from the process change we made. And that near-term disruption and the associated costs will not extend into the unit, and we actually expect these changes will positively impact our ability to deliver the NTE units profitably. The increases in projected cost and quantity of general procurement materials could negatively affect the profitability of the unit. So when you think of the NTE aircraft overall, we do still expect those to be profitable. With regards to the Air Force messaging around increasing the quantity of B-21 and potentially the rate at which they are being built. That has been spoken about in congressional testimony, particularly from the users of B-21, think the combatant command that is looking toward what they would like to have for completing their mission and their cab been discussions about raising the quantity. And so that's is the source that you can look to in open source to reflect that increased demand signal that we've been talking about. Doug Harned: And then just as a follow-on, switching over to defense systems. You've talked about IVCS and ten billion dollar potential international demand. Can you talk about how that's proceeding and how you see that now? When do we should see that impact? So it seems quite substantial and positive. Kathy Warden: Yes. IVCS is being fielded for the US Army in including expansion of the mission to include the defense of Guam, We also have Poland, as you know, that is expanding their use of IBCS. We first started with their mid-range air defense, and now we're moving to their near-range air defense. And we've talked before about a dozen countries who have expressed interest in procuring IDCS that are in various stages of maturity in the pipeline. But we are seeing great interest there and we continue to add additional countries that are looking to IVCS as the baseline for their architecture. We also, as we have responded to Golden Dome, request for information, incorporated the capability of IBCS, because its ability to integrate sensors and shooters. Is absolutely at the core of part of the underlayer for missile defense. For the homeland in the US as well. Doug Harned: Very good. Thank you. Ken Crews: Thank you. Operator: Our next question comes from Matt Akers with Wells Fargo. You may proceed. Matt Akers: Hey, guys. Good morning. Thanks for the Kathy, you had mentioned at a conference in the quarter that there had been, you know, some instances of contracts maybe taking a little bit longer to get signed during the quarter. Could you give us kind of a quick update to that? Is that something you're still seeing or is that dynamic improved a little bit? Kathy Warden: We have not seen those contracts get awarded yet. We are seeing them progress through the process of being reviewed and we hope ultimately decided and communicated. So we are holding to the expectation that we will see some of those awards start to happen this quarter and certainly in the second half of the year. Matt Akers: Yeah. Got it. And I guess any color you can add on what those contracts are specifically? Is that focused on one area of your business? Or, I guess, just anything else you can share? Kathy Warden: Sure. They're actually examples in all four segments of our business. Large aircraft program, in our aeronautics business, multiple space awards, in restricted, particularly communications, We have in mission system some restricted opportunities that we are anticipating will get awarded over the summer now. And in defense, it's largely munitions where we have a munitions contract we expected award in the first quarter and now are expecting to happen in the second or third quarter. Matt Akers: Got it. Okay. Thanks. I'll leave it there. Ken Crews: Thank you. Operator: Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton: Thanks. Maybe for Ken. I'm not sure. In January, I know you were looking for flat year-on-year sales growth in the quarter, and then in February, you updated that and then you came in below it. And I hear you on the EAC for the B-21. And you sort of alluded to some slowing progress in getting orders under contract. But doesn't sound like those orders are under contract yet, and you're looking for another decline year-on-year in the second quarter. So I guess what gives the confidence for that mid-teens acceleration you need in the second half of the year if bookings aren't in your hand and you've kind of seen what you've seen in the first quarter? Ken Crews: Yeah. And so thank you for the question. I'll put it into three buckets in terms of what's driving the ramp in terms of the second half of the year. The first one is the large awards we received at the end of 2024, and those fall in the lines of TACIMO and IVCS. As well as international activities early around ground-based radars. Again, I'll reemphasize that in our backlog. And so just from a natural timing progression when you think about ramp up in timing of materials that will happen in the second half of the year. And then when we think about the natural as part of our original assumptions in terms of just our current backlog growing, we had planned ramps of grocery restricted airborne sensors. We got planned ramps in terms of just timing on Sentinel our weapon systems across multiple activities like Argon, a stand-in attack weapon, as well as timing on strike, and that's just a few examples. And, again, that sales growth is driven by backlog. And then the other piece would be, which is primarily space, is new competitive awards. And we do expect we believe we're well-positioned for those and we do expect to hear about those in the second quarter, and then that's what drives the remaining piece of the growth profile. Myles Walton: Okay. So it wasn't anything in the quarter that was turned off. There was no stop works or customer decision points that were turned off. It was simply a timing of receipt of contracts. Ken Crews: Yes. And it's just timing. And then around the confidence pieces, when we think about it from a working capital in our inventory, once those get awarded, we are able to reduce that working capital. So it's associated sales real-time. Which also gives us confidence in our profile. Myles Walton: Okay. Alright. Thank you. Ken Crews: Thank you. Operator: Our next question comes from Ken Herbert with RBC Capital Markets. You may proceed. Ken Herbert: Yeah. Hi. Good morning. Kathy Warden: Good morning. Ken Herbert: Kathy. You called out I think, 14% of sales internationally in the first quarter. With all the strong bookings, are you how should we think about now maybe any upward momentum on international either as a mix in 2025 or just absolute growth off those sales this year? Kathy Warden: We are starting to see a significant pipeline of demand translate into firm international bookings. I did talk about our international sales being up 11% in the quarter. Perhaps even more, interesting for the long term is that our book-to-bill 2024 was 1.4 times than it was 1.45 times. In the first quarter. So we see it coming across a number of areas. We've talked already about ID and the dozen or so countries that are expressing interest. We didn't talk as much, but certainly significant interest in Argum and stand-in attack weapon, both Argum and Argum extended range have been approved for export. To a large number of countries, and we are in various processes of getting those awards on contract. I mentioned one in my prepared remarks. And then we also are continuing to see growth on aircraft platforms like E-2D and Triton. So it's broad-based in terms of where that international business is coming from. And, yeah, we see a significant portion of it in our defense systems business. They have had double-digit growth in international, and with the pipeline that we have and their portfolio in particular, we expect that to continue. Ken Herbert: Have your thank you. Have your assumptions at all changed on F-35 international sales this year into 2026 as a result of any of the more recent commentary on that program? Kathy Warden: Our expectations have not changed. The communications that we have had with the Prime are to continue producing at our max rate, which is 156 aircraft. That's what we're on contract to do, and so that's what we continue to do. And so we don't anticipate any change. Ken Crews: Great. Thank you. Ken Herbert: Thank you. Operator: Next question comes from David Strauss with Barclays. You may proceed. David Strauss: Thanks. Good morning. Good morning. Kathy, one follow-up on B-21 and then one follow-up to that. On B-21, this process change, that you've put in place to allow for accelerated production or higher clients, whatever it may be. Isn't this something the Air Force should pay for, and will they ultimately pay for it? It's just they can't pay for it given the current contract structure that you're working under. That's my first one. And then second one, if you could NGAD F-47, could you talk about what role, if any, you have on the Boeing aircraft? Thanks. Kathy Warden: Sure. So, look, we made the decision jointly with the Air Force to make the change, and we believe in the long run, it's not only in the best interest of national security and providing the Department of Defense the options that they need to have a force structure that meets their expanding requirements, but also for the profitability of the program over the long haul. And that's the decision framework that we operate within is to think about what is needed by the nation and our shareholders not just each quarter, but over the long duration that this program will be adding value. In regard to our role on NGAD, given the classification of the program, we can't disclose any information specific to the program, but you know that we are a merchant supplier of mission systems, and we remain fully committed to supplying those advanced capabilities for government customers and prime. And that our sensors are easily scaled and reconfigurable. For a wide application across a variety of platforms and domains. And, you know, simply leave it at that. David Strauss: Okay. And any update on timing on FAXX? Kathy Warden: We I do not have an update to provide you. The Navy remains committed to the program, and we do expect to hear something soon. David Strauss: Great. Very much. Ken Crews: Thank you. Operator: Thank you. Next question comes from Scott Mikus with MELIUS Research. You may proceed. Scott Mikus: Morning. Cash, quick question. Defense Systems, it looks like there was an explosion at a plant in Utah. That produces solid rocket motors. So I'm just wondering how you're thinking about that in terms of the outlook at the yes. Is there any potential impact to stand and attack weapon or Argum ER? Kathy Warden: Yes. Thank you for the question. It is actually part of our space business. This is where we build the larger solid rocket motors, not the tactical ones that go into missiles. And so it was in Promontory, Utah. And it was a building that where we produced an ingredient to our solid rocket motor propellant but we have other sources of supply outside of Northrop Grumman Corporation that will be able to provide us that ingredient. So we do not expect any impact to any of our programs. We've specifically been asked about Sentinel because Promontory is a production site for those solid rocket motors, and there is not expected to be any impact to Sentinel or any other program. And, again, it would be in our space business, not defense systems. So there's absolutely no correlation to programs like Argum, Argum ER, or Stanton weapons. Scott Mikus: Okay. Very helpful. Second question, DOD has highlighted a lot of need for investment in space. So is there a possibility that the classified space program that was canceled could end up being restarted under this new administration? Kathy Warden: You know, certainly, the requirements are what drive the need for development and fielding of capabilities. And so to the extent that the requirement has not gone away, we do believe that programs could be reevaluated and started under this administration to meet those requirements. Our current year expectations don't reflect that, but certainly, we continue to provide information to the government to help them understand their options for meeting those requirements. Scott Mikus: Thanks for taking my questions. Sure. Operator: Alright. We're gonna have to leave it there. Kathy Warden: Great. Well, let me wrap up by thanking you for participation in today's call. As you sensed, we are optimistic about the continued strong demand for our products, the growing global defense budgets that we see, and the solid execution of our team across the majority of the business. And while we are disappointed with the B-21 adjustment this quarter, the underlying business fundamentals in our company are strong. And we continue to derisk the B-21 program through the investments that we're making. So for the remainder of the year, we're gonna continue to focus on adding to our backlog, improving profitability in our business segments, and generating the cash that fuels our deployment plan. Look forward to giving you another update in the second quarter, and wanna thank you again for joining today's call. Ken Crews: Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's Fourth Quarter 2024 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Josh, and good morning everyone, and welcome to Northrop Grumman's fourth quarter 2024 conference call. Before we start, due to technical issues with our provider, we have provided a new dial-in information for the analysts. So, please use that to dial into the call. Moving on, matters discussed on today's call, including guidance and outlooks for 2025 and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filing. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. In addition, we'll refer to a presentation that is posted to our Investor Relations website. On the call today are Kathy Warden, our Chair, CEO, and President, and Ken Crews, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd, and good morning, everyone. Thank you for joining us. At Northrop Grumman, we remain steadfast in our mission to innovate and deliver cutting-edge technologies that enhance national security for the U.S. and our allies. We are harnessing our investments to manufacture at scale the integrated hardware and software solutions that give our customers an advantage. Our strategy, which is based on technology differentiation, has resulted in another year of strong financial performance. We set a new record backlog, including significant new competitive wins and follow-on awards. We ended the year with a backlog of approximately $91.5 billion and a book-to-bill ratio at 1.23 times, providing a solid foundation for future growth. This was driven, in part, by a new competitive win on the TACOMO program, and an award for the second LRIP lot on B-21 in the fourth quarter. Over the past three years, our book-to-bill is 1.15 times, reflecting strong ongoing demand for our capabilities across U.S. and international markets. In the fourth quarter, we also booked $900 million for the next iteration of Poland's IBCS system, bringing our international book-to-bill ratio for the year to 1.4 times. Given this strong demand, we now expect our international business to accelerate and grow faster than U.S. sales in 2025. Our proven ability to grow backlog and deliver key capabilities to our customers has led to another year of strong top line growth, with 2024 sales up more than 4%, building on the momentum over the last five years, where our top line has grown by 30% organically. Meanwhile, our focus on performance and driving efficiencies in our business is leading to margin expansion, with segment operating margin dollars growing faster than sales. And our free cash flow performance for the year was outstanding, increasing 25% year-over-year to over $2.6 billion at the high-end of our guidance range. As we look forward, our guidance reflects our expectation for continued solid organic growth of 3% to 4%, further segment margin expansion, and double-digit free cash flow growth again in 2025. This guidance is consistent with the outlook we provided you in October. At Northrop Grumman, our portfolio is well-positioned to provide critical deterrence capabilities and differentiating technology that address peer threats and achieve the shared goals of equipping the world's greatest military, reaching new frontiers in space, and improving the ways industry and government do business. We look forward to partnering with the Trump administration to accomplish these objectives. We expect Congress to complete FY'25 appropriations this spring, which is assumed in our guidance. As discussions continue regarding the U.S. defense budget and potential additional investments, we continue to see strong bipartisan support for national security. And global defense budgets are growing as our allies seek to counter aggression from increasingly sophisticated threats. This is driving an increase in demand, particularly in areas such as crewed and uncrewed aircraft, advanced weapons, and missile defense. These dynamics give us confidence in our strong international growth outlook. At our core, we are a technology company, and we are well-positioned on programs that are essential to the U.S. and our allies' national security. More than just an integrator, we possess technology depth throughout Northrop Grumman, not only in what we produce, but in how we produce it. This combination allows us to compete and win on priority programs, and support our customers' goals of peace through strength. One example is our government-trusted design and development of specialized microelectronics for the Department of Defense through our accredited foundry. In our microelectronic center, we build on our past to innovate for the future, and continually disrupt our own technology to bring unmatched capabilities to the U.S. military. Our terahertz microchip, which operates at one trillion cycles per second, is the fastest in the world, according to the Guinness World Record. This type of innovation is realized through material science, new hardware design and manufacturing techniques, and advanced software development. All capabilities that we have built and refined over time and possess at scale so we can deliver for our customers' most challenging missions. As a result of having this capability, our microelectronics business grew over 20% in 2024. And equally important, it creates competitive advantages for Northrop Grumman by providing mission-critical technologies that flow upward through our value chain, are married with Mission-IS software, and then are designed into product areas such as sensors, communications, processing, and security solutions. We deliver these game-changing capabilities as a prime contractor on platforms we build and also offer them as a trusted supplier to other platform manufacturers. As technological change accelerates, it becomes more important that we continue to deliver technology discriminators, whether that's tying together capabilities for family of system solutions or developing additional use cases for our missionized AI that enhance our solutions or accelerate decision-making. We are leveraging our own hardware and software and also partnering with leading companies in areas such as AI to ensure our customers have the most advanced equipment in the world. Innovation and having the capabilities to meet our customer needs are important. But the ability to scale production and field new systems at speed are core to ultimate mission success. As we've grown our capacity, we've also been implementing advanced manufacturing techniques, automation, and digital factories across our company. We are designing, manufacturing, and sustaining our next generation systems with digital ecosystems that are improving our agility and efficiency and therefore lowering our costs and time to field. These new manufacturing technologies, along with the capacity investments we've made, enable us to rapidly ramp production. We've done this in areas like solid rocket motors, advanced weapons, and satellite manufacturing. And these investments also allow us to more seamlessly transition major programs from design to production, like we've done with the B-21, all of which have been and will continue to be important drivers of growth for our company. Next, I'd like to update you on the plans we've previously shared to drive margin expansion. We continue to expect favorable mix to be a driver as we ramp on production programs and grow our international sales over the next several years. Beyond this, we are taking proactive actions to drive efficiencies across the company. These actions include implementation of digital tool sets that reduce process time, automate tasks, and maximize output for our technical team. We're streamlining our organizational structure, optimizing our supply chain spend, and reducing costs through improved utilization of our resources and facilities. We removed over $200 million of cost in the enterprise in 2024 alone. We have a laser focus on performance excellence, driven by delivering first-time quality and robust risk management processes. Altogether, these cost efficiency initiatives, mixed shifts, and focus on performance give us confidence we can reduce costs to the taxpayer, while also enhancing segment margins as we progress through this decade. This margin expansion coupled with continued growth in our business and reduced capital investment are the drivers of our multi-year free cash flow growth outlook. We continue to pursue a balanced capital deployment strategy that supports our customers' requirements and returns cash to shareholders. Over the past two years, we've invested over $3.5 billion in CapEx to expand our capacity and implement the advanced manufacturing lines across our company. And we are planning to invest another $1.5 billion in 2025. We've also delivered over 100% of free cash flow to shareholders last year. We continue to believe we have the best portfolio that is aligned to our customers' highest priority mission. However, as we always do, we continuously evaluate the portfolio to ensure that we are investing in the businesses that are core to achieving our strategic vision. This includes accessing any gaps that may emerge over time or businesses that may make sense to exit. With this in mind, we've decided to exit our training services business that is part of defense system segment. Today, we announced that we have signed an agreement to sell the business to Serco, Inc. for $327 million, and we forecast this transaction to close toward the middle of the year. This is an important capability for our customers, and we expect the team to continue to deliver world-class training services under new leadership, allowing us to focus on our core business. 2024 was marked by strong program execution, compelling financial performance, implementation of operational improvements, and impactful strategic initiatives that have positioned us for long-term success. Our ability to capitalize on opportunities and deliver exceptional results is a direct testament to the hard work and dedication of every member of our company. Our strategic priorities remain focused on fostering innovation, enhancing operational excellence, and expanding our impact for our customers. So, with that, I'll turn the call over to Ken to discuss our fourth quarter and full-year financial results, as well as our 2025 guidance. Ken? Ken Crews: Thank you, Kathy, and good morning, everyone. As Kathy outlined, we delivered another strong year of financial performance in 2024, delivering on or exceeding the financial commitments that we communicated a year ago. This sustained performance is a reflection of our strategic positioning, continued focus on operational excellence, and disciplined approach to financial management. We continue to see robust and enduring demand for our capabilities in both domestic and international markets. Reflecting this demand, we booked $17.3 billion in new awards in the fourth quarter and approximately $51 billion for the full-year. This led to a record backlog of over $91 billion, an increase of 9% compared to last year, positioning the company for continued growth. Moving to top line, we generated sales of $10.7 billion in quarter four and $41 billion for the year. 2024 sales increased by 4.4% with growth across three of our four businesses. Transitioning to segment performance, NGAS grew to $12 billion in 2024, an increase of 12% compared to the prior year. Sales volume increased throughout the portfolio and was driven by the production ramp on B-21 and from higher activity on the F-35 program. Sales were also higher on autonomous programs, such as Triton and Global Hawk, and we saw higher volume on E2 sustainment and modernization work. DS posted sales growth of 3%, driven by higher sales on Sentinel, advanced weapons, and ammunition programs, partially offset by lower volume due to the completion of an international training program. Mission system sales increased by 5%, led by higher volume on advanced and microelectronics and technology programs, and in the space segment, 2024 sales were down modestly, as expected, compared to the prior year due to the wind down of a restrictive program in NGI. As we previously stated, the remaining space portfolio grew at mid-single digits in 2024, driven by higher sales on Space Development Agency satellite programs and numerous other programs. Turning to the bottom line, 2024 segment operating income was over $4.5 billion, and our segment operating margin rate expanded to 11.1%. Margins improved due to the proactive steps we've taken to further enhance performance and drive efficiencies across our business, as Kathy described earlier in the call. This performance led to an increase in net favorable earnings adjustments, totaling $350 million for the year. Strong segment performance was the driver for higher year-over-year earnings per share, as shown on slide six in our earnings deck. 2024 mark-to-market adjusted EPS was $26.08 and exceeded the high-end of our guidance range provided in October. Higher net pension income and a lower share count also provided an uplift. Moving to cash, we had an excellent quarter of cash generation in Q4, as is our historical pattern. Our full-year operating cash flow was $4.4 billion, and we invested roughly $1.8 billion in capital expenditures. This resulted in over $2.6 billion in 2024 free cash flow, near the high-end of our guidance range, and up a notable 25% compared to 2023. Next, I would like to provide an update on our pension results and multi-year estimates. Asset returns in 2024 were 4.7%, below our long-term expected rate of return of 7.5%. Meanwhile, the FAS discount rate increased by roughly 60 basis points to 5.73%; more than offsetting the impact from lower asset returns. The net result, along with updated census data, is a 2024 mark-to-market after-tax benefit of $332 million, or $2.26 a share. Looking forward, these results translate to slightly higher expected CAS recoveries and a reduced FAS pension benefit, lowering overall net pension income compared to the prior outlook. Importantly, our pension plans remain fully funded, and we continue to project minimal cash pension contributions over the next several years. Before covering our 2025 guidance, I'll highlight recent changes to our portfolio. In addition to the upcoming divestiture of the training services business, which has an annual run rate of $300 million in sales, the strike and surveillance aircraft services business unit has been realigned from defense systems to aeronautic systems, effective January 1st of this year. This business provides a variety of support and sustainment activities, primarily on aircraft programs in our AS portfolio. This now aligns the full product life cycles of Northrop Grumman aircraft, allowing for more seamless development and sustainment of next generation aircraft. These actions, coupled with the completion of an international training program, create a portfolio at DS that is now centered around strategic deterrence, advanced weapons, and missile defense. Fourth quarter and 2024 results have been reported in the prior organization structure, and we've provided a few tables in our earnings release and slide deck that recast sales and margins for current and historical periods. Moving forward, we'll report first quarter 2025 results and beyond in the new structure. And our 2025 segment guidance also reflects the new structure inclusive of the divestiture. Turning to 2025, our segment guidance is included on slide eight in our earnings deck. Aeronautic sales are expected to be in the low $13 billion, representing mid-single-digit growth. This includes nearly 400 million of sales from the realignment previously mentioned. Aeronautics margins are expected in the mid to high 9% range and reflect higher sales on the LRIP phase of B-21. 2025 DS sales are projected in the low eight billions. We expect DS to be our fastest growing business in 2025. With double-digit organic sales growth driven by higher sales on Sentinel, IBCS, and our diverse weapons portfolio. Segment operating margin at DS is expected to grow faster than sales, with an OM rate of mid to high 9%. Sales at mission systems are projected to grow mid-single digits again in 2025, with sales reaching approximately $12 billion. And operating margins are expected to expand approximately 50 basis points to mid-14% as productivity initiatives continue to drive improved performance. We expect sales in the space segment of roughly $11 billion, reflecting a year-over-year headwind of $900 million from the wind down of our work on the restricted space and NGI programs. And we expect an OM rate of high 10% at space ahead of where we ended 2024. At the company level, our 2025 guidance is consistent with the outlook we provided on our Q3 call. Full-year sales are expected to grow 3% to 4% on an organic basis with first quarter sales and margins comparable to Q1 of last year. Keep in mind, the first quarter year-over-year company sales growth will be flat due to the program wind-downs in space with a majority of the year-over-year growth occurring in the second-half of the year. Full-year segment margins are projected to expand roughly 10 basis points, with margins also ramping throughout the year. This year-over-year expansion is driven by the continuation of our efficiency andproductivity initiatives, as well as international growth. Our guidance for mark-to-market adjusted EPS is $28.05 at the midpoint, up more than 7% year-over-year. Next, I want to take a moment to highlight several contributing factors to this outlook. First, the FAS/CAS pension adjustment is projected at 800 million, down 60 million compared to our prior outlook in Q3. Second, we are projecting corporate unallocated expenses of $280 million this year, up compared to our 2024 results and reflective of a normalized level of recurring expenses. The primary drivers of the reduced 2024 expense were state tax and environmental related benefits that are not expected to recur in 2025. Third, we expect a pretax gain from the training service divestiture of $205 million which will also flow through corporate unallocated. Our 2025 estimated tax rate is projected at low to mid 17% and we are reaffirming our 2025 free cash flow guidance range of greater than 15% growth at the midpoint. Speaking of cash, due to our strong performance in 2024, we ended the year with a cash balance of nearly $4.4 billion. In early January, we repaid $1.5 billion of notes that matured. This year, our investments in R&D and CapEx are projected at over $2.5 billion and we expect to return 100% of our free cash flow to investors. As we look ahead, there are many opportunities in front of us. The foundation we have built sets the stage for continued growth and value creation. Our investments in advanced technologies, forward-thinking strategies and disciplined financial management ensure we are well prepared to capitalize on emerging opportunities. I'm confident that together, we will continue to deliver outstanding results for all of our stakeholders. With that, let's open the call to questions. Operator: Thank you. [Operator Instructions] Our first question comes from Ronald Epstein with Bank of America. You may proceed. Ronald Epstein: Hey, good morning. So, there's been a lot of talk lately about an Iron Dome. Given the kind of work that you guys do both in space and in missile protection and so on and so forth, missile defense, can you give us any thoughts on how you're thinking about Iron Dome? Kathy Warden: Yes. Thanks, Ron. So, we welcome the urgency that the Trump administration is placing on protecting the homeland from escalating global missile threats. We think it is very timely. And as you've noted, we do offer end-to-end integrated air and missile defense capabilities. Just a few examples that might be relevant to a U.S. Iron Dome include capabilities that can disrupt missile launch. So, this is capability left of launch. We also have satellite-based missile detection and tracking, and we have interceptors for hypersonic weapons under development. And this, of course, is all in addition to the air and missile defense command and control systems that we build. So, when you think about an architecture to defense the U.S., particularly with the range that these missiles will need and the advanced threats that are emerging with hypersonic weapons, we think we're very well-positioned to support that architecture. Ronald Epstein: Got it, got it. And then, maybe just one quick follow on. When we think about growth in 2025, how much of a contributor is B-21 and GBSD? Kathy Warden: Both will contribute to growth in 2025. Both are more modest than the growth rates that they've experienced in the past just because of the place that they are in their life cycle. And so, we do continue to expect both to be less than 10% of sales in the company, but continuing to gradually increase from '24 into 25. Ronald Epstein: Great, thank you. Operator: Thank you. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle: Hey, good morning. Kathy Warden: Good morning. Scott Deuschle: Kathy, if the Air Force were to elect to accelerate production on B-21, would the incremental units that get accelerated have similar unit pricing as the existing aircraft in those lots, or would that be more of an open negotiation for any accelerated units? Kathy Warden: We would work with the Air Force to look at when those units would come into the contract. And obviously, we are accumulating more and more actual performance to help inform discussions with them about the right pricing. So, it would be premature for me to comment on where we expect that to land, but it would be a discussion. Scott Deuschle: Okay. And then, Ken, the guide imply some pretty solid margin expansion in Mission Systems? Maybe you could talk a little bit through the specific drivers that are supporting that margin expansion? Thank you. Ken Crews: Thanks for the question, Scott. And as you mentioned, when we looked into in 2025, the expansion of margin in Mission Systems is about 50 basis points, really proud of the Mission Systems team. Particularly, if you look at 2024, we had, as we scaled the business initial headwinds in Q2 and if you look at their performance since Q2, it's grown and they have done exceptionally well, ending the year with a 14.9% booking rate in quarter four. As we look forward, we're continuing to see the performance improvements driven by multiple factors. It's continuing to drive cost out of the business, leveraging the improvements that we made in our factories. As we progress and the business has scaled, we have made sure that we've developed our team in terms of being able to operate in a more effective and efficient manner as we produce those products. And then, obviously, the various digital technologies and the focus on cost reductions. If you look at Mission Systems, they have focused on reduced costs and even as a percentage of G&A, we're seeing it continuously reduce. And so, those are some of the primary drivers that give us confidence in terms of their ability to expand margins in '25. Scott Deuschle: Great, thank you. Operator: Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu: Good morning and thank you. Kathy, I think you called out in your script $900 million of headwind from MTI and classified when it comes to space, implies rest of the business is growing 2%. How are you thinking about just growth from LEO, GEO, NASA programs? And as a follow-up to that, when does the segment return to margin expansion or growth? Ken Crews: So, in terms of margin expansion, I'll take your second question first with space is, as you've seen year-over-year significant improvements when we think about earnings adjustments from what we saw in 2023 to 2024 and that's focused on the performance element and then driving efficiencies and reduced costs. And we continue to expect that focus and improvements from those efficiency initiatives. And as I mentioned in my prepared remarks is, we do expect space to continue to expand margins and delivering 2025 above what they delivered in 2024 at the high 10% range. And in terms of what's driving space overall growth is we do have, I just want to clarify the $1.5 billion of 2025 sales that became a headwind with about $600 million in '24 with $900 million in '25. That $900 million is primarily focused on the first-half of the year and we expect space to contribute to growth or return to growth towards the end of 2025 and then continue that expansion into 2026. The primary drivers of driving the growth overall is strategic comps, restricted space, the continued expansion of propulsion systems is what's driving that growth. Sheila Kahyaoglu: Great. Thank you. Operator: Thank you. Our next question comes from Douglas Harned with Bernstein. You may proceed. Douglas Harned: Very good. Thank you. Good morning. On Defense Systems, you've made a number of changes there. Kathy, could you describe what we should think of as Defense Systems sort of the theme there? In other words, it's much different than it was just a year ago. What are you trying to do with that segment? Kathy Warden: Yes. So, we have transitioned that segment over the course of the last year with the divestiture of training services and the movement of the sustainment portfolio into our AS business. Defense Systems now is largely a strategic missiles, tactical weapons and command and control business. And so, that aligns their customer focus more simply it also creates synergy across those three businesses you would expect it's the life cycle of missile defense if you will. And so, we're excited about that. But I also will say this synergy with AS to receive that sustainment business which has largely worked on either existing or soon to be fielded AS systems allows us to complete that lifecycle within the AS business looking at sustained systems and what's required to modernize them. So, we think this is beneficial to both segments in terms of the movements that we've made. Ken Crews: And then related to that, the Rocket Motors has been a big issue kind of industry wide. Clearly, you have your own capability there. How do you see the Rocket Motor portion of that business both in terms of if there's any bottleneck or any constraints for what you're trying to do, but also externally the ability to grow sales there. Kathy Warden: So, our Solid Rocket Motor business sitting inside of Defense Systems is mostly focused on tactical weapons and we have been growing that capacity and continue to execute funding to add to the capacity in the late '26 timeframe. We believe that the demand will be there to consume all of that capacity and probably continue to require more over time, but we are taking this in incremental steps to make sure that we don't get out ahead of capacity. And it's a whole variety of systems that we're supporting. It's often talked about as driven by stockpile replenishment of weapons that are being expended in regional conflicts, but it's also supporting new weapons that will be fielded to go into production in the later part of this decade. And so, that business is very diverse in terms of its pipeline and channels to market. Douglas Harned: Very good. Thank you. Operator: Thank you. Our next question comes from Seth Seifman with J.P. Morgan. You may proceed. Seth Seifman: Thanks very much and good morning. Kathy Warden: Good morning. Seth Seifman: Good morning. Kathy, in this administration and also some of the folks around it have been pretty vocal about looking to, I'm sure you've gotten questions over the years about defense startups and commercial technology. It seems like there is an effort in this administration to kind of accelerate both tapping into commercial technology and tapping into the capital that's in the commercial world. I guess, how does that make you think about anything related to the portfolio and what should be in it, what shouldn't be in it, where the focus should be Northrop's own capital deployment, any of those kind of big picture issues? Kathy Warden: Yes. Look, first of all, we embrace new entrants into the space. We often and in this case are teaming with companies that bring new ideas or new technology. It does not cause me to question our strategy on technology differentiation, but it certainly does sharpen our focus on where we should invest relative to the competitive landscape. And as I think about how this might evolve over time, the defense landscape is continuing to grow both domestically and internationally. We are advancing into new technology areas and I think there's room for all of us to work together to provide the U.S. and our allies what they need. Seth Seifman: Great, great. Thanks. And then, just as a follow-up, you talked about international growing faster this year and given the mix with space, that makes a lot of sense. When we look out further, I guess international had been running about $5 billion of sales. When you think longer term, is there either a dollar number or a percentage that you think about like later on in the decade? Kathy Warden: Yes. Well, this year we're expecting growth to accelerate as I said and we expect double-digit growth this year. And we see a path for that continuing for multiple years. Based on the backlog we've built, I noted that we had a 1.4x book-to-bill in international in 2024 and we have a strong pipeline emerging across a wide variety of products, IBCS, E-2D, Triton, just to name a few. And so, as those mature in the pipeline, turn into awards and backlog, we could see the path to continue to grow international above U.S. sales growth rates. Seth Seifman: Excellent. Thanks very much. Operator: Thank you. Our next question comes from Matt Akers with Wells Fargo. You may proceed. Matt Akers: Hey, guys. Good morning. Thanks for the question. Kathy Warden: Good morning. Matt Akers: I wanted to ask about Sentinel and just if you heard anything new around the program review there. And as you think of kind of the long-term outlook, is there you said there's risk to the downside if that program sort of gets shifted out? Or is there risk to the upside if it sort of doesn't? Or do you think it's sort of well-calibrated? Kathy Warden: Well, let me directly answer your question first and then I'll provide a little more context. We think that it's well calibrated in the outlook that we have provided. You'll recall last year we made some adjustments in both awards and booking rates that indicated our best estimate of the profile of how that program will be executed even through the restructure and that indeed is still what we believe today. We are working with the government on the restructure, but in the meantime we are performing and meeting important milestones on the EMD contract. The government has said that they project the restructure to take 18 to 24 months. So, we are still very much in that window. And we are -- even though they have paused work on some small infrastructure efforts in the command and launch segment that is reflected in what we have shared with you. We currently expect our 2025 Sentinel revenue to be in the mid-single digit percentage of total revenue, as I said, and continuing to grow from '24 into 2025. Matt Akers: Yes, okay, thanks. And then, I guess the free cash flow outlook on slide 11 to that if I look at the years, I mean '25, much bigger step up than '26, '27. I know the pension starts to be kind of less of a tailwind after this year. But, just curious if there are any other kind of moving pieces that kind of the growth slows down after '25. Ken Crews: Yes. So, what you're seeing in 2025 is a few things. It's the continuing management and robust management of our balance sheet and the working capital, as well as the profitable growth of the business and converting those margins to cash quickly. To your point, we also see tailwinds near term from CAS, but also our more normalized level of investments and capital expenditures. And then, when you move past 2025 into '26 and beyond, we have -- it's really driven by the overall growth of the business and continuing to manage our working capital, which I consider best in class. We're in the low single digits when you think about adjusted working capital as a percentage of sales. And so, it's really making sure that we continue to stay diligent managing the balance sheet. And then, as we grow the business, converting those margins to cash quickly, which is what more normalizes with the overall growth rate of the business. Matt Akers: Okay, thank you. Operator: Thank you. Our next question comes from Gavin Parsons with UBS. You may proceed. Gavin Parsons: Hey, thanks. Good morning. Kathy Warden: Good morning. Ken Crews: Good morning. Gavin Parsons: Aeronautics margin pressure, not too much year over year in 2025, given the B-21 ramp, I mean is there any change in the dilution consideration there? Or is that just kind of being offset by better performance in the core aeronautics segment? Ken Crews: So, you've highlighted in 2024, extremely proud of the team and what they've been able to accomplish, even as B-21 has continued to ramp, driving efficiencies and implementing performance improvement initiatives across the portfolio. And we've been able to maintain earlier in the core -- early first three quarters, double digit returns with quarter four, slightly diluted just based on timings of mix. As we look to 2025, you hit it as we're continuing to expand on B-21, but the team has opportunities, given those efficiencies, to continue to drive performance improvements and allow us to maintain that mid to high 9% level of returns. Gavin Parsons: Okay, great. How big is the microelectronics business? Kathy Warden: The microelectronics center is a business that feeds the rest of the portfolio, as I discussed. So, it contains our foundries and our work in developing ships. But, we actually sell most of that embedded in systems in other parts of our company or sell them directly to external entities. So, the vast majority shows up in revenue in our segments. And it's largely our space business and our mission systems business, where that revenue resides. It's a significant portion of both of those businesses that have value creation starting in the microelectronics center. Gavin Parsons: Helpful. Thank you. Operator: Thank you. Our next question comes from Peter Arment with Baird. You may proceed. Peter Arment: Yes, thanks. Good morning, Kathy and Ken. Ken Crews: Good morning. Peter Arment: Hey, Kathy. Northrop won a really nice contract in December, $3.5 billion for, I think, the fall-on for the E-6 Mercury program. Can you talk a little bit about that win? I know there also was some headlines around protests. Can you confirm whether that did get protested or not? And just how do we think about the contribution of revenues going forward? Thanks. Kathy Warden: Yes. We call it the TACOMO program. But it's the C-130J, and it will provide nuclear command and control for the U.S. Department of Defense. It is contracted through the Navy. It was a $3.5 billion award. We have passed the protest period. And we are looking forward -- we have started. And we are looking forward to delivering that capability. It basically has three major components to it. In the EMD phase of the contract, we have three systems that we will develop and build as the demonstrator units. Then, we'll have three additional on option for test units. And then, LRIP option award of six production aircraft. So, that's what is in the scope of the effort. We expect about $350 million in revenue this first year and then growing from there. Peter Arment: I appreciate that. Just as a follow-up, there's been a lot of discussions and back and forth of whether NGAD and CCA and how that's going to be reshaped. How is Norfolk thinking about the opportunity for either net NGAD or CCA? Kathy Warden: Well, we're certainly watching that space. And as we have described before, we believe we are well positioned to offer sixth generation aircraft based on our successful B-21 performance and experience to date. We are not laying any of that into our forecast at this moment, given the uncertainty of timing, particularly the Air Force program. We're not a prime, but we are a contributor to the program through mission systems. For the Navy program, we are looking to see how that program advances through the year and would be excited to be selected if indeed that were to happen. Peter Arment: I appreciate it. Thanks, Kathy. Operator: Thank you. Our next question comes from Michael Ciarmoli with Truist Securities. You may proceed. Michael Ciarmoli: Hey, good morning, guys. Thanks for taking the question. Kathy, can we just go back to international? You talked about the opportunities there and talked about the growth, how that will trend through the remainder of the decade. We obviously have the broad majority of NATO countries reinvesting in their own defense industrial bases. Is there a scenario where they start to procure more domestically, maybe for newer programs? And I mean, are you thinking about your international growth coming from existing legacy programs? Or is there more room for partnering as the NATO countries dial up their spending? Kathy Warden: Right now, we believe that there is still a strong demand for U.S. products by the NATO countries, particularly to be able to field capability quickly, while the defense industrial base in Europe is reconstituting some of their capabilities. And so, we are looking at our pipeline, mostly inclusive of U.S. programs of record, where there is an application for those systems with NATO countries. I described earlier IBCS, E2, and Triton, all of which fall in that category, where they are now mature option programs and our NATO allies can receive them fairly quickly and get the benefit of those capabilities. Michael Ciarmoli: Got it, got it, that's helpful. And then, just on, you mentioned the new industry entrance. What about, how are you viewing DOGE? And I know it's evolving seemingly on a regular basis here and there's a lot of different tweets, but even if we think about contracting changes, moving away from cost plus, are you seeing that risk or opportunities there? Kathy Warden: Net-net, I see more opportunity working with DOGE. I believe we all see that there is room for cost efficiency in the way that we work together between industry and government. And so, we've embraced the opportunity to share some of our observations and ideas and are starting to do that. Michael Ciarmoli: Great, thanks. Operator: Thank you. Our next question comes from Richard Safran with Seaport Research Partners. You may proceed. Richard Safran: Kathy, Ken, Todd, good morning. So, I'd like to ask you to expand a little bit more about your talk about bookings. You mentioned some of this in international. More generally, could you discuss the 2025 major opportunities that you're looking at that we should be watching? And more importantly, more specifically, your expectations for full-year bookings, if you think book-to-bill is going to remain above 1X, despite a growing top line. I mean, you did report some pretty strong book-to-bill numbers. Ken Crews: Yes, so for the second part of the question first, when we think about 2025 book-to-bill, we see it more around the one, one time sales, particularly in fact, of the strong history of bookings and some of those being multiyear. And so, we'll work against that backlog, but we'll also build it back up and be roughly around one time sales. When we think about growth opportunities and award opportunities moving forward, we have opportunities, particularly in space around restricted activities. We have it on the strategic comm side. We have continued growth as we and awards relative to B-21 as we think about advance procurements and continuing production activities. And then, on Mission Systems, it's a whole host of awards across ground-based sensors and airborne-based sensors, when you think about airborne radars, EW systems, as well as communication systems. And then, DS is, we just recently received IBCS. We see IBCS continuing to grow in 2025, as well as numerous awards, particularly around weapons systems and ammunition. When we look at that, we're building the backlog. It continues to build. We've seen about 15% growth year-over-year on the weapons system side. And so, those awards continue to roll in as well. Richard Safran: Okay. Let's leave it at that. Thank you very much. Kathy Warden: Thank you. Operator: Thank you. Our next question comes from Jason Gursky with Citi. You may proceed. Jason Gursky: Hey, good morning, everybody. Kathy, you spent quite a bit of time up front talking about the strategy of the company. I was wondering if you could just maybe comment on your top two or three priorities for the year and how you see yourself spending your time in prioritizing the implementation of that strategy and what you're going to be really focused on this year. Kathy Warden: Thanks, Jason. My priority is very much aligned with what I outlined. I believe the administration's priorities are the first, equipping our military to be the best fighting force in the world means advancing technologies and our strategy to provide technology differentiation, not just for the benefit of our shareholders in our company being able to grow, but for our customers to be able to fulfill their mission is our top priority. We also are very focused on efficiency within the company, much like the administration is, and we see this as an opportunity to work together and get more efficient step function improvements in how we are able to execute work so that we can deliver for the warfighter in a more cost-effective and timely way. And then, of course, within the company, deploying our resources to the areas that make the most impact, both for our shareholders and our customers, and we've been very focused on doing that and making smart strategic choices for capital deployment. So, those are the three areas that I'm focused on and will continue to be. Jason Gursky: Right, okay. That's great. And then, just following up maybe on Seth's question about the ecosystem, and I think you gave some comments on your perspective on the evolving ecosystem. I'm just kind of curious, though, what you're hearing from the customer, and what you're seeing them say and do as it relates to maybe enabling some of these VC-backed defensive bringing new technologies? Are we likely to see maybe, I don't want to say a lowering of standards, but maybe going back to lowest cost, technically acceptable kinds of constructs? And what are you seeing them say and do as it relates to trying to enable some of these companies? Kathy Warden: I still very much see a broad set of acquisition strategies being utilized across the Department of Defense that are matching what the government needs. Sometimes that is very capable systems that are developmental and innovative by nature. In other cases, it relies on technology that is lower cost, more commoditized. And that has been, and I believe will continue to be the case. And the department is implementing strategies that allow them to embrace both, as they should. But the reality is, we cannot equip the best fighting force in the world with technology that isn't leading the way, rather than leveraging what is commercially available. Jason Gursky: Okay. Great, thank you. Operator: Thank you. Our next question comes from Robert Stallard with Vertical Research. You may proceed. Robert Stallard: Thanks so much. Good morning. Kathy Warden: Good morning. Ken Crews: Good morning. Robert Stallard: Kathy, just to start off, on capital deployment, with a perhaps more relaxed regulatory environment moving forward, does that open the aperture for you with regards potentially to do more acquisitions? Kathy Warden: Oh, I think it's a little early to say what the regulatory environment will look like, particularly in the area of national security. Certainly, there have been concerns voiced about over consolidation. We have new entrants coming into the space and so market is opening up some, but I think that, that still will be a consideration as much for the Department of Defense as for the Department of Justice. But with that said, we have been able to manage our portfolio well over these last several years. The acquisition of Orbital APK, of course, was a terrific add to the company. We've done some recent divestitures and we'll continue to be active in portfolio management in any regulatory environment where we see opportunity to create value for shareholders. Robert Stallard: Okay. And then, just a quick follow-up for Ken, on the lot 2 LRIP of B-21, were there any accounting or cash flow impacts from that milestone? Ken Crews: No, we were awarded B-21 in Q4 and as we go through our normal detailed program reviews and EAC reviews, no changes there. And in terms of cash flow, again, we took the charge in 2023. Those cash flows and the associated impacts occur over a long duration when you think about the LRIP lots. And all of that's accounted for in the guidance that we provide. Robert Stallard: Okay. Thanks so much. Operator: Thank you. Our next question comes from Gautam Khanna with TD Cowen. You may proceed. Gautam Khanna: Yes, good morning. I wanted to follow up on the Mission Systems margin expansion in 2025. I'm curious how much mix is a driver of it, mix of cost plus moving to fixed price. Does that percentage change materially in 2025 versus 2024? Ken Crews: So, when we think about Mission Systems 2024 to 2025, not a significant portion of it is driven by mix. It's really driven by the performance and the implementation of the efficiencies. And then, as we've scaled the business, and as I talked about earlier, the learning and the development that has occurred, that is the driver. We do see mission systems in terms of mix shifting more towards FFP over the planning period, talk about the next five years, but gradual shift in the interim. Gautam Khanna: Got you. And then, just a quick follow-up, if in fact there is kind of an end to the Ukraine-Russia hostilities, what impact, if any, would be felt at Northrop and over what time frame? I assume at defense systems, but just what do you think of that? Kathy Warden: Yes. So, our revenue from tactical weapons and the kinds of systems that we would see being directly expended in Ukraine is less than 1% of revenue, just to give you a broad-based context. And we do believe that there will be a multi-year replenishing of stockpiles associated with those that have been depleted, so we don't see an immediate ramification. Gautam Khanna: Thank you. Operator: Thank you. Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton: Thanks. Good morning. Ken, I think when you listed the opportunity set for '25, I don't think I heard F/A-XX. I'm just curious, Kathy or Ken, how are you feeling about the timing and potential for Northrop to be a participant? Kathy Warden: Yes, Myles. So, when I mentioned the Navy's next generation fighter, we do believe that the Navy is progressing through source selection as they had indicated, and they have also shared that we are one of the companies in that source selection. So, we will continue to watch how that unfolds over the course of this year and keep you updated. There's not much more I can say about it given the restricted nature of the procurement. Myles Walton: Got it. Okay. And then, maybe, Ken, on the free cash flow side. Thanks for updating for 2027. There have -- there has been a $4 billion target for 2028. Does the trajectory still align with that $4 billion 2028 target in the future? Ken Crews: Yes, when we look out in the future and projected cash flows, we are on track to achieving the $4 billion in 2028, so no change there. Myles Walton: Okay, great. Thanks so much. Kathy Warden: Thank you. Todd Ernst: Hey, Josh. We're going to leave it there. I'll turn it over to Kathy for closing remarks. Kathy Warden: Great. Thanks, Todd. So, I want to close by acknowledging the -- just extraordinary accomplishments of our team in 2024. And I'm particularly grateful for the commitment of our team members in the LA area. I think many of you know, we have over 13,000 employees in that area who are dealing with a wildfire devastation in their local community. And we are so appreciative that they continue to come to work every day and support our mission. Our company's innovation, people, investments, and commitment, they sit at the core of this nation's ability to maintain peace through strength. And so, we remain focused on helping our customers succeed in their most challenging missions and we're really excited about the year ahead. So, thank you for joining today's call. We look forward to talking with you again soon. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's Third Quarter 2024 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's third quarter 2024 conference call. Before we start, matters discussed on today's call, including guidance and outlooks for 2024 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filing. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. Third quarter results reflect the realignment of the SDS division from space systems to defense systems. In addition, we will refer to a presentation that is posted on our Investor Relations website. On the call today are Kathy Warden, our Chair, CEO, and President, Dave Keffer, our CFO through September 30th, and Ken Crews, our CFO, as of the first of this month. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone, and thank you for joining us. We delivered strong operating performance again in the third quarter, building on the momentum we achieved through the first half of the year. Global events continue to highlight the need for advanced capabilities to defend and deter against increasingly complex threats. This is driving the demand for our differentiated portfolio and is evident in our results. In the third quarter, our book-to-bill was once again very strong, which drove backlog to a new record level. Our backlog is now $85 billion, which is more than two times our annual revenue, supporting our confidence in the future growth of this business. Revenue has increased 6% year-to-date, and we are on track to achieve our full-year guidance of 5% growth. The Northrop Grumman team continues to deliver critical capabilities for our customers, remain disciplined in new business pursuits, and drive cost efficiencies in our operations resulting in this strong performance. Segment operating margins significantly increased, both sequentially and year-over-year, to 11.5% this quarter, our highest margin rate in over two years. Solid sales volume and strong operating performance drove earnings per share of $7 in the quarter, an increase of 13% from last year's Q3 results. Free cash flow of $730 million was in line with our expectations and continues to provide us the considerable flexibility to deploy capital in support of both growing our business and our shareholder return strategy. Based on our solid year-to-date results and full-year outlook, we are increasing our EPS guidance range by $0.75. We are pleased with this performance because it's a direct result of the intentional steps we've been taking to realize continued growth and enhanced profitability. We continue to implement productivity and efficiency initiatives, including advanced production capabilities, digital engineering tools, and increased automation. We are streamlining processes, reducing rework, and improving our learning curves as we add up scale, resulting in improved program and operating performance. The impact of these initiatives was, again, evident this quarter at AS, where execution was outstanding. The mature production portion of AS' portfolio comprises more than half of its overall revenue, and it continues to perform very well. The B21 program has also made solid progress in achieving ground and flight testing milestones on the development contract and is continuing to execute the aircraft production contract in line with our estimates. This is our third quarter in a row of 10% or better margins at AS, due largely to our focus on total cost management and productivity. Space’s performance was also excellent in the quarter. As we expected, revenue was down modestly year-over-year based on the wind down of NGI and a restricted program, but earnings were up substantially. Strong program performance was the key driver as the team executed well, mitigating risks and realizing opportunities, leading to improved EAC trends in recent quarters. Our defense systems business continues to see broad-based demand, with a book-to-bill of 1.6 times in the quarter, building the foundation for future growth. Margin performance year-to-date is solid and consistent with our full-year outlook. While the timing of some of our shorter cycle programs affected sales this quarter, looking forward, DS is expected to be one of our fastest growing segments, with margin expansion opportunities as we realize increased international sales. Like at DS, we also see continued strong demand at mission systems. This segment also had a book-to-bill of 1.6 times in the quarter and robust 7% revenue growth. Mission systems is a leader in technology that's in high demand from our customers as reflected in their top-line results. And as we've seen this business grow, we've seen mix in productivity pressures, including in supply chain deliveries. The team is making good progress with the deliberate actions they've been taking to improve program performance and drive cost efficiencies. And I have confidence that we are on track to achieve higher MS margins in 2025. As we look forward, we see multiple trends across our portfolio that are supportive of continued margin expansion, including improving macroeconomic conditions, stabilizing supply chains, enhanced workforce productivity, and gradual shifts in our contract mix as a number of our largest programs transition to production, and we build our international portfolio. We also expect to see continued strong demand for the platform, sensors, and systems we provide that allow our customers to deter adversaries and operate in the most demanding threat environment. This demand is reflected in U.S. budgets, where there's strong bipartisan support for national security priorities. And as a result, we are seeing upward pressure on defense budgets. Over the past several months, the Senate Defense Authorization and Appropriations legislation proposed additional funding above the administration's fiscal year 2025 defense budget request. And while the legislative process is still playing out, it is encouraging to see strong support for both the budget and our program. As we look at markets outside the U.S., we continue to expect our international sales to grow faster than the rest of our business over the next several years. There is robust international demand for defense capabilities, particularly in Europe, where most NATO members are increasing defense spending from 2022 levels. This demand is reflected in our international book to bill, which was almost two times in the third quarter. While executing on our current programs is an important driver of our profitable growth outlook, we also remain focused on winning new development programs. Our strategy is based on continuing to deliver technical innovations to create competitive advantage for our customers. A great example of this is our selection by the Missile Defense Agency to develop the Glide Phase Interceptor, or GPI. This technology will address increasingly sophisticated hypersonic missile threats. In addition, this program is a collaboration between the U.S. and Japan, and will further strengthen the alliance with Japan and further ING's partnership with Japanese industry. Putting all of this together, as we look forward to 2025, we expect solid growth and strong performance to continue based on our record backlog and continued focus on program execution. At a company level, we project sales growth between 3% and 4%. This includes strong growth in three of our four segments. For space, we expect a mid single-digit decline due to the wind down on programs I referred to earlier. We continue to expect the company's segment operating margin to improve in 2025, driven by favorable macro trends, program performance, and cost discipline. Our free cash flow outlook is consistent with our prior long-term forecast, with 2025 increasing greater than 20% year-over-year. Investing in our growing business remains a priority. We are coming through a period of peak CapEx, and anticipate a reduced spending level in 2025, but still at a level above historical norms. And given our company's strong free cash flow outlook, we plan to continue our shareholder-friendly capital deployment strategy, returning approximately 100% of free cash flow to shareholders next year. The dynamic global environment calls for our industry to offer our customers the technology innovations they need to compete. Northrop Grumman continues to invest in the capabilities and capacity needed to deliver that competitive edge for them. We are also intensely focused on the talent in digital infrastructure that enables our performance and competitive differentiation. Our team is delivering today while also building for our future. Financially, this is translating into solid results now, a plan to rapidly expand cash flows over the next several years and a business that is well positioned for profitable growth for the foreseeable future. Before turning things over, I'd like to welcome Ken Crews, who became our CFO on October 1. Ken will talk through our forward outlook in just a moment. But first, I'll turn the call over to Dave for a discussion of our Q3 results. And as I do so, recognizing this will be his last call, I'd like to thank Dave for his leadership and outstanding service to our company. Dave, over to you. Dave Keffer : Thanks, Kathy. It's been an incredibly rewarding five years in this role, and I've enjoyed the opportunity to work with you, Ken, and the whole Northrop Grumman team. I'm confident you'll continue to do great things going forward. Now looking at the Q3 results, we continue to experience enduring demand for our capabilities in support of our U.S. and international customers. As Kathy mentioned, backlog hit a new record of $85 billion, driven by another quarter of strong bookings. Our international awards were particularly strong in Q3 at $2.7 billion, increasing our international backlog to almost $8 billion, the highest level in several years. Key awards included additional E2D aircraft for Japan, ammunition and urgent need capabilities at DS, and radar programs at MS. We continue to have a wide range of opportunities in our global pipeline that we're optimistic we can convert into bookings and revenue over the coming years. Turning to sales on Slide 4 in our earnings deck, strong momentum from the first half of the year continued in Q3 throughout most of our portfolio. Sales increased by 2% in the quarter and are up 6% year-to-date. Q3 sales were slightly below our expectation due to a few delivery timing shifts to Q4, primarily in DS, but those do not impact the full year outlook. Starting with aeronautics, Q3 sales were $2.9 billion, up by 4% compared to the prior year. The increase was driven by higher volume on F-35, E2, and Triton, partially offset by slightly lower sales on restricted programs. At defense systems, third quarter sales increased by 2%. Higher sales on Sentinel and from our weapons portfolio drove the increase. As I noted, sales would have been even stronger if not for a shift into Q4 of roughly $150 million of international ammunition sales that are in our backlog. And on Sentinel, we continue to partner with the Air Force on the restructure of the program, which resulted in adjustments to the timing of certain activities as we refine the latest program schedule. Mission system sales were particularly strong in Q3, up 7% compared to the prior year. MS saw an increase in sales throughout much of its portfolio, led by higher volume on microelectronics and advanced technology programs. And space sales were lower by 3%, consistent with our expectations, due to a headwind of $224 million in the period from the wind down of our work on the restricted space and NGI programs. The remaining space portfolio grew at mid-single digits, driven by higher sales on SDA satellite programs and other restricted work. Moving to the bottom line, Q3 segment operating income expanded to 11.5%. This performance was enabled by our continued focus on cost efficiencies, risk retirements, and outstanding program performance. AS operating income grew by 5%, generating an excellent operating margin rate of 10.4% in Q3. DS generated solid performance in the period, with operating income modestly lower than the prior period. Its Q3 operating margin rate included fewer net EAC adjustments and a change in contract mix. Mission systems operating income increased 1%, and its margin rate improved from the first half of the year to 13.8%. And space delivered a great quarter, with operating income up 14% and an OM rate of 12%. We continue to see improvements in space's program performance based on deliberate actions we've taken, and this was reflected in the level of net favorable earnings adjustments in the period. Turning to Slide 6. Earnings per share in Q3 increased by 13%, driven by the solid segment performance I described as well as from higher net pension income. A lower federal tax rate and strong performance in our marketable securities portfolio also provided an uplift. Our Q3 tax rate benefited from a net reduction in certain reserves in the period. Keep in mind, for EPS comparison purposes than in the third quarter of last year, we recognized a gain of $0.44 per share associated with the sale of a minority investment. Lastly, I'll take a moment to discuss our cash performance. Third quarter free cash flow was $730 million, in line with our expectations. Year-to-date, we remain ahead of our free cash flow position compared to this time last year. And we expect a strong quarter of cash generation in Q4, consistent with our historical pattern. And with that, I'll hand it off to you, Ken. Ken Crews: Thanks, Dave, and good morning, everyone. I'll spend a few moments on the forward outlook, beginning with our latest segment guidance on Slide 7 in our earnings deck. Aeronautics continues to perform at a high level. And as a result, we are increasing both its margin and sales rate guidance. We now expect sales of roughly $12 billion, reflecting a year-over-year increase of 11%. With another quarter of strong operating performance, we are increasing its operating margin rate guidance to approximately 10%. This increase reflects our confidence in this business to generate healthy margins even as B-21 scales. At DS, we are modestly lowering our sales guidance to the high $8 billion range, reflecting a mid-single-digit year-over-year growth rate. This update reflects our latest expectations for lower Sentinel volume this year, driven by timing connected with the program's restructure. And we are increasing our margin rate guidance at Space to the mid- to high 10% range, while updating our expectations for margin rate at MS to high 13%. Moving to company level guidance. We are reaffirming our full year sales guidance. At the midpoint of the range, this represents a sequential increase in sales to roughly $10.9 billion in quarter four, similar to the ramp we experienced during the fourth quarter of 2023. Fourth quarter sales will be driven by higher volume on the LRIP phase of B-21 international ammo deliveries at DS and multiple production programs at MS. Based on our successful execution of cost savings initiatives and our strong program performance, we are increasing the lower end of our segment operating income range. Q4 margins at MS and DS are expected to improve sequentially due to production mix and deliveries, while AS and Space margins are expected to be lower sequentially due to mix and lower expected net earnings adjustments. Altogether, our latest guidance continues to reflect a full year segment OM rate of 11% at the midpoint. We are reaffirming our guidance range for free cash flow that projects greater than 15% growth at the midpoint. We remain confident in our ability to generate strong and predictable cash flows. Year-to-date, we've returned $3 billion of cash to shareholders via dividends and share repurchases, and we continue to expect $2.5 billion in repurchases for the full year. Lastly, we are again increasing our earnings per share expectations, now to a range of $25.65 to $26.05, up by $0.75. This updated range reflects our confidence in continued strong segment performance, lower corporate unallocated costs, lower interest expense and a more favorable tax rate. Next, I wanted to take a moment to talk about pension income. Our pension plans remain in great shape with a funded status over 100% and minimal cash contributions projected over the next several years. Our funded status drives affordability for our customers and help support strong capital returns to our shareholders. As we've done the last few years, we provided a net pension income sensitivity table for the upcoming year in our earnings deck. Through September 30, asset returns have been in the low 7% range and discount rates were down modestly. So as we sit here today, there is no change to our 2025 net pension income expectations that we shared in January. As we look forward to 2025, we remain confident in our business strategy. As Kathy outlined, and as shown on Slide 10, we expect another year of solid growth, continued margin expansion and a lower level of capital expenditures. This combination, along with lower R&D cash taxes and higher CAS recoveries, produces a recipe to rapidly grow our cash flows. At the midpoint, we expect free cash flow growth of over 20% next year. And with our capital deployment strategy of investing in our business for profitable growth and returning cash to shareholders, free cash flow per share is growing even faster. Also, our 2025 outlook assumes that macro conditions will remain stable and the continuing resolution will have a similar duration to those of recent years. In closing, I believe our strategy will continue to create value for our customers and shareholders, and I'm confident about the opportunities we have ahead. I look forward to engaging further with the investment community over the coming quarters. I also wanted to take a moment to thank Dave for his leadership and contributions to our company and for support during this transition. With that, let's open the call for your questions. Operator: Thank you. [Operator Instructions] Our first question comes from Robert Stallard with Vertical Research. You may proceed. Robert Stallard : Hi, thanks so much. Good morning. Kathy Warden: Good morning. Robert Stallard : And best of luck, Dave, with your next ventures. A couple of contract or program questions for you, Kathy. First of all, on Sentinel, it looks like the timetable here is moving around a bit. But I was wondering if there was any financial or practical implications as a result of this schedule change? And then secondly, on the program we won in the quarter, GPI, I was wondering -- I mean, it might be classified, I was wondering if you could give us a bit more detail of the contract structure for this program and how the revenues are likely to progress from here? Thank you. Kathy Warden: Great. Thanks, Rob. Let me start with Sentinel. As we noted in the call, both this quarter and last, we had incorporated into our outlook for the program the changes that will result from the Nunn-McCurdy review and the restructure process that the Air Force is going through. That restructure process has started. It has not concluded. We expect it to continue well into next year. And yet we have looked at what we believe is most likely to happen as we do on any of our programs and incorporated that into our estimates. And so that is the smoothing of sales that you heard us talk about in the resulted from our view of what the ramp will look like as we move into 2025. And we do still expect the program to grow year-over-year from '24 into '25, just as it did '24 over '23. So a similar profile just moved out a bit over a longer period of time. On GPI, there, we're very pleased to be supporting the missile defense agency in this area to build an interceptor that will defeat hypersonic missile threats. And you know this is a very important area for national security to be able to defend against these threats as they evolve. We are starting with a piece of work that will continue what we have been doing around risk reduction and design and move to a more mature design in this next phase, getting eventually to a preliminary design review. And then after that, we will move to the next phase of the program. So it is an incremental funding approach, but this down select was important because it signifies that missile defense agency, like their design, and wants to continue in the development process with us. Robert Stallard : That’s great. Thank you, Kathy. Operator: Thank you. Our next question comes from Ronald Epstein with Bank of America. You may proceed. Ronald Epstein : Yeah, thanks. Good morning, everyone. Kathy, broadly, given the demand you're seeing across the businesses and the growth that you're going to have, what are you seeing in the supply chain? Are there tight points right now? Are there places that you're worried about? Going to be heard broadly from companies across the sector that there are still large supply chain issues. How are you managing it? And what areas are you worried about and working on? Kathy Warden: Yeah, Ron, we still see supply chain challenges mostly with capacity and productivity. And let me unpack that a bit. They aren't concentrated in any one area of the business. They're broad-based and they tend now to be more supplier dependent. And so we are working with individual suppliers to help them address their particular challenges. It stands from microelectronics to our solid rocket motor business supply chain as they try to ramp to the increased capacity that we are all asking of them. It includes even some of our Space and Aerostructure partners in space and AS, respectively. And so each of our teams across the segments have their top list of suppliers that they're working with. We do extensive monitoring of our supply chain so that we can hopefully see these issues coming. And then as soon as we do engage with the supplier to provide support, I don't expect that we will see all of these issues mitigated this year. It's improving and in many places, stabilizing, but we are carrying risk and certainly some plans into 2025 to continue to monitor and work with our suppliers. Ronald Epstein : Does it make sense to vertically integrate anywhere just in the supply chain so you can control some of it? Kathy Warden: We have not generally taken a strategy of vertically integrating unless we feel that there is no path forward to support the supplier in remaining viable. We obviously, from time to time, move away from a supplier that is not performing to another supplier that we first try to remediate and where we have, very few, or even some places sole source suppliers our first instinct is not to enforce that. It is to support them. But there are times when ultimately, we do find ourselves needing to bring capability in-house to ensure we perform on behalf of our customer commitment. Operator: Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu : Good morning, Kathy and everyone. Thank you so much. Maybe if we could talk about the multiyear growth cadence, just looking at the backlog pretty solid and a competitor talked about supply chain and potentially being able to execute to close the gaps. Assuming the headwinds in Space go away and just thinking about flagship programs, what type of growth should we be thinking about and targeting for Northrop over the multiyear time horizon? Kathy Warden: Well, we've been growing at 5% compound annual growth since 2019. And each year, we come into the year with opportunities and risks that we work to mitigate, and I'm very proud of the team for having been able to keep and maintain that very solid growth rate for the last five years. As we look forward, we've guided at 3% to 4%, as you know, and that too has both risks and opportunities. We think it's a very balanced approach. If we were to see some of these supply chain challenges ease, we could see upward pressure on that growth rate if we are competitively successful on opportunities in our pipeline, we could see upward pressure on that growth rate. And if we are able to continue to capture international business at the rate we did in the second -- in the third quarter at 2 times our sales that certainly will provide some upward pressure on that growth rate. So we are working hard to materialize those opportunities. There are clearly risks as well. Really, the downside is the flip side of each of those things that I just outlined. But we believe that 3% to 4% next year is a realistic starting point as we enter the year with what we know today. We don't guide beyond that, as you know. But I have said that I believe this business can continue to grow in that mid-single-digit range. And so that is the plan that we've laid out for ourselves. And based on what we see today, we think that's achievable. Sheila Kahyaoglu : Thank you. Operator: Thank you. Our next question comes from David Strauss with Barclays. You may proceed. David Strauss : Good morning, and welcome Ken. Ken Crews: Thank you. Good morning. David Strauss : Kathy, I wanted to see if you could just broadly touch on B-21 and the progress there relative to the charge that you've taken, kind of where you are in sign up additional LRIP lots, pricing on those, where you are with kind of locking in your suppliers. Yeah, just kind of wherever you want to take it in terms of an update on B-21 and then margin progression at AS. Thanks. Kathy Warden: So let me start with B-21 and then I will tie it to the broader AS margin picture because that's important in that. While B-21 is a key program in our company, it is not the majority of AS sales and so the rest of the picture is important in drawing out the view on margin performance for the business, which, as I said, was just outstanding again this quarter. With B-21, we are on track for meeting the milestones associated with an award of LRIP 2. And so we are expecting that to happen in the fourth quarter. We have talked to you about being awarded approximately annually. And so this is the time of year where happens, and we expect to get that on contract. We have no change to pricing. As you know, those were priced. And we have no change to our estimate complete based on our third quarter review. So we are continuing to perform, as I said a few moments ago in alignment with the plan that we have laid out for the B-21. I'm very proud of that team. It's quite a remarkable accomplishment to what they are doing, both on development and production. As we look at the broader AS through activities they've taken to manage costs and drive productivity, some really innovative work they're doing in workforce training to get new employees onto the factory floor, more productive on day one and down the learning curve quicker. We have been able to really improve our performance on the more mature production programs as well, which has provided even further lift to AS and contributed to the very strong margin rates that we are seeing on that mature production portfolio. We had talked a year ago about that being the vision, and I'm pleased to say that the team has executed it very well. David Strauss : Thank you. Operator: Thank you. Our next question comes from Jason Gursky with Citi. You may proceed. Jason Gursky : Hey, good morning everyone. Thanks for taking the call. Question, Kathy, just a quick one for you on the trends going on there in Europe and the pipeline and the bookings that you've been seeing there given the demand. I'm just curious the contract types that you'll be operating with there, generally speaking, FMS versus direct commercial? And kind of what does that portend for margins across the business is going forward as that mix shifts maybe a little bit more to some international work? Kathy Warden: It's a combination of contract types that we see across our international sales portfolio for our ammunition and weapons products. We typically see those as direct commercial sales. And for our more complex weapon systems, anything that would entail integration, for instance, [indiscernible] Triton, we would see those as FMS sales. In both cases, we tend to see those as accretive to overall both segment and company margin rate. As a result of us being further down the learning curve when we price those because we're building off of mature product lines. And so we expect that trend to continue as we look at the pipeline into next year because some of the weapon system sales are larger. We do see that as a bigger contributor to the growth. But DCS is also an important part of the international pipeline, and we see both growing into next year. Jason Gursky : Okay. Great. And then just a quick follow-up, just sticking with contract types domestically, are you seeing interesting comments or observations that you can make about the current contracting environment in the -- any shifts in DoD strategy on how they're going to ask you all to get yourselves on contract going forward? Kathy Warden: I haven't seen any significant shift but more dialogue for sure, in terms of what contract type is appropriate for the work that is being conducted. And as a result, we have seen on particular opportunities, a shift from one type to another based on industry engagement. So I think that's healthy. It's helping the government to really understand what motivates industry and what's necessary in terms of the business conditions for us to be able to invest in the way that supports the government ability to get products in a timely fashion. Because at the end of the day, cost is one element, but schedule is another, and we want to make sure that we can deliver not only what, but when and at the price that is agreed to. So getting the contract type right is an important ingredient to make that all work. Operator: Thank you. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle : Hey, good morning. Kathy Warden: Good morning. Scott Deuschle : Ken, was the F-35 program a driver of positive EACs at Aeronautics again this quarter? And then would there be additional opportunity to expand margins on center fuselage over the coming years as you move to newer lots that have some better pricing on them? Ken Crews : So we're -- thanks for the question, Scott. We're absolutely pleased with AS' performance in the quarter and what drove the overall positive in terms of net earnings adjustments. It really was a portfolio approach. And so it wasn't one program alone. It was mature production programs from across that portfolio. And we expect that to be the case, and it's really showing the benefits of the deliberate actions that we're taking to drive costs out of the business, to create efficiencies and it's paying off. As we look forward, our team is focused on leveraging the investments we made in our factories to drive efficiencies. And so I do anticipate opportunities across our mature production programs moving forward, leading to improved booking rates. However, knowing in 2025, we do have a mix shift, particularly related to the growth on the restricted programs, which will put pressure relative to the overall booking rates you saw in AS this year. Scott Deuschle : Okay. And then, Ken, maybe just what segments do you view as having the greatest opportunity to expand margins next year? And then maybe you could walk through some of the drivers there that would underpin that? Ken Crews : Sure. So when we think about next year is we see opportunities to expand margin across three of the four segments for my previous comments on AS. I would say, given the comments that Kathy made before, the mix of international, the focus on weapon systems, I believe DS has -- is one of the major drivers of that margin expansion. Also, too, is with MS, it's important to realize that MS creates an immense amount of value for our company and our shareholders. They're booking close to 14%. We've seen some headwinds that as we've communicated are temporal in nature. And so as we move forward, do expect MS to continue to see accretive margins. And then long term, as we shift back more towards FFP that margin expansion will continue to get back to the historical norms that we've seen. And then in space, I think this quarter is an absolute great reflection of space and the activities that they are taking to focus on performance, drive efficiencies into the business. And so we see opportunities there to expand margins as well. So it's going to be a portfolio approach across those three segments and DS should be the primary driver. Operator: Thank you. Our next question comes from Gautam Khanna with TD Cowen. You may proceed. Gautam Khanna : Yeah. Congrats, Dave and Ken. I'm curious on two things. One, just big picture, we got an election coming up. Do you see any dramatic differences between either candidate or administration on your programs and defense broadly? And then I have a follow-up. Kathy Warden: Thanks, Gautam. And welcome. I do not see a significant difference. What we have seen over time is that the defense budget more reflects the threat environment than any particular administration change. And so we fully expect that again this time. The National Defense strategy has remained consistent over the past several years and the last couple of administrations. And we believe that's because it is responsive to the emerging threats around the globe and focused on both deterring and defending. And in that regard, it's well aligned to the program portfolio that Northrop Grumman has with a significant portion of our work supporting the U.S. in both builds and modernization of the nuclear triad, but also a portfolio that very much supports the U.S. and our allies in being able to defend in conflict when called upon. So we expect those to continue to be the driving features of a national defense strategy, and therefore, what the budgets will support and reflect. Gautam Khanna : Thank you. And just a quick follow-up on space beyond 2025. I mean what do you think kind of the longer-term trajectory of that revenue will be? Kathy Warden: What we've said about Space beyond 2025 is that we do expect it to return to growth. And we also have said that it's growing mid-single digits without the headwinds of the two programs that are winding down. So it gives you a good sense of what we think that run rate might look like coming out of 2025. Operator: Thank you. Our next question comes from Doug Harned with Bernstein. You may proceed. Doug Harned : Hi, good morning. Thank you. Kathy, I wanted to follow up on the Space question because it's been complicated with the movement of Sentinel and NGI and the classified program. When you look forward from here, I guess, first of all, is it possible to compare apples-to-apples on what's changed in the space backlog over the past year, if we take out those other programs? And then can you highlight kind of what some of the more important programs -- or program areas will be in getting the growth rate you're talking about? Kathy Warden: Sure. When you look at the move of the SDS portfolio from space to defense, it is largely the sentinel program. And so the backlog shifts that we made there gives you a sense of what that profile is Sentinel. And you also can take a look at what's remaining and see that there is a very healthy sized backlog to support the space business. And while it's made up of a number of programs, many of which are restricted, it is broad-based in its nature. It is supporting ground, satellite builds, it is supporting intelligence missions as well as the Department of Defense and a significant portion of it is NASA and related civilian missions. And so can say is the backlog is well diversified. It is large, and it is in many cases, early stage programs that still have a lot of runway in front of them in terms of either future awards or production volume associated with development program. Doug Harned : And then just if I can, one follow-up on Defense Systems. Can you give a picture at all of what your expectation is for the percentage you'll get from international over the next couple of years since it is clearly expanding? Kathy Warden: Doug, I'd prefer to wait until we guide in 2025 because it is rapidly expanding. And as you know, at this time of year, we're still in our process of laying out the details associated with our long-range plan. And I know you're not just asking for what does that look like in a flip-year flip in 2025. But what does that trajectory look like over time. And I'll be able to give some more color on that in the January call and we'd be happy to do so since it is an important part of our growth strategy, not just in Defense Systems, but we believe it's material to the company overall. In two other segments, both Aeronautics and Mission Systems have significant international growth opportunities as well. Operator: Thank you. Our next question comes from Myles Walton with Wolf Research. You may proceed. One moment for our next question. Our next question comes from Ken Herbert with RBC Capital Markets. Ken Herbert : Yeah, hi. Good morning. Kathy, I wanted to ask you a question about autonomy. You've got a number of legacy programs here as we go to AUSA and look across the industry funding for autonomy and related technologies just seems to be incredibly strong. How would you characterize your portfolio in autonomy today? Where are you investing? And maybe what do you see as a couple of the big opportunities for you over the next few years? Kathy Warden: Yeah. We certainly have been a leader in autonomy and continue to be and across multiple domains and weapon system types. So when you think about our history, it's largely been associated with aircraft. And we clearly are a leader there in truly autonomous, not remotely piloted, but truly autonomous vehicles, having several in operations today and continue to invest in that area for the future of uncrewed aircraft. When you think about satellites, the command and control of a satellite, it is an ultimate autonomous vehicle. And more and more, the opportunity set in space is around maneuverability and command and control. So we're investing there. And then finally, when you think about weapon systems, they are less expensive, uncrewed vehicles in many cases, and that's not just in the weapon itself, but as we think about the role that they play in defense. So we are investing in autonomy company-wide and really drawing threads across those investments and not thinking so much about the platform that the technology self, which in this case, it's more in the software and integration. And one of the differentiation of our company is that we are not just hardware, we're software and integration, and we've demonstrated that through a number of leading-edge programs that allow us to get the benefit of both worlds coming together at scale and in operation. Ken Herbert : That's helpful. And as the software continues to be a driver here, do you think there's risk that on the customer side, sort of adoption or risk appetite could potentially hold back some of the opportunities here? Or how do you think the customer is able to keep up with what you're able to do on the technology side? Kathy Warden: I think there's an appetite for the capability that is strong, getting through a certification program, particularly when you think about airworthiness with an autonomous vehicle is not easy, and we've done it, not many companies have, and we have, but it is a rigorous process for good reasons. And it is one that should remain rigorous, and that's really where you need to be assured that your software is sufficiently protected and tested to be able to operate and under conditions where you may have denied communications and jamming and other impacts to what would be rudimentary ways of supporting autonomy or remote piloting. So I'm going into a little bit of detail to just share, it is not an easy task. So the demand certainly is there. The ability to respond to that demand, I think, will be the pacing item for some companies. Operator: Thank you. Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton : Thanks. Good morning. Dave, it sounds like 2024 free cash flow is going to be comfortably at the high end of the range based on your comments. Is that right? And then maybe Ken, on the 2025 outlook for free cash flow, the guidance or the increase is about $600 million. But that looks like it's just covered with pension, CapEx and taxes. So is there a working capital or maybe burn off of B-21 that's offsetting earnings? Ken Crews : I'll be happy to start, Myles, on 2024 and then hand it to Ken for a discussion of periods beyond. We didn't mean to indicate a direction toward either end of the free cash flow range for this year. As we noted, we've had a strong third quarter and year-to-date performance for free cash flow. I think if you look at prior year trends, you'd see a similar trend line through prior years of the quarterly progression such that Q4 is expected this year as it has been in the past, to be a strong free cash flow quarter. But we're not meaning to indicate a direction toward either end of the free cash flow range. We're pleased to continue to maintain that really strong range that reflects a strong growth year-over-year in 2024. So Ken, over to you for any follow-up discussion on '25. Ken Crews : Sure. So from a working capital perspective, as we've communicated in the past, we expect that to be relatively flat. You'll see it elevated levels right now, and that's just timing as we get through quarter four with the sales profile, it will level to our historical norms. We expect that in 2025, and when we think about what is driving the cash flow expansion in 2025, I would put it in two primary drivers. The first is operating performance. So as we expand margins and we convert those margins to cash. The other major driver is the reductions in investment from our historical peaks. There are some minor benefits regarding R&D cash taxes as well as cash pension recoveries, but it's really going to be driven by operations and investment levels. Myles Walton : All right. Thank you. Operator: Thank you. Our next question comes from Seth Seifman with JPMorgan. You may proceed. Seth Seifman : Thanks very much. And good morning and congratulations to Dave and Ken. Kathy, I wonder if you could talk a little bit about within Defense Systems and the missiles and munitions, we saw some investments, some additional investment in solid rocket and mortars. And I think there's a sense that there's a lot of capacity coming into the solid rocket and mortar area. We saw kind of a surge in demand for missiles and munitions, but kind of how enduring is the demand level there? And so I wonder if you could talk a little bit about how you see that given the investments that you're making? Kathy Warden: Yeah. We do see that not only the U.S. but multiple allies are likely to need to restock pile munitions. They have donated to Ukraine. And as a result, we believe that this higher demand signal is enduring for multiple years. We have invested to laying capacity, as you know, and increased capacity more than doubled at the point in moving toward a tripling of capacity with some U.S. government supported funding. And as we do that, we are working through our supply chain to ensure it's not just our capacity, but it's theirs as well to support the entire build process. As others are coming into the marketplace, I think there will come a time when we need to look at how much capacity is enough. We are certainly not at that place in our company at this point in time, the investments that we are making, we are committed to making. And we believe there will be plenty of demand for that capacity. But we'll continue to monitor it as we do any area where we're facilitating to ensure that we don't get out ahead of the demand signal. Seth Seifman : Great. Thanks very much. Operator: Thank you. Our next question comes from Matt Akers with Wells Fargo. You may proceed. Matt Akers : Hey, good morning. And Dave good luck. Nice working with you. Can you talk about kind of CapEx trends longer term? I think, Kathy, you kind of mentioned in the opening remarks, 25 lower, but still sort of elevated versus historical levels. Is there room for that sort of move down either in absolute terms further out or as a percentage of sales and sort of what's driving that investment right now? Kathy Warden: Yeah, I'll take that. We certainly want to ensure we're able to continue to invest in our growing business as well as return cash to shareholders. And it is true for the last several years, we have been investing more heavily in the business because the opportunities were there, and these were good opportunities that would create long-term profitable growth for the company. As we look over the horizon, we still see opportunities to grow the business, but not as capital intensive as what we have experienced and many of the growth opportunities that we have ahead of us this decade, we have now invested in to support the program and its move to production. So we naturally are seeing less pressure for CapEx in the out years of our plan. And we are going to be responsive to that by lowering our CapEx expenditure. I believe it will still be at a historical norm level, not below that, but just not as elevated as it has been in the past several years. And we've been specific about what that looks like in 2025. We've also said that it will come down further in 2026, but we haven't put more numbers to it beyond 2025. Matt Akers : Got it. Thank you. Ken Crews : We have time for one more question. Operator: Our last question comes from Scott Mikus with Melius Research. You may proceed. Scott Mikus : Good morning. Kathy, I wanted to ask, the Air Force seems very pleased with Northrop's execution on B-201. The program of record calls for 100 production units, but Air Force has publicly stated that it's desired inventory is for 150 B-21's. With the Air Force reevaluating at least the men part of NGAD. Could that free up to get your funding for the Air Force to get to that desired B-21 inventory of 150 units? Kathy Warden: Well, Scott, I think that's exactly what the Air Force is looking at. They are undertaking a force structure design review and the Secretary has been open about looking at the various options they have for increasing Air Force size and has talked specifically about NGAD. And we know that B-21 is in the mix as well. It would be premature for me to suggest where that for structure review will end up. But I do think in the coming months, we may get a better indication from the Air Force as to how they're thinking about B-21 quantities in the long run. In the short run, we remain very focused on delivering them optionality. The performance that we are delivering gives them a capability that is in production now that is well below the cost target for the platform. And we believe that, that's the role of industry to give the government options as they think about their force structure. Scott Mikus : Thanks for taking the question. Kathy Warden: Thank you. Well, let me close by thanking the Northrop Grumman team for another outstanding quarter. They are executing our strategy. And importantly, that means that they're providing the capabilities our customers need in this incredibly dynamic environment that they face. I also just want to take a moment to thank Cai von Rumohr and George Shapiro neither of whom are on the call today. But I think you all know that retiring after respectively, 55 and 43 years of covering this industry, which is just amazing. And we've truly enjoyed working with them both and who miss their expertise and commitment to this industry. So -- in addition, I do want to congratulate Dave on his retirement, not quite 55 years in the industry, but the 5 years with our company have been truly outstanding and wish you all the best in your retirement. So thanks to all of you for joining our call. We look forward to talking to you again in January, if not before. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's Second Quarter 2024 Conference Call. Today's call is being recorded. My name is Josh and I will be your operator today. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks Josh and good morning everyone and welcome to Northrop Grumman's second quarter 2024 conference call. Before we start, matters discussed on today's call, including guidance and outlooks for 2024 and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. And also, we will refer to a presentation that is posted on our Investor Relations website. On the call today are Kathy Warden, our Chair, CEO and President; Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone. Thank you for joining us. As you saw from this morning's earnings release, we delivered excellent operating results again this quarter, building on our momentum from the first quarter. Our company's ability to respond to U.S. and international customer requirements with a wide range of advanced capabilities continues to drive strong growth, with sales up 7% in the quarter and 8% year-to-date. And our team's solid program performance, along with cost management discipline, led to operating income growth of 13% in the second quarter. The combined strength of our top and bottom line operating results was the primary driver of our 19% EPS growth. And in addition, we delivered robust free cash flow, which is up over $500 million compared to the first half of last year. Based on these strong first half results and confidence in our team's ability to deliver on continued robust demand in the second half, we are increasing our 2024 revenue and EPS guidance. The breadth and depth of our portfolio is an important differentiator, particularly when coupled with the effectiveness of our strategy in aligning our resources to anticipate and deliver on our customers' needs. Given this, I'm going to take the next couple of minutes to provide important context on our portfolio. When you step back and look at the key components of our business, you'll see that 85% of our sales come from a diverse collection of technology advanced capabilities, such as electronic, communications, crewed and uncrewed aircraft, space payloads, advanced weapons, command and control systems and other product areas, which are critical to global security. The capabilities we provide often as a supplier are in the nation's most advanced space air, land, sea and undersea platforms. In the last several years, we've been selected through dozens of competition to develop and build differentiating technologies that will provide an advantage to the U.S. and our allies through the 2030s. The remaining 15% of our sales is comprised of two prime programs in support of the nation's strategic deterrent, of course, that's Sentinel and B-21, with each generating a high single-digit percentage of our revenue today, and we expect that balance to continue for several years. With the recent realignment of our SCS division to our Defense Systems sector, we have four strong and differentiated segments that are more equal in size with each having multiple avenues for profitable growth. Our business is well aligned with the U.S. National Defense strategy. And as I've outlined in recent years, we've won significant roles on long-term programs that address the threat environment of today and are expected to do so for the next several decades. In addition, we continue to expand exportable product offerings, and we are developing our international partner and supplier base to position us for the growing international markets. We have also invested to increase our capacity to deliver the quantities of rocket motors, armaments and air and missile defense capabilities needed by the U.S. and our allies to defend freedom and deter aggression around the globe. Examples of this growth include the Guided Multiple Launch Rocket System or GMLRS, where our year-to-date revenue has grown by nearly 60%. Additionally, we were awarded over $500 million in contract for ammunition that we will begin delivering in the third quarter. And we see additional demand for international ammunition opportunities in the coming quarters. Overall, the key takeaway is that the breadth of our portfolio, our alignment to the key priorities for the U.S. and our allies and our role on each leg of the U.S. strategic trial provides us visibility into avenues for our business to grow even if U.S. budget growth slows. And as we've discussed frequently over the last two years, we're not just focused on top line growth, we're taking deliberate actions to enhance profitability through digital enablement, productivity, supplier management and cost efficiency. As we look at the remainder of this year and next, we expect solid growth across the portfolio to continue, particularly in areas such as weapon systems, advanced electronics and aeronautics. International sales are also progressing from our pipeline to our backlog and are expected to contribute to increased sales and profitability. Our outlook is supported by the national security spending environment. In the U.S., the fiscal year 2025 defense budget is moving through the appropriations process with recent markups by Congress. We were pleased to see the Senate Arm Services Committee increased the FY 2025 top line by $25 billion and we're encouraged by continued support for investment in defense. Northrop Grumman programs broadly and particularly the B-21 Sentinel in Colombia, which provide the basis for the U.S. strategic deterrent continue to receive strong support, bolstering our view that we're well positioned in this such an environment. Given the importance of the triad to the nation's deterrence, I'll provide an update on two legs of the triad for which Northrop Grumman is the prime industry partner to the Department of Defense. So, starting with Sentinel. Earlier this month, the DoD submitted to Congress certification of the of the Sentinel program as part of the Nunn-McCurdy process. This certification validates the need for the land-based leg of the triad and continued confidence in the Sentinel weapon system, the critical role it plays in safeguarding global security. DoD and the Air Force are working to restructure program to reflect the latest cost and schedule estimates. The majority of the cost growth is expected to occur in the production phase of the program, which is beyond the current EMD phase and outside of the future year's defense program or fight it. We continue to execute on our existing EMD contract, which includes the design, development and testing of the full system. We are partnered with the Air Force on completing the design of all aspects of the system and how many of the systems components already in development and tests, including all three stages of the missile, command and launch subsystems for launch activation, security and systems monitoring as well as transportation and support equipment. The progress we've made on the program is significant, and we remain committed to partnering with the U.S. Air Force to identify ways to reduce the costs associated with feeling this system. So, turning to the air leg of the triad. The B-21 is progressing well through the testing program, and as you know, has entered low rate initial production. The team continues to perform exceptionally well, and we remain within our schedule and cost estimates. As we recently shared, B-21 test pilots report that the aircraft is flying like the simulator, which is another indication that our digital environment has effectively predicted the performance of aircraft, thus reducing new discovery and risk. For these reasons and more, we continue to believe in the significant value this program will create for customers and shareholders over time. It's important to note that while the B-21 program is very important, it contributes less than 10% of our total sales, and we expect that to remain the case through the decade. Assuming stable economic conditions and continued strong performance by our team, we also expect program margin dollars to grow annually from here as we complete the EMD program and for five lots of production move into advanced production awards on the more profitable lab and beyond and add modernization and sustainment revenue to the program. As you can see, our portfolio includes a compelling mix of technology-driven capabilities and franchise programs that are well aligned to the evolving needs of all our customers. As a result, we've grown our organic revenue at greater than 5% compound annual growth over the past five years, including 5% growth projected in our increased 2024 guidance. We also continue to rapidly expand our cash flows, including generating over $1 billion of free cash in the second quarter. Based on the strength of portfolio, backlog and performance trends, we are reiterating our long-term cash flow outlook, which assumes a greater than 15% compound annual growth rate through 2026. To support growth in our business, we're maintaining our investments and capabilities across the company. We continue to target $1.8 billion in capital expenditures this year, which is around 4.5% of revenue and well above the industry average. Including R&D, we're investing approximately $3 billion in our portfolio. At the same time, we're efficiently returning capital to shareholders, including $2.3 billion in the first half of the year. In May, we increased the dividend by 10%. This is our 21st consecutive annual increase, as we continue to focus on delivering competitive sustainable dividend growth. Before I turn the call over to Dave to provide more details on our financial performance and outlook, I'd like to thank our team for another great quarter, as we continue to execute on our long-term strategy. We have an outstanding portfolio, a high-performing team and a bright outlook for the future. So with that, I'm going to turn the call over to Dave. Dave Keffer: Thanks Kathy and good morning everyone. Before covering our Q2 results and outlook, I'd like to take a moment and provide some context around our financials, given the recent segment realignment. As Kathy noted, the Strategic Deterrent Systems division, which includes Sentinel and other related programs moved from our Space Systems segment to our Defense Systems segment effective July 1st. Second quarter results have been reported in the prior organizational structure given the effective date of the realignment, but we've provided a table in the earnings release and earnings slides, the recast sales and margin for current and historical periods under the new organizational structure. Moving forward, we will report third quarter results and beyond under the new structure and our updated financial guidance is also under the new structure. So with that, let's get into our second quarter results. Starting with demand. Q2 net awards totaled over $15 billion, generating a book-to-bill ratio of 1.5 times and increasing our backlog to over $83 billion. As a result of our strong year-to-date performance, we now expect a full year book-to-bill ratio of more than one time sales. Turning to our top line results on Slide 4 in our earnings deck. Second quarter sales were $10.2 billion, an increase of 7% compared to the same period in 2023. All four segments generated year-over-year growth again in Q2. Looking ahead to the second half of the year, we expect a gradual ramp in our quarterly sales profile with Q3 sales projected to be roughly in line with Q2. Aeronautics' second quarter sales increased by 14%, with similar drivers to Q1, higher volume on B-21, F-35 and Triton again led the way. At DS sales grew by 7%, primarily due to higher volume on certain military ammunition programs and higher volume from the timing of materials on GMLRS. Mission Systems sales increased by 5% with continued strong growth on advanced microelectronics programs, our Marine Systems portfolio and SEWIP. And at Space, sales were up by 2%, driven by growth on the SDA transport layer programs and GEM 63 solid rocket motors, partially offset by lower sales in the restricted space portfolio. Bottom-line results were also very strong with segment operating income up 5% year-over-year and total operating income up 13%. These results reflect another solid quarter of overall program performance as well as lower corporate unallocated expense. AS operating income grew by 6%, generating an operating margin rate of 10% for the second straight quarter. These results have provided an example of how strong program performance, focused productivity initiatives and indirect cost efficiencies can generate margin rates at these levels even as we ramp on B-21. Speaking of B-21, there were no significant changes to our LRIP EAC again this quarter. There are currently 21 aircraft in baseline for the first five LRIP lots and another 19 production aircraft subsequent to these for, which we have not to exceed or NTE pricing. These prices were set in 2018, and given that the production for those lots was well into the future, the average unit NTE price was set above the average LRIP price. The NTE lots include an economic price adjustment clause to protect against certain inflationary pressures. Pricing, final quantities and terms and conditions have yet to be fully negotiated for these additional aircraft. Based on our current projections, we expect to be able to execute the NTE lots profitably. As you think about the trajectory of the overall program, we expect to begin work on long lead items related to the NTE lots in 2026. Overall production will continue to ramp through the second half of the decade. And we expect that production sales will become larger than EMD beginning in 2026. Other B-21 efforts for modernization and sustainment will also begin to grow over the next couple of years and are expected to generate profit rates that are accretive to the overall program. Taking all these factors together, we currently project that margin dollars for the overall program will gradually expand going forward, as Kathy outlined. Defense Systems had a particularly strong quarter, with operating income up 23% and a margin rate of 13.5%. Higher net EAC adjustments and favorable changes in contract mix contributed to their significant year-over-year improvement. At Mission Systems, operating margin rate was 13%, which was lower than Q2 of last year. Similar to Q1, this was a result of lower net EAC adjustments and changes in contract mix towards more cost-type contracts. While margin rates at current levels remain very competitive, they are below MS' historical performance, and we continue to see opportunities to improve margins in the second half of the year. These improvements will be driven by continued investments we're making our factories to improve performance and increase production volumes as well as from business mix shifting to more fixed price work. Space had another solid quarter of operating performance, with operating income increasing 14% from the prior year, generating a margin rate of 9.1%. We've seen improvements in space program performance for multiple quarters now as a result of deliberate actions we've taken in the business. Moving to earnings per share on Slide 6. Q2 diluted EPS was $6.36. This represents an increase of 19% from the prior year, driven by continued strong growth in segment performance as well as from higher net pension income and lower corporate unallocated expense. Rounding out our Q2 results is cash flow. We had an excellent quarter of cash generation with Q2 free cash flow of $1.1 billion, up 80% compared to our results from Q2 of last year and on track with our expectations for the full year. We returned approximately $900 million to investors in Q2 via dividends and share repurchases, while also continuing to make strategic investments in our business. Slide 7 includes our latest segment guidance based on our new organizational structure. We are increasing our sales guidance at both AS and MS, neither of which were affected by the sector realignment. AS is now projected in the high $11 billion and MS is projected in the mid-$11 billion. The increases are driven by the strength of their year-to-date results and expectations for the rest the year. As we indicated on our Q1 call, Aeronautics sales are expected to flatten out in the second half of the year based on timing of materials and production schedules. We've also updated our margin expectations for AS and MS. We now expect a margin rate at Aeronautics of mid to high 9%, reflecting our ability to generate strong margins across mix of mature production programs and early-stage development programs. The increase at AS offsets the decrease in margin rate at MS, which is now projected at low to mid 14%. At DS, we've increased our sales guidance this year to roughly $9 billion. This reflects the realignment of the SDS division to DS, which is expected to generate sales this year of roughly $2.7 billion. The increase also reflects our expectations for higher sales volume associated with ammunition and weapons replenishment. We expect Space sales to be relatively flat this year, projected in the mid to high $11 billion range and to be down somewhat in 2025. This profile is driven by the removal of NGI and the restricted program during 2024, which collectively had a run rate of about $1.5 billion in annualized sales. Those headwinds affect both this year and next, of which the larger impact will be experienced in 2025. We expect the rest of the space portfolio to continue to grow. Overall, we expect a relatively stable level of margin dollars in space in 2025 as the margin rate grows and offsets pressure from lower volume. Space's guidance also reflects higher intercompany sales, primarily associated with propulsion activities in support of the Sentinel program. This also has the effect of increasing company level eliminations to roughly $2.7 billion. We expect a margin rate at DS of approximately 10% this year and a low 10% rate at space given the shifts in the portfolio. In total, we now expect company level sales of $41 billion to $41.4 billion, representing 5% growth at the midpoint. We continue to expect segment OM dollars to grow at roughly the same rate as sales. We've lowered our expectations for corporate unallocated expense to $150 million based on year-to-date trends. We continue to expect corporate unallocated expense be weighted toward the second half of the year, consistent with prior years. We've increased our expectation for the federal tax rate to the mid-17% and slightly lowered our expectation for interest expense to roughly $650 million. As we've noted in prior quarters, we're monitoring for any favorable or unfavorable updates in tax legislation, audits and appeals processes that by their nature, are not factored into our guidance. And based on the latest plans for a higher volume of share repurchases, we've lowered our estimate for weighted average shares outstanding to the mid-$147 million. Altogether, our strong performance and outlook results in an increase of $0.45 to our diluted EPS range. We had a strong first half of the year, and we're looking forward to continuing to create value in the second half and beyond. So, with that, let's open up the call for questions. Operator: Thank you. [Operator Instructions] Our first question comes from Kristine Liwag with Morgan Stanley. You may proceed. Kristine Liwag: Hey, good morning Kathy and Dave. Kathy Warden: Good morning. Kristine Liwag: I want to understand a little better the 19 B-21s under not to exceed pricing agreements. I mean I understand that the ceiling for the average unit price is higher than the first 21 aircraft, but how do we get comfortable that these next 19 aircraft are indeed profitable as final pricing is yet to be determined. And then also as a follow-up, I think you both mentioned the slot 6 is more profitable. And I just want to clarify, this mean absolute positive margin on the program? And -- or is that a relative comment to the previous slots I just want to understand the dynamics a little bit better on the B-21? Thank you. Dave Keffer: Sure, Kristine, happy to clarify a few of those points. As you've noted, the NTE lots that follow the first five LRIP are currently projected to be more profitable than the LRIP lots. And to clarify that further, we are projecting a positive profit rate in Lot 6 based on our current projections. So, to your point, those NTE prices are set higher than the prices that are expected for the first five lots and with cost efficiencies that we're working hard to drive and program performance and productivity efforts very much in progress. Our current projections indicate positive profitability for those lots. Operator: Thank you. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle: Hey good morning. Thanks for taking the question. Kathy Warden: Good morning Scott. Scott Deuschle: Dave, just to follow-up on Kristine's question. Is the difference on B-21 units, 22 to 40 that they have both a higher average base price and the EPA cost protection or units 1 to 22 also have that EPA protection? Dave Keffer: I think you're right, those are both important points about the NTE lots that that they are set higher. They also do include an EPA clause that is one we're monitoring carefully. So, both are important to keep in mind as eventual pricing and terms and quantities are finalized for those portions of the program. Scott Deuschle: Okay, great. And then, Kathy, there was a news article a while back about the issue the industry faces and sourcing ammonium percolate for making solid rocket motors. Is that something you guys have made some good headway on. And based on your comment on GMLRS output being up 60%, it sounds like the answer is yes, but just curious for your perspective. Thanks. Kathy Warden: Yes, Scott, thank you for the question. We did recognize this as a constraining factor in our supply chain for solid rocket motors four or five years ago, and the team brought forward a business case, which we funded to create an alternate supply, and we have done so, which gives us more confidence in our ability to manage that supply. We also, of course, are buying IP from other sources as well. We are not the single supplier of our own AP, but we did add to the overall production capacity, which has improved our ability for predictability on SRM, solid rocket motors. Operator: Thank you. Our next question comes from Rob Stallard with Vertical Research. You may proceed. Rob Stallard: Thanks so much. Good morning. Kathy Warden: Good morning. Rob Stallard: Kathy, on Sentinel, there's been some reports that the customer is not happy with the way this program has been progressing so far. And I was wondering, first of all, what sort of risk is there that Northrop could be on the hook for additional charges on this program? And then secondly, what you're trying to do practically to improve the cost profile on Sentinel? Thank you. Kathy Warden: Yes. Well, thank you. The DoD did a thorough review of a program as part of the [Indiscernible] process, and they were very transparent about the results of that review. For those of you who haven't seen it, they did a press release, they conducted media interviews about a week and a half ago to share those results and they met with many members of Congress. And in that process, they have not pointed to industry performance as the cause of cost growth. The things that they have pointed to include inflation, obviously, particularly as we look at the deployment cost, there's a big construction component of this job, and also the assumptions that were made many years ago that underestimated the complexity of the program. And those were two primary costs growth drivers that were identified. We are working with the Air Force to identify ways to perform better than those cost estimates. We will continue to do that. We are looking at everything from design alternatives that they have referenced in the restructure of the program to ensuring we have the right team in place to execute on every part of the program in that deployment and production phase. And, of course, we are continuing bolster our own staff and systems engineering on the program. But the reality is that most aspects of the program are progressing very well, and the Air Force has publicly made those comments – we are very focused on the ground in the structure, which is the piece of the program that is driving the vast majority the cost growth, and that's what our focus will continue to be through the restructure. Rob Stallard: Thanks so much. Operator: Thank you. Our next question comes from Jason Gursky with Citi. You may proceed. Jason Gursky: Yes, Kathy, just a quick follow-up to that last commentary. There was an article yesterday with some comments from somebody up on the hill, senator; I think that did mention Northrop. So, I'm just kind of curious if we can some context about your recent visit, it sounds like you made up to the hill and why you'd have somebody in the Congress making some comments and a little bit contrary to what you just mentioned. Kathy Warden: Well, I'm not going to comment on any individual meetings that I had, but I have had a number of meetings with members of Congress on both sides of the aisle, and they have generally been very supportive of the need for the program and our team's role in that program. And I will also just note that the Department of Defense speak for the program and their findings on the Nunn-McCurdy and have spoken very clearly about that. The final thing I'll suggest is that while not everyone is a supporter of the land-based leg of the triad, you can look at the vote and the appropriations, which have fully funded the program, and it's more reflective of the landscape I painted, which is broad-based congressional support for the program and our role in it. Jason Gursky: That’s helpful. Thank you. Operator: Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu: Good morning, Kathy, Dave and Todd. Thank you. Maybe if we could just talk about your Mission Systems business. It's been a solid double-digit business, and you step down this quarter. How do we think about that mix impact lower EACs and there's 100 basis points of ramp in the second half versus H1. How does that evolve? And how do we think about that longer term? Dave Keffer: The way I would characterize that is, I think, first of all, you've touched on a key point that the mix in MS has shifted over the last few years to be more heavily cost type in nature. We think that mix will shift back in the direction of more fixed price work over the next several years. A lot of the growth in MS in recent years has been large cost-type development programs, leading technology efforts across its multiple mission areas. And as a result, its cost type mix has gone from the mid-30% back in 2021 to the mid-40% this year, gradually that will shift downward over time to include the second half of this year when consistent with last year, some of our greater sales volume in the second half in MS will be driven by programs that are more predominantly fixed price in nature, and that will blend the mix upward even as soon as the second half of this year. But I think another important point is the set of deliberate actions we're taking to improve productivity and performance and cost efficiency in our Mission Systems business as we're scaling to meet increased demand in our factories. And improvements there are being felt already in the business and are another driver of our confidence in second half margins for MS being higher than those we've delivered in this half. We're working closely with our suppliers and our production teams in MS to continue to deliver on those efforts and expect progress in the second half and beyond. Sheila Kahyaoglu: Thank you. Operator: Thank you. Our next question comes from Seth Seifman with JPMorgan. You may proceed. Seth Seifman: Hey, thanks very much and good morning. Wanted to dig in a little bit on the Space decline, you talked about for next year. It looks like off of the revised numbers, maybe it's a modest decline this year. When we think about what's coming next year and the ability to grow in I think you talked earlier, Kathy, about growing again in 2025. The ability to grow in 2025 relative to the 5% growth rate that you're expecting for this year. Is it possible to make any comments about that at this point? Kathy Warden: Sure. With the increase in our guidance this quarter, we expect 5% growth again this year, following a period, as I said, of about 5% compound annual growth for the last five years. So, looking forward, we'd expect solid growth across three of our four segments with the strong demand that I talked about earlier in the call, balanced across the portfolio. Space is likely to be exception to that next year. We are guiding around flat this year and down modestly net. And that's due largely to the impact of NCI and the restricted program that we talked about earlier this year being canceled, and then we do expect space to return to growth in 2026. So it's too soon to provide a detailed guide for 2025 at a company level, but that gives you a sense of the dynamics that we're expecting in the various segments. And with the broad-based portfolio that we have, the slight decline that we expect in sales in Space next year do not change our outlook for the company as a whole. Seth Seifman: Okay. Okay. Thanks. And then maybe as a quick follow-up. In Aeronautics, we've seen some fairly strong margin performance early this year and led to the guidance increase? I guess, are there specific things to point to for the second half that will pull that that down below 10%. Dave Keffer: Sure, Seth. Happy to comment on further. To your point, it was a really solid first half of the year and a solid second quarter for the AS business, top and bottom line performance were strong. And really since the beginning of the year, we've been projecting and noting that sales growth rate would moderate a bit in the second half of the year because of the timing of top line items in aeronautics, supplier deliveries and such, both on B-21 and on programs like F-35 that were going to lead to higher volume in the first half of the year than we saw a year ago. So, that's where we've seen the really strong year-over-year growth rates in the first half. We've been able to increase our guide for both sales and margin rate for the year. But to your point, it will involve slightly slower growth and slightly lower margin rates in the second half. We have initially guided 9.5% for the year and have now increased that rate because of the first two quarters at 10%. So we're continuing to project a really strong rate for the year. And I think that's evidence of the fact that we have a diversified mix of programs in AS and programs like our support for F-35 as well as Triton E-2D and others are in healthy production levels where we're doing a great job for our customers and delivering strong results for investors. Operator: Thank you. Our next question comes from Gavin Parsons with UBS. You may proceed. Gavin Parsons: Thanks. Good morning. Kathy Warden: Good morning. Gavin Parsons: I appreciate all the detail on B-21. That's really helpful, especially in terms of EBIT dollars growth. When do you foresee the peak margin rate headwind occurring from that program? Kathy Warden: So Gavin, what we have shared today suggests our modeling of the program would see increased dollar growth from here and on earnings and modest sales growth. So you can anticipate, even though we didn't specifically outlined that we are at the trough of margin rate performance on the program in our current modeling. Gavin Parsons: Got it. That's helpful. And then I guess on the expectation for equitable adjustment Lot 6 or beyond. I think there was some expectation that there might be one on the first five LRIPs. Is it more contractual now on the board expectation? Kathy Warden: So the difference with the NTE pricing is that the pricing itself has an economic price adjustment clause in it for the EPA contracts, which, of course, we have not negotiated or definitized. The LRIP did not have an EPA clause. So any inflation relief that we get on those contracts is additive to the term. Gavin Parsons: Thank you. Operator: Our next question comes from Cai von Rumohr with TD Cowen. You may proceed. Cai von Rumohr: Thanks so much. So help me understand on B-21. I mean, you took close to $1.6 billion charge over five lots, that's roughly $300 million a lot. So I assume that's moving from about zero last year up to $300 million negative. How do you get enough profit to offset that? Or when you talk about profit dollars and improving, are you talking from an accrued basis where you've taken the charge already? Dave Keffer: Right. Cai, it's the latter. We took that charge last year. So we're talking about the anticipated results from the program going forward. Cai von Rumohr: Got it. Thank you very much. And then secondly, they're talking about restructuring the Sentinel program. Is that likely to be, in your opinion, Kathy, an opportunity or a risk for Northrop Grumman? Kathy Warden: At this point, Cai, what I would say is that the cost growth that is being talked about and which drove the Nunn-McCurdy is mostly outside of the EMD phase of the of the program, which, course, is what we are on contract for and therefore, what our financial projections reflect. And we do reflect modest cost growth that we're expecting in the EMD contract in our financials. So, you see that reflected in the Q2 booking rate. And I would say we've taken a cautious approach on our booking rate at this point as we normally do. at the beginning of the program. And as we perform and achieve more percentage performance milestones over the course of the program, we would expect that booking rate to improve. Operator: Thank you. Our next question comes from Doug Harned with Bernstein. You may proceed. Doug Harned: Good morning. Thank you. Kathy, when you talked -- you had a really big quarter this year for bookings after last quarter was pretty soft. And you're looking at being above 1.0 for the year. How should we think about outlook this year in terms of bookings? And I'd say in two dimensions. One is growth, U.S. versus international. And then second, which segments are we looking at where you expect to see that over the -- see some good growth over the next two quarters? Kathy Warden: Yes. So, as Dave said, we are now expecting book-to-bill in the year over 1 after a very strong second quarter. We do see lumpiness in awards, as we've talked about before, but consistently has been performing on an annual basis with book-to-bill over 1. And this year, it is again expected to be reflecting our mix of domestic versus international sales because awards are going to be strong in both categories, with international bookings being stronger this year than they have been in the past in domestic bookings remaining strong. In terms of the segments that are going to drive that, we've seen it shift more to our shorter-cycle businesses. So strong bookings are more concentrated now in our new defense systems and in Mission Systems than they are in AS and space. But of course, I'll point that in both those segments, we've had strong -- they've been the key driver of strong bookings in past and so they still have a really solid backlog. Doug Harned: Yes, I guess part of what I was getting at is if you're looking at -- we're looking at still unfortunately fairly flat budgets in the U.S., but a lot of growth outside, should we expect to see over the next couple of years any kind of a shift in mix with a higher percentage of international sales? Kathy Warden: I would say we are more international sales than we are expecting our international sales to grow at a faster rate than our domestic. But also when you look at bookings and the strength of our alignment with the National Defense Strategy and the prioritization, particularly of triad and the growth that we expect on all three of the programs as they move through development into production. We do believe that they will be well-supported in the budget, and we'll see them take more share of the budget overall, even though each one of them is well below 1% of the overall DoD budget, they are well-prioritized within the spending profile. Operator: Thank you. Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton: Thanks. Good morning. Just had a quick follow-up question for you, Kathy, in your remarks earlier in the prepared remarks, you talked about high single-digit percentage of revenue on the Sentinel and B-21 and staying consistent with that over next several years. And I guess, I was expecting that the B-21 would drip into double digits within that time period, understanding that Sentinel might have a smoother or slower growth rate. Is that correct or incorrect in this assessment? Kathy Warden: No. And it's why we included it to clarify that even though you see budget profile from department that show growth, that includes things that aren't on our contract as the government needs to staff up to be able to test to be able to support, to be able to build a sustainment to organization to house the aircraft as we deliver them. So there are a lot of things in that budget beyond our contract value. And with the dynamics that I described with EMD moving toward completion over the next handful of years and meeting IOC on the program with the production meeting its quantity level and then starting to flatten off. And with modernization and sustainment coming online, that whole mix keeps us generally in that high single-digit range, especially as the rest of the portfolio growth as well. Myles Walton: Okay. Very good. And then the space booking -- excuse me, space performance in the quarter, it sounded from your tone that it had improved. Are we now back to positive EACs or are we just less negative EACs that we're seeing? Dave Keffer: I can take that one. The EACs for Q2 for space were less negative than the last couple of quarters, clear improvement there in performance in the business, still a few small negative items. But clearly, as you saw from the year-over-year booking -- or margin rate improvement and the overall margin rate that we're now expecting for the full year in space, there's been demonstrable progress there, really related to the actions we've been taking for the last year to improve program performance, deliver cost efficiencies, deliver affordability for customers as we do it. So certainly a good news part of the story there. Myles Walton: Thank you. Operator: Our next question comes from Matt Akers with Wells Fargo. You may proceed. Matt Akers: Yes. Hey, good morning. Thanks for the question. Can you comment on the Navy new fire, the FXX, just what you're hearing on timing there and if you still have plenty to bid on that program? Kathy Warden: Yes. We have not received any updates that would suggest the Navy is changing their approach. They are in competition now for selection to occur next year. And in terms of our overall collection of opportunities continue to believe that the Department of Defense will move forward with sixth generation platforms. The timing is a bit influx on many of them as they sort out budget priorities. But we are confident that we're well positioned when and if they do move forward. Matt Akers: Great. Thanks. And if I could do a follow-up. I guess Spirit AeroSystems is a supplier on B-21 -- any thoughts around the acquisition there with Boeing? And if there's a chance you would bring that work kind of in house? Kathy Warden: Yes. I'm not going to comment on specific discussions that we've been having with Spirit. But generally, we acknowledge that they are a supplier, and we have agreements in place with them that we would any owner of the company to adhere to as we move forward. Operator: Thank you. Our next question comes from Pete Skibitski with Alembic Global. You may proceed. Pete Skibitski: Yes. Good morning guys. Cathy, I think it was on the last call, you talked about an increasing amount of Triton export opportunities. I was wondering if you could give us a sense of timing for when those might get signed off on and maybe size some of the opportunities? Thanks. Kathy Warden: Yes. So we are excited that both NATO and Norway have expressed interest in Triton, and we are hopeful that announcements will be coming shortly on both. And as we look to build Triton for the U.S. and Australia, this simply adds to the production line outlook for Triton through the decade. And so we had envisioned this day coming where more countries would get the opportunity to see Triton once it was fielded has a tremendous ability to surveil large areas of ocean. You can think of the relevance to that in the Pacific, which is what was attractive to Australia and the U.S. Navy, but of course, in the Arctic, this is an area of great importance as well, which is driving to NATO and the Norwegian interest. Pete Skibitski: Great. Thank you. Operator: Thank you. Our next question comes from Robert Spingarn with Melius Research. You may proceed. Scott Mikus: Hi. Scott Mikus on for Rob Spingarn. Kathy, I wanted to ask about the Sentinel program. It had an 81% increase in cost, but the DoD's Cape office said that their confidence interval on that estimate was only about 50%. So if the estimates end up being higher or lower, can you talk about opportunities where you think you can lower the cost of the program? And then as a follow-up, although nuclear modernization is a high priority, budgets aren't unlimited. So how concerned are you that cost growth in Sentinel could result in it being truncated or potentially B-21 end up being a bill payer with the Air Force's budget? Kathy Warden: Yes. A couple of things to frame for you in answering those questions. The first is a reminder that the cost growth that is projected is indeed that a projection over a very long period of time. It covers not just work that we're doing right now to design, develop and tests, which will largely be through the remainder of this decade. The majority of those cost growth projections come for the fielding building out the missile silos for the system, 450 of them, and that doesn't happen really until the next decade. So that's why there's so much uncertainty. It's like any of us sitting here and trying to project what costs might look like 10 to 15 years from now, and that's what's baked into those estimates. The second part of your question is around the 80% growth. There's so much of that is well into the future. There are still decisions that the Air Force can make today that can drive solutions that reduce that cost projection. And that is what they're doing in the restructuring, looking at those options, and we are partnering with them to do that and very committed to help them do that. And, of course, on many of Northrop Grumman's program, we are performing well-below the government's independent cost estimates, which is what these are. These are not industry's estimates. These are the government cost estimates. And this is not growth on the current contract. This is projections of future growth. So with all of that in mind, there is time here to work through a number factors to determine what the actual cost growth would be and how that gets incorporated into future year defense programs, but it is not expected to have a significant impact in the next five years, and the Air Force has made that clear. Scott Mikus: Thank you. Operator: Thank you. Our next question comes from Peter Arment with Baird. You may proceed. Peter Arment: Thanks. Good morning, Kathy and Dave. Thanks for all the incremental details on B-21 super helpful. Just Dave, quickly on working capital, just dynamics going forward here and then how we're thinking about that as it rolls into 2025 just given all the growth that you guys are enjoying? Dave Keffer: Sure. Clearly, a really strong Q2 for free cash flow performance, working capital very much an integral part of that. I think it's a good opportunity to take a step back then and look at the rest of this year and beyond? And what's factored into our multiyear outlook and our guidance for this year. And for working capital, the answer is essentially that our expectations are pretty flat that we're already performing at a very high level, very strong level for working capital and that we're not anticipating additional efficiencies nor are we anticipating erosion to those levels. So, when we talk about a 15% plus free cash flow CAGR from 2023 to 2026. That is not driven by further working capital efficiencies. It's driven by the expansion of operating profits as we continue to grow the top line, and we deliver on margin expansion opportunities. CapEx is at peak levels this year as it was last that will decline going forward, both in real dollars and clearly as a percentage of sales toward our longer-term target in the 3% range. And then we should see modestly stronger CAS pension recoveries as we showed in our latest projections earlier this year based on the actuarial environment today. And then the Section 174 impact on cash taxes will continue to decline each year. So that combination of factors is what leads to the 15-plus percent free cash flow growth in our outlook and working capital is essentially a flat element of that outlook. Peter Arment: Appreciate the details. Thanks. Dave Keffer: You bet. Todd Ernst: And Josh, we have time for one more question. Operator: Thank you. And our final question comes from David Strauss with Barclays. You may proceed. David Strauss: Thanks for squeezing me and I appreciate all the additional color on B-21, very helpful. Kathy, can you -- you've talked about the company eventually getting back to this 12% margin range. Today, you're at 11. You talked about B-21 today, not really being much of a headwind as we think about margins going forward. Can you talk about that progression back to 12%, how you see that kind of playing out over the next couple years? Kathy Warden: Sure. So, we've talked about several factors. The first is getting the macroeconomic headwinds behind us related to inflation flowing through our contracts, the disruption and challenges that we've had with supply chain deliveries, and those are largely getting behind us, although we do still have some contracts that is flowing through, and we're seeing those impacts, as we talked about in Mission Systems today. But as those headwinds dissipate, then it really is about the strength of the portfolio shining through in operating results. And you're starting to see that take hold. What I would say is that from a cost efficiency standpoint, the team is making sure that the business is sized appropriately and everything from human capital to facilities to our infrastructure. We also are investing in digital enablement, as you know, which is a tailwind to program performance as we've demonstrated on B-21 with our ability to adhere to modeling that predicts future and then hit that performance in the product, that is derisking our programs and driving improved margin opportunity. And then some more structural items like the mix shift that we spoke about on the call, our cost plus business, which we've had a heavy concentration of here in these last few years, including programs like Sentinel with lower booking rates, which will over time move toward fixed price and more profitable programs. And then, of course, international, which is a portfolio tailwind as more of our business comes from international sources. So it's that full combination of paths that we are working. We're showing progress on each as we move forward, and it bolsters our confidence that we can drive this business to another 100 basis points of margin performance over the decade. David Strauss: Thanks. If you sit here today, would you expect margins to tick up next year off the 11% level? Kathy Warden: I would. David Strauss: Thanks. Appreciate it. Kathy Warden: Thank you. All right. So, with that, I'd like to conclude by once again thank you to team for a fantastic quarter. And in particular, I want to recognize Mark Taylor who is retiring from our company tomorrow after a distinguished Northrop Grumman career and over a decade on our executive leadership team. And also I want to note that in the coming months, Dave, Todd and I look forward to introducing Ken Cruse, who is here with us in the room to our investor community as our incoming CFO effective October 1. So in the meantime, we look forward to talking with you in October and seeing you over the course of the summer, and thank again for joining our call today. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's First Quarter 2024 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's First Quarter 2024 Conference Call. We'll refer to a presentation that is posted on our IR website this morning. Before we start, matters discussed on today's call, including guidance and outlooks for 2024 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. And on the call today are Kathy Warden, our Chair, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thank you, Todd. Good morning, everyone. It's so good to have you joining us today. So earlier this morning, we released our first quarter results. And as you can see, we are off to a strong start to the year with broad-based growth across our portfolio. The team's relentless execution of our strategy, which includes technology leadership aligned to our customers' priorities and a laser focus on performance has positioned us for continued success. Growing global demand for our capabilities led to an exceptional 9% year-over-year increase in Q1 sales, driven by growth in all 4 of our sectors. The productivity and cost efficiency measures we've been implementing are gaining traction, and our program performance in the quarter was strong, resulting in segment operating margin dollars increasing by 10%. Operating profit expansion, along with the lower share count helped to drive 15% EPS growth. Overall, our first quarter performance was in line with or better than our expectations, and we are reaffirming our 2024 company level guidance. Global demand for our products continues to be robust, fueled by rising defense budgets and our market position. We're pleased that an agreement was reached on the U.S. fiscal year 2024 defense budget, which includes support for our key programs and represents a 6% growth in investment accounts over 2023. In March, the administration released the 2025 defense budget and Future Years Defense Program or FYDP. And these also were consistent with our expectations. We continue to see robust support for our program portfolio in areas that include nuclear modernization, microelectronics, advanced weapons in space. Together, the appropriations in FYDP give us confidence in our longer-term outlook even if we experience a somewhat slower top line growth environment for the U.S. defense budget in the short term. As we look beyond the domestic market, we continue to see numerous new international opportunities as well. These span a wide range of capabilities across our portfolio, and they provide an additional avenue for sustainable and profitable growth. In the first quarter, Poland signed a letter of acceptance with the U.S. government for an additional implementation of our IBCS product line, known as [ Narav ]. This represents the short-range air and missile defense portion of Poland's missile defense architecture, and it will augment the medium-range portion, which is currently being deployed. In addition to Poland, we see an IBCS pipeline now of approximately $10 billion from numerous countries who are considering this joint battle management system. Another important suite of international opportunities for Northrop Grumman is sensor modernization of fourth-generation aircraft. This includes our IVEWS electronic warfare offering, which leverages the U.S. program of record. IVEWS has been down selected by 2 international partners, and we are in discussions with 7 other countries. Overall, IVEWS has the potential to be a new multibillion-dollar product line for us. We're also well positioned to address emerging international opportunities for autonomous systems. The first of 4 Triton aircraft is expected to be delivered to Australia later this year. In addition, NATO is actively looking to expand its maritime surveillance capabilities, enabling a higher degree of interoperability amongst allied nations. We believe our Triton program is well suited to meet these requirements, providing an opportunity for up to 5 aircraft. And we see additional Triton opportunities emerging elsewhere in Europe. There also continues to be an uptrend in U.S. and allied partner demand for missile products and ammunition. This includes several significant ammunition opportunities for allies that in aggregate have the potential to support further growth in our Defense Systems portfolio at solid margins. And this week, the U.S. Congress has supplemental funding bill, which includes munitions procurement and missile product capacity expansion. As we shared in our prior calls, to meet growing demand across our weapon systems business, we have been investing in our largest solid rocket motor production facility over the past 5 years, and we have now tripled our production capacity for tactical SRMs. Technology leadership is an important part of our business strategy. And we've been investing to maintain our lead in microelectronics for defense applications. To further this objective, we recently established the Northrop Grumman Microelectronics Center, which brings together our microelectronic capability from across the company into one organization. It will be led by our Mission Systems business, where over 80% of their revenue is enabled by our innovation and investments in microelectronics. Today, our U.S. microelectronics facilities produce over 1 million microchips a year with tailored design, fabrication and advanced packaging needed to support the most advanced defense systems and sensors. We also work with leading-edge technology developers in the commercial space, like NVIDIA to incorporate their technology into our national security solutions. In addition to advancement in capability, we are expanding our capacity in this important technology area. In the quarter, we held a groundbreaking ceremony for our new advanced electronics facility in Waynesboro, Virginia. With this $200 million investment, we are increasing our ability to manufacture and test advanced electronics and mission solutions. As I mentioned earlier, we are laser-focused on performance and driving cost efficiencies in our business. This includes deploying systems and tools that help enable increased productivity across our business. In the first quarter, we completed the implementation of a significant financial ERP upgrade, which consolidated multiple versions of our prior system, and it will significantly improve the efficiency of our operations. This new system provides a foundation that supports many of the other digital transformation initiatives. And it plays an integral role in our longer-term margin expansion strategy. The upgrade, as you would understand, was a massive undertaking that was achieved with minimal disruption to our business. It's really a credit to the entire team who worked tirelessly to achieve this outcome. We also continue to proactively address our overhead costs and indirect rates to drive affordability for our customers. We saw benefits of this in the first quarter, particularly in production programs at both AS and DS. Efficiency in both direct and indirect cost management continues to be a priority across the company. Program execution is another area of particular emphasis in 2024. In our space sector, after rapid growth over the last several years, we are keenly focused on delivering key capabilities for our customers, executing our extensive backlog and generating strong returns in the process. This includes the progress we're making on the Sentinel program. We're continuing to execute the EMD phase of the program, and we've made solid progress on design and development activities for the facilities and support equipment as well as the missile itself. The Nunn-McCurdy review is continuing, and we are providing support to the Department of Defense in that process as well. It's a complex undertaking to modernize the U.S. strategic deterrent, which requires delivering the most advanced capabilities in the world to form the basis of that deterrent. We're honored to be part of this vital mission, so we're partnering with our customers in bringing the focus, resources and talent needed to deliver on those commitments. Finally, I'd like to provide an update on our capital deployment strategy. First and foremost, we are investing in capabilities that meet our customers' needs to address rapidly evolving threats. This year, we continue to expect that we'll invest roughly $1.8 billion in capital expenditures bringing our total investment to nearly $8 billion since the beginning of 2020. These investments have contributed to our strong growth performance and outlook. At the same time, we are efficiently returning capital to shareholders, including nearly $1.5 billion in the first quarter. So in summary, with a broad portfolio of well-supported programs continued new domestic and international opportunities, a relentless focus on performance and a capital deployment strategy designed to create value for customers and shareholders alike. Northrop Grumman is well positioned for the future. So with that, I'd like to hand the call over to Dave, and he's going to cover some of the details of our financial performance and outlook before we take your questions. Dave? David Keffer: Thanks, and good morning, everyone. As Kathy highlighted, we're off to a strong start to the year. Sales, operating income and EPS all increased meaningfully from the first quarter of 2023 as we execute on our backlog and drive efficiencies in our business. Starting with our top line results on Slide 4 in our earnings deck. First quarter sales increased 9% to $10.1 billion. We were pleased to deliver higher Q1 sales at all 4 of our segments. These results were ahead of our initial projections for the first quarter, due in part to the timing of material volume on certain programs. With that in mind, we expect a more gradual ramp in our quarterly sales profile than in the past few years. I'll address the factors contributing to this as I walk through updates to our segment guidance. As AS sales were particularly strong, up 18%, driven by higher volume on the B-21 program as well as on mature production programs like F-35. Defense Systems sales increased 3%, primarily due to growth on multiple programs in our weapons business, and as expected, were partially offset by lower volume on an international training program. Mission Systems sales grew by 4%, led by rapid growth on advanced microelectronics programs in our restricted portfolio, partially offset by lower volume on SABR. And sales at space increased by 9% with broad-based growth throughout the portfolio, including on the SDA transport layer programs as they continue to ramp. Turning to the bottom line. We remain laser-focused on performance. In Q1, we generated segment operating income of $1.1 billion, a year-over-year increase of 10%. Margin rate was also solid at 10.9%. As we've outlined on previous earnings calls, we expect to increase our margin rate over time as mix shifts favorably, macro conditions improve and productivity measures continue to bear fruit. Aeronautics operating income increased 25% for an operating margin rate of 10%. Efficient indirect rate performance, driven by productivity initiatives and careful cost management helped to generate a healthy volume of favorable net EAC adjustments. These adjustments were recognized across the AS portfolio but primarily benefited mature production programs. On B-21, there were no significant changes to our EACs, and we continue to make good progress in the test phase of the EMD program and on the build of the LRIP production units in flow. We have finalized negotiations with additional suppliers on the LRIP phase of the program and are in the late stages of negotiations with the remaining. Defense Systems operating income grew 11%. They also benefited from favorable mix and indirect rate performance, driving their OM rate to 12.5%. At Mission Systems, segment operating income increased 5% and margin rate increased 20 basis points to 14.2%. MS' OM rate benefited from favorable mix on higher-margin advanced microelectronics programs, partially offset by lower net favorable EAC adjustments. We see opportunities to further improve performance at MS, driven by operational efficiencies and investments we've made in our factories. Lastly, space operating income increased 6% and its margin rate was a solid 9.1%. Moving to earnings per share on Slide 6. Diluted EPS were $6.32 in Q1, an increase of 15% from the prior year. The increase was driven by our strong growth in segment performance as well as from higher net pension income and a lower share count. Turning to cash flow. We're pleased with our cash performance. particularly in light of our ERP conversion that went live in the first quarter. This was a significant undertaking that will help to drive additional efficiencies in our business over time. Q1 free cash flow was an outflow of approximately $1 billion, and we expect a strong quarter of cash generation in Q2. This profile is consistent with our seasonal pattern of generating the majority of our free cash flow in the second half of the year. Moving to guidance. We are reaffirming our 2024 company level guidance and have a few updates at the segment level. We continue to project a book-to-bill ratio close to 1x for the year. Note, we expect a higher ratio at AS, DS and MS and a lower ratio at space, given all the backlog growth that has generated in recent years and flattening U.S. space budgets. At the company level, we expect our second quarter sales and segment margin volume to be roughly in line with the strong Q1 results with modest expansion in the second half. We expect the quarterly profile to vary at the segment level, so I'll take a moment to provide some additional color. First, DS and MS sales and margin dollars are expected to ramp throughout the year, generally consistent with prior year patterns. Restricted programs in MS continue to expand, and the DS Weapons business has significant demand that Kathy described, which should lead to further second half growth. Our margin rate guidance was adjusted slightly higher at DS and slightly lower at MS, reflecting our Q1 performance and latest expectations for the remainder of the year. At aeronautics, we are increasing our sales guidance to the mid-$11 billion to reflect our strong Q1 results and our latest projections for B-21 sales timing. But the quarterly sales profile is projected to be different this year than it was in 2023. The timing of materials volume, primarily on F-35 and B-21, drove additional Q1 sales. So we'd expect a flatter profile through the remaining quarters. As our full year guidance indicates, AS margin rates are expected to be lower in subsequent quarters based on business mix and the strength of Q1 EAC adjustments. For the full year, we continue to expect margins in the mid-9% range. And at Space, we're lowering our sales guidance to the low to mid $14 billion, which roughly reflects 3% annual growth. Sales volume is now expected to trend lower over the remaining quarters of 2024, reflecting the NGI decision and the contract termination and restricted space that we noted last quarter. This is expected to be partially offset by continued growth in Sentinel and the SDA portfolio. Below the segment line, we are reaffirming our company-level guidance reflecting the strength of our broad portfolio. We continue to expect corporate unallocated costs to be weighted toward the second half of the year, consistent with prior years. Interest expense will also be higher in future quarters due to the additional debt issuance in Q1, and we continue to project an effective tax rate around 17%. As we've noted before, we're monitoring any changes in tax legislation and any updates in our tax appeals processes, that by their nature, are not factored into our guidance. And as a reminder, we completed a $2.5 billion debt offering at attractive rates shortly after the filing of our 10-K. The proceeds will be used in part to retire $1.5 billion of notes that are maturing in January 2025, as well as for general corporate purposes, including share repurchases. We initiated a $1 billion accelerated share repurchase in Q1, which is now nearly complete. In total, including our open market purchases, our Q1 repurchases were $1.2 billion. For the full year, we have increased our expectations for share repurchases to greater than $2 billion. We also remain committed to providing a strong and growing dividend. Our capital deployment plans are enabled by our ability to generate strong and predictable cash flows in our diverse and durable portfolio. We continue to project industry-leading investments in our business to support our customers while returning excess cash to shareholders. We're confident that this business strategy will create value for all our stakeholders. In summary, we're off to a great start to the year, and we remain upbeat about our long-term outlook. And with that, let's open the call for questions. Operator: [Operator Instructions] Our first question comes from Ron Epstein with Bank of America. Ronald Epstein: Kathy, if you could speak to just maybe a little more detail in that $95 billion supplemental, what potentially is in there for Northrop given everything you guys have been doing in those related businesses. Kathy Warden: Yes. Well, as I noted, we are pleased that the supplemental did pass this week. And as we are looking through it. There are a number of areas that align to our program portfolio. Some where we are prime in weapons programs, others where we are a supplier of solid rocket motors. And then there is a line for additional capacity expansion. I talked about the capacity expansion that we have done for solid rocket motors in our largest production facility that over the last several years has enabled us to triple capacity, there is additional funding that would take that capacity even higher and reflects what's needed to support those programs that are funded in the supplemental. So we are bullish on the opportunity to fulfill that demand through both the investments we've made and the additional capacity that we can lay in over these coming months and years. Ronald Epstein: And maybe just a quick follow-on, if I may. With the push out to F/A-XX, I mean how does that have -- like what strategic impact does that have on the Aeronautics business? Kathy Warden: There are a number of opportunities in aeronautics that we are pursuing that being one of them. It doesn't really have an impact on our near-term outlook for that business. As we shared today, we're raising the sales guidance for that business this year, and that's really on the strength of the current portfolio and the growth that we continue to see there, but we will continue to pursue additive opportunities that maybe program being one of them. Operator: Our next question comes from Doug Harned with Bernstein. Douglas Harned: You talked a little bit about outlook for book-to-bill this year and backlog was down in each segment in Q1. I understand some of the space issues. But on AS, DS and MS, if you're looking at a book-to-bill of above 1 for the year, can you talk about where that's likely to come from? What will drive those business units since that the backlog was down in Q1? Kathy Warden: Yes. Doug, as we've talked about before, awards can be very lumpy, and so we tend to look at our book-to-bill over a longer stretch of time. And our last 2 years have been well over 1, so we expected this first quarter to be lighter and we had signaled that. As we look at the full year, we still believe that we'll be near 1. And it's largely going to be driven by our shorter-cycle businesses, so think Commission Systems and Defense Systems and space will clearly be the lowest as we digest the NGI loss and, of course, the cancellation that we had in the first quarter. But I'll remind you, our space business has nearly doubled over the last 4 years, and the book-to-bill there has been incredibly strong. So they're still carrying a large backlog of business that supports the growth rates that we're projecting for them. Douglas Harned: Well, and then just on space, you mentioned the importance of Sentinel and you've talked over the last quarter about some of the Nunn-McCurdy breach and those issues. But when you look at the Air Force moving the IOC schedule back by 2 years, how does that affect your growth path on Sentinel? Kathy Warden: We had talked about Sentinel growth coming flattening out for a few years and then returning to growth as we moved into the production phase later in the decade that still holds true. That timing has, of course, moved as the program schedule is moving, but the profile still is quite similar to what we have been discussing. And it was so far out in the future, it really wasn't in any of the projections that we had in '24 or even '25. It was well beyond that. Still a healthy ramp is expected for that program, and we are laser-focused on delivering and meeting the schedule commitments that we are working towards with the Air Force. Operator: Our next question comes from Kristine Liwag with Morgan Stanley. Kristine Liwag: The Air Force lowered its near-term requested funding levels for B-21 in the fiscal year '25 budget proposal. And they talked about lower negotiated prices on low rate production. How does this change alter the economics of the program and risks of incremental charges? Kathy Warden: It doesn't change the economics of the program. What happened is the budget was set based on the independent cost estimates. And as we move towards the contract phase where LRIP was exercised the first option, the government is now reconciling to our contract value. There was no change in price schedule quantities. It's just a reflection of them moving off of an independent cost estimate and moving to our contract value, which, of course, was lower than their independent cost estimates. Operator: Our next question comes from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Kathy, I wanted to ask about DS. Maybe can you talk about the puts and takes there just given supply chain as well as services and incremental opportunities such as IBCS and Missile Systems. How do you think about the trajectory just given some of the positive movements we've seen in missiles, initial defense and obviously, supplementals and the driver of potential margin improvement there? Kathy Warden: Yes. So our Defense Systems portfolio has been undergoing a transformation over the past several years. As you know, we divested the services business, and we still have a sustainment and modernization business. That business has been flattish. And this year, we talked about a headwind in that business to growth associated with an international training program. You see that weighing a bit on first quarter growth in DS being 3%. Over time, we expect that growth rate to reflect the other 2 portions of the business more and more as that mix shifts toward weapons and our battle management portfolio. That's where IBCS sits. I spoke on today's call about some of those opportunities, both domestically and internationally in the weapons and the IBCS portfolios. And so we expect those to contribute to growth, and they are also higher margin than our sustainment business. So as that mix shifts, so will margins improve. Operator: Our next question comes from Seth Seifman with JPMorgan. Seth Seifman: Kathy, I wanted to ask on autonomous aircraft and the CCA program, we saw last night the news about Anduril selection along with General Atomics. And I was wondering if you can -- with that news, maybe update us on Northrop's strategy to capture a new work in the autonomous space. Kathy Warden: Yes. So we're obviously disappointed to learn that we weren't selected on this phase of the CCA program. The -- as Air Force has described this acquisition strategy as a continuous competition and they're already outlining future phases. So we'll see what that presents in terms of future entry point. We also see the other services in the U.S., and I talked about international partners as well, continuing to look to add to their autonomous vehicle fleet. And so we are pursuing those opportunities. We haven't learned anything at this point that fundamentally changes our strategy in autonomy, but we'll monitor how the CCA program progresses and will incorporate any learnings that we have into those future opportunities. And for us, you didn't ask, but this phase of the program was relatively small. We didn't have it assumed in our plan. So there's no impact to the guidance that we shared this morning for the AS sector. Seth Seifman: Okay. Okay. Great. And then maybe a follow-up on it. When you think about where you want to be focused in autonomy. I guess the legacy of the company is more on the exquisite side, and there will probably be some demand for that, but also demand for quantity and -- which requires affordability. Do you plan to pursue opportunities in both of those submarkets or really focus more on that kind of legacy exquisite piece of the market? Kathy Warden: We are obviously working toward affordability in our product line, so we do not want to be viewed as only offering exquisite and expensive technology. So we've been working to drive down the cost of our offerings, and I think we had quite a compelling offering on CCA and can compete in that marketplace. We are really positioned to provide the best solutions that our customer needs against a high-end threat, however, we are not looking to compete in a more commoditized part of the market that's very low cost and not survivable systems. That's just not our business model, and we know that. So we'll remain disciplined in where we invest in the pieces of the market that we pursue, but we think that what we provide is still highly relevant. Operator: Our next question comes from David Strauss with Barclays. David Strauss: Kathy, I wanted to ask about MS margins. A couple of years ago, we were running in the 15 level, they stepped down a little bit last year. You took down a margin guide there. Can you just kind of talk about what's driving the lower margins? Is it just solely mix that's driving the lower margin in that MS? Kathy Warden: It's a bit of mix as we've been talking about. They have a higher cost plus mix now than they have historically, and we expect that to shift over time, but they are still at a high watermark. And there also is a productivity element to the story. We've talked about supply chain disruption as we have ramped and we are also increasing the scale of that business. You see a mid-single-digit level growth in Mission Systems. But with price coming down on microelectronics, it's actually a much higher volume ramp than is reflected in the total sales growth of the business. So as we have climbed that ramp, productivity has taken a bit of a dip. But as we said, we're focused on getting back to our prior performance levels at now this higher volume level, and we see that as something this team is very capable of doing. And that's why you see a margin profile that always is start a little slower and ramp through the year for MS, but you'll see it again reflected this year based on those productivity improvements that we expect to achieve throughout the year. David Strauss: Okay. Got it. And then similar question over on the Space side. So you took down the top line there, I assume that was partially NGI. The slower growth, should we see that potentially reflect itself in a little bit better margin profile? I know you got the margin guidance unchanged at 9, but I guess the NGI loss and just a little bit slower growth, could that actually help the -- help enhance the margin side of things. Kathy Warden: Yes. As we look at the slower growth, it is largely development programs that are dilutive to the both space margin rate and the company margin rate. So as -- that part of the business is no longer as significant. You will see that be both margin and cash tailwinds because there was also CapEx investments planned that we will not extend in those programs now either. Operator: Our next question comes from Cai von Rumohr with TD Cowen. Cai Von Rumohr: Good performance, Kathy. So following up on Dave's focus on space, I think I've got 2 questions. First, the restricted program that was canceled, is there any chance that we heard a rumor it might have been related to a supplier issue. Is there any chance that, that function or that program might reappear again in the future? And secondly, the SDA business, you basically decided not to bid 1 contract. Is that as a group, are those profitable contracts? Because every time I look, there's another new small supplier coming in and they're all fixed price contract. Kathy Warden: So let me start with your first question on the restricted program. There's very little I can say, given the nature of that program, except to say that the Air Force canceled that program largely due to budgetary concerns and prioritization, but the requirement likely does still exist. And so we will see how that plays out over time. I also -- as we look at the broader space portfolio, we'll answer your SDA question more generally. We see a whole variety of opportunities that we can pursue, so we're simply selective on which ones we're best positioned to win, where we think that we can competitively. And with SDA, we've been quite successful and those programs are profitable. But that's because we're remaining disciplined in choosing where we can best compete and win with a reasonable fee and the probability of success. Cai Von Rumohr: But you did know bid that one program. As we move forward, is the pricing here getting a little bit more competitive as more people join the party? Kathy Warden: The way I think about bid strategies is if there is an area where you have a differentiated value, then you are going to be able to price accordingly. If you don't, you won't. And so we don't bid when we don't feel like we have a differentiated value that's going to be successful with the price we need to bid to both win and execute. It's really a decision we make on every capture. It's fundamental to the way we both commit and execute as well as deliver the returns that we expect. So no change there and no difference in the states than it is in other parts of our portfolio. Operator: Our next question comes from Robert Stallard with Vertical Research. Robert Stallard: Kathy, I just wanted to follow up on your comments at the start of the call where you talked about the FY '25 request and DoD spending leveling off. I was wondering who you think could be the bill payers in that budget scenario or whether there's any vulnerability in the Northrop Grumman portfolio? Kathy Warden: We looked at the FY '25 president's budget is very much in line with our expectations. So no surprises and no concerns about our portfolio. Obviously, we talked about two things where budget was a factor in DA choosing to down select early on NGI was largely due to budgetary constraints. And then, of course, the restricted space program that we mentioned, but those we have now digested and, of course, reflected not only in our outlook, but my comments about the FY '25 budget. . So nothing else that we see in there that is concerning. And as I noted, '24 ended up being a strong year for the investment accounts with 6% growth over '23. And we also have the supplemental on top of that. So it's early in looking at '25 and where the budget environment will actually end up in the U.S. But I also just keep pointing back to international demand, that's the strongest that I've seen in a long time. And so we look at global demand, not just the U.S. marketplace. Robert Stallard: Which is -- I've got a quick follow-on on that actually because you did mention exports as well. And I was wondering if you could give us an update on what sort of scale as a percentage of revenues, exports are at the moment and what that could grow to in the future. Kathy Warden: They're about 14% right now. And while we don't see that moving significantly in the near term because there's opportunities I noted in the pipeline do take a while to prosecute and turn into sales. We do expect that, that will be a faster segment of growth than our domestic business over the next several years, just the richness of the pipeline. Operator: Our next question comes from Pete Skibitski with Alembic Global. Peter Skibitski: Kathy, can you talk about Northrop's roll in the shipbuilding supply chain, which I guess is the marine unit in MS. Just because the Navy has talked about some of the supply chain challenges in shipbuilding. Maybe you could just kind of swage any concerns maybe in terms of how that unit is performing and the growth outlook there? And just kind of how you guys are managing that unit to just so we have a good feel that smoke doesn't turn into fire kind of scenarios? Kathy Warden: Absolutely. It's a critically important part of our portfolio. We're very focused on delivering for our customers in that portfolio. And there have been challenges that we own. We've been working on a development program for nearly 10 years. It's going to deliver an amazing step function improvement in propulsion for the Columbia class submarines. And we are near delivering those first care of turbine generators. And that's what the Secretary of the Navy was referring to in his testimony on the Hill. We are working to address supply chain challenges, as you have heard across the entire shipbuilding enterprise, our experience is very consistent with that. These programs are long cycle. And so we only go through these development efforts once over a multi-decade period and there's learning that happens. But in this case, I think we are largely through that learning and on a path for delivery, and we're optimistic of the future ahead in being able to deliver this capability. From a financial perspective that you asked about, this is relatively small, so not something that you should think of as having a material financial impact, but that doesn't mean we don't take it very seriously. Operator: Our next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Dave, just to clarify, what's the message on space growth beyond this year? Does it reaccelerate off this 4% or so this year? David Keffer: Yes, I appreciate the question. As you know, we'll provide more specific guidance for all of our businesses and at the enterprise level later this year and provide some indications on the October call as is our traditional approach. I think the broader themes that we've talked about in space today are important. We've touched on the restricted program cancellation in the NGI down select news. But broadly speaking, the doubling of that business's backlog over the last 5 years, the 17% CAGR in sales over that business in the last 4 years, both position us really well for continued success in that business. And there is margin rate and margin dollar expansion opportunity on top of that. So we'll provide more specifics as we go about the combination of headwinds from the items we mentioned and tailwinds from the continued growth on other programs. So more specific later in the year, but we continue to be confident in the long-term outlook of the Space business. Scott Deuschle: Okay. Great. And then, Kathy, you flagged opportunities for increased demand for ammunition from U.S. allies, so I was wondering if you could talk a bit more about maybe the specific ammunition products that allies you're looking to purchase from Northrop? And in which regions you're seeing that demand percolate? So I understand that there's at least one specific European supplier of ammunition that generates something like 25% operating margins off that revenue. So just curious to understand what that opportunity could mean for Northrop. Kathy Warden: Yes, of course. So as we look at our weapons portfolio today, it's about 6% to 7% of revenue. It's growing double digit, and we expect that to continue. A good part of that growth will be supported both by the supplemental that I spoke about in my opening comments in response to Ron's question, but also the European demand has strengthened. So we have a number of opportunities, countries across Europe looking to do the exact same thing the U.S. is doing in replenishing stockpiles for munitions. And those are basic and nonstandard ammo contracts that we have. Our business grew nicely last year. We expect that to continue this year. And we also have programs like AARGM, where there's international demand, that's a longer-term proposition as we look to provide those products to our European allies, particularly as they feel the F-35. So a wide ranging set from ammunition all the way up to tactical missiles. And then, of course, our solid rocket motor facility expansion supports many of our peer programs like GMLRS, PAC-3, looking to be a second source to support and fix all of those opportunities are in the mix for us. Operator: Our next question comes from Myles Walton with Wolfe Research. Myles Walton: Kathy, you provided a ton of international color both in your opening remarks and also a follow-up to Rob's question. But when I look at the sales disclosures, it's been pretty locked in at $5 billion for 5 years of absolute dollar revenue. So is there a color you can give us on the backlog that shows that this international opportunity is at least working its way into backlog, if not sales in the coming year? Kathy Warden: Yes. So in terms of backlog, what you would look to see as we signed the IBCS deals that I mentioned with additional countries as we sign the contracts for Triton that I highlighted in the call today. The IVEWS that are in the early stages, the 2 countries progressing toward awards. These are all awards that would be in new franchises that we have not had in the past. While we continue to see just the standard growth in areas like F-35 international and the Triton portfolio with the Australians that are already underway or E-2D franchise with France and Japan. So those are still in the backlog and then you'd add to that, the opportunities that I highlighted this morning that are new franchises for us. Myles Walton: Okay. So the percent of the backlog that's international has been expanding though, I think, is what you're saying? Kathy Warden: It has, although really what we see now is a whole set of opportunities for product lines that were not in our backlog over the last 5 years. So that's the difference. Our portfolio has largely been high-end capabilities that aren't exportable. And as you look at how the portfolio has evolved over time, these new franchises that I spoke about today or franchises like Triton now getting permissibility for exports to more countries is really opening up a whole new set of opportunities for our company. Operator: Our next question comes from Gavin Parsons with UBS. Gavin Parsons: Kathy, you mentioned you've finalized negotiations with additional suppliers on the B-21. Were those all in line with your expectations? Can you share what percentage of suppliers are now locked in? And then when you expect that to be fully finalized? Kathy Warden: So they were largely in line with our expectations, which is reflected in the fact that we had no EAC change in the quarter. We are far along in negotiations with all of our suppliers, and we expect to be closing on those shortly that we're making sure that we have the best scale possible and that we work those negotiations diligently. So I've not set a time barrier to the team more so an outcome, I've set of objectives for them, and they're doing quite well against those expectations. And our suppliers are obviously key to us. We want to make sure that they are able to support the investment in this program that's necessary. And so we're taking their interest in line as well. Gavin Parsons: Okay. Great. That's helpful. And then, Dave, maybe just on Aeronautics margin, I think you mentioned the strength in 1Q will be a little lighter through the rest of the year. But was 1Q as expected? Was that in guide? Or did you perform better than you thought you would in the first quarter? David Keffer: The first quarter was particularly strong. As we mentioned, we had anticipated an opportunity for productivity gains and indirect rate-driven enhancement to the margin as well this year that was baked into our guidance. And the timing was such that a lot of that came in, in the first quarter, which is why we've noted that we expect the margin rate to be slightly lower in subsequent quarters than it was right out of the gate set at 10%. And so while there's no single onetime item in the first quarter, it was a particularly strong start and a great way to kick off the year for AS. Operator: Our next question comes from Matt Akers with Wells Fargo. Matthew Akers: I wanted to ask on Sentinel. You mentioned you're supporting the Nunn-McCurdy review. Just curious what you think the outcomes of that could be? And if there's any risk to that program or do you think that's not the case just given sort of how critical it is. Kathy Warden: Well, there has been strong bipartisan support for the program. We expect that will continue. It, of course, is the nation's policy as reviewed in the nuclear posture review to have 3 legs of strategic deterrence. So we do expect that the program will be recertified, but the government needs to take the process seriously. It's a good process. And they're working through the phases of that recertification now. And as I said, we're providing support to them and stay committed and very focused on delivering the program in the meantime, not getting distracted by the activity associated with the Nunn-McCurdy but supporting it fully. Matthew Akers: Yes. Got it. And I guess one for Dave. Just thoughts on where EACs at the company level kind of go from here, you're still running quite a bit below where you were a couple of years ago, it sounds like AS had some good EACs, but just thoughts on the progress from here. David Keffer: Sure. I agree with your characterization that there was good progress in the first quarter. And you'll see that further detailed in our 10-Q disclosures as well. We had been running substantially above the levels of 2022 and 2023 in prior years before the macroeconomic disruptions. And so over time, we anticipate that we will normalize to levels more like our history and we saw progress towards that in the first quarter, as you mentioned, particularly in AS. But really across the business, you're seeing the results of our heavy focus on program performance and cost efficiency. It's 1 of the 3 drivers that we anticipate for margin expansion, along with business mix enhancement, and the gradual decline of macroeconomic pressures. And so across those 3 dimensions, we see an opportunity to continue to see margins normalize over the next several years, and Q1 was a good example of what you can anticipate there. Operator: Our next question comes from Jason Gursky with Citi. Jason Gursky: Kathy, I was wondering if I could ask you to dive a little deep on the space business in 2 areas, maybe starting with sensors and payloads. And talk a little bit about the pipeline of business opportunity that you have there, where you're seeing the most interest kind of -- like type of sensor, letter optical communications, SAAR, RF, that kind of thing. Just talk a little bit about the general kind of ecosystem and what's going on in the sensors and payload business that you've got there and what you're kind of excited about today? Kathy Warden: So we are seeing interest in modernizing really the entire architecture and space. And I've been talking about this for a while, so whether it's intelligence surveillance reconnaissance, communications, missile warning and tracking, the entire space architecture is being upgraded, both in terms of advancing the capability of those sensors and payloads but also the coverage with the broadening of the space architecture. And so we're involved selectively in all of those areas. As you know, we play a key role in ISR communications, and very informed of both missile tracking and missile warning. So really, we feel we have a very broad portfolio that stretches across those areas we don't focus in on one over the other, and we see them all equally attractive. And really, in many ways, that modernization is well underway and is what has contributed to the strong growth of our backlog and space over the last few years. Jason Gursky: Okay. And maybe a similar kind of discussion on the ground systems side of things and whether that's all the sensor and payloads that we're launching up in the space are driving the ground system business, just kind of what the competitive environment looks like for you there? Kathy Warden: Yes. They are, and we do participate in the ground segment. I'd say our strength is more in the sensors and payloads but we look at a full integrated solution and often are asked by the government to support them on the ground systems development that go with the satellites that we're fielding. And so we see that as a marketplace where we absolutely can compete. We just choose to be a bit more selective there, again, back to where we're more differentiated. Todd Ernst: Josh, have time for one more question. Operator: And our last question comes from Peter Arment with Baird. Peter Arment: Nice results. Kathy, can you maybe just talk a little bit about what you expect on your CapEx kind of profile. When we think about last year, you had a big step up and things are staying elevated here, but you also have just tremendous demand signals, both domestically and internationally. Just how you're thinking about how CapEx should trend? Have you made enough of the investment. It sounds like you have on the solid rocket side and microelectronics, but just thinking about more broadly? Kathy Warden: Yes. Some part of why we highlighted today some of those investments that we're making that will support growth over the long term is to reflect the statements that we've made that we do see this year being the peak 4% of revenue CapEx expenditures and then starting to see those come down gradually more towards a normalized level in our company, still see those as a robust growth environment. And so there will be investments that we're making. We're committed to do that. But we do not see the same demand for those investments over the next several years that we've seen over the last several. Good well, thank you all for joining us on the call today. We -- as you see, we're off to a strong start to the year, and we will carry that momentum into the following quarters as our team focuses relentlessly on delivering that technology advantage for our customers and value to our shareholders. So thanks again for joining us. I look forward to speaking with you on our next call in July. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen. Welcome to Northrop Grumman's Fourth Quarter and Year-End 2023 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Josh. Good morning and welcome to Northrop Grumman's Fourth Quarter 2023 Conference Call. This morning, we'll refer to a presentation that is posted to our IR website. Before we get started, matters discussed on today's call, including guidance and outlooks for 2024 and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. And on the call today are Kathy Warden, our Chair, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks Todd. Good morning everyone and thank you for joining us. Before discussing our 2023 results, I wanted to take a moment to thank our team for their hard work and dedication to our important mission. Our talented workforce which is now over a 100,000 strong continues to deliver some of the most advanced technologies in the world. These capabilities are used by our customer’s everyday to defend freedom and deter aggression around the globe. The geopolitical landscape has grown even more complex driving continued increases in global security spending. Our strategies has positioned us well to compete and win in this growing market which has translated into accelerating topline growth for Northrop Grumman. Revenue increased by over 7% in 2023 [indiscernible] more than a billion above the midpoint of our original 2023 guidance. In addition, our book-to-bill for the year was 1.14 times, that’s in line with our exceptional four year average. As a result of this award strength, we achieved a new record backlog which now exceeds $84 billion and now provides a healthy foundation for our continued growth. The underlying performance of our company is strong. We generated free cash flow at the high end of our guidance range, and we comfortably exceeded our sales and EPS guidance range, absence of B-21 charge. While we're disappointed that our assessment of conditions for the low rate initial production portion of the B-21 program necessitated this charge in the quarter, we are confident in our ability to deliver on the company's forward outlook, which remains unchanged. We're also proud of the performance of the B-21 team, which continues to execute an unparalleled aircraft development program. As we look forward, we will continue to execute our business strategy, which at its core is based on technology differentiation, a laser focus on performance, and value delivery for our customers and shareholders. To support this strategy, we are prioritizing investment in our capacity and capabilities. In 2023, we invested over $2.9 billion in R&D and CapEx, that's 7.5% of sales, to continue driving innovation and capacity to support our customer mission success. We also delivered over $2.6 billion to shareholders through dividends and share repurchases, representing a return of approximately 125% of our 2023 free cash flow. So now I'll highlight a few examples of progress we've made across the portfolio that further bolster my confidence in our future. Shortly after the close of the fourth quarter, we announced our GEM 63XL solid rocket boosters helped to successfully power ULA’s Vulcan launch vehicle on its first mission. Future Vulcan missions will utilize additional GEM 63XLs in support of Amazon, Kuiper, and other ULA customers, providing a significant growth opportunity for our propulsion business. And this is an important milestone because it supports our investment to significantly ramp production capacity of GEM 63s in the coming years. Global demand for our weapons system increased in 2023, and we expect this trend to continue. In this market, we're both a supplier and a prime. We're a supplier of propulsion systems, warheads, fuses, and cannons across a highly diversified customer base, and a prime contractor for predominantly air-to-ground missiles, including AARGM, AARGM-ER, and Stand-in Attack Weapon. Weapons systems currently represents approximately 7% of total revenue, and based on the demands we're seeing, we expect this business to grow faster than the company average for the foreseeable future, with a significant portion of this expansion coming from international customers. In our Mission Systems business, demand remains exceptionally strong, with a 2023 book-to-bill above 1.2 times, the highest of all of our segments. As we've seen in recent years, the restricted portfolio of Mission Systems is a meaningful driver of growth as our customers pursue solutions that enable them to operate inside the decision loop of potential adversaries who are also advancing their computing capabilities. We are helping our customers stay ahead by developing advanced microelectronics, sensors, processors, and secure communication. Our product lines are enabling faster cycles of modernization, positioning our customers with decision advantage in this rapidly advancing technology environment. And we continue to make significant progress on the EMD phase of Sentinel, which is the next generation land-based leg of the strategic triad. We are achieving milestones to mature the design and reduce risk, including key test activities, such as the successful static fire test of the Sentinel Stage 2 solid rocket motor for the missile earlier this month. Last week, the Air Force submitted to Congress a new set of cost estimates for the program, which triggered a Nunn-McCurdy Breach. This in turn launches a review of the program by the Department of Defense, which we expect to be ongoing for the next several months. It's important to note that the cost growth is primarily driven by estimates for the command and launch facility build-out, which is part of the military construction and procurement phases of the program. We and our industry team are continuing to perform on the EMD phase in close partnership with the U.S. Air Force. And we'll work with the government to explore opportunities to reduce costs on the program with a focus on the late 2020s and beyond when the program is expected to move into the procurement phase. And in the fourth quarter, the B-21 entered its flight test phase. This is a major milestone for the program and achieving it within the baseline schedule is a credit to the Northrop Grumman team and our close partnership with the U.S. Air Force over the past several years. Following this milestone, we were awarded the first LRIP lot in the fourth quarter and production is now underway. Let me take a few moments to provide a little more detail on the B-21 charge. The possibility of which we started talking with you about at this time last year. As you know, like all of industry, we and our suppliers have experienced cost pressure from recent global macroeconomic conditions, which are significantly different from the assumptions the team made when bidding these five production lots in 2015. During the fourth quarter of 2023, we again reviewed our estimated profitability on the LRIP phase of the program. And we now believe it is probable each of the first five LRIP lots will be performed at a loss. The charge is largely driven by a change in our assumptions regarding funding to mitigate the impact of macroeconomic disruptions on the LRIP phase of the program and higher projected manufacturing costs that reflect recent supplier negotiations and our experience in completing the first aircraft. The after tax cash impact related to these updates will be spread over a number of years. Importantly, we have absorbed this effect and we have not changed our outlook for free cash flow growth over the next several years. This is a game changing capability that will be of great value to our nation. And we are focused on executing the program in a way that also delivers value to our shareholders over the coming decades. Turning now to the budget environment. Global national security spending is increasing as the U.S. and allies invest in capabilities to deter and defend against aggression. Demand for our capabilities remain strong due to our differentiated portfolio and alignment to customer priorities including the triad, space and weapons. In the U.S., our franchise programs remain well supported by Congress and the Department of Defense. And this gives us confidence in our outlook even in a constrained U.S. budget environment. We are pleased to have an NDAA in place that provides continued support for defense spending. And we're hopeful that Congress will enact appropriations soon. Our guidance assumes we will not have a shutdown or a full year CR, and we're encouraged by the progress we've seen so far towards passing appropriations in the March timeframe. Additionally, we are monitoring progress on supplemental funding and we see opportunities in expanding the industrial base and increasing munitions production in this pending request. Our allies are also increasing their defense spending and we expect our alignment with their needs for aircraft, weapon systems and mission systems to be an additional source of growth. So as we look to the future, we have the right portfolio and team to deliver on our long-term outlook. Our organic sales have grown at a greater than 5% annual rate since 2019. And our guidance calls for continued growth of 4% to 5% in 2024. Segment operating margin dollars are expected to grow at roughly the same rate as sales in 2024. And our 2024 EPS guidance range of $24.45 to $24.85 at the midpoint represents roughly 6% growth excluding the B-21 charge and 11% growth compared to our initial EPS estimates which we provided for in 2023. In addition, the structural building blocks to expand our margins that we outlined in last year's 2Q earnings call, including dissipating macroeconomic headwinds, implementation of productivity and cost savings initiatives and future favorable mix shift remain in place. We are laser focused on performance and bid discipline to drive margin expansion. And importantly, we continue to expect our free cash flow to grow at a double digit rate over the coming years. We are reaffirming our 2024 and 2025 free cash flow outlook. And we've also introduced a 2026 outlook of $3.3 billion at the midpoint. With the businesses generating significant cash flow, we have considerable flexibility in deploying capital to generate value for customers and shareholders. Our top priority remains investing to support our business strategy. And we expect to invest over 7% of sales again in 2024 in capital expenditures and R&D. At the same time, we'll continue to provide strong capital returns to our shareholders. Last month, our board of directors increased our share repurchase authorization by an additional $2.5 billion, and we ended the year with a remaining authorization of $3.6 billion. For 2024, we expect to increase our share repurchases to at least $2 billion. This includes a $1 billion ASR that we plan to initiate in the coming days based on the strong liquidity position with which we entered this year. So when we take these factors, sustainable top-line growth with expanding margins, and couple those with declining capital intensity and lower projected cash taxes, you get a recipe for robust cash flow growth for years to come. So now I'll turn it over to Dave to provide you more details on the segment results, 2024 guidance, and the forward outlook. Dave? Dave Keffer: Thanks, Kathy, and good morning, everyone. We finished the year with strong momentum, enabling us to reaffirm and build upon our favorable forward outlook. I'll start by elaborating on our 2023 results and then provide additional details on our guidance. On the demand side, we ended 2023 with over $84 billion in backlog, a new record for our company. All four of our segments generated a full-year book-to-bill ratio over one-time sales. We also continued to deliver strong top-line results with Q4 sales of $10.6 billion, up 6% compared to the fourth quarter of 2022. Full-year sales were even stronger, up over 7% at $39.3 billion, or roughly $300 million higher than our latest guidance. These top-line results were enabled not only by the strong demand environment we're seeing among our customers, but also by our ability to ramp on new programs, expand our workforce, and convert our backlog into sales. Moving to segment results, we generated sales growth in each of our businesses in 2023. Aeronautics sales were up 2% for the year, returning to growth earlier than previously expected. AS growth was driven by higher volume on restricted programs that more than offset declines on mature production programs. DS posted sales growth of 5%, led by higher volume in the weapons and missile defense portfolio. Mission System sales were also up 5%, driven by higher restricted sales on advanced microelectronics programs and higher volume on marine systems programs. And our space business posted another quarter of double-digit top-line growth, with sales up approximately 14% for the year. Nearly 40% of the growth came from Sentinel and NGI, with the rest coming from our broad space portfolio. As Kathy described, our segment margins included a charge for the B-21 program. The charge was primarily driven by the confluence of lower assumptions around macroeconomic disruption funding and higher production cost projections. While the full pre-tax charge had the effect of lowering our segment margins, only $143 million has been recorded as an EAC adjustment, including a $43 million reduction to Q4 sales. The remaining was booked as a contingent liability because the majority of the lots have yet to be awarded. The charge also led to an $82 million benefit in corporate unallocated expense, stemming from a reduction in deferred state taxes. Continuing with our results, slide 5 shows a comparison of our 2023 earnings per share to the guidance we provided in October. Diluted EPS includes a $2.08 unfavorable mark-to-market adjustment from our pension plans and a $7.68 per share impact from the B-21 charge. Absent these items, we would have exceeded the high end of our prior EPS guidance range by over $0.40. Our 2023 mark-to-market adjusted EPS also included significantly less pension income compared to 2022. In total, net pension costs generated a $4.07 per share headwind in 2023. Next, I'll take a few moments to discuss our cash flows. As is our historical pattern, we had an outstanding quarter of cash performance in Q4, generating $1.6 billion in free cash flow. For the full year, our operating cash flow was $3.9 billion, and our free cash flow was $2.1 billion. This result was near the high end of our guidance range and represented free cash flow growth of 30% compared to 2022. Turning to pension results, we generated strong asset returns of roughly 11% in 2023, ahead of our long-term assumptions. The FAS discount rate declined by roughly 40 basis points to 5.15%. Netted together, along with updated census data, this generated a mark-to-market pension expense of $422 million in our GAAP results. Slide 7 in our earnings deck summarizes our pension estimates for the next three years. We continue to expect CAS recoveries to increase from current levels, providing a benefit to our cash flows, but slightly less than prior projections. And we expect a higher level of non-operating FAS pension income in the coming years, driven by our strong asset returns in 2023. In total, our funded status remains superb at nearly 100%, and we continue to project minimal cash pension contributions over the next several years. Turning to 2024, slide 9 in our earnings deck includes our segment-level guidance. Building off the strong top-line results in Q4, we now expect aeronautics sales in the low 11 billions, driven by growth on B-21 and on other programs such as F-35 and E-2D. This is higher than our prior sales estimates for AS, which reflected a flat 2023 and modest growth in 2024. Higher B-21 sales also result in a slightly lower margin rate expectation for AS, which we now project in the mid-9%, netting out to a similar volume of margin dollars compared to prior estimates. DS sales are expected to be roughly $6 billion, up low single digits from 2023. As we mentioned on the Q3 call, DS has really turned the corner on growth through strong demand for weapons and missile defense capabilities. We are optimistic in our ability to convert these opportunities into sustained growth in this business over time, which we expect to be partially offset by modest declines in the sustainment and training portions of the business. Margins are projected to remain strong at DS in the low 12% range. Mission System sales are expected in the low to mid $11 billion range for another year of mid-single digit growth, with margins of roughly 15%. And that space, after expanding sales at a greater than 17% CAGR since 2019, growth is expected to moderate in 2024 with higher segment margins. Space sales are now expected in the mid-to-high $14 billion range, with margins of approximately 9%. The mid-single digit growth rate in space reflects declines in a restricted program due to shifts in government priority, which are more than offset by growth in other parts of the space portfolio. Having built a tremendous backlog in recent years, space now has an opportunity to deliver strong ROI through more measured growth, along with margin expansion and cash generation. At the company level, our guidance reflects growth in sales and segment margin between 4% 5%, absent the B-21 charge, consistent with the outlook we provided on our October call, even after delivering top line upside in Q4. We expect another solid year of bookings, with a book-to-bill around one times. And similar to our cadence over the last few years, we expect sales to ramp throughout the year, with first quarter sales a little less than 24% of our full year estimate. We plan to be in the market soon for new debt issuance to take advantage of the favorable rate environment. The proceeds from the debt issuance will also be used in part to support refinancings of $1.5 billion of notes that are coming due in January of 2025, as well as for general corporate purposes and share repurchases, including the $1 billion ASR we intend to initiate in the coming days. We've reflected this debt issuance in our interest expense guidance, and we'd also expect interest income to contribute to the EPS line, as it did in 2023. We project an effective tax rate of approximately 17% in 2024, consistent with the range we've experienced over the last few years, excluding the mark-to-market adjustment and other unique items. We're coming closer to conclusions on a number of open audit and appeals processes with the IRS, which could have positive or negative effects on book and cash taxes as they're resolved over the next couple of years, and our forward guidance does not include any such adjustments. Similarly, we have not factored any potential changes to R&D tax legislation into our outlook. And as a reminder, our interpretation of current tax law results in a projected 5-year impact from R&D amortization of approximately $2 billion. We will continue to track these matters carefully and provide updates as they progress. In total, we expect our 2024 earnings per share to be between $24.45 and $24.85 on with approximately 148.5 million weighted shares outstanding. Moving to cash, we expect 2024 free cash flow between $2.25 billion and $2.65 billion consistent with our prior outlook. And as we've said before, capital expenditures are expected to remain elevated in 2024 before moderating in 2025 and beyond. Slide 11 in our earnings deck provides an update to our long-term free cash flow outlook to include 2026. We continue to expect our free cash flow to grow at a double-digit rate for several more years with additional growth in the second half of the decade. This expansion will be driven by sustained growth in our business, generating strong operating margin volume and converting those profits into cash. Meanwhile, lower cash taxes, higher CAS recoveries and lower levels of capital spending in the coming years provide additional structural levers to expand our cash flows at a rapid rate. Importantly, these ranges also include the latest estimated cash impacts associated with the B-21 charge. We expect roughly 60% of the charge to affect cash flows through 2026 with the remainder in the following years. Longer-term, we are confident we'll be able to continue to absorb the cash headwinds from B-21 while delivering excellent free cash flows in 2027 and beyond. In closing, I want to thank the entire Northrop Grumman team for their contributions to another great year. The strength of our portfolio and visibility of franchise programs provides us the opportunity to deliver and deploy robust cash flows as we execute on our strategy. And with that, let's open up the call to Q&A. Operator: Thank you.[Operator Instructions] Our first question comes from Kristine Liwag with Morgan Stanley. You may proceed. Kristine Liwag: Hey good morning, Kathy and Dave. Kathy Warden: Good morning. Kristine Liwag: Kathy, on the B-21, you've been very clear about the pressures on this program. Ultimately, how much relief did the customer extend to you to offset macro pressures and elevate [ph] portion. And is there still a possibility of future relief? Kathy Warden: So Kristine, we've been working with the customer. And as we noted, the conversations continue. And last year, in 2023, we and Air Force disclosed that about $60 million of $1.5 billion that Congress appropriated for inflation was allocated to the advanced procurement for Lot 1 on this program. But we have yet to work through what that relief may be in future lots. We have, of course, as we said, updated our assumptions -- and through conversation and the tight budget environment, we've actually lowered the expectations for inflation relief. And so at this point, our focus is on executing this program and finding opportunities in the performance on the program while we continue to work with the government to see if there is any inflation relief opportunity. Kristine Liwag: Great, thank you. And I’ll keep it to one today. Thank you. Kathy Warden: Thank you. Operator: Thank you. One moment for questions. Our next question comes from Richard Safran with Seaport Global. You may proceed. Richard Safran: Kathy, Dave good morning. So I know you're going to get a lot of questions on the B-21, but I thought I'd ask you about to expand on your opening remarks about Sentinel. I thought you might talk a bit more about the actions you're taking at the program back on track. How are you seeing risk on the program right now? And I guess, importantly, what you think the government's level support for the program is given all the headlines and what we've been seeing? Kathy Warden: Yes. Thanks, Rich. So as the land-based leg of the nuclear triad, Sentinel is a top priority for the Department of Defense. The requirement for the program has been validated numerous times by multiple administrations, and we expect that to be the outcome of this latest review. As the Air Force is reported, the non-operating cost reach on the program is largely due to cost growth in the military construction and procurement segments of the program, and we and the industry team are currently executing on the cost plus EMD phase of the program. That's important because our design work in this phase is helping the Air Force to better estimate the costs of those later phases and due to a number of factors of learning their cost estimates for these later phases have increased, and that's what's driving the non-[indiscernible] breach as the Air Force has said, growth on the EMD would not have triggered the breach. I'll also note that their update captures the inflation since 2020, the last time they did a cost estimate. And we all know that there's been significantly higher inflation than what was assumed at that time. So some of that is what you're also seeing reflected in these latest cost estimates. I mean with that said, though, you asked about our performance on the program, and I'm really pleased to report on the progress that our team has made over the last 3 years while we've been executing on the EMD phase. We've on boarded thousands of engineers. We've matured the system design. We've produced and tested critical hardware in the missile system, as I've outlined earlier on the call. We've also engaged in risk reduction, which is helping to inform the Air Force launch facility modernization and we've done all this while also doing detailed planning for the future phase of the program. I myself have visited the missile fields actually, I was at one last Friday, which is part of why I've got this cold, I brought back. And I met with the Airmen [ph], who have committed themselves to this important mission. So we're all in. We know how important this is our team is partnering closely with the Air Force, and we're going to help them to deliver this essential capability for our nation. Richard Safran: Thanks for that. Feel better. Kathy Warden: Thank you. Operator: Thank you. One moment for questions. Our next question comes from Ron Epstein with Bank of America. You may proceed. Ronald Epstein: Hey good morning everyone. So maybe just jumping back to B-21. Charges like there's some programs have a tendency to accumulate over time. They don't tend to go the other way. How should we think about it as we go forward? I mean, this is what for the first 5 LRIPs, how many LRIPs could there be? And how do we think about the bounds on this? And then maybe one last thing. Is the program NPV positive and if it is, when does it actually become NPV positive, cash flow positive and so on and so forth. If you could just peel back the onion on the program. David Keffer: Sure. I can go ahead and get started with that. And see if we can address a number of questions you raised. First of all, in terms of the future, we'll continue to update our projections every quarter as we do with all of our large programs. But it's important to note, we have a lot more information today than we did at this time last year, having completed the production in the ground test phase of the first aircraft. We also have the majority of the suppliers now under contract with the remaining in advanced stages of negotiations. We have our latest estimates for productivity and reasonable learning curves that we believe are appropriate based on our historical experience. Of course, we now have one lot under contract, and we'll finalize quantities of the next four lots over time as well. In the economy and inflationary factors have stabilized a bit over the past year, and we'll continue to track those, of course, over time as well. But perhaps most importantly, we're still performing well on this program, which is continuing to provide a critical capability for our customers. In terms of the long-term NPV, we think that's the most important thing is that our customers will get great value from the aircraft. We'll deliver them over time, and that should, over time, also lead to value for the company and our shareholders. Operator: Thank you. One moment for questions. Our next question comes from Douglas Harned with Bernstein. You may proceed. Douglas Harned: Thank you. Good morning. I wanted to go back to the Sentinel program. And when -- what you've described is that I think because that EMD is going well. But when you look at where this is headed and what came out with the Air Force commentary on the Nunn-McCurdy breach. A couple of things that I wanted to understand better. They're talking about potentially a 2-year delay in IOC, they're also -- also you talked about it a little bit, but to understand how much of this breach is due to potential changes in requirements and things that are, in a sense, under your purview versus those that may be under others, including the government customer? Kathy Warden: Yes. So as you note, there is a delay to IOC, the reason though for the Nunn-McCurdy breach is the cost growth. So oftentimes scheduled delays add costs to the program, that is not the primary contributor. It is, as you noted, design decisions, particularly related to the command and launch requirements that the Air Force has and that affects the deployment in the launch facilities in each of the silos. And so that is what we are working to inform the Air Force decision process on alternatives and ways to reduce those costs and procurement and yet those are Air Force cost estimates, and they include a significant amount of scope that is outside of the industry team's execution. But nonetheless, we will help to inform those discussions if they're ongoing during this review process. Douglas Harned: And does the delay in the timing, does this have much effect right now on your outlook for the overall profitability of the program. Kathy Warden: It does not, Doug, our near-term assumptions on both the ramp of the program relative to sales as well as the profitability of the program are not materially impacted. Operator: Thank you. One moment for questions. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu: Good morning everyone. Thank you. Kathy or Dave, maybe if you could just talk about the free cash flow guidance that you're sticking with the 15% CAGR. Just the drivers in terms of top line working capital, Section 174, and the impact of B-21, Dave, I think you said 60% of that over $600 million is through 2026. Is that right? And do we think about Sentinel as a positive cash contributor? David Keffer: Sure. Thanks for the question, Sheila. I'm happy to dig into that. The strength of the free cash flow outlook we really think of as one of the highlights our report today. And so happy to dig into that in more detail. And I think you heard correctly that 60% of the charge is associated with the period through 2026 from a cash flow perspective. I think importantly, the strength of the broad base of other programs across the business is serving to offset those pressures. And that's what we're seeing in our ability to maintain and build confidence in our multiyear outlook including adding a strong 2026 year to that outlook that continues the double-digit growth trajectory that we expect for the next several years. We had a great finish to 2023 for free cash flow, really strong working capital performance, and that is enabling us to build confidence in our ability to continue to perform at similar levels going forward. As a company, we've put a lot of focus on working capital efficiency, on capital efficiency, on driving cash returns on recent investments and that is clearly showing up in the results and the performance of all of our sectors. We're proud of their performance on cash in Q4 and in the outlooks for 2024 and beyond. And the net effect of all of these factors is that unchanged free cash flow outlook for 2024 and 2025, along with a strong 2026. I'd highlight in terms of what drives that going forward? What's the underlying force as you point out? Certainly, the operations of the business growth in the top line is, first and foremost, with an opportunity for growth at the margin rate line as well that leads to really strong margin dollar volume, which will convert into cash through the strong working capital performance that we expect to continue which is essentially a stable assumption in our outlook. We're not looking for significant additional efficiencies given just how strong we were at the end of 2023. And then as we noted earlier, there are other structural factors that should help as well with CAS pension reimbursement growing slightly over the next few years and cash tax is projected to decline over that same period. So essentially, all of those factors will lead to strong -- strong free cash flow growth outlook for the next several years and beyond. Sheila Kahyaoglu: Thank you. Operator: Thank you. One moment for questions. Our next question comes from Seth Seifman with JPMorgan. You may proceed. Seth Seifman: Thanks very much. And good morning. I guess a 2-part question about B-21. First was the $143 million EAC in the quarter, is that the extent of the entire anticipated loss on lot 1 and I guess, how do we think about the progression of losses on the various lots? And then second, the fact that this charge includes lots that will be in budgets in 2026 and 2027 and not come under contract for a while and not be worked on for a while. I guess how would you assess the opportunity to maybe ultimately do a little bit better than anticipated here. David Keffer: Sure. I can start on that, Seth. I think you've read properly into the $143 million EAC adjustment with Lot 1 having been awarded and the other is not yet awarded, that one does take the form of an EAC adjustment. So that $143 million is the lot 1 amount we are currently projecting. And the future progression while we can't get into much detail because that would involve a lot sizes and quantities and other classified details. Clearly, the implication is that there's modest growth from lot 1 to future lots on average. Over time, I think you're thinking of this the right way that our current projections would indicate an average of a couple of hundred million dollars a year of after-tax impact on our -- on the cash line from B-21, and that's, as I referred to a few minutes ago, the headwind we've been able to mitigate through strength in the rest of the business. In terms of your point about opportunity to outperform that over the long-term. Clearly, it is a core focus of our team to continue to drive efficiencies in the learning curves, successful outcomes of our negotiations with suppliers. We continue to engage and partner with our customer to understand macroeconomic impacts on the program and address opportunities for funding of relief, as Kathy mentioned earlier. And so we'll continue to address all of those opportunities. This is something we'll update you in the rest of the Street on over time. Operator: Thank you. One moment for questions. Our next question comes from Cai von Rumohr with TD Cowen. You may proceed. Cai Von Rumohr: Thanks so much. Kathy best wishes to feel better. Kathy Warden: It sounds like you need those wishes as well. Cai Von Rumohr: So anyway, so you had the loss on the B-21 kind of it didn't look like a loss couple of quarters ago. You've had your second loss on Halo. This is clearly proving to be an environment where on fixed price contract, there is more risk. Have you changed your strategy regarding how you bid and specifically with reference to Tranche 2 of the tracking satellites because you were on Tranche 1 and you were not on Tranche 2. So have you changed your strategy in terms of how you're bidding? And are there any contracts that you bid before changing your strategy that would still have risk that we're not aware of today? Kathy Warden: Very insightful question as always, Cai. So when you look back to 2015, when we did B-21, we certainly have changed our view on bidding of contracts where did not have a mature design. It's a point of bid and yet we committed to fixed price options into the future. And we have, to my knowledge, not done that again. And we have passed on some high-profile programs as a result of the risk balance that the customer put forward in the RFP not meeting our standards. We have programs like Halo, which we have certainly learned some additional lessons and are applying those as we move forward. And you note on some very recent bids, we have taken a different approach in looking at firm fixed price, where we've either declined a bit if the customer chose to go fixed price or we've offered a price -- in the case of SDA Tranche 2 that we thought was fair and reasonable and the customer decided not to further negotiate with us. These are things that are going to happen and we're going to remain disciplined. We have plenty of opportunity in this company to grow. We have a strong pipeline of opportunities we're pursuing. And a strong pipeline of opportunities that we believe have the right risk/reward balance with industry. Cai Von Rumohr: Thanks so much. Feel better. Kathy Warden: Thank you too. Operator: Thank you. One moment for questions. Our next question comes from Gavin Parsons with UBS. You may proceed. Gavin Parsons: Thanks, good morning. Kathy Warden: Good morning. Gavin Parsons: Maybe just following on Ron's question. Does the B-21 charge contemplate current conditions as they are? Does it have some consideration for future uncertainty in macro or supply chain? Kathy Warden: With all of our EACs, B-21 included, we do our best based on what we know today to project conditions out into the future. Now with that said, that's difficult to do longer-term that period of performance is. So in this case, we're looking out over greater than 5 years. So as we get into those out years, that's a bit more speculative, but we do incorporate our expectations for changes in everything from material labor pricing to productivity and learning. Gavin Parsons: Okay. Understood. And Dave, you mentioned the IRS appeal process. Any way to put a range around the possible cash impact on that? David Keffer: No, I'd refer you to our tax disclosures for more than enough detail on all of those fronts. It's tough to put a range around those things. We're looking forward to getting through processes, as you know, from those disclosures, we have a lot of open years that have yet to be resolved and looking forward to working with the IRS to come to reasonable resolutions there, and we'll update you on any book or tax differences from current reserves as we get there. Operator: Thank you. One moment for questions. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle: Hey good morning. Kathy Warden: Good morning. Scott Deuschle: Dave, can you give us a sense for the proportion of supplier costs across the 5 LRIP lots that have now been fixed versus what's still open to negotiation? David Keffer: Sure. As we noted a few moments ago, we're now at a majority of the supplier costs that have been fully negotiated across the LRIP phase. And we're in various stages of negotiation with suppliers for the remainder. So that's one area where we have learn more and progressed in our process compared to where we were a year ago or even a quarter ago. Scott Deuschle: Okay. Great. And then just as a follow-up, where does the commercial inventory come from in the space business? And is that EBIT headwind mostly gone now? Or is there any more of that left to come in 2024? Thank you. David Keffer: Sure. Thanks for the question. We had offsetting effects in 2024 and 2023, rather, including Q4 in the commercial elements of the space business. As you know, those are much smaller than and kind of tangential to the core national security space business that we have. In the case of those commercial inventory write-downs, those were related to newer investments in product lines to address burgeoning market opportunity in both the government and commercial elements of the space market. We did see some modest write-downs in various quarters in 2023 associated with those. Those are the types of things you occasionally go through as you make such new investments. So again, not core to the current or future growth story of the space business. Operator: Thank you. One moment for questions. Our next question comes from Ken Herbert with RBC Capital Markets. You may proceed. Kenneth Herbert: Yes, thank you good morning. Maybe, Kathy, at a high level, I wanted to follow up on your comments earlier regarding sort of the key margin drivers you outlined last year. Specifically more on the cost and productivity efforts and maybe on the mix side, are you seeing incrementally more opportunity now as we think about 2024? And how should we think about sort of the absolute opportunity on those now into this year versus perhaps how much more of a benefit we see in 2025 and beyond. Kathy Warden: Thanks, Ken. We laid out 3 drivers, the first of which being stabilization in macroeconomics, and we are certainly seeing that in 2024, which is why we see our margin rates this year in line with last with some opportunity for improvement as we go throughout the year. We layer on top of that cost and productivity actions that we are taking in the company, and that will provide some tailwinds in 2024 growing tailwinds into 2025. And the mix shift really is a bit of a longer-term proposition for us. We've talked about that being a shift from cost type to fixed price, where we expect 2023 was really our high watermark for cost type, but a very gradual shift in that mix to fixed price with more of it coming in the latter half of this decade. And then international mix is the other where we don't expect significant international growth in 2024, but we do expect that to step up based on our pipeline and particularly the strong weapons demand outside the U.S. in 2025. That gives you a sense of what will be a tailwind to margin rate win. Operator: Thank you. One moment for questions. Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton: Thanks, good morning. I was wondering, Dave, or Kathy, you previously talked about a $4 billion free cash flow target in 2028, effectively doubling what you've done in 2023. I just want to make sure that's still on the table, despite the charge absorption in that period of time? And then maybe, Kathy, on the margin expansion specific to Aerospace, is that still a 10% margin business? Or do we have to glide slope down a little bit further into 2025, 2026. David Keffer: Thanks for the question, Myles. Let me kick off with the 2023 free cash flow number. I appreciate the question on that because I think that too is core to the outlook going forward. Yes, we are reaffirming that $4 billion target for 2028. And essentially doubling the level that we were projecting at the midpoint of our 2023 guidance, which was $2 billion. Of course, we exceeded that by $100 million in our final result for 2023. The drivers of that growth are much of what we've talked about already. Certainly, growth in the top line. As Kathy just noted, some of the drivers of margin rate expansion opportunity which leads to margin dollars having an opportunity to exceed the growth rate of our top line through 2028. And importantly, CapEx will moderate during that same period. So we've noted that 2023 and 2024 of these peak years of capital intensity that continues to be our outlook with declines in 2025 and beyond. And then pension and tax will serve as tailwinds during that same period. So that leads you to the $4 billion number. And I think if you look at the 2024 and 2025 numbers we've reiterated for our free cash outlook today and add in that 2026 range, you'll get to that same glide slope that would push you upward toward the $4 billion number by 2028. So those are the building blocks and the way we plan to get there. Kathy Warden: And Myles, on AS margins, what we're seeing, as Dave noted earlier is that with the B-21 growth being a bit stronger than we had anticipated, AS is stepping up on top line. It is putting some pressure on margin rate, but margin dollars are exactly where we had anticipated they would be coming into 2024, and our guide therefore, remained consistent for AS on a dollar basis, even though we now are looking at more of a mid-9s rate projection. As you go out over time, it's less dependent on what happens with absorbing that lower rate on B-21 and more what happens in terms of other new programs coming into the AS portfolio and the rate at which we will book those programs. So we'll provide you more insight into that over the coming year as we look towards 2025 and beyond. Operator: Thank you. One moment for questions. Our next question comes from Robert Spingarn with Melius Research. You may proceed. Robert Spingarn: Hey good morning. Kathy, a few minutes ago, you alluded to international and I wanted to bring up IBCS because it's had some strong demand signals from international customers and thought maybe you could dig into that program a little bit, give us a sense of how large it is in revenue or how -- in 2023 or 2024? And how big it might be, let's say, 5 years from now? Kathy Warden: It certainly is an area of strength in our portfolio. We've seen strong performance by the team on the U.S. Army program and also as we are deploying in Poland, and we see follow-on opportunities in Poland as a result. We've also, as I’ve spoken about throughout the course of 2023, added a number of additional countries who have expressed interest in the program to the pipeline, and that's what would drive the growth that we anticipate in the 2025 time frame. As you noted, I mentioned international demand. Part of that is weapons part of that is the IBCS portfolio. And then, of course, we have some aircraft and mission system strength in the pipeline for international in 2025 as well. The program itself is growing at a fairly rapid rate, but off of a relatively small it's about $400 million of annual sales. And we expect that to grow, of course, but not a major contributor is the enterprise line for growth. Operator: Thank you. One moment for questions. Our next question comes from George Shapiro with Shapiro Research. You may proceed. George Shapiro: Good morning. Kathy, I wanted to ask on the charge for the B-21, what caused it to be bigger than the 0 to $1.2 billion range that you've kind of been reiterating since last year? And then just specifically, maybe the margin that you had said would be around 10% is now maybe 9.5%. I know you alluded to a few minutes ago, the B-21 was growing faster. But it’s got to grow a lot faster to drop the margin by 50 basis points. So I was just wondering if you could explore that a little bit more. Thanks very much. Kathy Warden: Let me start with the first part of your question and Dave will cover the second. As we noted, we identified this risk last year, and we, throughout the year, revisited it on a quarterly basis. There were 2 primary changes in the fourth quarter that both led us to deem it probable loss as well as impacted the value of that loss. First, we significantly reduced our projections for funding related to macroeconomic impacts, as we've talked about a couple of times already. Although we continue to partner with the government to address these impacts. We believe it's prudent in light of the current budget status to reduce those assumptions. And so we did that. The second is we've experienced growth in our cost projection, both in the internal production costs as we've continued to build aircraft as Dave talked about through our negotiations with suppliers. We have learned and built that learning into the forward-looking estimates that we now have in the EAC, so those were the factors. As we've talked about, we did a very detailed look at this EAC in the fourth quarter and had matured and had actual data to reflect on that we did not have at an earlier point. David Keffer: Let me follow up on the second part of your question because I do think it's an important nuance. The AS business was operating in the mid-10 billions in scale over the past year, it exceeded our original expectations in sales in 2023 and now is projected to exceed them even more significantly compared to where they were a year ago in 2024. We were talking about a flat 2023 and very modest growth in 2024 based off of that mid-tens level. And now we're all the way up into the low 11s. And so that low 11s at a mid-9% margin rate is the same as the mid-to-high 10s at a slightly higher margin rate. We're really focused on driving the dollar volume of operating margin in our Aeronautics business and across our business, it's that return on invested capital, the growth in margin dollars and in free cash flow that results from it, that is really our core focus. Todd Ernst: Josh, we have time for one more question. Operator: Thank you. One moment for our final question. Our final question comes from Jason Gursky with Citi. You may proceed. Jason Gursky: Hey good morning everybody. Dave, just a clarification question for you to start. You mentioned in your prepared remarks that there were some shifting priorities from the government and the space business that was leading to a deceleration in growth. I was wondering if you could provide a little bit more color on what those shifting priorities might be? And then Kathy, I just wanted to provide you maybe a bit of an open-ended question to kind of wrap all this together here. Just broadly talk about all the risks and opportunities that you see in front of you on the execution side of things. You've obviously got record backlog here and we know about the B-21 risk. But I'm wondering if you could just maybe highlight and wrap this all together, do we have a balanced risk and opportunities portfolio here, we a little bit more overweight risk than we are opportunity? And maybe just kind of dive into a little bit of the details of what you're seeing and maybe what you're all doing to address those issues. Thanks. David Keffer: Sure. Great questions, Jason. Let me go ahead and start with your original question on the national security space portfolio. As we mentioned, our guidance captures growth and declines in various programs across all of our portfolios, very much including space. In the case of space, as we've noted, there are some shifts in budget priorities. A lot of our customers are having to address budget prioritization, particularly as it relates to 2025 and beyond. With that said, in this particular case, given that it's in the restricted domain, there's not much more we can say about the mission or the program or anything like that. What's important there is that our space sector, and therefore, company guidance accounts for our latest understanding of all the programs in that portfolio and the likely path forward for them. And I think when you look at the space guidance, you see a lot of value creation as they continue to grow the top line. And in this case, now grow margin rates alongside that with lower capital intensity starting in 2025, in particular, you see a lot of improvement in returns on invested capital in the space business, given how much growth they've built in their foundation over the last few years. Jason Gursky: Kathy? Kathy Warden: And Jason, I really appreciate the question. I wish I had another hour to discuss it with you, but being respectful of everybody's time, let me just simply say that I see our portfolio and the set of opportunities and risks we have as balanced and consistent with what I have seen in recent years since I stepped into this role. We have a team who has stepped up and provided top line growth, which I believe is industry leading at about 5% on a compound annual basis each of the last four years. We're projecting that again this year. We see the opportunity space is rich, both domestically and internationally. And to the risks that we have in executing this portfolio, while the pandemic certainly made that more challenging for the last couple of years. We're turning the corner. Our overall program performance has not been stronger since I've been at the company, and that's 15 years and going. So I really feel good about how this team is positioned. We now have fully disclosed and taken into the P&L the B-21 risk, which we've been talking about and feel confident that we can now go execute this program. And I am proud of what the team collectively has accomplished across 2023 and look forward to the outlook we have in place for 2024. So with that, I just want to again thank my colleagues at Northrop Grumman for their dedication, both to our country and our company. I also want to thank you for joining us today, and we look forward to speaking with you on our next earnings call in April. So Josh, that concludes the call. Thank you. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's Third Quarter Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's Third Quarter 2023 Conference Call. On the call this morning, we'll refer to a presentation that is posted on our IR website. Before we start, matters discussed on today's call, including guidance and outlooks for 2023 and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On the call today are Kathy Warden, our Chair, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone. Thank you for joining us. We are all witnessing significant geopolitical tensions across the globe, including the ongoing war in Ukraine and the horrific attacks in Israel. We truly hope that peace and safety can be established for the people in these regions, and we'll continue in our steadfast support for the U.S. and our allies in their pursuit of global security and stability. On this morning's call, in addition to reviewing our third quarter results and important program events in the quarter, I'll address the U.S. budget and trends we see in the global environment. And as usual, at this time of year, I'll provide our initial outlook for next year. So starting with the quarter. Our book-to-bill was 1.5x with approximately $15 billion in awards, and our sales increased 9% year-over-year with growth across all four of our business segments. Our backlog now stands at $84 billion. It's a new record, and it strengthens the foundation for our future growth. It also continues to reflect the alignment we have with our customers' priorities and the continued success of our business strategy. Segment operating income increased by 8% year-over-year, and the OM rate increased over last quarter. Earnings per share were $6.18, up 5% compared to last year. Strong earnings rose nearly $900 million in free cash flow in the quarter, and we remain on track to achieve our 2023 free cash flow target. Excellent cash generation continues to provide us the flexibility to invest in our capabilities and capacity while returning capital to shareholders. We remain committed to returning over 100% of our free cash flow to investors this year, including $1.5 billion of share repurchases. And year-to-date, we've returned approximately $2 billion to shareholders in dividends and repurchases. So turning now to the U.S. defense budget. As is common in recent years, the federal government is operating under a continuing resolution to start fiscal year 2024. We're encouraged by bipartisan support for national security priorities and are hopeful an agreement will be reached on full year appropriations soon. Our guidance and outlook assume a full year budget is passed by the end of this calendar year or early next year. And as we saw last week, the administration continues to make supplemental request for urgent needs, including those in Ukraine and Israel to include investments in weapon systems and defense industrial-based readiness. The federal government is also developing its budget plans for fiscal year 2025, which we expect to be submitted to Congress early next year. We are working closely with our customers to plan for future capabilities and navigate the fiscal pressures they see to ensure our programs remain well supported. As we have been discussing throughout the year, we are also seeing an increase in international demand for our capabilities. We've seen a particular increase in our weapon systems portfolio and missile defense technologies like the IBCS product line. One notable example of this growing demand is with AARGM-ER where we've now received interest for more than a dozen countries and just this week, the opportunity for a foreign military sale to Finland was announced. We are also working with the U.S. government to provide new advanced weapons capabilities. During the second quarter, we received a $705 million contract from the United States Air Force to develop the Stand in Attack weapon, also known as SAW, an air to ground weapon with the capability to strike mobile defense targets. Our SAW offering builds on the capabilities we provide with our high-speed AARGM missile, which is in production. Building off a mature product baseline, we're able to reduce the developmental time, cost and risk to the SAW program. These missiles are expected to be the air-to-ground weapon of choice for the F-35 and other fighters. In our Space business, we remain focused on being at the forefront of technology, and that strategy has enabled us to build a differentiated portfolio that provides end-to-end solutions for our customers. from new space architectures to launch capabilities. We see broad applications for the technologies we've developed with a particular focus on national security missions. This includes helping to turn the Space Development Agency's vision of a new low earth orbit constellation of satellites into reality. In August, we were awarded a $712 million contract to design and build 36 satellites for SDA's tranche two transport layer data constellation. With this award, along with our work on SDA's tracking layer and tranche one of the transport layer, we are now building nearly 100 satellites for the proliferated war fighter space architecture. Our success in this area highlight our ability to compete and win in highly competitive and dynamic new markets within the space domain. In addition, we had two notable launch events in the quarter. We successfully launched our 19th resupply mission to the International Space Station as we continue to execute under NASA's commercial resupply contract. And five of our GEM 63 solid rocket boosters helped to power ULA's Atlas V launch of a national security payload. These rocket motors will continue to support future ULA launches to include ULA's Vulcan rocket. For next-generation interceptor, we successfully manufactured the first set of solid rocket motor cases in August, and we're on track for our preliminary design review in the fourth quarter, more than a year earlier than the original contract date. These are just a few examples of the focus we have on strong program performance across the portfolio. Now before I turn the call over to Dave to provide more details on the quarter, I'd like to provide some initial color on our 2024 outlook. We continue to see solid growth across all four of our businesses. with sales growth of approximately 4% to 5% compared to our latest 2023 guidance, which we've now raised by $800 million throughout the year. We also expect operating income to grow by 4% to 5% year-over-year. We reaffirm our free cash flow outlook range of $2.25 billion to $2.65 billion in 2024, which accounts for continued investment in the capabilities and capacity needed to grow our business and support our customers. So in summary, Northrop Grumman is well positioned to drive value creation for our customers and our shareholders. We are focused on executing our strategy, driving operating performance and generating cash for our disciplined capital deployment. So now with that, I'll turn it over to Dave to provide some more details on the segment results, 2023 guidance and our outlook. David Keffer: Thanks, Kathy, and good morning, everyone. As Kathy described, we generated another strong quarter of results. The business is well positioned in growing segments of the market, and we're delivering key capabilities that address our customers' missions. As macroeconomic conditions improve, and pension and tax cash flow headwinds reverse over the next few years, we have a great opportunity to create value for shareholders through substantial cash flow growth, consistent with our long-term strategy. Taking a look at our demand metrics, we ended the third quarter with a record backlog of $84 billion, bolstered by several new competitive awards. And as a result, we now expect our full year book-to-bill ratio to be well over 1x. Turning to the top-line, we continue to build on our momentum from the first half of the year, with overall sales growth of 9% in the third quarter. This includes growth in all four of our segments for the second straight quarter as our teams continue to ramp up new wins, add new talent and manage through continued pressures in the supply chain. At the segment level, Aeronautics posted sales growth of 90%, driven by higher volume on manned aircraft programs. DS grew by 6% on continued strength in their missile defense and armaments portfolios, including IBCS, GMLRS and HAKM. Mission Systems continued to generate rapid growth of restricted sales in the Network Information Solutions business, driving their top line up 7%. In Space again delivered double-digit sales growth as a result of the continued ramp on programs like GBSD, NGI, OPIR and several in the restricted domain. Moving to segment margins. We're pleased with these bottom line results in a dynamic environment. In total, segment operating income grew by 8% compared to the third quarter of last year. As we expected, we delivered an incremental improvement in our segment OM rate from earlier quarters this year, expanding to 11.1% in Q3. Program performance remained strong across the portfolio. Our Aeronautics and Defense businesses generated a healthy volume of favorable EAC adjustments through efficient execution and risk retirements. MS margins were down slightly as mix shifted to more cost-type development efforts, particularly in their restricted portfolio. In that space, given the rapid backlog growth we've experienced, strong execution and program performance are our top priorities. Space margins improved by 80 basis points this quarter compared to Q2. Diluted EPS in the third quarter were $6.18, up 5% from the prior year. The increase was driven by higher sales and segment performance, along with a lower share count. We also recognized a gain from the sale of an Australian minority investment in Q3 that we described on prior calls and included in our guidance. Partially offsetting these items was lower net pension income of roughly $1 per share, a nonoperational impact consistent with the first two quarters. Q3 was a strong period for cash generation with free cash flow of nearly $900 million. On a year-to-date basis, this brings us to nearly $500 million of free cash flow, well ahead of where we were at this time last year. We continue to remain disciplined in managing our working capital, and we saw improvements in these accounts across the company in Q3. With respect to cash taxes, the IRS recently provided additional guidance on the amortization of research and development expenditures under Section 174 of the tax code. This guidance did not change our interpretation of the provision. But upon finalizing our 2022 tax returns, we lowered our estimates for Section 174 cash taxes based on applicable R&D costs that were below our original estimates. Offsetting the lower 174 taxes is an increase in other tax items, the net result of which is a multiyear cash tax forecast that is roughly unchanged. Moving to 2023 guidance, I'll begin with a few updates to our segment estimates as shown on Slide seven in our earnings deck. First, based on the strength of our year-to-date results, we now expect modestly higher sales in our Aeronautics business in the mid- to high $10 billion range. This represents a return to growth this year at AS, a year earlier than expected, and continues to assume that we will be awarded the first LRIP lot on the B-21 program in the fourth quarter after first flight. The Air Force said in September at the AFA Conference, we are progressing through ground testing, and we're on track to enter flight testing this year in line with the program baseline schedule. And we are again increasing our top line expectations for our Space segment based on new wins and continued strength in this business. We now expect 2023 sales of approximately $14 billion, which represents year-over-year sales growth of 14%. For operating margin rate, we're projecting a slightly lower operating margin rate at MS to reflect their year-to-date trend line. Other segments are unchanged. At the enterprise level, we're increasing our sales guidance by another $400 million and now expect 2023 sales of approximately $39 billion. This represents year-over-year growth of roughly 6.5%. We are maintaining our guidance for segment operating income. Year-to-date trends would indicate figure towards the lower half of that range, and we're reaffirming our estimates for EPS and free cash flow. Next, I'll build on Kathy's comments on our 2024 outlook. Sales growth has accelerated sooner than we expected in 2023, and we continue to project growth at all four of our business segments next year. We expect segment margins in the low 11% range, and we continue to project improvement over time as we see benefits from the stabilizing macro environment, our cost efficiency initiatives, and our business mix improvements. We continue to anticipate CapEx to be roughly consistent as a percentage of sales in 2024 before declining in 2025 and beyond. And shareholder returns will remain a top priority for our free cash flow deployment, including returning at least 100% of free cash flow to shareholders next year. Given the volatility in the financial markets, I'd also like to provide a quick update on our pension plans. Our funded status is now above 100% as of the end of Q3. And we continue to expect minimal required cash contributions over the next several years. This is a discriminator for us that supports our affordability and competitiveness as well as our capital deployment optionality. Given that our GAAP earnings per share are affected by net pension income, as we did last year, we have provided a pension income sensitivity table for 2024 on Slide 9. Our forecast in early 2023 was predicated on asset returns of 7.5% and a discount rate of roughly 5.5%. Through September 30, financial market movements have led to a roughly 50 basis point increase in discount rates and a year-to-date asset return of 1% to 2%. This combination of results would reduce net FAS pension income and increased CAS recoveries from our prior projections. Based on the sensitivities highlighted on the slide, the net result would be an impact to 2024 GAAP EPS of roughly $0.50 compared to our initial outlook provided in January. Keep in mind that FAS pension income is noncash in nature. Higher CAS estimates would provide a modest benefit to our cash flows but could have a modest downward impact on EACs in the quarter in which they are updated, consistent with this year's pattern. Speaking of cash flow, we continue to see a path to grow our cash flows at a greater than 20% CAGR next year and through 2025 with further expansion in the following years. As is our practice, we'll provide our latest multiyear outlook for free cash flows on the January earnings call. We remain confident in the long-term value creation opportunity from free cash flow expansion and disciplined capital deployment through the rest of the decade. With that, let's open the call up for questions. Operator: [Operator Instructions] Our first question comes from Douglas Harned with Bernstein. You may proceed. Douglas Harned: In Aeronautics, you're raising your top line guidance. Dave, you talked about this. I mean, Kathy, we've talked about this subject many times, with the valley that you had kind of forecast for revenues this year as legacy programs declined. But things are getting better. So what are the puts and takes here that appear to be starting you on a growth path going forward? And given the mix, do you still see Aeronautics is able to maintain 10% margins in the coming years? Kathy Warden: Thanks, Doug. So the puts and takes that we've been talking about have materialized as we expected. The biggest factor was the programs that were declining are largely through our year-over-year comparison now. Those include Global Hawk, which is in sustainment; Triton, which is still in production. But as we look forward, that rate is fairly stable and so it is not contributing to significant growth. What is contributing to growth is B-21, and we expected that ramp to start this year and continue and we still anticipate that. And then other stabilizing factors of the F-35, E-2D large programs that have generally remained constant. As we look forward, we see that same profile in those program categories, and that will contribute to growth at AS. We do expect that margin rates will be near that 10% mark that we've been talking about. And we've gone through, again, those major categories of the portfolio and how they contribute. Our mature production is about 60% of the portfolio and that tends to have above 10% margins, whereas the B-21 has contributed lower margins and will, as we move into production, contribute 0 on the production. That's our planning assumption, of course. And so it's the mix of that entire portfolio that brings us to that approximately 10% expectation toward the near to midterm. Douglas Harned: And then when you look forward into 2024, I know in the guidance today, you said 4% to 5% increase in sales, 4% to 5% increase in operating income. I mean that implies really no margin expansion overall in 2024. Can you talk about that and just how you're thinking about margin progression going forward? Kathy Warden: Absolutely. So at this point in the year, as is normal, we wanted to provide an outlook. They are broad ranges. So the 4% to 5% both for sales and operating margin, it gives us opportunity to do further planning and characterizing of the budget as that becomes more clear, and we'll provide more precise guidance in January. What I would say is that we are still on track for the trends that we have spoken of in operating margin. We see improvements, and that is reflected in our guidance for 2023 in the fourth quarter, again, sequential improvement over Q3 performance. And we expect as we move into next year, there are continued opportunities for improvement in operating margins. They are related to macroeconomic trends largely inflation, labor cost, productivity. And so we'd like to get a little bit more time under our belt before we get concrete about what that improvement might look like. So we are expecting some modest margin rate improvement into next year as we have outlined for Q4 of this year. I also just want to point to the fact that the free cash flow growth is the real point for our investors to understand, while earnings growth will be there, we also have headwinds that have historically in the last couple of years, challenged us on free cash flow that are dissipating. We've talked about -- and I'm sure we'll talk more on today's call about Section 174, which is a decreasing headwind over time. We also see the pension headwind curtailing. And then, of course, since we reduce our CapEx spend starting in 2025, even more robust free cash flow growth. But looking at 20% year-over-year free cash flow growth is really an important milestone for us. and something we're very focused on delivering. Operator: Our next question comes from Ronald Epstein with Bank of America. You may proceed. Ronald Epstein: Yes. Across the industry, there's been a lot of discussion about from supply chain capacity constraints, labor constraints. One thing that's popped up in a lot of discussions is just the availability of solid rocket motors for missiles and so on and so forth. Just broadly, Kathy, how is Northrop handling? You're getting a surge in demand at a time where kind of post COVID and all that, I mean, labor has been tough and supply chains are tough. I mean how is it going? And what's Northrop doing to handle that? Kathy Warden: Ron, we got ahead of seeing the demand, not quite to the degree that the demand has increased in the last 18 months, but we had forecasted an increase in demand, particularly in our solid rocket motor business, but broadly as we've been ramping up for production of satellites, aircraft and mission systems capability across the board. It's why our CapEx has been elevated. And so first and foremost, we did what's necessary, and that is invest in our workforce and our facilities to be able to support that demand. And it's what's allowing us to support both our direct customers and prime who are now coming to us at for that capability. We are going to continue to do that, and that's why we still have some robust CapEx plans in place for 2024 reflected in the outlook we provided. We are seeing labor back to pre-pandemic levels in terms of our ability to hire, retain. Certainly, inflation is causing more labor rate escalation than we saw pre-pandemic, but we are able to get the workers that we need. Our focus now is on productivity. And there too, we've invested in training. We've invested in standard work instructions in digital technology, all of which are enabling productivity in our workforce. That has been a little slower to materialize with our supply chain. And so we are spending a lot of Northrop Grumman resource with our suppliers, co-locating with them. and helping them to improve productivity as well. And once we remove that bottleneck, I think we'll, as an industry, be able to no longer have capacity to be our constraining factor. But with that said, and now we're looking at a supplemental and growing international demand, all of which continue to add to the demand equation. So we are still going to be a bit in a catch-up mode because it does take generally 18 to 24 months to lay in new capacity to support that demand. Ronald Epstein: Got it. Got it. And then maybe a follow-on for Dave. Is there -- can you give us any update on how you're thinking about the B-21 LRIP? Because that's something that's kind of always on everybody's mind. David Keffer: Sure. It's Dave. So we continue to anticipate, as we noted in the earlier part of the call that the first LRIP contract will be awarded in the fourth quarter. That's consistent with our expectations that we've described throughout the year and reliant upon first flight occurring between now and that LRIP contract award. And we continue to evaluate our performance and our outlook on the LRIP phase of the program each quarter and did not make any significant changes to our estimates for that phase during the third quarter. So we'll continue to update everyone over time as we have updates. Operator: Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu: Kathy, you highlighted a few moments ago that free cash flow growth is the real story here. So I want to focus on that since you mentioned it. Can you talk about multiyear free cash flow growth? You've done so in the past. But how do you think about the biggest drivers from a top line networking -- net income drop-through tax CapEx perspective? David Keffer: Sheila, it's Dave. I'm happy to provide some additional color there. The 2024 updates that we provided on the call today should give you a sense for our near-term sales and earnings growth expectations underlying that free cash flow expansion. We do expect to continue to see a leading sales profile in the growth of our business. And as we've talked about, we anticipate long-term margin expansion opportunity as well. And so both of those are foundational to our multiyear free cash flow growth expectations. On top of that, we've talked about the last couple of years that the 2023 and 2024 would be a period of peak capital intensity for the business, and that is consistent with our current expectation. Large programs that we've had for a number of years as well as new wins we've had that have grown our backlog so significantly over the past couple of years have all contributed to a peak period of capital intensity right now that we have clarity on sources of decline in the middle of the decade. And so we expect that capital intensity to be alleviating in 2025 and beyond. Working capital performance is really among the best in class at this point. And even with a modest headwind from the progress pay changes, we anticipate continuing to be able to deliver stable working capital performance, not a meaningful driver of headwind or tailwinds there. And then you get to the two items Kathy mentioned earlier, modestly higher CAS pension recoveries currently projected over the next few years. Of course, those will continue to fluctuate based on -- primarily on asset returns, but other actuarial changes that are possible as well. And then on the cash tax side, as we've noted, a pretty stable outlook for free -- for cash taxes from what we've been anticipating previously, and that outlook is for declining cash taxes over the next several years largely driven by the Section 174 movement as we get through the period of amortization over these five years. So all in all, a number of key tailwinds most critical of which, of course, is the expectation of continued growth and margin opportunity in the business. Operator: Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton: Kathy, could you comment a bit on relative growth rates at a minimum for the segments next year? And just playing off the space backlog, which continues to expand pretty wildly, maybe just dig in a little bit deeper as to how the complexion of that backlog might play out on hopefully a margin expansion profile from here? Kathy Warden: Yes, Myles. So as we have been saying all year long, we expect space growth to moderate as we go into next year, still be our fastest-growing segment, but the growth profile across the four businesses will be more similar next year, more tightly clustered, if you will, around that growth rate we're projecting for the enterprise at 4% to 5%. DS and MS will likely be around that profile in the mid-single-digit range, although I will say DS this year is experiencing some upward pressure on growth due to the demand that we spoke about, particularly globally for air and missile defense and weapon systems. If that continues, that would continue to push DS' growth expectations even higher into 2024. And then AS will still be in growth territory, but as we've talked about, it will be modest growth into 2024. So that gives you a sense of the relative order that we see. And for Space, in particular, while we have approximately doubled that business in the last five years, so it's been just on a tremendous growth tier. We are very focused now on the performance of that backlog and ensuring that we can, as you said, deliver the margin expansion, and that is still very much our pathway in 2024. Myles Walton: And can you just clarify on the underlying margins, EACs were still negative within space. Is there -- and we've seen that for now five quarters. Are there programs you could point to, to say, okay, these are running off and that's why we're going to have this margin expansion profile? David Keffer: Myles, this is Dave. On that one, there has not been any one or two particular programs driving the majority of the negative EAC adjustments you're referring to over the last year plus. It's broader. And to Kathy's earlier point, there has been so much backlog expansion that there are so many new programs in our space business over these last few years, examples of really strong market share gains. And it's been across a number of those programs that we've seen EAC pressure given the newness of those development programs. And so I wouldn't characterize them as falling off anytime soon. If anything, we see opportunities for a number of programs in our Space business to transition to more mature phases of those programs, including production phases over the next couple of years, which is important to the broader margin expansion opportunity point that Kathy described. So I think what we see here is an opportunity for margin growth as we see the continued stabilization of the macro factors that have really been underlying industry-wide pressures over the past couple of years and the continued maturity of those programs over those same couple of years coming up. Operator: Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed. Kristine Liwag: Kathy, on the Stand in Attack Weapon win, some of your competitors indicated that the risk/reward profile wasn't as strong in this particular program. Can you provide more color on your competitive edge and how this pursuit drives with the risk tolerance you've demonstrated elsewhere, like on the decision not to bid on NGAD as a prime? Kathy Warden: Yes. Thank you. So in my comments, I alluded to the fact that AARGM is a product line that we have. We've talked about the base AARGM product, the AARGM-ER, or extended range, and now the SAW award and with each of those products are building off of a mature technical baseline. As I've talked about our approach to thinking about fixed price, I have often said fixed price is appropriate where it's either a commercial item or an item that has reached a design maturity and been risk reduced to where we know what it will take to deliver that product. Because of the maturity of AARGM and us having a product line that met the Air Force requirements for SOL to bring forward, we are able to reduce cost schedule and, of course, have better risk management. That allows us to have the risk tolerance then to bid fixed price. And I recognize that in competition, there are many factors, but when a company has invested and gotten the mature product line, there is a natural advantage that comes with that. And that's the situation we found ourselves in with SAW in that specific competition. Kristine Liwag: I had a follow-up question on the B-21. Does the current budget standoff in D.C. impacts flight testing or the timing of the LRIP award? Kathy Warden: No, it does not. As we look at the timing of the LRIP award, as Dave said, we still expect that to happen this year. And as we have talked about before, first flight is a milestone that the Air Force is looking to achieve before they make that award, and we are on track still anticipating first flight this year. Operator: Our next question comes from Robert Stallard with Vertical. You may proceed. Robert Stallard: Kathy, I just wanted to follow up on your budget commentary at the start of the call. I'm wondering if you're putting any contingency plans in place in case we get arbitrary DoD budget cuts as a result of this craziness in Congress. Kathy Warden: So Rob, we have looked -- it would be irresponsible of us not to run some numbers and look at where we might have risk. And as I mentioned in my commentary, we are working with our customers to navigate any budget challenges that they see, either as a result of not getting appropriations passed in a timely fashion in accordance with the Fiscal Responsibility Act requirements or even as they look into 2025 and the pressures that they have there with a minimal top line growth rate. But we are not seeing any significant risks to our portfolio at this time, but we will continue to monitor that as such as discussions progress. We're just very pleased to see that the House Speaker and we should expect to begin to see those bills moving through Congress now. Robert Stallard: Yes. And then as a follow-up, you mentioned the strong demand on the defense export market at the moment. I was wondering if there could be any capital deployment opportunities there, either Northrop Grumman acquiring companies overseas or making other investments. Kathy Warden: We are already making capital investments that support that growing demand in missile defense and armaments. And so as we have talked about our CapEx investments over the last several years and planning forward into 2024, those do support our international product lines. We are not seeing a significant increase that we would anticipate in that demand signal yet. We are monitoring it both through the supplemental, but we've already baked in a good bit of product line growth that we've accounted for in our CapEx planning over the next several years. And so at this point in time, I don't see that providing more upward pressure on CapEx. Operator: Our next question comes from Cai von Rumohr with TD Cowen. You may proceed. Cai Von Rumohr: Yes. So to go back to Doug's question, I mean, you're looking for basically flat margins next year. And kind of in recent quarters, Kathy, you've made the point about the opportunity for space margins to go up. Certainly, if I look at defense, basically with more munitions moving up, I think you've made the point that there should be some opportunity there. You've brought the target down for MS this year, which would suggest an easier base of comparison for next year. I think you've talked about Aero as being roughly flat. But as you look at your portfolio, is there opportunity for those margins to move up next year? And if so, which of the sectors that have the greatest opportunity for margin improvement and which are the ones that perhaps face greatest risk that margins would be flat to down? Kathy Warden: Yes. I like the way you're thinking. It's exactly the challenge that me and the team are discussing amongst ourselves is to how we do drive margin improvements next year. And in the Q2 call, I laid out for our investors what that path is and the key factors associated with improvement. And let me just touch on each of those and then I can tie it also to where the segments see the greatest opportunity. For macroeconomic factors, I've talked about those already on the call. We are seeing inflation be a bit secure than we had hoped at this point in time. We are incorporating that into our forward estimate, but it is impacting our ability to return to higher levels of profitability factor. Productivity is another area where we are working to improve productivity, not just within our company, but our supply chain. That is opportunity. That would be upside to a flattish look next year. Although, as I also indicated, we are expecting some modest improvement in margin rate next year. What then we look at is the mix, and that has been a factor for both base and mission systems over the last couple of years, particularly notable for mission systems this year. We don't see a significant mix shift going into next year. It is a very gradual mix shift. And so that -- those two pieces of the business will still feel some margin rate pressure until they can shift to more production in the portfolio. As you note, our Defense Systems business has the most both top line and margin upsize that could come as the result of growing international demand as well as what we see domestically, particularly through the supplemental. Those are uncertain at the moment. So we do factor those in our plan, but that could be a source of upsize. But then, of course, we are managing risks across the entire portfolio. And so when we put all of that together, we're looking at some modest rate improvement into next year and really striving to do better. But at this point in the year, we are very comfortable with what we've laid out as a set of expectations. Operator: Our next question comes from Ken Herbert with RBC Capital Markets. You may proceed. Kenneth Herbert: Kathy, maybe I just wanted to follow up on the strong bookings this year. Can you call out or maybe help quantify how much of that could have been or is international? And as we think about sort of this growing set of international opportunities, maybe not so much in '24, but how much international growth could you see next year and into '25? And I guess, more importantly, how could that impact margins as I think about maybe international being slightly accretive to margins? Kathy Warden: Yes, Ken. So you're pulling on all the right threads. Our bookings are up for the international portfolio this year. And as we look into our future plans, we expect that, that trend will continue. It takes a little while to then materialize that into sales in a meaningful way. So we see a gradual shift in terms of the percentage of our overall sales that will come from international. We've talked about achieving a double-digit growth rate. I would expect that not necessarily in 2024, but into 2025 because of the time it takes to ramp sales on these awards. And so you could also expect that any upward margin opportunity would also be more material starting in that 2025 time frame than 2024, but we are actively working those opportunities now so that they do materialize in that time frame. Kenneth Herbert: That's helpful. And is there any way to think about just with, obviously, a lot of what we hear in the geopolitical environment, are you seeing that yet translate into sort of bid opportunities when you think about international? I'm just trying to get a sense as to with all of the -- all of sort of this growing expectation, how much you're actually seeing that yet transpire or actually materialize in terms of real opportunity you're going after? Kathy Warden: We are seeing it in signals of demand. So I mentioned on our last call that we have over 10 countries that have expected -- expressed interest in our IBCS product line. Today, I noted another dozen or so that have expressed interest in AARGM. As we look forward, we do expect that, that demand signal for many of those countries will translate into contracts it takes time. And that's why I was talking about seeing 2024 is a time frame where we'll be working to translate those demand signals into contracts, but 2025 being more the time frame we expect them to materialize. And I'd say the same is true with the domestic marketplace as we look to replenish U.S. stockpiles or to work through the supplemental budget that I would expect to be more material for us in 2025, but we're working now to ensure that we're qualified to be a supplier on either second source or new missile programs. Operator: Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle: Kathy, in the emergency supplemental request from the White House, there was $2.6 billion included for classified Air Force procurement programs. Do you have any sense for whether that could potentially help support your programs in the event that there's an extended CR here? Or is that just entirely a black box as we might otherwise expect? Kathy Warden: Yes, there's really nothing I can comment on with regard to that, Scott. I will simply say we do continue to work with the Air Force on ensuring that we have the resources necessary to make B-21 program successful. Scott Deuschle: Okay. Fair enough. And then Dave, the updated margin guide on MS implies something like a 15.9% margin in the fourth quarter. Just curious if you could talk a little bit about the drivers there. Obviously, you've done above 16% before so I assume something like what we've seen historically. But just curious for any commentary on drivers. David Keffer: Sure. A couple of thoughts there. One, you saw a similar trend last year in our MS business with its strongest margin performance in the fourth quarter of the year, driven by the mix of business that we tend to see spike in the fourth quarter with more predominance of mature fixed price programs in that fourth quarter sales mix. We anticipate a similar trend this year. With that said, need to continue to perform and execute well and with efficiency across that MS portfolio to deliver on that result. In aggregate, the 23% margin guidance change for MS is really driven by mix. A lot of the growth in MS this year has been in critical work in the restricted portfolio that tends to be at this phase in its life cycle cost-type work. There is opportunity for that work to shift back towards more fixed price over time. But the fact that most of the growth in MS this year has been driven by growth in cost-type contracts has been a pressure on its margin rate. With that said, it along with the rest of our businesses drove margin dollar growth year-over-year in Q3, and we anticipate the same trend in Q4. Operator: Our next question comes from Gavin Parsons with UBS. You may proceed. Gavin Parsons: Dave, I was hoping you could go into just a little bit more detail on the Section 174 change and what the offset is given it would seem like that has to be pretty sizable, especially if you get some recapture from 2022? David Keffer: Sure. Happy to go into that. I think the important takeaway here is that our cash tax forecast is, in the aggregate, largely unchanged, and that remains a tailwind for our free cash flow outlook over these next several years. To your point, 174-driven taxes have come down a bit in that outlook. That's largely due to lower-than-projected cost applicable to the 174 guidelines, not a change in our interpretation of the latest guidelines. To be clear there, we will continue to assess any future guidance that comes out on 174 and continue to apply our best interpretation of that guidance to our own costs and the appropriate and applicable cost there. With that said, the issue that others in the industry have discussed around the difference between cost type and fixed price R&D-related expenditures is less impactful for us than it appears to be for some of our peers, particularly given the reduction in our 2022 174-driven costs. So less of an impact based on our interpretation than for others. So with all of that said, there are some puts and takes across a business of our scale with as many open tax years as we have, and we disclose all this in some clarity in our 10-Qs every quarter. There is a balance of upside and downside items that are largely driving an unchanged cash tax forecast. Gavin Parsons: Got it. That's helpful. Kathy, you mentioned stickier inflation. Any update on discussions with customers for relief on that front? Kathy Warden: Discussions continue, and I think we're making good progress in having awareness of the issue. And with Congress setting a precedent last year of having some funds available, I'm hopeful that once again this year, we will see funds appropriated that give the departments the flexibility, both in language and dollars to address these issues. Operator: Our next question comes from Seth Seifman with JPMorgan. You may proceed. Seth Seifman: Apologies to be deep in the weeds on the taxes, but kind of what I got left here now. And so I just wanted to ask you, Dave, just to understand that a little better and your interpretation of this. If I look at what Lockheed paid in 174 payments last year, it was like 38%, 39% of their IRAD and you guys paid like 75% of your IRAD. So it would seem like that's a very different interpretation. And it would seem like there -- the guidance is consistent with the idea that IRAD is kind of the basis of what's subject to Section 174. And so maybe if you can provide -- I know we spoke about this, but just a little bit more color on what's different about your business. David Keffer: So I appreciate the question, Seth. I know it's been a common line of discussion for us, and it's an interesting topic. I would say this probably isn't the time or the place for us to assess differences in our own interpretation of guidance from peers. We're not familiar with the interpretations of our peers. When it comes to our own view of Section 174, it is broader than IRAD and includes a portion of our contract-driven R&D as well. With that said, as I mentioned, we'll continue to assess potential future guidance, even following on and clarifying guidance provided in September. And we're open to different interpretations based on different guidance we may get in the future. But importantly, as I mentioned, a difference in contract type interpretation is not nearly as impactful for us as others have said it is for them. And so I think, in aggregate, this should be less of a focus. That interpretation difference should be less of a focus for the Street going forward than it has been for us in the recent past. And the important point to take away is that our cash tax forecast hasn't changed in any meaningful way and remains a tailwind for us. It's a small piece of the much more important puzzle that is really strong free cash flow growth opportunity for us over these next five years, leading to a lot of optionality as it relates to capital deployment. And I think that's the more important headline. Operator: And our final question comes from David Strauss with Barclays. You may proceed. David Strauss: Wanted to ask specifically on B-21 and your guidance for -- it sounds like 10% margins at AS next year. Are you assuming, Kathy, any incremental inflation [indiscernible] on B-21 in that? Kathy Warden: So we look at the EAC, and it has a number of factors incorporated into our expectations performance, our expectations for the contract terms. And so all of that is factored into what goes into the expectations that I laid out for B-21. And as we've consistently said through the year, we are planning at a zero profitability. But we have to perform and we are working hard to ensure that, that plan is what we achieve. David Strauss: Okay. And apologies, Dave, I got to go back to Section 174. Just to level set us, are you -- in your free cash flow forecast this year, are you still assuming $700 million impact from Section 174 and stepping down roughly 20% from there next year? David Keffer: No, I appreciate the clarifying question. We have stepped down about 20% below our prior estimates for the impacts of the annual effect of Section 174, and we've detailed that further in our 10-Q in terms of the impacts on 2022, 2023 and beyond based on the numbers that we've calculated with the benefit of actual cost to apply as we have formulated our 2022 tax return. So it's a bit lower than that. As I mentioned, that's offset by a couple of factors moving in the other direction, which in aggregate, leads to no change in our cash tax forecast for this year or the next couple of years. So no change to that element of the free cash flow guidance. Kathy Warden: Thanks, David. So quickly before concluding the call, I just want to take a moment to acknowledge our team and thank them for their contributions to our company and our customers. And in particular, I want to thank our General Counsel Sheila Cheston, who is retiring after 13 years with the company. Sheila has been instrumental in instilling a culture of strong ethics and she has provided outstanding counsel for the company and been a trusted partner to the Board and to me and the leadership team. Kathy Simpson is our new General Counsel. She is also a valued member of our team. She's been with us for many years, and she brings a wealth of broad-based legal and strategic expertise to the role. So we're thrilled to have her. And I also want to congratulate Rob Fleming, our new Space System Sector President and thank Tom Wilson for his leadership in guiding the space business for the last several years during a period of just tremendous growth. Tom is now taking a new role with the company who's going to help us expand our business development capabilities across the entire enterprise. And Rob has extensive experience running complex businesses during his 18 years with our company. He most notably and recently led the Strategic Space Systems division, which is the largest segment of our space sector, and I think what you see from our team is that the depth and strength of our team allows us to make these internal transitions very smoothly. I'm looking forward to working them and them meeting you in future years. So thank you for joining the call today, and we look forward to speaking with you again on our fourth quarter call in January. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Todd Ernst: Thanks, Josh. And good morning and welcome to Northrop Grumman second quarter 2023 conference call. We will refer to a PowerPoint presentation that is posted to the IR website on the call this morning. Before we get started, matters discussed on today's call, including guidance and outlooks for 2023 and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of Federal Securities Laws. For looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to GAAP results in our earnings release. And on today's call are Kathy Warden, our Chair, CEO and President and David Keffer, our CFO. At this time, I'd like to turn the call over to Kathy, Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone. And thank you for joining us. As you saw from this morning's earnings release, global demand for Northrop Grumman solutions is driving exceptional growth. In the second quarter, our sales were up 9% with solid contributions from each of our four business segments. Our ability to hire and retain talent and improving supplier deliveries are strengthening our top line. Even our year-to-date sales increase of 7% and an improved outlook. We're increasing our full year's sales guidance range by 400 million. In addition, award volume in the quarter was robust, with a book-to-bill ratio of 1.14. As a result, we're increasing our full year book-to-bill projection to approximately 1.0. Our $79 billion backlog continues to be more than two times our expected 2023 sales supporting our long term growth outlook. We delivered solid second quarter earnings per share of $5.34. And we're increasing the lower end of our full year guidance range by $0.20. And free cash flow was healthy in the quarter more than a billion dollar higher than Q2 of last year, positioning us well for our full year target. Turning to the budget environment and starting with the U.S. We're encouraged by the continued bipartisan support for national security funding to implement the administration's national defense strategy. The FY ‘24 budget and recent congressional committee bill prioritize modernization including areas of strength in our portfolio, such as the triad, the space domain, information superiority, and advanced weapons. We also anticipate continued support for Ukraine and related emergency spending, which would represent even further increased demand. Global demand for our products also continues to grow as our allies increase defense spending to address evolving threats. We are well positioned in multiple markets to meet this demand with programs such as [Argonne] IBCS and E2-D as well as munitions. With a robust backlog and leading growth outlook. I'd like to now spend a few minutes outlining our path to margin expansion, which is a key element of our earnings and cash flow growth plan. Our 2023 operating margin dollar guidance is in the range we've previously provided. This guidance implies a segment margin rate in the mid 11% range in the second half of 2023. Having delivered a rate of 10.9% in the first half. We also see an opportunity to increase our year-over-year margin rate in 2024, and get to a 12% target in the longer term. Achieving this margin improvement is built on three key drivers. First, is the stabilization of temporal macro economic factors that have driven higher cost and impacted our supply chain and labor efficiency. Second, is the ongoing implementation of cost management programs across the company that helps drive affordability, competitiveness, and performance. And third is our business mix, which we see shifting to more international and production contracts. As international demand grows, and many of our current development programs mature over the next several years. With regard to the macro economic factors, supply chain disruptions rooted in the pandemic, and the subsequent labor market tightness, have created programs delays and cost growth. To reduce this disruption, we're buying ahead of schedule pursuing second sources where it makes sense and placing more of our people at suppliers to facilitate timely material delivery. We see signs of progress across our supply chain from these actions. And we are seeing fewer new issues emerge. We've had exceptional performance in growing our headcount since the second half of 2022, and attrition rates are down to pre pandemic levels. Our focus now is on optimizing labor efficiency, which is an important driver of profitability. To accelerate the learning curve for our employees. We're leaning forward with innovative training programs and standardizing work instructions. Inflation has been a challenge for industry as well as others, cost growth has now begun to moderate. But the last 18 months of inflation continue to have a higher base effect on our costs, especially in labor. If you look at our year end 2021 fixed price backlog, it was largely priced before we began to experience elevated levels of inflation. However, of that backlog, approximately 70% will have been converted into sales by the end of this year. And for new bids, we are factoring higher inflation expectations into our contracts. We're also working to drive additional discipline in our bid approaches, particularly on fixed price contracts to help protect against these types of dynamics in the future. Overall, we anticipate that these macro economic impacts have stabilized and now have largely been incorporated into our margins risk factors. The second key driver of margin opportunity is cost management, which benefits both affordability and competitiveness. We are laser focused on overhead cost reduction. A foundational element of these reductions is our implementation of digital solutions across our business, which will help to drive performance and productivity. For example, we've built a digital ecosystem that focuses on program execution, bringing together employees, customers and partners into an integrated environment, so they can seamlessly work together. This accelerates design, integration, testing and deployment across programs helping us to deliver with quality, speed and efficiency. We're increasing the number of programs that are operating in this ecosystem. And today, we have over 100 active programs that are doing so, we're also investing in and advancing the technologies and digital systems in our factories. We're scaling this across the enterprise to drive efficiencies that should benefit all of our stakeholders. For example, on the B-21 we've successfully demonstrated the use of this digital thread high to advanced manufacturing technology to realize over 15% labor efficiencies in one area of the build. And in June, we launched the expansion of this approach across the whole build process. We're extending this digital thread into our business operation to deliver further benefits across the company. This includes how we're managing our supply chain, where we've broadly centralized procurement, and we're working to leverage our purchasing power to reduce costs. We have over 20,000 suppliers and we've begun securely connecting them into our digital ecosystem. Over the next several years, we expect to have the majority of our supply base fully integrated, this is expected to lower supplier costs and significantly improve productivity. The third key area of margin opportunity is our business mix. For several years we've had one of the highest cost plus development contract mixes in the industry reflecting our significant early stage position on key franchise programs, which will transition to production throughout this decade. This cost plus mix has been increasing with our first house revenue at 55% Cost Plus up from about 50:50 last year. Looking forward, we see this shifting towards more fixed price revenue, rising to approximately 60% of sales by 2027. As a number of large programs in all four of our sectors transition to production. Production program margins are typically a few points higher than development margin. So mix shift can contribute meaningfully to our segment operating margin rates. And we're making good progress on moving programs through development and into production. For example [Argonne ER] completed its fifth consecutive test flight in the second quarter. This program is nearing completion of its development phase, and is on track to ramp production volumes next year. And on B-21, we successfully powered on the first flight test aircraft in the quarter another important milestone in our campaign to achieve first flight in transition to production. We also expect our international business to grow at a double digit rate over the next few years, improving our margin opportunity as global sales become a larger percentage of our mix. In the second quarter, we demonstrated our IBCS solution for eight potential international customers, reflecting growing demand for this advanced air and missile defense capability. We also signed a memorandum of agreement with Rheinmetall to expand capacity for F-35 center fuselage production in Europe. We expect these three drivers to result in improved affordability, even better performance and higher margins. When combined with the strength of our backlog and increasing global demand. These operating margin improvements should provide the foundation for strong future free cash flow growth. Now with respect to capital deployment, we're executing a strategy that prioritizes investments to support our business plan and returns cash to shareholders. In May we increased our dividend for the 20th consecutive year by 8%. Year-to-date, we have returned $1.5 billion to shareholders and are on track to meet our goal of returning more than 100% of free cash flow this year. Overall, the global defense budget outlook and our alignment with customer priorities give us confidence in our growth trajectory. We are focused on margin expansion opportunities and converting this to free cash flow growth to deliver value both for our customers and our shareholders. So with that, I'll hand it over to Dave and he'll cover details of the second quarter financial results and updates to our full year outlook. David Keffer: Thanks, Kathy. And good morning, everyone. We're pleased to report another solid quarter, we remain focused on executing our strategy and believe we're well positioned to grow our topline earnings and cash flows for years to come. The demand environment continues to be robust, supported by the alignment of our portfolio with our customers highest priority missions. And those Kathy described, we see a path to expand margins in the second half of this year and beyond. As macro pressures ease and we drive efficiencies into our business as it grows and experiences mixed tailwinds. Now turning to Q2 results, we generated $10.9 billion of new awards, a higher total than we previously expected, our book-to-bill was 1.14 and was driven by restricted awards of $5.4 billion. This brings our year-to-date total to $8.6 billion in restricted bookings. Looking forward, we expect a number of production awards in the second half of the year, including the first lot of B-21 LRIP. Moving to sales on Slide 4 in our earnings deck, we’ve delivered strong topline growth of 9% in the second quarter. Building on the momentum from Q1 as a result of our success in bringing on new employees, incremental improvements in the supply chain and continued backlog strength our sales are growing at a higher rate, and we've increased our full year guidance. With respect to segment results all four of our businesses grew in the second quarter. Space continues to lead the way with their second consecutive quarter of 17% sales growth as GBSD, NGI and restricted space programs continue to ramp. In defense system sales increased 10% on the strength of their armaments and Missile Defense franchises. Mission Systems growth of 5% was driven by restricted programs in the networked information solutions business and aeronautics systems returned to growth as higher volume on restricted programs outpaced the headwinds on legacy programs as we've anticipated. Turning to Slide 5, segment margins in the second quarter were 11%. Keep in mind that Q2 of last year included over $70 million or 80 basis points of benefit from a land sale and a contract related legal matter. Most importantly, margin dollars improved incrementally from Q1, largely meeting our expectations. Program performance remains strong across the portfolio, as the team does a good job in navigating the lingering disruption from the pandemic and macro economic factors we've been discussing. One area of pressure we experienced in the quarter was a $36 million unfavorable adjustment on NASA's habitation and logistics outposts program or HALO in our space system sector. Moving to earnings per share on Slide 6, diluted EPs in the second quarter were $5.34. This included lower net pension income of roughly $1 per share partially offset by more favorable returns on marketable securities than in the same period last year. Slide 7 highlights the non operational pension headwinds we experienced in Q2 on a year-over-year basis 2023 pension income will be lower for all periods when compared to 2022. But these headwinds are expected to dissipate as we look to 2024. With respect to cash, we generated strong free cash flow in the second quarter of over $600 million, a significant increase compared to the same period last year in which we had an outflow of $460 million. This improvement was driven by increased billings and timing of collections across the company. We paid roughly $360 million of cash taxes associated with section 174. And we continue to expect a full year impact of a little over $700 million. Moving to 2023 guidance. We'll start with a few updates to our sector estimates which you can see on Slide 8, our space business continues to deliver outstanding sales growth and bookings, demonstrating the strength of its diverse portfolio capabilities. As a result, we're increasing sales guidance for space to the high $13 billion range. Remember, as recently as 2019, this business was generating revenue in the mid $7 billion range. So our guidance this year reflects a Fantastic Four year CAGR of roughly 17%. At defense systems based on the strength of their year to their year-to-date results, we're increasing our full year expectations for this business to the mid to high $5 billion range. This represents growth in the low single digit range. There are no changes to our revenue expectations at [AS or MS]. With respect to margin rates. We're maintaining our expectations for as AS, DS and MS and we're projecting a lower operating margin rate at space to reflect the rapid increase in new program winds and their first half results. At the company level, this translates to an increase to our sales guidance of $400 million in a growth rate between 4% and 6% for the full year, we're maintaining our expectations for segment operating income dollars, we expect a slightly higher full year tax rate of 17% and we reduced our projection for shares outstanding to the mid $152 millions to reflect our latest share repurchase expectations. Our EPS outlook continues to assume Q3 Closer of the sale of the minority investment for which we increased our full year EPS guidance by $0.40 last quarter. This quarter, we're increasing the lower end of our guidance range by $0.20. We remain on track with our full year outlook for cash and continue to expect to grow our free cash flow to about $3 billion by 2025. This represents a greater than 20% CAGR driven by the growth of our business and structural tailwinds from cash taxes, lower CapEx and higher CAS recoveries. In over the next five years, we see an opportunity to approximately double our current level of free cash flow. Lastly, we continue to execute our balanced capital deployment plan. This includes investments of over $2.8 billion in R&D and CAPEX this year and returning excess capital to shareholders via our quarterly dividend and share repurchase plans. For the year, we continue to expect to return over 100% of our free cash flow to shareholders, including roughly $1.5 billion in share repurchases. We also plan to retire $1 billion of notes that mature in August, and we don't have any additional bond maturities until 2025. Overall, the Northrop Grumman team delivered a strong first half of the year, our business strategy is working and we're continuing to drive additional growth in sales earnings in cash. With growing global demand for a portfolio of solutions and solid program performance. We're building long term value for all our stakeholders. With that, let's open up the call for questions. Operator: Thank you. [Operator Instructions] Our first question comes from Robert Stallard with Vertical Research you may proceed. Robert Stallard: Thank you so much. Good morning. Kathy Warden: Good morning. Robert Stallard: A couple of questions from me. First of all, Kathy, thanks for your commentary on the margin expectations for the next few years. But I was wondering, as you talk about this, what are you expecting on the B-21 LRIP? Is that still anticipated to be around a sort of breakeven margin in your expectation? And then secondly, does the end of the F-18 have an impact on this? Kathy Warden: Rob, thanks for the questions. So as we look at the profile going forward for B-21 as we've noted before, we are not planning to have margin from the LRIP contracts. So when I talk about our Merchant projections going forward and anticipate that I will remind you we still have the risk factor associated with B-21 as we look at inflationary impact. In the quarter, we did receive notification that the DOD has allocated $60 million for B-21 LRIP procurement due to inflationary impact and we expect that to be awarded later this year. But keep in mind, this only applies to the one fiscal year it's associated with FY ’23 and we continue to work closely with the government on an effort to address the impacts of macroeconomic disruptions. With regard to your question about F-18. Yes, our projections also incorporate the wind down of the F-18 production line. We have been anticipating that it is built into our plans if we think about our production profile over time, that mix is being driven not just with aerospace programs like B-21, transitioning to production and F-35 continuing to grow. It is built on our entire portfolio. All four of our segments will see programs shifting from development to production in that timeframe and that mix shifting. Okay, then just a quick follow up on the HALO program. Could you clarify if this is a fixed price development program or if it doesn't, has a different contractual structure? Thank you. Kathy Warden: It is a fixed price program. We had worked with the government in a cost plus structure through the preliminary design review. So we had a more mature design before transitioning into a fixed price contract structure. And as I noted in my comments, we’re being even more disciplined moving forward in ensuring that we work with the government to have the appropriate use of fixed price contracts. We think that is best applied for commercial items or production programs with stable requirements in mature design is it's turning out on the HALO program. The requirements are not as stable as we or the government anticipated. And we're working with them to address that change management as we go forward. Operator: Thank you, one moment for questions. Our next question comes from Richard Safran with Seaport Global Partners. You may proceed. Richard Safran: Kathy, David, Todd, good morning. How are you? Kathy Warden: Good morning. Richard Safran: So, you've been a bit reluctant to talk about this so far, but I thought I'd see if you'd comment on the NGAD Sixth-Generation Fighter Program since the Air Force just recently announced the competition. What I'd like to know is if you're thinking about bidding this as a prime, and I'd also like to know if you could, if this program is considered part of your, your growth strategy, so any color you could provide that would be helpful. Thanks. Kathy Warden: Thanks, Rich. Yes, before the government officially announced the program and they're intend to issue the RFP we had been quiet. But we have notified the U.S. Air Force that we're not planning to the NGAD RFP as a prime. We are responding to other bidders request for proposal as a supplier that's particularly in our mission systems portfolio. And as I noted in my remarks, we are remaining disciplined in assessing the right programs to pursue. And that's ones where we feel we're well positioned with a mature offering. And with the business deal reflects an appropriate balance of risk and reward for both the customer and the industrial base. So the [novice] decision on this program doesn't impact our path to sales and earnings growth at [NGAD] we have a strong backlog in that sector and we have other opportunities and military aircraft that we are pursuing. Richard Safran: Okay, thank you. Kathy Warden: Thank you. Operator: Thank you one moment for questions. Our next question comes from Ron Epstein with Bank of America Merrill Lynch. You may proceed. Ron Epstein: Yes. Hey, good morning, everybody. I guess I have to dig down a little bit further on that with that no bid, also crossover to FAXX? Or do you -- at a related program or a different program? How should we think about that? Or is that when you want to be a supplier on as well? Kathy Warden: Well, I'll just say that, when I noted we have other opportunities we are pursuing. I won't disclose at this point exactly what those are a little more information comes out on other programs. But you could assume that if we feel we're well positioned, and the government is appropriately balancing risk and reward as I said that that would be a program we would pursue. Ron Epstein: Got it? Got it. Got it. Got it. Okay, cool. Thank you. Operator: Thank you. One moment for questions. Our next question comes from Kristine Liwag with Morgan Stanley, you may proceed. Kristine Liwag: Hey, good morning, guys. And maybe following back up on those two questions, I mean, not bidding as a [prime] and NGAD. Kathy, is this part of your strategy in terms of maintaining, margin growth in the next few years? Because, we look at historically you guys had walked away from T-7, you'd walk away from the [tanker], and avoided the Winner's Curse. Is that how to think about the strategy for this program? Or are there other factors in play that we should consider? Kathy Warden: Oh, Kristine, certainly your words, not mine. But we do feel that discipline has served us well in the past and selecting how much risk to take and what to pursue. And we've learned lessons from some of our own experience as well. So we are applying those as we think about what to bid and what not to bid going forward. And that is critical to us, expanding our margins back to what investors expect of this company. And it's the three factors I mentioned. But the discipline, and ensuring we have the right combination of risk reward is important. And it's not just important for us to be able to meet our commitments to investors, but for the entire industrial base to remain healthy, so that we can have industrial base that investors want to invest in. Kristine Liwag: Great, thank you. I'll keep it to one. Kathy Warden: Thanks, Kristine. Operator: Thank you, one moment for questions. Our next question comes from Doug Harned with Bernstein. You may proceed. Doug Harned: Good morning. Thank you. On the margin question, even when we look at history, generally inflation, it doesn't affect defense companies that much. And we've obviously seen a very difficult two years where it rose, and you've talked about this rose very quickly, and you've had to absorb costs and fixed price contracts. When you look forward. You talked about being able to run out some of the contracts that were priced before we had that higher inflation level. But when you look at repricing contracts that go into next tranches, new work, do you expect that you're going to be able to get back to be able to price off a base cost level that could allow you to have the same kind of performance we saw in the sense in the pre COVID era? Kathy Warden: Yes, Doug, we do expect that to be the case, the government will look at the actual that we have experienced and the inflationary pressures are absolutely showing up not only in labor but material which then provide us the basis to work with the government and negotiate half of those hire, half in the future contract. Douglas Harned: And then, clearly and it sounds like you're looking at this so over the next 12 months or so you see this shift but clearly it also requires more money in the budget. We saw a lot of money come in in '23 budget from the senate last year. But you're expecting then in the budget to also be able to cover these higher costs? Kathy Warden: I expect that the budget will need to incorporate these higher costs to the extent that inflation exceeds the growth of the overall budget, they could of course be supplemental or priority. Will be made in terms of what the government will buy. We've already seen for the government happening to reduce quantities on program from their anticipated level which you address the higher cost coming in based on the inflation and we expect that to continue for the foreseeable future as the contracts come up for renewal. Operator: Thank you. One moment for question. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu: Good morning, guys. Thank you. I want to ask about space specifically fees. Your revised guidance takes into account $1.6 billion of sales growth in 2023. Can you maybe bucket this growth for us and where is it coming from, how much of it is GBSD and how do we think about the margin implications of this growth given the quarter? Kathy Warden: So, a good bit of the growth has been and continue this year to come from two programs: GBSD and MGI. We have talked about that been approximately half of the growth and the other half coming from a broad set of programs but most notably our national security portfolio which is about 80% of our overall revenue in the space business. And the margin profile is similar across those businesses with early space development being lower margin as we shift into production there like we talked about earlier on the call will present the opportunity for space margins to continue to expand. But we're really pleased with the 9% that we're seeing there. Obviously we work to get that closer to 10% through the work that we're doing, there is some performance. And in the longer-term is mix as seen and have the part potential to go even higher. But when you look at 9% for a business, that is the door, that type of growth and been able to continue to manage through the disruption of the macroeconomic environment. We feel like we're in a good place. Sheila Kahyaoglu: Thank you. Operator: Thank you. One moment for questions. Our next question comes from Matt Akers with Wells Fargo. You may proceed. Matt Akers: Hey, good morning. Yes, thanks for the question. I want to ask about and I think there was a GAO reporter in the quarter that customer maybe some schedule rips on that program, I think it's cost-plus any have been, just your thoughts on how that programs going, is there maybe any riskier than that? Kathy Warden: Yes, thanks for the question. So, this is in regards to Sentinel or GBSD as many of you know it. And there was a GAO report that's focused schedule pressure. We've been talking about that and the U.S. Airforce has as well as we have seen disruption in supply that has flowed through to schedule pressure on the program. We're in the process of working with the Airforce on looking to optimize the schedule to see what we can pull outward obviously it's shifting right and how we can maintain the initial operating capability day which is the primary focus of the government, so that we cannot place those missiles in silos as anticipated later in the decade. Matt Akers: Okay, thanks. And then, if I could follow-up. I guess maybe on working capital. Dave, I don’t know if you could comment on your thoughts on how that progresses in the second half? David Keffer: Sure, thanks Matt. We continue to feel really good about our working capital status as efficient I think as any across the industry and particularly strong in the second quarter. We mentioned a $1 billion of improvement year-over-year in free cash flow that was bolstered by the strength of our invoicing and collections efforts during the quarter which puts us in good status. We think about where we stand year-to-date compared to a year ago. We continue to expect a kind of typical seasonal pattern with the strongest free cash flow and therefore working capital efficiency in the fourth quarter of the year. But overall feel good about our working capital efforts. Operator: Thank you. One moment for questions. Our next question comes from Peter Arment with Baird. You may proceed. Peter Arment: Yes, thanks. Good morning, Kathy, Dave, Todd. Hey Kathy, thanks for your comment on the mix and kind of the longer-term outlook on where that transitions from cost plus to kind of fixed price mix for the company. Is 2023 kind of the peak year or is it more like next year for cost plus and just a related to kind of just your comments on working capital. How do we think about the working capital profile kind of over that similar period? Is that like a that does have become a headwind or is it an opportunity for you. Thanks. David Keffer: Thank you, Peter. I'll start with your mix question. Yes, this is the year to think of as the higher water mark for cost type work given where we are in the development cycle particularly on many of our largest programs. We mentioned we've been in the 55% of sales range in terms of the cost plus mix in the first half of the year. We expect that to ease slightly in the second half, well it's really over the next four five years we'll see that shift back to the other side of 50/50 and toward that 60/40 fixed price mix that we described in our prepared remarks. So, that is a meaningful opportunity for us in terms of margin expansion as we help deliver those capabilities to our customers in the production phases of the programs. Working capital longer-term, as I mentioned, we're really pleased with our working capital efficiency when we think about where we finish 2022, where we project 2023 finishing as well. And so, we don’t think of working capital as a source of a lot of upside opportunity for additional efficiency over the next five years nor do we think of it as an area of expected headwind. I think it'll be more neutral than that. So, when you think what will drive that opportunity to double our current run rate of free cash flow over the next five years, think of it in terms of growth in the sales volume of the business, the margin rate opportunity we've been talking about and the conversion of those margin dollars to cash flow that certainly the number one effort and the number one driver. But then, coinciding with that you'll see a decline in demand for capital expenditures where peak levels in '23 and '24 around capital intensity, that will ease to a more historical levels over the next five years. You'll see some increase in CAS funding over the next couple of years in our in the projections we've outlined over the last few quarters. And then cash taxes will decline based on current tax law particularly related to the amortization requirements for R&D. Operator: Thank you. One moment for question. Our next question comes from George Shapiro with Shapiro Research. You may proceed. George Shapiro: Yes, hello. On the options for the B-21, I mean you still got the same commentary in the queue. I think that you've been expecting the first option to get called in the third quarter. Is that the time yet that we'd expect to see some real update on what the losses might be. And if that will you sit there and provide a number for that one option and then subsequently rate fill other options are exercised and what you're thinking as to how you will handle that. Thanks. David Keffer: Hey George, it's Dave. So, as we talked about on the call, the first flight at aircraft was successfully powered on in Q2. We remain on track for first flight this year. Again, that timing continues to depend on events and data of course over time. And we anticipate that that first LRIP contract will be awarded following first flight. We will continue to evaluate the performance in the outlook for B-21 LRIP as well as the EMD portion of the program on a quarterly basis and provide updates as we have them. Of course, those will be informed by continued progress in driving efficiencies on the program as well as our understanding of that first LRIP contract lot and beyond. So, we'll take all of that into account each quarter as we update our thinking. Operator: Thank you. One moment for questions. Kathy Warden: Go ahead, well you can give us a follow-up. David Keffer: We can take that one follow-up if you don’t mind. Operator: Oh, no problem. [Audio Gap] -- 9% or so. So, about half what you experienced in the first step. Can you provide reasons for that slowing? David Keffer: Sure. A few things I'd point out there. Obviously the growth rate for the year for space is increased with its guidance update to the low double-digits now and we're really pleased with that. The first half of the year has been close to that 17% range. Some of what you see there is just a matter of the year-over-year compares where the first two quarters of the year were a bit lighter compared than Q4 in particular. And that’s frankly the case across the business. We had a tremendous Q4 for sales volume in 2022, so we anticipate that the touch compare will lead to a lighter year-over-year growth rate in the second half of the year across all four of our segments as we get to Q4. But overall the sequential growth is where we'll continue to look for from space and other sectors. When you look across the company, you've got about 51% of our sales guidance in the second half, 49% in the first half. So, you see the demonstration of continued sequential growth and the year-over-year growth rates are more of a matter of those compares. Unidentified Analyst: Okay. Thanks very much, Dave. Operator: Thank you. One moment for questions. Our next question comes from Seth Seifman with JPMorgan. You may proceed. Seth Seifman: Hey, thanks very much. Good morning. I wanted to ask first about space and it seems like definitely I appreciate the detailed commentary on the overall margin outlook. It seems like space has been the business where a lot of that margin pressure has been felt most not just maybe from foreseeable things like mix but from surprises that have caused the company to go down the margin there. What is it about the portfolio in space that's driving that now? And how do you assess the risk from here, is space still the sector where there is maybe the most margin risk due to continued work on fixed price development programs like HALO and maybe exposure to either the SDA Tranches which I think are also kind of fixed price development work. How do you see that now? Kathy Warden: So, overall the space business is performing very well. We certainly have pockets on certain programs that we are focused on continuing to improve the disciple around tower managing those efforts along with the customer. And so, I don’t see space as majorly different than any other segments of our business in terms of risk profile aside from mix. Certainly there is more risk in development programs and that's why we generally have where our margin rate coming out of development. But as space has transitioned programs to later stage developments in production, their performance has out solid the rest of the business and we expect that to continue. Seth Seifman: Great. And maybe just as a quick follow-up in AI. Perhaps feudal attempt to bring out a little bit more information about the NGAD strategy. I believe the collaborative combat aircraft portion of NGAD is a separate solicitation. Are you planning to pursue that? Kathy Warden: It is a separate solicitation and we're looking at it closely. Operator: Thank you. One moment for questions. Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton: Thanks. Good morning. Kathy, you mentioned margin expansion in '24 but obviously the margins for '23 in the guidance have actually come down. So, I'm just wondering could you put a quantum to the margin expansion you're looking for in '24 as it to just get back to where prior '23 was. And then maybe for Dave just a clarification, the 10-Q mentions a $100 million gain in the third quarter. That is into new guidance, I wouldn’t imagine just yet, is that correct? Kathy Warden: So, I'll start and then turn it to Dave. As I think about margin profile, we do expect the second half of this year to be stronger than the first half and based on our guide you could expect us to see that progress that we have largely from macroeconomic disruptions dissipating through the year to continue into 2024. The mix shift that I focus is more gradual. I talked about that shift toward 60% fixed price in 2027, so you could think of that as a progression through 2024 to those later years. And so, we're not going to guide today around 2024. We will provide just some more specifics as the year progresses and certainly at the beginning of the year next year. But you could think of it as a steady progression of improvement not a dramatic change from where we've been performing this year. David Keffer: And I could touch on the $100 million gain you referenced that that's just an approximation, of course we've until that closes. We do expect that sale of an international minority investment to close in Q3. And that's the item for which we'd increased our guidance range by $0.40 last quarter. So, that is incorporated into our guidance net, net we see that in that $0.40 range of benefit to the company. So, we're pleased to have that approaching and look forward to the cash inflow from it as well. Myles Walton: Okay. Thank you. Operator: Thank you. One moment for question. Our next question comes from David Strauss with Barclays. You may proceed. David Strauss: Good morning, and thank you. Kathy Warden: Kathy, so you're -- the growth rates accelerated a little bit faster in '23 than you had initially anticipated. As we think about '24 with AES returning to growth and I assume space growth slowing a little bit. Would you expect topline growth in a similar range or is it possible that we could still see an acceleration next year overall for the company evolve. Thanks. Kathy Warden: Right. So, we're really pleased with the progress that we've seen this year, our sales guidance increasing at space and TS and our other two sectors continuing to see progression towards their growth objectives as well. As we think about this year, a good portion of that growth is the strong backlog that we developed and continued win of competitive bid. Part of it too though is what we've been talking about with the phenomena of having supplier deliveries to late last year and starting to come in this year having ramped our headcount significantly in the latter part of last year and early part of this year, is contributing to growth rate. Those elements you wouldn’t think of as it continued, it was a bit of at that wave that we've now seen come into this year. But the growth based on backlog performance and new winds, we do expect to continue into next year and its better see another year of healthy growth in 2024. David Keffer: And the other point I'd add is to your point David around the segment level view. We do expect the growth to be more balanced going forward with opportunities for growth in each of the four sectors as we demonstrated in this period in Q2. We see the growth in our defense systems business having recovered really nicely over the last couple of quarters. There were continued opportunities really across all four of the segments to drive growth. David Strauss: Great. A quick follow-up on the F-18. How big is that still for you today and when would you expect that to completely run off? David Keffer: Sure. Consistent with the commentary from our prime on the program, we do anticipate that production will wind down over the next couple of years. And for us it's 1% or less of sales and therefore not too dramatically impactful to the overall company topline. It's incorporated into our thinking about opportunities for growth in sales that AES over the next couple of years as are the other moving pieces we talked about throughout the call today. Operator: Thank you. One moment for questions. Our next question comes from Jason Gursky with Citigroup. You may proceed. Jason Gursky: Yes, and good morning everybody. Audio has been a little choppy this morning. So, I apologize if you've already commented on this. But the comments you made early in your prepared remarks Kathy about the backlog of which you had at the end of '21 and where you are going to sit as you exit this year with having delivered about 70% of that backlog. I'm just kind of curious the remaining 30% that is still in front of you, what how big is the B-21 program in the remainder of that 30% which you've got still going on? Kathy Warden: So, the remainder of backlog on B-21 is relatively small because what's in backlog is the EMD program completion. Production has yet to be awarded, so the lots we've been talking about is how to get to the first slot of production and contract later this year. But of course, it is priced and so that is a contractual commitment, but we have not yet been awarded it, so it's not showing up in backlog. Programs that are a significant amount of that backlog, our program like Sentinel, a sizable program that was awarded in 2020 or 2021 and is going to carry forward for several more years as part of that EMD program and backlog. And there are several others, but none that rise to that level. But I will remind you that Sentinel program is a cost plus program. David Keffer: Right. So to that point, among the fixed price programs, where we talked about the 70% of that 2021 backlog having been transitioned into sales by the end of this year, there are no huge individual drivers of the remainder of -- the remaining 30%, if you will, and that will gradually translate into sales over the next few years. So a gradual wind down of the remaining 30%, based on the metrics we described earlier. Jason Gursky: Okay, right. And then I'm sorry to beat a dead horse here on the space margins. But I did find your comment, Kathy, interesting about the potential for the business to operate above 10%, I think you said you want to drive it to 10. But there'll be opportunities for it potentially to go above that metric at some point in the future. I'm just kind of curious as to whether that is a comment for the broad portfolio of your space programs because when I historically think of spacecraft and space based assets, I tend to think of lower margin rates for that kind of work historically because it's been a lot of cost plus kind of work. So I'm wondering if this is a comment about the broad portfolio and would include assets that are going to be operating up in space? And is that comment -- if that is true, is it because you've got more fixed price work going on there than has historically been the case? Kathy Warden: Yes, so as you think about the transition that the space market has undergone to where we had few large and exquisite assets, those were largely developed under cost plus and then transition to production but in low quantity, now we're seeing much less dollars go into development, and then a transition into production of higher quantity. So that mix will be different in terms of development versus production in the market as a whole. In addition, when you think about our portfolio and what's in our space segment, it includes things like solid rocket motors, particularly large solid rocket motors, it includes programs like Sentinel that will transition into production, and programs like [indiscernible] that we've talked about so as those transitions happen again, specifically now to our portfolio, not just the market in general for space, we've seen mix shift that will be tailwinds to margin over time. Todd Ernst: Josh, we have time for one more question. Operator: [: Unidentified Analyst: Hey, good morning. Kathy, just sticking with that a little bit and tying this to the prime versus merchant supplier discussion we had in the beginning on aeronautics, when you think about the shift, at least in satellites from GEOs to MEOs and LEOs when these highly proliferated constellations, and the significant to the SDA in that part of the market and their desire for fixed price contracts, is it better, at least in that kind of work to be on the supplier side at some point would you consider that? Kathy Warden: We consider it with each opportunity, just as I discussed in Alpha process around military aircraft, we don't have a blanket, we will do this and we won't do that we think about each opportunity in terms of its risk profile. The maturity of our designs and offerings at the time that we're being asked to bid also weighs heavily into our thinking about that decision. And so in the case of the Space Development Agency, we are executing on several programs for them today and performing quite well. So we have chosen wisely and been disciplined in how we have taken on that work and will continue to do that. The beauty of our portfolio, as we've talked about before, is we can choose to prime. But if we don't see the right mix of risk reward we can also choose to be a supplier and still bring the capability forward that the government needs and expects from us. Unidentified Analyst: Thank you. Kathy Warden: Great. Well, I think that's about all we have time for. So thank you to each of you for joining our call today. I also again want to extend my appreciation to the Northrop Grumman team for their continued strong performance and contribution to global security. I hope that all of you enjoy the remainder of your summer and I look forward to seeing you throughout the summer and talking to you again in October. Take care. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day ladies and gentlemen and welcome to Northrop Grumman's First Quarter Conference Call. Today's call is being recorded. My name is Lisa, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Lisa. Good morning, everyone and welcome to Northrop Grumman's first quarter 2023 conference call. We'll refer to a PowerPoint presentation that is posted on our IR web page this morning. Before we start, matters discussed on today's call, including guidance and outlooks for 2023 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On the call today are Kathy Warden, our Chair, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone and thank you for joining us. Northrop Grumman is off to a solid start to the year. Our team is driving industry-leading growth by executing our strategy, meeting the growing global demand from our customers and performing on our programs. As a result, we increased sales by 6% and delivered strong earnings per share in the quarter. Additionally, we're delivering on our capital deployment strategy which prioritizes investing in our business and returning cash to shareholders. In the first quarter, we continued thoughtful investments in the capability and capacity needed to support our customers' operational initiatives and we initiated a $500 million accelerated share repurchase plan, returning a total of nearly $1 billion to shareholders through dividends and share repurchases. Based on first quarter results and our continued expectations for growth and strong operational performance, we're reaffirming our 2023 segment guidance. We're increasing our EPS guidance based on our continued confidence in our business outlook and to account for the divestiture of a small minority investment signed this week and expected to close this year. As we look to the long term, increasing breadth to freedom and security persist around the world. Given this, we expect continued support in Congress and the administration for the priorities outlined in the National Defense strategy which align well with the Northrop Grumman portfolio solution. This support was reaffirmed in the administration's budget request which was released in March. DoD investment accounts are up by nearly 4% for fiscal year 2024. Northrop Grumman programs continued to be well supported in the budget request, particularly in the areas of strategic deterrence, space, missile defense and advanced computing and communication technologies. The 2024 budget request also reflects the growing need for weapons capability and capacity, with overall funding increasing more than 20% compared to fiscal year 2023 and significant funding increases to major weapon programs, including many of which we provide key components. Two of our franchise programs, GBSD and B-21, each fall total investment account funding increased by approximately 10%. The future year defense plan or also prioritizes these programs, with funding projected to nearly double from about $8 billion in fiscal year 2023 to $15 billion in 2028. Outside the U.S., the geopolitical landscape remains dynamic. Global defense budgets are increasing as many U.S. outlies modernize and expand their defense capabilities. An important part of our long-term growth strategy is focused on leveraging our portfolio to meet these growing global needs and we continue to make progress in this area. In February, Australia issued a request for AARGM-ER, a high-speed, long-range air-to-ground missile that provides counter air defense capability. Northrop Grumman is a prime contractor for AARGM-ER. And this recent FMS request has a potential value of over $500 million. Australia is one of over a half dozen additional countries expressing interest in this capability. In addition, last month, the Defense Security Cooperation Agency approved the sale of 5 additional E-2D Hawkeye aircraft to Japan. These aircraft, along with the existing backlog, are expected to extend E-2D production well past mid-decade. These international opportunities, together with a broad set of others in IBCS, munitions and sensors, form a strong foundation to grow our international revenue at a double-digit rate over the next several years. With this global demand signal as a backdrop, we've been executing a strategy over the past few years to significantly enhance capabilities and capacity in our weapons portfolio. This portfolio includes components such as electronics, propulsion systems, warheads, infuses as well as missiles, armaments and interceptors. And as a result, we have multiple positions on key programs as both a supplier and a prime contractor. Let me share a few examples of progress we've made on this strategy. In the first quarter, we received awards for nearly $350 million for medium- and large-caliber ammunition, Bushmaster cannon and propulsion products for the guided multiple launch rocket system, or GMLRS. In addition, we're developing smarter, more advanced weapons required for future high-end fight with innovations in next-generation strike weapons, high-speed propulsion and smart ammunition. One example of this advancement is the Air Force's Stand-in Attack Weapon, also known as SiAW, a high-speed longer-range air-to-ground missile. During the first quarter, we received an award that takes us to the next phase of this competitive program. To meet our customers' growing demand in this area, we have invested nearly $1 billion since acquiring Orbital ATK, building our capacity for weapons and missile components. Our investments significantly increased capacity to produce solid rocket motors supporting our expectation for continued demand for this capability as well as increased capacity for GEM 63 boosters which supports the growing launch needs of our civil and commercial customers. We're also investing to increase capacity in our missile integration facility located at the Allegheny Ballistics Laboratory in West Virginia. Our newest 113,000 square foot facility is a factory of the future. It is designed to support production of up to 600 strike missiles per year. Production operations will commence with the second lot of low rate initial production for AARGM-ER, adding to other programs that we currently support this complex, including GMLRS Hellfire and Precision Strike Missile, among several others. In addition, we're building a new hypersonic center of excellence in Elkton, Maryland. Later to open this summer, this new production facility is designed to provide full life cycle production for hypersonic weapons from design and development to production and integration using the latest digital engineering and smart manufacturing technologies. The Elkton facility supports programs like hypersonic attack cruise missile, known as and Air launched powered hypersonic weapon that we're producing in partnership with Raytheon Technologies. We're not only a provider of missile systems, we also are a leading provider of missile defense system. This is a rapidly growing area within our business and includes a diverse set of franchise programs. Our work in missile defense is now approaching 10% of company revenue and we see an opportunity to expand that in the years ahead. Our broad end-to-end missile defense portfolio includes sensors, interceptors and command and control systems. One example is our prime contractor role on the next-generation Overhead Persistent Infrared, or OPIR Polar segment. This OPIR satellite constellation will operate at a highly elliptical orbit and provide critical strategic missile defense warning capabilities. Importantly, we also provide proliferated low earth orbit missile defense capabilities on programs like HBTSS and recent awards for SDA tracking Tranche 1. In addition, we're a prime integrator on next-generation INTERCEPT capabilities, including NGI and glide phase Interceptor. They protect against advanced ballistic and hypersonic missile threats. Shortly after the close of the quarter, we received approval for full rate production for IBCS, an integrated air and missile defense system. This key milestone allows the U.S. Army to set the fielding schedule for IBCS to its Air Defense unit which will significantly bolster regional defense capabilities. Over the fighter period, domestic deliveries of IBCS units are expected to increase by 40%. And as a reminder, Poland selected IBCS to serve as the centerpiece of its air and missile defense modernization and a number of other allies are also evaluating the system. Before turning the call over to Dave, I'd like to touch on a couple of key program updates, starting with B-21. The program remains on the government's baseline for cost and schedule and we're continuing to work towards first flight which will be informed by events and data and remains on track for this year. There are no material changes in our EACs this quarter for the EMD phases of the program and we continue to expect to receive the first LRIP award later this year. The B-21 program is expected to be the centerpiece of the Air Force's long-range strike portfolio for decades to come. With steady growth in the projected funding across the site, as I outlined and strong customer demand for its unmatched range, health and survivability, the long-term outlook for the B-21 program remains robust. On GBSD, we achieved 2 key milestones in the quarter. This includes its first full-scale static test fire of the Stage 1 followed rocket motor and the successful completion of a series of wind tunnel tests which tested the system in both subsonic and hypersonic environments. The comprehensive test campaign validated our digital modeling and simulations and improved design maturity of the missile. And earlier this month, the James Web-based telescope industry team led by Northrop Grumman won the prestigious trophy for revolutionizing the field of Aster physics. I want to congratulate the team for a pioneering design and unwavering commitment which were instrumental in winning our industry's highest honor. Overall, our strong start to the year is a clear indicator of this team's performance. We see continued robust demand for our solutions in the U.S. and abroad and we believe we're well positioned to maintain our industry-leading profitable growth and deliver value creation for shareholders and customers alike. With that said, I'll hand the call over to Dave to cover the details of our financial results and our outlook. Dave? David Keffer: Okay. Thanks, Kathy and good morning, everyone. As Kathy noted, our first quarter results provide further evidence that our strategy is working. The strategic investments that we're making in franchise programs and key customer priority areas have positioned us to deliver differentiated growth. Our team continues to do an outstanding job of managing through challenges in the macroeconomic environment. We added substantially to our headcount again this quarter. With respect to the supply chain, we saw signs of modest progress in Q1. We continue to believe that our supply base will experience areas of pressure for some time. And inflation levels have begun to moderate but continue to have a higher base effect on our costs over time, especially on longer-term programs. As we've discussed on prior earnings calls, we've been experiencing impacts from inflation-related cost increases over the past year. We continue to drive efficiencies in our business and partner with our customers in an effort to reduce those impacts going forward. Now turning to Q1 results. Bookings of roughly $8 billion, were in line with our expectations, including $3.2 billion in restricted awards. Our backlog remains solid at more than 2x our annual sales, including nearly $24 billion in restricted backlog. At the segment level, our Q1 sales were particularly strong at Space Systems which grew 17% year-over-year. Aeronautics sales were slightly below the projected full year run rate, primarily due to timing of volume on a few of our large programs. MS was up 3% in the quarter, driven by expansion in restricted sales in the Networked Information Solutions business. And Defense Systems sales were up 7%. It's Battle Management and Missile Systems business, several components of which Kathy described earlier, is experiencing particularly strong customer demand, given the global threat environment. Segment margins were 10.8% in Q1, in line with our expectations and included roughly 50 basis points of unfavorable impact associated with higher CAS pension costs that were incorporated into our rates in Q1. Those impacts were spread relatively evenly across the 4 segments. AS margins were down from the first quarter of 2022, primarily because of the $67 million favorable EAC change on the B-21 EMD phase last year. GS margins were about in line with our full year outlook adjusting for the CAS pension impacts. MS was slightly under its 2023 projection, due in part to a loss recognized on an unconsolidated joint venture. And Space margins were solid in the quarter with lower EAC adjustments partially offset by the sale of a license to a customer. At the enterprise level, we generated sales volume of $9.3 billion, representing growth of 6% compared to the first quarter of 2022. Consistent with what we communicated last quarter, our Q1 sales were just over 24% of the midpoint of our full year estimate and were driven by both our hiring trends and supplier deliveries. Our first quarter operating income also grew 6%, due to lower corporate unallocated expense and intangible asset amortization. Our diluted earnings per share were $5.50 and included a headwind of over $1 per share compared to the first quarter of 2022 from lower net pension income. This noncash pension headwind will continue to be a factor in our year-over-year EPS comparisons throughout 2023. And based on current estimates, we expect pension income to begin to increase next year. We also had a few Q1 benefits below the segment line that contributed to our earnings per share. First, our other corporate unallocated expenses were only $4 million. And while our forecast for corporate unallocated was already weighted toward the second half of the year, this created a timing benefit of roughly $0.10 per share in the quarter. Our marketable securities were favorable in the period and contributed roughly $0.10 to earnings. And our Q1 estimated tax rate of 15.6%, was lower than our full year forecast, contributing another $0.10 of upside. This was due in part to the benefits of various tax credits recognized in the quarter. Altogether, these items contributed approximately $0.30 of benefit to our Q1 EPS but they are primarily timing related in nature. Turning to cash. As is our typical pattern, we experienced an outflow of cash in the first quarter, due primarily to working capital timing. Capital expenditures totaled $309 million and our first quarter operating cash flow was a usage of approximately $700 million, consistent with historical trends. Q2 last year was a period of cash outflow also but we're currently forecasting a modest inflow in Q2 this year. In April, we made our first cash tax payment of the year, including the R&D taxes owed associated with Section 174. For the full year, we're projecting over $700 million in cash taxes associated with Section 174 and we continue to be hopeful that Congress will find a way to amend or repeal the law. Moving to guidance. Given that the first quarter was roughly in line with our expectations, we have not changed any of our full year segment guidance ranges. We continue to project a book-to-bill ratio just under 1.0x for the year. We expect our second quarter sales to be in line with or slightly higher than Q1 and less than 25% of our full year estimate. We expect many of the timing items I mentioned previously to normalize over the course of the year, including interest expense. With respect to capital deployment, we remain committed to returning more than 100% of our free cash flow to shareholders this year via dividends and share repurchases. As Kathy mentioned, we initiated a $500 million accelerated share repurchase in the first quarter. And including our open market repurchases, we'll repurchase roughly $720 million of stock in the period. We also raised $2 billion in new notes in the first quarter at attractive rates which we anticipate using in part to retire the $1 billion of notes that are maturing in Q3. Over the long term, we've demonstrated our ability to generate strong and stable cash flows in our underlying business. And based on the durable growth in several areas of our business that Kathy highlighted, we continue to expect our free cash flow to expand at a robust rate, not just through 2025 but through the second half of the decade as well, providing flexibility for our long-term capital deployment plans. And as we noted in our 10-Q this morning, we just signed an agreement to sell our minority equity investment in a small international business. Closing is expected to occur later this year, most likely in Q3, subject to government approvals and closing conditions. We have increased our EPS guidance by $0.40, consistent with our estimated gain from the transaction and additive to our strong business outlook. In conclusion, we're pleased with our start to the year, certain improvements in the macro environment and robust demand signals from our customers domestically and abroad. And with that, let's open up the call for questions. Operator: [Operator Instructions] The first question will come from Doug Harned of Bernstein. Douglas Harned: I'd like to go back kind of to last quarter on the B-21. And the reason is, in the last quarter, you all raised the possibility that you could see the first 5 LRIPs not be profitable in a sense because of inflation. And one of my question is that presumably, when you originally won the contract back in 2015, you made inflation assumptions in the pricing that I would assume maybe LRIPs profitable. And since that time, we've seen mostly low inflation years with a couple of recent high inflation years just recently here. And first, how has inflation progressed relative to your original assumptions over that 8-year period? And is there an inflation level we should watch for going forward, where those costs become the issue that you were concerned about? Just trying to really see what the assumptions you're making are and how we should think about ultimate profitability here? Kathy Warden: Yes, Doug, thanks for the question. So to talk about the assumptions that we made then on inflation and even that we're making now, I would look to publicly available information. We tend to use indices to think about long-term projections on macroeconomic condition. So if you roll the clock back to 2015 and look at what the Fed was doing, they were managing inflation to a 2% target and doing that pretty effectively. So you can imagine that that's the set of assumptions that we would have been relying on as we looked out into the future. I'm not saying that's exactly what we did. We're not going to disclose that but those indices give you a good sense of what we would have been thinking. Of course, the last couple of years, inflation has been higher than that. And the thing about inflation, particularly as it relates to labor, is it doesn't tend to come back down on labor once salaries are elevated, they tend to set a new labor benchmark. And so as we think about the future, we're expecting those costs at least to remain elevated over the remainder of the execution of the contract. In areas like materials and other supplies, we do believe those will follow the indices associated with those commodities. And so there will be some variation of what we can buy those materials out into the future and the indices are a good way to think about that as well. Douglas Harned: And so when you go forward to finalize each of these LRIPs which is coming soon, I guess two things. I mean, is there -- is it possible to think -- for us to think of inflation levels that could be of a concern? But then also shouldn't you have the opportunity at least on labor and materials to get some sort of an equitable adjustment on cost? Kathy Warden: Well, we certainly believe so. And as I noted in our last call, that is what we're working toward. And so we continue to have discussions with the government, both congressionally with the dollars that they have appropriated for inflation relief for contracts just like this and the Department of Defense as they think about how to allocate those funds and we'll continue to work that very actively. And of course, wouldn't expect that relief to come all at once but in the annual appropriations associated with the program or a separate funds like we saw in 2023 for inflation relief. Now with that said, we also are working to offset these increases with other elements inside of our control, our overhead rates, the other costs that flow into segment operating margin that can have a beneficial effect as well. We're not relying fully on actions the government will take, although we do believe that both the government and Northrop Grumman should be working to mitigate these impacts and share this risk together. Operator: Our next question will be coming from Seth Seifman of JPMorgan. Seth Seifman: I wonder if you could talk a little bit about Aeronautics and kind of other than restricted programs. I assume B-21, we saw a number of declines in the quarter. And that's not very surprising. Those are kind of mature programs. But where do you see, excluding B-21, where we have the budget documents, when do you see the rest of the Aeronautics portfolio sort of stabilizing? And then, if you could talk about the potential for any other growth drivers in the portfolio, especially potentially in the Autonomous area over time and how you're thinking about aligning with the Air Force's strategy there? Kathy Warden: Well, thanks, Seth. We have talked about the long-term view of Aero top line. And so while not guiding for 2024, we have said that we do expect revenue to be flattish this year and then begin to grow again next. And that's driven by a few factors. The first is those programs you noted and that we noted in the Q, like Joint Stars, Global Hawk that have been putting pressure on our year-over-year comparison, Aero do become minimal from this point forward in terms of year-over-year sales decline. We also have programs that are fairly stable, like F-35, that will continue. And then we have growth drivers like B-21. And in addition to that, I would add the Air Force's operational imperatives as well as some new program activity that's happening for the Navy and Aviation as well. So all of those create modest but some upside for us as we look in the compares '24 to '23. Seth Seifman: Great. I guess if I could sneak in one more. You talked a lot about the investments that you're making in your prepared remarks and I thought that was very helpful. And I kind of plays into this idea that we're in sort of a different world where the customer needs kind of more spare capacity. How do you think about return on investment in that world where maybe there's a need for more spare capacity? And is there a willingness on the customer side to kind of recognize that and provide some value for it as well? Kathy Warden: Yes. Excellent question as well. So as we're thinking about the investments we're making, we look at what we believe a stable long-term capacity level is that will be supported by government expenditures. And we've made those investments. We got ahead of that curve because we believe that we can gain share by being ready for that demand signal as it comes. But then we look out and say there is likely to be a period of surge that the government would like industry to respond to. And there, we've put proposals forward to the government to get their funding to support what would be that additional capacity. So in the example that I gave today, I talked about us investing nearly $1 billion of our own dollars in expanding solid rocket motors, both for tactical missiles which was really the focus of my commentary today but all the way to strategic missiles as well. We're expanding capacity in those areas. We have more than doubled the capacity with the investments we've laid in or plan to make. For the government to go even further than that, we are suggesting that we can support that but would look for government funding to complement it. Operator: Our next question will come from Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Kathy, you mentioned GBSD and B-21 funding nearly doubling through the bid up. How do we think about this relative to your plan as it relates to Northrop's revenues versus some of the money, obviously, going to suppliers or the government? And you also mentioned free cash flow growth beyond the current target. How do we think these programs contribute to that growth? Kathy Warden: So as we look at the profile on large programs like B-21 and Sentinel. You are right point out that all of that doesn't come to Northrop Grumman and our suppliers. Some of that is government funding. And that's particularly true with the Sentinel program because there is a significant of government activities associated with the work that will go on in the missile field and the coordination and collaboration across government to enable the construction scope. So when we look at our profile on these programs, it is a subset of the overall budget growth but it tends to follow in terms of relative year-over-year growth. What we will experience, not necessarily in that year because those appropriated funds or for what will be extended, it then takes us time to extend those funds, sometimes 18 to 24 months depending on the scope of work kind of program like B-21 and Sentinel. So when you net all of what I just said, the signal from the budget tells you there is continued and sustained growth in both of those programs through the that, that growth will come and be sustained not just through that 2028 period if you could expect it to continue, both when you look at what the government has said about quantities on B-21 and how they ramp as well as Sentinel moving into production in that time frame and still be ramping. So it's not just about '24 to '28 projections that you see in the Fidelis but looking beyond that into the next decade. David Keffer: Sheila, one thing I'd add to the second point you raised around free cash flow growth, what we were touching on there is really beyond the 3-year outlook period that we've provided with specifics. The second half of the decade provides an opportunity for continued free cash flow growth and that's driven by returns on some of the investments Kathy has been describing throughout this call. It will be a period of less heavy capital intensity and more in the way of opportunity for returns on those investments we have been and are currently making. And then, of course, some of the less operational items like cash taxes will be lower in the second half of the decade as we get through the Section 174 amortization period. And the opportunity exists for CAS pension recoveries to continue to be higher in that second half of the decade. So all told, that's what gives us optimism about that period from a free cash flow expansion perspective also. Operator: The next question will be coming from Ronald Epstein of Bank of America. Ronald Epstein: Maybe changing gears just a little bit. Kathy, can you talk a bit about -- and you mentioned it a little bit in your opening remarks about Northrop's strategy in the space market. One of the big things that we learned out as the space imposing, the whole architecture of space is changing. You guys had a huge presence there and there's some pretty interesting stuff going on with your partnership with Firefly and so on and so forth. But if you could just kind of walk us through your vision on Northrop in space, defense and commercial? Kathy Warden: Yes, certainly. So you're right to point out that our strategy in space is broad-based. The cornerstone of it is as the cornerstone of our business tied to national security and supporting the U.S. and our allies to operate effectively and freely in space. But we also have a strategic significant pillar in space exploration as evidenced in our work in James Webb and more scientific missions but also our work in the Artemis program in space exploration. And our commercial ventures are largely tied to enabling those two strategic pillars within our space business. So when we are looking at the technologies that we need in space, we are well integrated across all elements of a solution, meaning we think about launch, even if we're not the launch provider, having partnerships with companies that can provide us the ability to launch. And that's the relationship we have with Firefly, being able to build the satellites that provide value and that's both being a bus provider as well as the payload, then being able to operate, command and control those assets in space. So that's more of a JADC2 contribution with the space domain in mind. And then, of course, that means being able to operate on the ground as well as be able to have these satellites able to communicate and share data. So this ties to the core competencies we have across this company in other domains and we are working to bring all of that to the space domain. And the space domain is the fastest growing area, not only of our business but our customers' budget, both NASA and the Department of Defense has been very well supported in recent budgets and we expect that to continue. So our objective is to use this opportunity to continue to grow our share and our relevance in those markets. Ronald Epstein: And then, if I may ask just a quick follow-on to that. When you think about the growth in that business, it's been a huge growth driver for you. Do you foresee that continuing into the next couple of years? I mean, how should we think about the growth of that business? Kathy Warden: I do. And I've said that we shouldn't get wedded to double-digit growth that we've been experiencing consistently for the last several years because we have been in a position of winning significant new programs and seeing those programs ramp. And the business itself has nearly doubled. It's pretty amazing to see what's happened in the last few years. So I don't expect that to be the growth profile for the next several years but I do expect it to continue to be a growth engine in our company. And as we just talked about programs like Sentinel, the most significant growth on some of these is yet to come because many of the programs are in the development phase, where we are just building the first of. The opportunity is when those transition into production for both higher volumes and higher margins. And that's still very much ahead of us. Operator: The next question will be coming from Robert Spingarn of Melius. Robert Spingarn: So Kathy, just a follow-up on Ron's question on space. SpaceX announced a separate division called Star Shield that's going to be focused on defense work. How do you think about their push into national security? And is there an opportunity actually to partner with them? So is it more of a positive potentially or negative? Kathy Warden: I don't see it as a significant change. We have been partnering with SpaceX. We expect to continue to do so. And my sense is that standing up this into within SpaceX, it's more to help them with the structural differences in dealing with the government work and customers versus their commercial aspirations. But in terms of our ability to work together, they've been a good partner to us. Of course, they're also a competitor but that's normal in our space and so we expect that to continue. And we embrace competition in Northrop Grumman. We think it hones our skills makes us stronger. And so we see this as a positive for the industry overall. Operator: The next question will be coming from Jason Gursky of Citi. Jason Gursky: Kathy, you did a nice job of outlining some of the recent wins and developments and investments that you're making. You touched a little bit about Aeronautics and Space growth in the out years. So I wonder if you might do the same for Defense and the Mission Systems kind of focusing in not just on the positives but any potential headwinds that you see there, so we can all kind of get a good sense of what out your growth rates in '24 and '25 might look like? Kathy Warden: Yes. So why don't I start with Mission Systems. It's been a steady grower. We anticipate that it will continue to be. It hasn't been our fastest grower but it's just really consistent. And I expect that to be the position Mission Systems finds itself and going forward. And that's not to say there aren't a lot of changes happening within that business. It is a highly competitive business and one where technical differentiation is critical but they are staying at the forefront of technology to remain competitive. So, some examples of that are as aircraft of the fourth gen are retired eventually, they have roles -- significant roles on some of those. And so that work starts to dissipate. But at the same time, they are competing for next-generation technologies. And you see this even playing out on the F-35, where we talked about the new radar development award that we got is that platform is being modernized with Block IV upgrades. And so I'm really pleased with that team's competitive position stay at the forefront of technology and continue to win new work but that will be necessary for them to continue this mid-single-digit growth rate that we've got become accustomed to there. In terms of Defense, it's a little bit of a different story. There, we have been a flattish business and that has been because we weren't seeing significant growth in weapons. It was a pretty stable business and we were seeing the work in our aircraft modernization decline. What I expect to see going forward is that our weapons portfolio growth more than offset the declines in the other part of the portfolio and it will be a net grower for us. How much is dependent on how quickly that global demand that I talked about in today's call matures and also how successful we are in winning work on both new weapons development programs as well as second source on some existing programs. And I'm optimistic there. But this year will be really pivotal in indicating what we think the growth for that business will be. But we do see it being a growth business next year. Operator: The next question will be coming from Kristine Liwag Morgan Stanley. Kristine Liwag: With the debt ceiling standoff, there's been a lot of discussion of an extended CR in fiscal year '24 which tend to have more of a disruptive impact on programs that are ramping or transitioning. You've previously mentioned that you expect the first B-21 LRIP contract later this year as it transitions from development. But if the program award date slips past the end of September and into fiscal year '24, what could that mean for the program? Kathy Warden: For the B-21, because those funds were appropriated as part of FY '23, we don't believe that there will be an issue with them awarding that production lot. And as you look across our portfolio, we are used to navigating CRs. And so there aren't any major issues that I would point out to you if this is a short-term CR. But as the industry always points out, the longer a CR goes, the more those risks become material. I'm hopeful that, given the threat environment that Congress recognizes the importance of timely appropriations, I'm not saying we won't have a CR but I am hopeful that it won't be an extended period CR. But if indeed that's the case, we'll work with the government to address any issues that we see on individual and material program. Operator: The next question comes from Myles Walton of Wolfe. Myles Walton: Dave, I wonder if you could first size the loss of the JV and the favorable license in relative terms or absolute terms you like? And then maybe, Kathy, at a high level, I think this is the high watermark thus far for cost-plus mix, 54% in the quarter since the Orbital acquisition was done. And I'm curious if it keeps going higher from here or this truly is a high watermark? David Keffer: Well, why don't I start on the first and then I'll hand it over to Kathy. On your first question, we talked on the call about last year's $67 million EAC benefit on the B-21 EMD program in this quarter. When things get to that level of magnitude, well into the tens of millions, we tend to disclose and describe and quantify those in more detail. When we have things in the $10 million and $20 million [ph], as we do every quarter, as you'd imagine a business of our size, we tend to group those together and describe them as we have in this case, the benefit of the license sale and the downside from the JV. So, you can expect things like that to have been in that much lower range but still meaningful in terms of thinking through run rates and full year impacts. Kathy Warden: And Myles, I'll just add on to that before I answer your second question that if you look at our margins coming out of the gate for the year right where we wanted to be in segment operating margin adjusted for the pension impact which we've been talking about, hitting the programs in the first quarter. So we're not breaking that down by segment. If you took each of our 4 businesses and then accounted for those 2 minor exceptions which you just outlined and adjusted for pension, they be right in line with our guidance for the year. So we're not going to walk you through the exact math of each item that goes into that, that we can tell you that those segments all 4 are in the first quarter with those impacts we've outlined adjusted for right in line with where they need to be to deliver on their guidance. In answer to your second question, I do believe the quarter is a bit of a high watermark on our mix because we had some fluctuations just in production quantities within particularly MS that drove their mix balance higher on cost plus. We don't even expect that to sustain for the full year within MS. So we're going to probably end the year a little over the 50% cost plus which is where we had signaled we would likely be and that's still where we think we are. And we don't see a major shift in that for the next couple of years until, as we've said, these programs that are in development start to move into production, especially the bigger ones like B-21, Sentinel and some of the space programs, then you'll see a more material mix shift for us but it will be towards fixed price. Operator: The next question will be coming from Cai von Rumohr of Cowen. Cai Von Rumohr: Terrific. So Kathy, you mentioned that book-to-bill expected to be a little bit under 1x this year. But lots of times, key wins have small bookings to start off. So could you give us some color in terms of what are the key competitions or booking opportunities you see over the rest of the year? And what are the milestones we should look for? Kathy Warden: Yes. So it's a very intuitive question. As we look at 2023, there are not many competitive new awards or even down select. As I've talked about, we have a good bit of work in our portfolio where we are in a usually 2-horse race programs like NGI is a good example of that. But we don't see many of those this year. They become more substantive in '24 and even '25. And -- so we'll provide more color on those as we guide for '24 later this year. What I'll tell you about 2023 is that the majority of our sales this year are in backlog and we don't see much in the way of competitive new awards. It's really immaterial for us this year. Operator: The next question is from Robert Stallard of Vertical. Robert Stallard: Kathy, one for you. The Australian government put out a defense strategy report, I think it was earlier this week. And in there, they seem to be contemplated whether they thought they might buy the B-21 which is a bit of a surprise to me at least. I was wondering this might be a sign that the U.S. government is a little bit more open to the U.S. defense industry exporting some of its more sophisticated equipment, including Northrop Grumman? Kathy Warden: Yes, I'm glad you took the question the way you did. I was obviously expecting someone might ask, why didn't they buy it? And you're right on. It would be premature for the U.S. to be working with another government on the B-21 program. But I think it is important that there were discussions ongoing ones that if you would have told me a handful of years ago might happen, I would have been surprised to hear. So I think in particular and the opening of a strategic relationship on nuclear-powered submarines between the U.S., the U.K. and Australia is going to change how those 3 nations at least work together more collaboratively and I wouldn't take it off the table in the long run that other strategic capabilities become part of that dialogue. But with where the B-21 is today, I think it appropriate that they did not count on it in their defense strategic review. Operator: The next question is coming from Ken Herbert of RBC. Kenneth Herbert: Your acquisition of Orbital ATK, the timing in hindsight now seems to have been very good, just considering growth in Space and now what we're seeing in Missiles and Munitions. Within the broader sort of capital allocation context, are there other areas perhaps from an inorganic standpoint or acquisition standpoint that you think could fit in well with the portfolio? You obviously outlined a number of organic investments today. But how do you view acquisitions perhaps moving forward relative to the market opportunities? And at what point would you maybe look more favorably on inorganic growth? Kathy Warden: We certainly remain active in looking at opportunities to expand through acquisition. I would say that on the breadth of our portfolio and the strength of it, there are no gaps that I see an imperative to use acquisitions to fill those gaps that we are positioned to do so largely through both organic investing and external partnering which is an important tool in our toolkit. It doesn't require acquiring companies to have those very strategic partnerships with them, one of which we talked about earlier in the call with Firefly, for instance. But with that said, the regulatory environment is certainly top of mind when I think about execution risk associated with acquisition as well. So we take all of that into consideration and likely wouldn't see a path to do a significant strategic acquisition in the near term. Operator: The next question is coming from David Strauss of Barclays. David Strauss: Kathy, you mentioned the updated funding profile for B-21 and Sentinel that were in the budget. Specifically, I wanted to ask about B-21. It looks like there was some shift there where development dollars were added and production dollars were shifted to the right. So if you could comment on what that reflects, first of all? And second of all, what that could mean for your margin profile in the program, given your strong performance during the development phase? Kathy Warden: Yes, David. So you may recall, we had talked previously about our cost projections for the program were below independent cost estimates upon which the government needed to set their budget. You're starting to see that now reflected in the modifying those production budget. And you might see more of that in the future as we're hitting those cost targets that we have for the programs that are below their independent cost estimates. So that's what you see happening in production. The production funding they requested really supports the needs of the program as we and the government understand them today that is allowing them to ask Congress for more in the RDT&E accounts associated with modernization and beginning that modernization now. And I really want to complement the way the Air Force manage this programs. They are always thinking ahead and working with us on not just the current spaces we're executing but how we will execute the next phase of the program. So we have largely moved our way through EMD. Now we're starting production. We -- it's only natural that we would be looking at the modernization program and that's what you see reflected in their budgeting. And from a margin perspective, I know which is really where you want to go, yes, we do expect the margins on that work associated with modernization to be better than what we expect to get in LRIP production, so it will be a net positive to the overall B-21 margin picture. Todd Ernst: We have time for one more question. Operator: The next question and final question is coming from Peter Arment of Baird. Peter Arment: Kathy, just circling back to kind of how you kicked off the call talking about kind of increased demand signals on Munitions and some of the Missile Defense capabilities like IBCS. Just when we think about international, how do you think a lot of this growth starts to layer in? Is it more '24, '25 or in beyond? Or do you see some of this growth actually showing up more to the left of that? Kathy Warden: Yes. We see some of it starting to show up now. So I mentioned $350 million of awards that we received in the first quarter associated with weapons. And of course, IBCS, part of the Missile Defense portfolio, we are starting as that now has gotten full rate production approval to see that demand fill out not just here but with the Poland deliveries as well. So, some of that certainly is going to provide support to the Defense System sector in 2023. But we do see the majority of those opportunities later, '24, '25, as those programs scale. NGI is another good example where we have seen significant growth last year in this. We'll see somewhere into 2024 but the real opportunity there is after either a down select or a carry forward of 2 parties and moving into production in the later part of the decade. So thanks, everybody, for joining our call today. I also want to again extend my thanks and congratulations to our team for another solid quarter. We look forward to speaking with you all on our next earnings call in July. So Lisa, with that, we're concluding today's call. Operator: Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's call. And you all may disconnect.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's Fourth Quarter and Year-End 2022 Conference Call. Today's call is being recorded. My name is Norma, and I'll be your operator today. [Operator Instructions]. I would now like to turn the conference over to your host today, Mr. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Norma. Good morning, and welcome to Northrop Grumman's Fourth Quarter 2022 Conference Call. We refer to a PowerPoint presentation that is posted on our IR web page this morning. Before we start, matters discussed on today's call, including guidance and outlook for 2023 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call includes non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On today's call are Kathy Warden, our Chair, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone, and thank you for joining us. The Northrop Grumman team delivered another year of strong performance in 2022, positioning our company for the coming year and beyond. A growing global demand environment and the team's success in capitalizing on competitive opportunities drove exceptional bookings. Top line growth accelerated throughout the year, driven in part by improving labor trends. I'll note that we set our sales and EPS guidance ranges at the beginning of 2022, and even in a dynamic macro environment, we navigated the challenges to deliver at or above the high end of those ranges, and then importantly, to deliver capability for our customers. This performance highlights our solid operating execution, our ability to win new business and the alignment of Northrop Grumman's portfolio to our customers' priorities. We enter 2023 with a backlog of more than 2x our annual sales. This strong backlog, along with increasing demand and rising global defense budget supports our expectations for continued growth. Given this and supported by robust headcount growth, we have increased our 2023 sales guidance range from our October outlook. We are projecting solid segment margin performance that takes into consideration inflationary pressures and supply chain disruptions, consistent with the expectations we outlined on the October call. And we expect a greater than 20% compound annual growth in our multiyear cash flow outlook that supports continued investments in the business and significant returns of capital to shareholders. Before providing more details on our outlook, I'm going to highlight a few notable achievements from the previous year that underscore the tenets of our long-term strategy and illustrate our positioning for the future. In 2022, the James Webb Space Telescope proved its status as the world's most powerful space telescope and an engineering marvel. It achieved full operational status, shared first images in July and continues to discover and inspire with its incredible insights into distinct galaxies. This project is just one example of the technology innovation and leadership our team brings to our customers. And it has provided an excellent platform for attracting talent to our industry and our company. In 2022, we continued to win new competitive awards across the company, achieving a book-to-bill ratio of 1.07. Two notable new awards are the space development agencies tracking and transport layers. As our customers look to expand their resilient national security space capabilities, these programs leverage our advanced space solutions for low earth orbit and showcase our ability to compete and win programs across a range of missions. We also completed over 40 successful launch and space missions in the year, exemplifying our end-to-end capabilities in the space market and our ability to perform at scale. Further, our solid rocket boosters helped propel NASA's base launch system as part of the Artemis 1 mission with the largest human-rated solid rocket boosters ever built. We also received a $2 billion award for GEM 63 solid rocket boosters in support of Amazon's Project Kuiper. Together, SLS and Kuiper validate the robust investments that we've made in solid rocket motor capabilities. We also delivered advanced architectures that integrate sensors to provide unprecedented situational awareness for our customers. One example is our IBCS solution. After successful testing in the fourth quarter, IBCS is poised to transition from LRIP to full-rate production in 2023. IBCS integrate systems that weren't designed to work together, creating a seamless air and missile defense network and allowing customers to better utilize their defense assets. This capability is needed more than ever to address advanced threats and it's one where we've seen a significant increase in interest across our global customer base with 10 additional countries expressing interest in obtaining this system. We continue to keep our focus on innovating and leveraging our strong position in advanced technology. This includes the development of a new radar for the F-35. This radar is capable of defeating current and projected adversarial air and surface threats and is compatible with variants of the F-35 aircraft. And we capped off a strong year with the historic unveiling of the B-21 Raider. The B-21 is a multifunctional platform with unmatched range, stealth and survivability, and it will be the backbone of future U.S. air power for decades to come. We continue to perform well on the program and remain on track for first flight later this year. As the program transitions into low rate initial production, we are working to address macroeconomic conditions, especially related to inflation and their impact on material, suppliers and labor. Importantly, I want to highlight that our B-21 unit cost projections remain below the government's independent cost estimates. The program has strong support from the U.S. Air Force, Congress and our suppliers. And in the words of Secretary Austin from last month's rollout, "This aircraft is proof of the department's commitment to building advanced capabilities that will fortify America's ability to deter aggression today, and in the future." Our 2022 achievements underscore the breadth of our portfolio across a wide range of domains and technologies and the strong performance of the entire Northrop Grumman team. As we look forward, defense budgets are on the rise, and we see our global customers continuing to seek proven solutions to address rapidly evolving and increasingly sophisticated threats. We are meeting their urgent needs in areas such as air and missile defense solutions, medium and large caliber ammunitions and armaments, advanced radar capabilities and global surveillance to name just a few. And we are partnering to expand our opportunity set and positioning our international business for future growth. We clearly saw increased demand in 2022, and we continue to expect to grow our international business over the next several years. In the U.S., we are encouraged by the continued strong support for National Security, including overwhelming bipartisan support for a 10% spending increase in the fiscal year 2023 defense budget that was passed in December. Our portfolio and the capabilities we offer are well supported by the administration and Congress. Growing security challenges will test our resolve in ways not seen for a generation, and we are confident this administration and the new Congress will find ways to work together to meet them. We expect the President's fiscal year 2024 budget request to support robust funding for the highest priority capabilities outlined in the National Defense Strategy. And our strategy has positioned us well. We're clearly maintaining our technology leadership and growing our portfolio of offerings, which is aligned to customer priorities. Another key element of our long-term strategy is keeping a laser focus on performance and driving cost efficiencies throughout the business. The current macroeconomic environment reinforces the importance of doing so. An example of our effort is the implementation of digital solutions across the company. Beyond the benefit of transforming how we design, test and manufacture the next generation of systems, our digital initiatives are streamlining business functions and increasing productivity. We are also optimizing our facilities and consolidating our real estate footprint. Every day, we seek new and innovative ways to drive performance and increased efficiency while remaining agile and meeting our customers' expectations. Our capital deployment strategy supports our business strategy. We are investing to not only drive efficiencies but also to allow our customers to stay ahead of the threat environment. In 2022, we invested over 7% of revenue in R&D and capital expenditures to provide the capability and capacity needed to address the threats of today and tomorrow. We also continue to return cash to shareholders. Last year, we increased our dividend by 10%, which was the 19th consecutive increase. And during the year, we delivered over $1 billion to shareholders through the dividend and returned another $1.5 billion through share repurchases. So looking forward to 2023, we are well positioned for continued growth, and our revenue outlook has improved from the high $37 billion range we shared in October. We now expect sales to be in the range of $38 billion to $38.4 billion, representing about 4.5% growth at the midpoint. Margins are expected to remain solid in the 11.3% to 11.5% range. We are projecting strong free cash flow growth that supports our capital deployment strategy. And we expect to return more than 100% of free cash flow to shareholders again in 2023. Our backlog, strong recent global demand growth and our ability to deliver products that address an increasingly complex security environment give us confidence in our outlook. So with that, I'll hand it over to Dave to cover the details of our financial results and more on guidance. David Keffer: Okay. Thanks, Kathy, and good morning, everyone. I also want to thank our team for another year of strong performance in 2022. We won several new franchise programs, delivered industry-leading top line growth and bolstered our talented workforce, with the addition of over 6,000 net employees during the year. I'll spend a few minutes on our fourth quarter and 2022 results and then discuss our future expectations in more detail, including our long-term cash flow projections. We ended the year with nearly $79 billion in backlog, reflecting strong demand for our products and capabilities. We continue to convert our backlog into revenue at an accelerating rate with fourth quarter sales growth of 16%. This was enabled by our ability to continue strong hiring in Q4 as well as a higher volume of material receipts based on the timing of program demand. The team did an outstanding job of working with our supply chain to secure program material. And for the full year, our sales grew to $36.6 billion, representing organic growth of 3% and exceeding our prior expectations. Our operating performance and margins remained solid despite the continued pressures of the macroeconomic environment. Our segment operating margin rate was slightly below our expectations at 11.3% in Q4 and 11.6% for the full year due in part to the impacts of inflation, which resulted in a lower level of net earnings adjustments. But margin dollar volume was very strong given the top line outperformance. A positive EAC adjustment in the quarter was on B-21, where we recognized a $66 million pickup on the EMD phase of the program, reflecting our latest assumptions regarding future incentives in that phase. Continuing with our Q4 results. Our transaction adjusted earnings per share were $7.50, a 25% increase over the same period in 2021. Higher EPS were driven by robust growth in our segment top and bottom lines as well as a lower effective tax rate. The lower Q4 tax rate was driven by the recognition of an $86 million benefit from the resolution of a legacy Orbital ATK tax return, which we previewed in our guidance last quarter. And corporate unallocated costs were also below our expectations due to lower state taxes as a result of the R&D tax amortization law not being deferred. For the full year, our transaction-adjusted earnings per share were $25.54, well ahead of our guidance range. Now turning to cash. We had an extremely strong fourth quarter, consistent with our historical pattern. For the year, we generated $2.9 billion of operating cash flow and $1.6 billion of transaction-adjusted free cash flow, in line with our expectations. This was inclusive of a full year of cash taxes associated with the R&D tax amortization law as well as our final payment of deferred payroll taxes from the Cares Act legislation. Moving to our pension plans. Slide 7 in our earnings deck includes our latest assumptions. After 3 consecutive years of double-digit asset returns, our plans declined by roughly 15% in 2022, in line with market trends. Our FAS discount rate increased roughly 250 basis points to 5.54%, which was the driver of the mark-to-market pension benefit of $1.2 billion reflected in our GAAP results. These factors are also reflected in our latest pension estimates for 2023 to 2025. As we previewed last quarter and updated in our slides today, we're projecting a decline in our noncash net FAS pension income and an increase in our estimated CAS recoveries. In total, our pension plans remain strong. As a result of the higher discount rate, our funded status has improved to nearly 100%, and we continue to project minimal cash pension contributions over the next several years. Now turning to 2023 guidance. Our revenue expectations have increased from our prior estimates, with the midpoint representing nearly 4.5% growth on top of the strong level in 2022. We expect Space Systems to remain our fastest-growing business. Sales are projected in the mid-$13 billion range, up over $1 billion from 2022 levels, with GBSD and NGI contributing nearly half of the growth and the rest coming from our broad space portfolio. Mission Systems sales are expected in the high $10 billion range, up mid-single digits, driven by restricted programs in our Networked Information Solutions business. And we continue to expect flattish sales at both Aeronautics and Defense Systems. While programs like B-21 and IBCS continue to grow, headwinds remain on legacy platforms as systems are retired. We expect Aeronautics and Defense Systems to return to growth in 2024. And similar to our cadence in 2022, we expect first quarter sales of approximately 24% of our full year estimate, with sales ramping again throughout the year. With respect to margins, we expect our 2023 segment operating margin rate to be down roughly 20 basis points from 2022 levels. Challenging macroeconomic conditions, including extended lead times in the supply chain and high levels of inflation continue to put temporal pressure on margins. And while higher CAS recoveries provide a modest benefit to our cash flow in the coming years that create pressure in our overhead rates and EACs. Similar in nature to what we experienced in the first quarter of 2021 when we recognized a favorable impact from lower projected CAS costs, this could lead to an unfavorable margin impact when we update our rates this quarter. We notionally expect this to have a 10 to 20 basis point impact on the full year. In regard to the B-21 program, we expect the 2023 contract award for the first of 5 LRIP lots with the LRIP phase scheduled to run through approximately the end of the decade. We're continuing to work with our customer to address macroeconomic risks and enhance efficiencies in the program. As we've described in our 10-K, we do not believe that a loss on the LRIP phase is probable and therefore, no such loss is reflected in our results or guidance. Now turning to our future outlook. We expect our 2023 earnings per share to range between $21.85 and $22.45 based on approximately 153 million weighted shares outstanding. This includes $450 million of net pension income, which represents a $4.30 per share headwind compared to 2022. Partially offsetting this nonoperational headwind is strong growth in segment performance and the lower share count, which adds roughly $0.90 of additional earnings per share and lower purchase intangible amortization largely offsets the higher tax rate. Moving to cash. We expect 2023 adjusted free cash flow between $1.85 billion and $2.15 billion, consistent with our prior outlook as adjusted for current R&D tax law. Although we expect discussions to continue on Capitol Hill, our guidance and multiyear outlook are now based on current tax law for all years and do not include any refunds for R&D taxes paid in 2022. Capital expenditures are expected to remain elevated at $1.65 billion to $1.7 billion in 2023 and a similar level in 2024 before moderating in 2025 and beyond. This is driven by investments to support several large new business wins from 2022. Our guidance assumes we will not have an extended CR, a breach of the debt ceiling or a prolonged government shutdown as this is our current expectation. Slide 12 in our earnings deck provides our long-term cash outlook, which is predicated on continued top line growth in our business generating strong and gradually expanding operating margins and converting those margins into cash. R&D-related cash tax payments should decline by about 20% per year. As I described, CapEx is expected to remain near 4.5% of sales in 2023 and 2024 before starting to decline in 2025. After investing in our business, we continue to expect to return more than 100% of our free cash flow to shareholders in 2023 in the form of dividends and share repurchases. And we plan to be in the market for new debt issuance soon to support our capital deployment plans including the refinancing of near-term maturities. In summary, 2022 was another successful year for Northrop Grumman, and we continue to deliver value for our customers, employees and shareholders. And with that, we're ready to take your questions. Operator: [Operator Instructions]. Our first question comes from the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: Kathy, you mentioned in your prepared remarks that the B-21 cost estimated is below the government estimates. But as Dave mentioned, there are macro and inflation cost pressures. I mean this comment really stood out to me since in the past decade, we've seen many large defense development programs exceed costs and not just by a smidge but meaningfully. Can you provide more color on what the Northrop team is doing to manage this risk and how we should think about the LRIPs through the end of the decade? And what are puts and takes in terms of potential risk? Kathy Warden: Yes. So as we noted, we are performing exceptionally well on the B-21 program, and we have continued government support for the quantities of at least 100 that are represented in the program of record. But given that this contract was initially awarded in 2015, the recent and really unprecedented macroeconomic impact of inflation, labor, supply chain disruption has affected the cost estimate to perform on the LRIP phase of the program. And importantly, we noted our projected cost per unit are still below the government cost estimates upon which the funding profile is based. And that's important because it supports the overall buy plan of the U.S. government. And just to, as a reminder on timing, the government hasn't yet exercised any of the LRIP options. So like we do on any price options, we continue to look at what the future may hold and reflect that in our estimates that complete, but those are indeed estimates of cost and future performance. So while -- as we note in the K , we don't currently consider a loss on LRIP to be probable, if it were ultimately to occur, it would spread over all 5 lots of the program. And particularly, that's important related to any cash flow impact. So as we look at 2023, we do not see that as material in our cash flow outlook. And even as we put together our 3-year cash flow outlook, we wouldn't see that as being material. So hopefully, that gives you a sense of what is contributing to B-21 cost estimates. Inflation clearly is the primary driver there. as we think about what's changed recently in our estimates, and we are working to mitigate those impacts, as you say, and we have some time as we move forward and get into production to continue to do that. Operator: Our next question comes from Ronald Epstein with Bank of America. Ronald Epstein: Maybe my first question is on space. The performance there is better than I think anybody was anticipating. What's underlying that? And how should we think about that going forward maybe even beyond 2023? Kathy Warden: Yes, Ron, you are stating it accurately the performance there has been better even than we expected, and it's largely driven by more success in competitive wins than we had anticipated. Generally in all of our business, we project a certain amount of success, particularly in competitive environment. And here, we've just done better than we anticipated. And so that's driven sales upside and the very strong book-to-bill that we've had in that business where their backlog now is more than 3x sales and supports our projections for long-term, steady and durable growth. Ronald Epstein: And then you mentioned in your -- just as a follow-on in your prepared remarks that your growth has been supported by your ability to hire folks. How has that been -- I know, I mean, it's kind of across the entire industry and your supply chains, getting labor has been difficult, particularly skilled labor that's kind of up to spec. How have you guys been able to do that? And what's underlying that? Kathy Warden: It has been a key driver to generating 16% sales growth in the fourth quarter, in particular. We noted in the third quarter of last year that we were starting to see labor trends change in a favorable way. Our hiring had improved. Our retention had dramatically improved, and we saw that trend continue in the fourth quarter. I think a few things contribute. We hire technology skills that are very akin to what the technology sector employees, and we've certainly seen softness in that sector that has led to a significant increase in applications to Northrop Grumman. But I'd also like to think it's to do to the reputation of our company as being a technology innovator and the successes that we were able to showcase last year like James Webb and the unveiling of B-21 really spiked interest in applications to -- for employment at our company. And so those 2 things in combination are certainly working in our favor in a differentiated way. Operator: Our next question comes from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Just a follow up on an earlier comment. In the past, I think you've talked about 12% margins in 2024 and the 2023 guide is 11.5% or so. As you think about sort of inflationary pressures, what are you watching? And you mentioned some of the B-21 items as an example. So what sort of offsets that to get to that 50 basis points of expansion? Kathy Warden: As we've noted, we had talked about 12% being the fundamental margin rate that we believe this business, this portfolio can perform at, and we would be working our way back to that as particularly mix becomes less of a headwind in the middle of the decade. We still see that. But we are having these temporal pressures related to inflation that are flowing through all of our programs, B-21 most notable because of its scale and that we did it very long ago. As we think about how we are offsetting those costs, we talked about some of those ways today. We are working to digitally enable our business, which reduces program costs directly and improve profitability. But we also are applying that to our back office to streamline business processes and reduce costs that flow into our overheads also making our rates more competitive. And reducing the impact of cost growth. So those things that -- real estate has been key. You saw today, we talked about a few things that we did in the real estate area already in 2022, but we have many more of those lined up as ways to continue to offset any cost growth that we see and drive towards those higher margins. Operator: Our next question comes from Richard Safran with Seaport Global. Richard Safran: Kathy, Dave, Todd, I think we probably all agree the stock right now seems to reflect the idea that defense is going to be a bill payer as we move to a period of deficit reduction. And I realize this question puts you a little bit on the spot forecasting government spending. But I wanted to know if you'd expand on your optimistic opening remarks. Talk about your macro outlook relative to what seems to be being priced into your stock? And if you think modernization might be sacrificed as part of the budget negotiations? Kathy Warden: Yes. So we look at the stock price over a longer time horizon than weeks, and we've consistently outperformed the industry on a relative TSR basis over the long term. But as you indicate, -- we've seen some pullback in the last several weeks across the sector and even more so with Northrop Grumman. I am a little surprised at the level of relative pullback we've seen given our strong continued results, our growth outlook and the relative portfolio positioning that we have in the U.S. and internationally. And to answer the second part of your question directly, I do not see the U.S. or our allies pulling back on funding their national defense strategy that is well aligned with the Northrop Grumman portfolio. So I'd sum it up by saying, with a strong backlog, growing global demand for our products, differentiated technology and the ability to attract and retain top talent, we're really well positioned to continue executing on the strategy that we have that is expected to deliver differentiated growth and a potential to generate greater than 20% free cash flow growth for at least the next several years, and we believe beyond. So I think investors are going to like that. And we've been in periods like this before following sequestration, where there was noise in the system related to the government's commitment to national security. But following that, it was one of the best periods of relative TSR growth at our company, and really, our industry has produced in a while. So I see this as a temporal speed bump in our past and yet our strategy remains strong to deliver value. Richard Safran: Just as a quick follow-up on inflation. The comments on the B-21 that you've been making, is there a general trend here is when your contracts you're signing right now with the government, are they generally accounting for inflationary effects or are you not finding that? Kathy Warden: So our customers are engaging in conversations with industry to understand to motivate our investment in future capability and capacity, that is what they really want. And I think many of them now understand that shifting too much risk to industry doesn't support that investment, nor does it deliver the capability they need in a timely fashion. So with that, I expect we're going to see less the price development going forward. And they are specifically to inflation, the industry broadly is pushing back on accepting long-term fixed price contracts right now. And they're asking for reopeners for inflation. We expect that to continue. And as our suppliers ask us for that, we, of course, are passing that on to the government. And really, that's just common sense. So I believe it will become the norm. Operator: Our next question comes from Douglas Harned with Bernstein. Douglas Harned: Last year, you had a decline in Aeronautics that we understood pretty well because you've got quite a few legacy programs that were ramping down, like JSTARS Global Hawk. When you look at this year, with your fairly flat guidance for Aeronautics, how do you look at the pluses and minuses when we look at B-21 growth but you still got some legacy programs that are declining. How do you see those offsetting each other? Kathy Warden: So Doug, this year is really a continuation of those same trends flowing through the top line. The programs that have been declining. We've seen the majority of those declines, but they do still flow into the '23, '22 compare. So it is things like Joint STARS and Global Hawk. F-35 being a big revenue contributor in AS is relatively flat. So that ties directly into the narrative about their revenues being flat. And then B-21 is an increase, but it's not a significant increase yet because we're just moving from EMD into LRIP and these 2 combined are not a significant increase in the program as of yet. Douglas Harned: Well, and then on a slightly different topic. When you look at rocket motors, and this is an important area for you. And I'm trying to picture what the growth trajectory looks like. And also just in a sense of your market share, you've got 1 competitor that is a mature player. There are new entrants coming into the space. How do you see the long-term evolution of your market share and how you're positioned in that area? Kathy Warden: So we stay focused on investing in the future capability needed and more so lately in the capacity needed. And in many ways, the reason we are being asked take on more share of the market is because we've been investing in this business and are able to take on that additional business because we have outfitted our manufacturing facilities to support the growth. As with the government is asking, we have been responsive. And so as a result, we are winning more business in that area. But we expect to be able to compete even as other new entrants come into the space because we do have a long heritage of expertise that contributes to our solid rocket motor business. And that's for all size, as I talked today and highlighted some of the larger solid rocket boosters that we build in support of SLS and GEM 63 for Kuiper. But that's true in businesses like [indiscernible] , where we are taking on more of the needed capacity because we've been investing in our manufacturing capacity there as well. Operator: And our next question comes from Seth Seifman with JPMorgan. Seth Seifman: I wonder if you could talk a little bit about the profitability in the space business. The margin guidance came down there, margin rate guidance came down there a couple of times during the year. And it's kind of perceived to be kind of a 10% business, I think, is what we've talked about in the past and looking to a second year in the mid-9s here in 2023. So what's changed there over the past year? David Keffer: Seth, it's Dave. So I think you pointed out accurately that we're now projecting a margin rate for space in the mid-10s going forward. There were a lot of puts and takes in that margin rate upward and downward throughout 2022. Obviously, it's a rapidly evolving business, a tremendous amount of backlog growth and new program activity added into that portfolio over the last couple of years. So we're really pleased with the volume we're adding both at the top line and the bottom line in that process. Obviously, a lot of new cost type work being added to that portfolio and that mix growing, but also work that will evolve toward fixed price over the next couple of years and some new fixed price programs in that mix as well. So in aggregate, we think the mid-9s is the right way to look at 2023. In the coming years, we do see the opportunity for margin rate expansion. But I think the most important takeaway for the space business is that the volume of top and bottom line growth that we've been delivering over the last couple of years and now are projecting over the next few is really adding a lot of value there. Seth Seifman: Okay. Okay. Great. And then just as a follow-up, Dave. So the working capital performance was quite good in '22. I think the way that measuring here. Working capital actually came down a bit despite the growth and despite the tough operating environment, only 6% of sales, which is below some of your peers. What's the opportunity from here? Or is there kind of a normalization at some point where actually for a growing business, the normal level of working capital is higher? David Keffer: So let's talk about that for a few minutes. There is not a substantial change in working capital projected in the 3-year free cash flow guide that we gave today. There is more capital intensity in 2023 and 2024 that we've signaled throughout this year, given just how much more new business we were awarded this year and the additional capital investments that we need to make to support capacity and capability there. We've talked about things like the Amazon Kuiper Award and and other areas of the business that Kathy just noted, we're making investments upfront for these long-term franchise programs. So that is a headwind to free cash flow. But we're pleased to be able to offset that and deliver free cash flow guidance for '23 that's in line with our prior expectations. That's supported by the growth of the business, both top and bottom line. The R&D tax numbers will come down steadily over the next 5 years. And then gradually, over the next several years, we'll see improvements in the CAS pension cost reimbursement based on current projections. So not much change in working capital, but there are some other moving pieces in the mix. I think importantly, when we look at the underlying fundamentals of growth and margin rate, as we talked about in our scripted remarks, we do anticipate growth through this 3-year outlook that we've provided at the top line, and we are modeling small but gradual improvement in the margin rate as well. So that's a healthy underlying condition for free cash flow. And while we're at it, as we think about this outlook for free cash flow, the foundation is set for strong free cash flow beyond this 3-year period. The second half of this decade will have more programs moving to production, fewer of these upfront investments required to do so. The foundation we've laid over the last several years of capital investment is going to pay off in the second half of this decade on many of those programs. And so that's a healthy environment for continued growth in free cash flow as well as the continuation of the R&D tax amortization rolling off as a headwind. So when you look at the second half of the decade, I think your expectation should be more of the same strong growth in free cash flow that we've been talking about in the first half. Operator: And our next question comes from Myles Walton with Wolfe Research. Myles Walton: I did have a couple of follow-ups on the B-21, if that's okay. And Dave, I think you alluded that the first LRIP contracts to be awarded in '23. I'm just curious, is that sort of the triggering event or whether or not you'd know you're in the loss or not at that point? And then Kathy, I know you said the 10-K disclosure is over the 5 LRIP lots. But I'm just curious, is it tougher at the front end of those lot profiles? Is it more promises at the back end that you'd have time to fight off inflation? Anything on those 2 fronts? David Keffer: Sure. I'll start on your first of those questions. The award of that first lot of LRIP will be a noteworthy event but not a triggering event of any kind from an accounting perspective. We will update our projections quarterly as we have been. We'll continue to do so. And so at this time, we don't believe that a loss is probable and therefore, we have not booked one. We do believe that a loss is possible, which is why we're including it in our remarks and our 10-K disclosures. It's something we will continue to work over time. Obviously, this is going to continue for a number of years. As Kathy has talked about, we'll continue to do everything we can to mitigate inflationary pressures and work with our customers and our suppliers in the process. Kathy, anything you'd like to add? Kathy Warden: Sure. So in answer to your second question, we do expect to have a better sense as the year progresses, and we'll update disclosures as we do. And as we look at the profile, there's nothing really notable. To your point, we have more time to work cost efficiencies in the later lots. But of course, we made some more aggressive assumptions about learning curves and the like as we would on any production program. So really nothing notable in the profile and how you might think about any potential loss in spread. Operator: Our next question comes from Robert Stallard with Vertical Research Partners. Robert Stallard: Dave, I've got a couple of cash flow questions for you. First of all, on basically cash taxes with the R&D tax legislation impact. What sort of tailwind are you expecting from this -- from 2023 and onwards? And then secondly, what are your assumptions for equipment sales in that cash flow guidance for 2023 or for the whole period? David Keffer: Sure. Thanks for those questions. The answers are pretty straightforward. As we noted, the impact on our cash taxes in 2022 from the R&D tax legislation was just under $1 billion. We would anticipate that being about 20% less per year, just under $200 million or so on average less per year. And so that is the magnitude of the annual tailwind that we'd anticipate for the next 5 years or so. Overall, cash taxes, excluding the impact of that R&D tax amortization will increase slightly over the coming years, but that's factored into our multiyear outlook. And as for equipment sales, I appreciate the question there. We received the final payment associated with the equipment sale that we booked a couple of years ago in 2022. And so we don't anticipate we're having our multiyear cash flow outlook, any continued recoveries from equipment sales. Operator: Our next question comes from the line of Cai von Rumohr with Cowen. Unidentified Analyst: This is actually Jack on for Cai today. Just a quick question back to kind of the Section 174, Dave, I know in the past, I'm not sure if you quantified that if you could actually provide that dollar figure if you could. I know it steps down 20% each year. But looking back at your guide from last year at this time for '24, it looks like a larger delta than an implied $700 million headwind. So just to confirm, is that incremental CapEx going higher? Or if you could just provide some color there, that would be helpful. David Keffer: Sure. I appreciate those questions. I think you have to the air math about right on 174. It was just under $1 billion in 2022, and it will decline by just under $200 million a year on average going forward. In terms of that 2024 guide, you're right that our CapEx expectations increased a bit given the volume of new business that we won this year that we'll be investing in going forward. No other material changes to 2024. We do anticipate growth as we've seen in '24 and then a real ramp in '25 as CapEx begins to decline, and you have the tailwinds as well in '25 and beyond from R&D tax, CAS pension recoveries and the underlying growth in margins in the business. Operator: Our next question comes from Peter Arment with RW Baird. Peter Arment: Kathy, within Aeronautics, the service mix continues to be a bigger part of the story. I guess it's now about 22%. If you finish 22 and look, that's up from the mid-teens the last few years. Obviously, there's some puts and takes on why that is. But just wondering if this trend is going to continue and how you think about the impact on margins? Kathy Warden: Yes. So we do expect the trend to continue in terms of -- as assets get into service, we continue to support. But we also have assets like Global Hawk that are coming down. So I don't see a material change in that mix as we look forward, Peter. Operator: Our next question comes from the line of Ken Herbert with RBC Capital. Kenneth Herbert: Kathy, in your opening comments, I think you maybe called out international opportunities, perhaps a little bit more than I can remember from recent quarters. Can you help frame maybe how much of an uptick in international opportunities could be reflected or international sales could be reflected in the '23 guide, if that was all a part of any of the upward revision -- and then as you think about beyond '23, how meaningful is international in terms of an uptick for you? I know historically, obviously, it hasn't been as meaningful as part of the mix of some of your peers, but maybe you can comment on that expanding opportunity set? Kathy Warden: Yes. Thank you. So in the fourth quarter, we did see some meaningful uptick in Defense Systems, and you can see that reflected in our results, both from the areas that I outlined in this call related to ammunitions and armaments but also increased interest in IBCS, and we have the current Poland work continuing to ramp but the 10 additional countries that I've noticed that have expressed interest. So as we think about the near-term drivers, it's the things that we already have in production. But as we think about the longer-term drivers is areas like IBCS future sales. And we are seeing that interest increase across the business, but most notably in '23, I think you will see that reflected as upside opportunity in defense. As we look at the enterprise over the next several years, we do expect our international growth rate to be double-digit, low teens compared to a U.S. growth rate that more in the norm of our mid-single digits. So as we think about international, we do expect it to grow as a percent of our portfolio in the next several years. And that's all based on international demand growing as a result of increased spending confirmations made by our allied partners. Operator: Our question comes from Scott Deuschle with Credit Suisse. Scott Deuschle: Kathy, if I go back to 2018 when the group sold off quite a bit, Northrop got pretty active on buying back stock. And I think you even launched an ASR, if I recall correctly. So I'd be curious if that would still be your playbook this year if the valuation continues to come down? And whether you might lean on the balance sheet to do so just given the track record of having run a valuation-sensitive buyback program? Kathy Warden: Yes. Well, as you note, we have used ASRs as the tool in the past. And as we indicated in the call today, we do plan to put more than 100% of our free cash flow back into the deployment to shareholders. The fact that our valuation is down, really, we don't try to time the market per se. But we do think about that as we are kind of weighing our options for capital deployment this year, and we do have the flexibility to increase share repurchase from our original plan. So that is something we're actively contemplating. Operator: Our next question comes from George Shapiro with Shapiro. George Shapiro: Dave, I had one for you. In the operating income discussion in space, you had a big gain, $45 million charge. And you said it was all -- the $96 million gain only partially offset the lower EACs. When I look at the K for the year, you had minus $38 million in space versus $134 million last year. So if you kind of just discuss what happened in the quarter and just why such a significant change year-over-year? David Keffer: Sure. Well, that's a great question, George. Clearly, that's an indication of the broader macroeconomic conditions that we in our industry, and frankly, most other industries we're facing in 2022, and in our business, it impacted the level of net EAC adjustments in really each of our sectors in different ways. And you see it acutely there in space, as you mentioned. A number of those EAC adjustments were in the fourth quarter. And that kind of -- the net of all those puts and takes to include the inventory adjustment on a new commercial product line that you mentioned was another downside in Q4. Those were roughly offset by the upside from the land exchange transaction in space. So a number of puts and takes, but when you net it all out, not much overall impact on the space margin rate in Q4 or for the year. We're forecasting a rate just above that level that we operated at in '22 as we now look at '23. And as I noted earlier, something in the mid-9s is our kind of going forward expectation for '23 margin rate in space. George Shapiro: But Dave, it's still unusual to see negative EACs for the year. So I was just wondering, are there any specifics that you could point to maybe was for the year or just for this quarter? David Keffer: No single item was a driver of that of much more significance than any other. I think that alone, George, is an indication of the fact that this was more in line with broader macroeconomic pressures as opposed to any performance issue or contract issue in any particular program. This was broader and more widespread, but not significant on any one program in and of itself. And again, I think really just indicative here of the environment we were operating in, in a business with a lot of programs, a lot of new growth in recent years to be excited about. George Shapiro: Okay. And then just one general one for you, Kathy. I mean, with the better sales growth you're guiding to in '23, a result of the budget or new awards won or both? And then also, with 16% sales growth in Q4 and outlay is likely to grow 7% or 8% in '23 based on the budget investment authority of 15. Why does the growth rate slow that much in '23? I mean why wouldn't it be higher than what you're suggesting? Kathy Warden: Yes. So as we noted throughout 2022, if we could break loose supplier deliveries and continue to improve labor trends, we could deliver accelerated growth. And fourth quarter exemplified a path to doing just that. As we come into 2023 with that momentum, the same holds, we are confident enough in our sales expectations as we sit here today to raise them above what we had said in October, largely because we are seeing those improvements in labor in particular. And if those trends continue, we would have opportunity to even further accelerate growth in 2024. The budget does not play into this. We had assumed strong budget growth. It, of course, came to fruition in the '23 budget, and we continue to believe the '24 President's budget will also show growth. Todd Ernst: Norma, we have time for one more question. Operator: Our next question comes from the line of David Strauss with Barclays. David Strauss: Great. A lot of discussion on B-21 and EMD and LRIP. Just -- how should we think about what happens to AS margins over the next couple of years as I assume EMD flans out or starts to come down where you've been taking positive adjustments and LRIP ramps up from here? David Keffer: David, I'll start on that one. Our margin rate was particularly high in AS in 2022. That was driven in part by the strong performance on those EMD profit pickups associated with anticipated incentives on that part of the program. We projected a 10% or so level for AS margins in '23 and expect that, that's a reasonable kind of planning assumption at this point for '23. And as we look forward beyond that, a lot of the factors that are working into the '23 estimate would be those that we'd expect to continue beyond '23. So of course, we'll update you over time. You mentioned B-21 EMD program will -- a portion of the contract will continue for a number of years on LRIP. We haven't baked any margin or cash in that part of the program into our multiyear outlook or our '23 guide. So we think that 10% level is the right way to think about kind of the underlying margin rate in AS in the near term. David Strauss: Okay. And Kathy, maybe your thoughts on what bookings could look like this year, what you're anticipating for the book to bill this year? Kathy Warden: Yes, David. So we had projected book-to-bill to be light in 2022, and it turned out to be 1.07. We are projecting it to be light again in 2023. I've noted before, we look at this over a multiyear period. We've been running at 1.2 for the last 4 years aggregated across those 4 years. So we still expect to be well over 1 when we think about a 5-year aggregated book-to-bill, but we do expect 2023 to be less than 1. Todd Ernst: All right. Great. Thanks. Kathy, over to you. Kathy Warden: So look, 2022 was another year of outstanding performance by the Northrop Grumman team, and I want to thank them. As we reflected on our call today, we're even more encouraged with the opportunities for continued growth and value creation for our company in 2023 and beyond. So hopefully, that conveyed to you. Thanks again for joining our call today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Operator: Good day, ladies and gentlemen. Welcome to the Northrop Grumman's Third Quarter 2022 Conference Call. Today's call is being recorded. My name is Michelle and I will be your operator today. [Operator Instructions] I would like to turn the call over to your host, Mr. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Michelle. Good morning, everyone and welcome to Northrop Grumman's third quarter 2022 conference call. We'll refer to a PowerPoint presentation that is posted on our IR web page this morning. Before we start, matters discussed on today's call, including guidance and outlooks for 2022 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On the call today are Kathy Warden, our Chair, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone. Thank you for joining us. The Northrop Grumman team delivered another quarter of solid performance. Our top line returned to growth with continued strong execution. Demand for our products remained robust with a book-to-bill ratio of near 1, including a number of key awards in our restricted and Missile Defense portfolios. And we remain on track to deliver strong results for the year, with growth expected to accelerate as we look toward next year. Taking a step back for a moment from the quarter, I'd like to start with an update on the global security environment. Earlier this month, the Biden administration released its full version of the National Security Strategy which is used as a guide for policy and budget decisions. The strategy spotlights the dynamic and challenging threat landscape around the world and stresses the importance of working with allies, maintaining a strong industrial base and continuing to invest in advanced technology. It also reinforces the triad as a top priority. So, it's clear that Northrop Grumman's portfolio continues to be extremely well aligned with the requirements outlined in the National Security Strategy. This is reflected in the administration's fiscal year 2023 budget request which showed alignment with these priorities and strong support for many of our key programs. Throughout this summer, congressional committees marked up the administration's defense budget request, generally increasing the proposed level of funding with the intent of strengthening the country's defense posture and addressing the impacts of inflation. Based on these additions, we believe that the ultimate fiscal year '23 base defense budget will be higher than the President's budget request. And as you know, we started off this fiscal year in another continuing resolution which currently extends to mid-December and this is factored into our guidance. We are confident in our program funding positions and hopeful that the annual budget will be passed by year-end. Meanwhile, global commitments to invest in Defense and National Security capability continue. In Europe, we've seen increased demand for our Integrated Air and Missile Defense solutions and precision weapons and advanced ammunition. In the Asia Pacific region, we've seen similar interest in Air and Missile Defense as well as Maritime ISR, Advanced Radar and other Mission Systems. All this points to a strong demand environment for Northrop Grumman. And we're doing our part by investing in solutions and capacity to address many of our customers' most pressing needs. This year, we expect to invest over $2.5 billion in CapEx and research and development. And as a result, we're winning new business and bolstering our backlog for long-term growth. Our backlog has increased year-to-date in each of our 4 segments and is up nearly 5% overall. Given this, we now expect that our full year 2022 book-to-bill ratio will be over 1, a significant improvement from where we started the year. This increase is attributed not only to the robust defense budget environment but also a strong competitive win rate. That said, we recognize that our industry and many others are experiencing macroeconomic volatility that we haven't seen in decades. Inflation remains at 40-year high, lead times have been extended in certain areas of our supply chain and the labor market shows signs of easing but it remains tight for critical skills. Our team is tackling these challenges, keeping a focus on our people and performance and driving efficiencies across the business. In the labor market, we've driven improvements in hiring and retention over the past several months which Dave will describe in more detail. This was instrumental in our return to growth in the third quarter. And it's worth noting that this favorable trend has continued into the fourth quarter as well. This supports our full year 2022 guidance and our outlook for accelerated sales in 2023. In the supply chain, we continue to experience disruptions in delayed deliveries in certain areas of our business which we have -- that has been a headwind to growth. It's a risk that we're closely monitoring and we're working with our suppliers to mitigate. But we do anticipate that supply chain challenges will continue in 2023 and this is now reflected into our 2023 outlook. Elevated inflation levels in both labor and supply chain has persisted more than expected as we came into this year. To address this, we are implementing operational efficiencies and working with many of our customers on program funding and other contract actions to support the health of the defense industrial base. We believe this balanced approach is the best solution to allow continued investment in the capabilities to support our customers' mission. With that said, we see these as temporal challenges and remain committed to driving our segment margin rates higher over time. Turning now to the execution of our long-term strategy. One of the key elements of our strategy is a relentless focus on performance. That's why I was particularly pleased to receive the 2022 Deming Cup for operational excellence on behalf of Northrop Grumman earlier this week. The award recognizes our achievements and leadership in creating a culture of operational excellence and continuous improvement across the company. Our customers recognize this commitment and have entrusted us to deliver some of the most technologically advanced next-generation systems and solutions. The B-21 Raider is 1 such example and we're excited to unveil the aircraft to the public on December 2. The B-21s outstanding performance can be directly tied to our company's investment in digital tools and facilities and the incredible U.S. Air Force and Northrop Grumman team, who are developing this sixth-generation platform. The program continues to progress through testing in preparation for first flight in 2023. Last month, we announced a data sharing agreement on B-21, enhancing data access and collaboration across the program, including the launch of a shared environment for the B-21 digital twin. This data sharing agreement enhances our partnership with the Air Force and further demonstrates our digital maturity on the program. Our Mission Systems solutions are another area of our portfolio where innovation is critical to success, where the fast pace of threats and new technologies is driving the need for platforms and sensors to be able to connect with one another, share data and be part of a broader family of systems. In this growing market, we're building on our strong position in sensors, secure communications and networking to compete for and win new opportunities. For example, last month, we were selected to be a member of the Air Force's ABMS Digital Infrastructure Consortium. And we're also seeing interest from global customers including the Australian Defense Force where we recently demonstrated a product solution with robust C2 functionality to link sensors and effectors across domains. Another significant area of focus for the U.S. and our allies is the modernization of Missile Defense solutions to address current and future missile threats. We continue to strengthen our position in this area with a $1.3 billion Ground-based Midcourse Defense Weapon System award in the third quarter. This award builds on our Missile Defense portfolio and helps our customers defend against intermediate and intercontinental missile attacks. And turning to our weapons business. I'm pleased to share that we've now delivered more than 100,000 Precision Guidance Kits to the U.S. Army. These projectiles provide enhanced precision to artillery units and come embedded with built-in safety features. We've exceeded requirements on both accuracy and reliability with these upgrades. And one last area that I'll highlight is hypersonics, where we continue to win new competitive business. Last month, the Air Force selected our Raytheon and Northrop Grumman team to develop the Hypersonic Attack Cruise Missile also known as HACM. HACM builds on our scramjet propulsion technology and ushers in a new era of faster, more survivable weapons. This program is one of several hypersonic opportunities within our portfolio. We're approaching this market as both a prime and a sub, bringing our expertise in high-speed propulsion, survival navigation and targeting capabilities and systems integration to multiple solutions. These are just a few examples of markets where we continue to grow our business by delivering the products and solutions that our customers want and need, while also building long-term value for our shareholders. So now, I'll turn it over to Dave, who will provide more color on our Q3 results and touch on our expectations for 2023. Dave? Dave Keffer: Okay. Thanks, Kathy and good morning, everyone. As you heard from Kathy, we delivered solid results across all key metrics in Q3. We're reaching an inflection point in our sales growth, driven by the strength in the demand environment, our new business performance and our success in hiring and retaining employees. We had another strong quarter for bookings with roughly $8.7 billion in awards. This contributed to a year-to-date book-to-bill ratio of 1.14 and an increase in our full year book-to-bill expectations. Our Q3 top line results of roughly $9 billion, were up sequentially from Q2 and up about 3% compared with the third quarter of 2021. This acceleration has been driven by our positive hiring trends. We added nearly 1,000 net new employees in Q2 and we added an additional 2,700-plus people in Q3. With continued positive hiring and retention results, we've improved our labor-driven sales visibility, so the supply base is now the key to achieving our full year sales outlook. We're seeing temporal challenges in the supply chain, as are most others, including longer lead times and higher costs in some areas. Our suppliers are a critical element of the Defense Industrial Base and we're closely monitoring small businesses, who are the most vulnerable to the challenges of this macroeconomic environment, particularly inflation. We're encouraged by recent comments from Congress on this topic and we're actively working with our customers to help mitigate inflationary effects on our contracts, including those being felt by our suppliers. Our program execution remained solid in the quarter, with segment margins of 11.2%, reflecting lower net EAC adjustments due in part to the inflationary pressures that we've noted. As costs have remained elevated, we've captured our latest estimates of inflation and opportunities to mitigate it in our EACs. This had a downward effect on our margins in Q3. But year-to-date, our segment margins are 11.7% and we continue to expect the full year rate to be in the range of 11.7% to 11.9%. Turning to earnings per share. Our diluted EPS in the quarter were $5.89. The year-over-year earnings decline was driven by nonoperational factors, including lower net pension income, unfavorable returns on our marketable securities and an insurance settlement for $60 million that was recognized in the third quarter of 2021. Together, these items represented roughly $0.85 of year-over-year EPS headwinds but as I pointed out, our businesses continue to execute very well in a complex environment. In terms of cash, we generated outstanding operational cash flows in the third quarter of over $1.3 billion and we expect Q4 to be even better. This is consistent with our historical pattern of collections and disbursements. In the quarter, we made our third cash tax payment associated -- aided with the R&D amortization law of approximately $220 million and we continue to expect roughly $1 billion in cash tax payments related to R&D for the full year. Through the end of Q3, we completed over $1 billion in share repurchases and we're on track for an additional $500 million in the fourth quarter. Now moving to 2022 guidance. We have not changed our sales, earnings or cash outlooks. The foundation for our strong financial performance starts with the continued demand we're seeing for our products. We're increasing our expectation for book-to-bill again this quarter to greater than 1x which is a significant improvement from our original expectation. Our team has done an outstanding job of serving as a trusted partner to our customers in winning new business. We're maintaining our original guidance for the top line. And based on year-to-date results, we continue to expect our full year sales to be around the low end of the range, consistent with the trends we described last quarter. Our full year outlook implies Q4 sales of roughly $9.6 billion which represents excellent sequential and year-over-year growth. As we've noted throughout the year, we anticipate that Q4 will include a strong volume of material receipts across each of our 4 segments. We're also maintaining our guidance for the bottom line, including segment OM rate and earnings per share. Given that 2022 sales volume will be around the low end of the range, we expect EPS to be near the low end of its range also. Within our earnings outlook, we're accounting for continued year-to-date pressure on our marketable securities portfolio, offset by an anticipated federal tax rate benefit in Q4. Our marketable securities are down nearly $100 million in 2022 which represents about $0.50 of earnings per share pressure. But on the income tax line, we've lowered our effective rate expectation from 17% to 15.5%, reflecting progress in resolving matters related to historical filings in 1 of our businesses. We currently expect those matters to be concluded in Q4, resulting in about $0.50 of EPS benefit that offsets the marketable securities pressure. It's also possible that the tax item could be resolved in Q1 which would shift the benefit from 2022 into 2023. Moving to cash flows. While we remain optimistic that Congress will repeal or defer the R&D amortization law, we have focused our free cash flow guidance this year on the current tax laws scenario which is unchanged from last quarter. If the law is deferred or repealed in Q4, we would expect a onetime spike in state taxes recognized in corporate unallocated expense, as well as a cash refund in 2023. Operationally, we're very pleased with the progress we made in cash flows in Q3, bolstering our confidence in the full year outlook. Next, I'd like to take a few moments to describe the outlook for our pension plans. Most importantly, our current funded status remains strong and roughly unchanged year-to-date and the cash flow implications of CAS changes over the next several years provide a modest benefit. The GAAP income statement effects I'll describe today are noncash in nature. Year-to-date, our plans have experienced double-digit negative returns and discount rates have risen nearly 250 basis points. This combination of results will affect our GAAP earnings in future years. So I'd like to take a moment to discuss what our 2023 net pension income would look like under various scenarios. In January, we provided a sensitivity table in our earnings call deck related to changes in discount rates and asset returns on our nonservice FAS pension income. Based on the high level of volatility, the pension funds have experienced so far this year, I wanted to provide a grid of potential outcomes that also incorporates FAS service expense and CAS costs which can be found on Slide 9 of our presentation today. To help calibrate you to this slide, we've highlighted the 2023 pension estimates provided in January which were based on expected 2022 asset returns of 7.5% and a year-end discount rate of roughly 3%. Given the year-to-date asset returns and discount rates at the end of Q3, we would expect significantly lower net FAS pension income in 2023, currently in the range of over $900 million less than our previous projection. As I've described, this lower net FAS pension income is noncash in nature. Over time, higher CAS recoveries would lead to modestly higher cash flow related to our pension. I also wanted to provide additional insights on a high-level financial outlook for 2023. Note that this is predicated on our current expectations regarding the macro environment. As Kathy said, we expect strong demand to continue into 2023. In terms of hiring and retention trends, as I've now shared a few times, we've seen improvements since the beginning of 2022 and we anticipate that this will remain consistent next year. In the supply chain, where the environment has remained challenging with various delays and disruptions, we project that those challenges will continue throughout 2023. And with regard to inflation which has been more persistent in '22 than originally expected, our projections incorporate gradual easing based on the latest industry labor and material indices. As Kathy described, we continue to expect our sales growth to accelerate next year, building on the momentum we've driven in 2022. In total, we expect sales growth in the 4% to 5% range. Based on our low $36 billion expectation for 2022, that would put us in a high $37 billion range for 2023. Within our segments, we continue to expect Space to remain our fastest-growing business, with sales growing by another $1 billion over 2022. We expect strong sales growth in MS in the mid-single-digit range. And we anticipate sales at AS and DS to be flattish compared with their latest 2022 levels. We also expect to generate solid segment margin rates. As I've described, net EAC improvements are likely to be lighter than usual until inflation begins to normalize. So we'd expect our segment OM rate which would otherwise have been projected in the high 11% range next year, to be between the mid-11% and the high 11%. With regard to earnings, pension income will be a noncash headwind as quantified on Slide 9. But excluding pension, we expect our earnings per share to grow faster than sales in 2023, driven by continued strong execution and a lower share count. We expect our tax rate to return to its more normal level of around 17% next year. And we continue to generate excellent cash flows with our prior 3-year cash outlook intact and another year of free cash flow growth expected in 2025. We anticipate modest increases to our prior CapEx projections based on the strength of this year's new business wins and backlog growth, offset by corresponding improvements in operating cash flows. We're very proud of the performance we've delivered this year in a continued challenging environment and we're pleased with our projected growth acceleration in the second half of 2022 and in 2023. With our multiyear cash flow outlook intact, we're looking forward to continuing to create value for our customers and shareholders. And with that, we're ready for your questions. Operator: [Operator Instructions] Our first question comes from the line of Doug Harned with Bernstein. Doug Harned: You talked about supply chain here and that’s obviously an issue across the board. Is it possible to look at the constraints you had from the supply chain and give us a sense of what the quarter and the year might have looked like had you not had those constraints? We’re just trying to figure out, what sort of normal would be and how much is being held back? Kathy Warden: Doug, thanks for the question. Supply chain certainly is central to not only the remainder of this year but next. So let me try to characterize, not particularly in numerical terms but in more -- less quantitative terms, what we have been seeing. It is in particular areas of the supply chain. So it is not widespread but it's in areas that are important -- is component to our development programs, in particular, where we have seen delays that then result in impacts to those development efforts. And so it's the timing of sales not necessarily a deferment of sales, if you will. And this year, I would point to our 2022 original guidance which was our expectations with either minimal or no supply chain disruption, because when we put that plan together late last year, we were not anticipating the level of supply chain disruption nor the duration of supply chain disruption that we've experienced. So throughout the year, we've pointed you now to the low end of our sales guidance. And I would say the best way to think quantitatively about the impact is, we would have expected to be on the high end of that guidance had we not experienced the supply chain disruption. Now I do want to point out and we've said it in the call that we expect these challenges to persist into 2023. So when I talk about timing, we do not expect all of what we experienced in 2022 to recover by the end of 2023. We expect these issues to be a bit sticky for the next year. We do expect them to resolve in the 18- to 24-month time frame. Doug Harned: And as you go into 2023, you said in the outlook that Space is expected to be up by about $1 billion but flat at Aeronautics. So can you help us understand what the drivers are in those 2 units that lead to somewhat different results? Obviously, you have huge backlog in Space. But just trying to understand those 2 trajectories? Dave Keffer: Sure. Doug, I'm happy to shed some light on that. In both cases, those trends are consistent with what we've communicated previously and the drivers are therefore consistent as well. Starting in AS, we project a stable 2023 given that there is anticipated growth in programs, including B-21 but then offset by modest declines in programs like the legacy programs in the HALE portfolio, Joint STARS, et cetera, modest decline in F-18 likely over the next couple of years. So again, continuation of trends we've been talking about for a while and we continue to anticipate a growth recovery in 2024 for that business. In Space, the expansion and the growth opportunity is broad-based across multiple orbits, across multiple mission areas from missile tracking to ISR, growth in our supportive launch capabilities. It's really an outstanding segment of performance for us recently on the growth side. You see a growing market but growth also in our market share. Of course, GBSD is a contributor to that growth but by no means the only one. Each of our divisions in that business is growing at a nice clip. So we’re really pleased to be able to continue that outlook in ‘23. Operator: And our next question comes from the line of Ronald Epstein with Bank of America. Ronald Epstein: Maybe just a question on capital deployment. You're going to be generating a lot of cash as you pointed that out. What's your plans to do with that into next year? Is there -- is it just share buybacks? Or is there some selected M&A? Or how are you thinking about that? Kathy Warden: So our -- plans for capital deployment are still aligned with what we've been saying all year, a balanced approach to capital deployment, still investing in supporting the growth of the business that we've experienced which as we said, has been even more robust we anticipated coming into this year, not just because demand is higher but we have been quite successful in competitive wins. So we'll continue to invest to be able to deliver that business successfully and generate the resulting earnings and cash flows from it. We also look at our dividend as a significant part of our capital deployment strategy. We have been consistently raising the dividend, this year another 10% increase. And so we will think favorably into next year about the dividend as a mechanism for returning capital to shareholders. The remaining piece is share repurchase which I know was the core part of your question and this year, we are on track for $1.5 billion of share repurchase. We plan to complete that. We do expect that to be slightly higher next year. As we look at our plans for capital deployment, we will share those with you in more specificity and what our guidance is for share count in January. But safe to say, we are still on the mindset of returning 100% of our free cash flow to shareholders. And those 3 elements are the major ways in which we'll do that in 2023. Ronald Epstein: Got it. And then one follow-on, if I can. On the supply chain stuff that’s been impacting the whole industry. Are you seeing DoD doing anything to help resolve it? Because some of the issues, it seems like you’re running into it, everybody’s running into it. Is DoD doing anything to help the industry? Kathy Warden: Yes, they are. And I applaud the work that DoD is doing. I think they and we would agree that we need to continue to do more, particularly for medium and small businesses, who find themselves lower in the supply chain and even in circumstances where primes may have a cost-plus contract. They often have fixed prices that we need to adjust. And so the government working with the prime to address that impact on small businesses, I outlined in my comments earlier on this call, is going to be important for the health of the Defense Industrial Base. And we, as an industry, are doing our part. Certainly looking at those investments and managing some of our cash into the supply chain in ways that we have not historically done for the benefit of keeping those businesses healthy. And we’ve been doing that now for the last several years, really since the pandemic began and I expect we will continue to do that. There are impacts, though, to large business as well. And so we are all in this together, as you point out and we have work ahead of us. I am encouraged by Congress’ comments that they expect that the ‘23 budget will start to address some of these challenges. And I’m hopeful that as the administration puts their 2024 budget together, they will continue on the path to identifying funding that would allow us to keep the Defense Industrial Base healthy. Operator: And our next question is going to come from the line of Myles Walton with Wolfe Research. Myles Walton: Dave or Kathy, I’m not sure which. The fourth quarter recovery, I think you pointed out was going to come from receipt or timing of material receipts. I’m just curious, does that put you more at risk from supplier performance than your own internal performance, as you go into the fourth quarter? Is that the way to think about it? Dave Keffer: Myles, it's Dave. I'm happy to address that one. I think the way we look at it is, the really strong head count growth that we've had over the last quarter, in particular but the last 6 months broadly, adding approximately 4% to our overall employee count or over 3,500 employees really shores up the labor visibility for labor-driven sales for 2022 and sets us off on a good track for '23. And to your point, that means the supply base and its performance are key to the fourth quarter. With that said, we've had a year now of these more challenged supply chain conditions to become accustomed to where there are constraints and where there are not. And I give a lot of credit to our supply chain folks and our program teams, who are managing and mitigating those challenges every day. We think we've got that captured in our outlook for Q4. The pressures to date have pushed us towards the low end of the sales range for the full year and we think that's appropriate caution as a result of the supply chain conditions but feel that we've bounded it well in that range as we think about Q4 and the full year now. Myles Walton: Okay. And maybe just a follow-up. Within Space, the negative EACs there. Is it – is there any program-driven drivers to those negative EACs? Or is it purely cost and inflation dropping through across the portfolio? Dave Keffer: There was not any 1 single program EAC that drove a material change this quarter in the Space business or any other across our portfolio. I think you're right to point to the broader market conditions. Costs are escalating at a level not expected a year or 2 ago. We're mitigating that very well across our business. But in fact, our latest expectations are factored into the EACs on our programs and that did have a dampening effect, particularly in Space's margins in Q3. Operator: And our next question comes from the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: One of your peers has recently announced significant new share repurchase authorizations using debt. Considering the multiyear visibility in the cash flow, the strength in the balance sheet and the upward pressure on defense budgets, would you consider levering up an increased buyback similar to what the company did a decade ago? Kathy Warden: Well, Kristine, I wouldn't rule it out as we sit here today but I'm also not announcing any plans. We currently are executing our strategy which is, as I said a few minutes ago, for a balanced capital deployment strategy and we think that is the right thing for our company. Our foundation and fundamentals are incredibly strong. With the growth in our backlog, the ability to grow the business top line, we want to ensure that we're investing appropriately in that. It's the best thing for our shareholders in the long-term, we believe, as well as our customers who need this capability and capacity that we're delivering. So that remains our top priority. And we, as I have said, are committed to return 100% of our free cash flow this year and that to our shareholders and we'll do that in the balance of dividends and share repurchase. But as you know, we have used ASRs in the past and we have looked at share repurchase and we'll continue to do that on a regular basis and keep you apprised of any change in our plan. Kristine Liwag: And if I could do a follow-up. You mentioned that you expect supply chain issues to persist into 2023. Can you provide more color on what’s embedded in your 2023 revenue outlook of 4% to 5%? Where are the risks and opportunities to that? Kathy Warden: So in the -- earlier in the call, we outlined 3 major elements that we are monitoring closely. The first is our own labor. And we have talked about that throughout this year as being a bit of a headwind for us in the first half of the year. We were not adding headcount and retaining headcount at the level we needed to fuel our growth. And that started to turn the corner in the summer. And you've seen in the third quarter, really robust results in net headcount growth, as Dave outlined, with nearly 3,000 adds. We are this environment that we're experiencing currently, not necessarily nearly 3,000 adds in a quarter but this hiring and retention environment is what persisted into 2023. There could be some opportunity there. As you all know certain firms are reducing their headcount or at least their hiring. So ER, as I noted, seen that in certain areas, the labor market is starting to soften. But we aren't counting on that being a significant tailwind to us next year. We're looking at it continuing about like we see it today. In supply chain, as we noted, we do expect the disruption that we now see in the supply chain to have lingering effects into 2023. And we've done our best to capture those in what we've now reflected as our updated guidance. But if they were to get worse, we certainly would have some downside risk. I don't expect them to get significantly better. So unlike labor, I would say that one is more of a risk. And then in the third area of inflation, we are tying to the indices as we look forward. We certainly have now captured the inflationary pressures that some of what we indicated was the downside on segment operating margin rates that we saw in the third quarter of this year. And your guess is as good as mine as to, when this inflation really start to modulate. So we're using the indices as our best way to get our arms around that. I don't see that as a big opportunity or risk. I think that one we probably have hedged pretty well but we're monitoring it, as I said. So, that was a lot of context. But I think it’s important because we did put a 2023 outlook in front of you, even at this early stage which we often do but I will say this is a more volatile time than we often experience going into the following year. Operator: Our next question comes from the line of Rob Stallard with Vertical Research Partners. Rob Stallard: Dave, I’m going to start with you. On the 2023 margin guidance, are you expecting any major changes in the segments versus where they’re likely to end up at the end of this year? Dave Keffer: Thanks for the question, Rob. We do not anticipate meaningful movements in the segments as we look at '23. Let's talk in aggregate first and then I'll give you some color on the segments. As you'll recall, our segment OM rate was in the 12% range in the first half of this year. We talked on the call today about the fact that, that will fluctuate a bit from quarter-to-quarter. We worked through some of -- temporal challenges that we and most other industries face these days around inflation and supply chain and such and noted some of that in the Q3 result. Year-to-date, we're in that guidance range we've provided for the full year. As we talk about next year, we noted mid- to high 11% or our current expectation. Think of that as in the range of 20 basis points lower next year than we're seeing this year. And at a business level, what I'd highlight is in a few of the areas where we had unique upside in the first half of the year, that's where we would expect that to normalize and create some of the lower margin profile next year. I'd note, AS had a land sale in the second quarter. So you can think of that as 20, 30 basis points of margin rate pressure on a year-over-year comp basis. In Space, we think the volume of new development work they've continued to add and the pressure that's put on their margin this year is again a good reflector of what you'd be likely to see next year in Space. Mission Systems and Defense continues to perform well on the margin rate side and we don't anticipate meaningful movement there. MS did have some strong upside in the first half. So we'll look to see what they can continue to deliver in '23. Again, no meaningful movements across the board. I'd just adjust for some of those comparability items in '23 to get a segment level view. Rob Stallard: That’s great. Very helpful. And then just a quick follow-up for Kathy on the B-21. We’re looking forward to the rollout in December. But I was wondering, how the numbers on the program are progressing. Practically, you’re making good progress. But given it’s a fixed price program with inflation, how are the margins on this program going? Kathy Warden: Yes, Rob, thanks for the question. We are also very excited about the rollout on December 2 but we are keeping our focus on the performance of the program. So while it's important for us to celebrate milestones as they come. It's also long-term program, as you suggest. And so we are working that program as we are all to each quarter reflect what we know about the current environment and our projections going forward. And as we outlined earlier this year, we spent a good bit of time actually talking through the B-21 and how we were keeping our assumptions updated. That continues to hold true. And so there’s nothing to report to you in any material change on our outlook for the profitability on that program. Operator: Our next question comes from the line Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: You talked about flattish Defense sales next year. Can you give us some of the puts and takes in the business with supply chain? Does that continue to linger and what’s going on in the services side? And maybe incremental opportunities with programs, such as IBCS and missiles and how you do think about Europe playing into that as well? Kathy Warden: Thanks, Sheila. Certainly, the disruption that we're talking about does hit short-cycle businesses a little more than long cycle. And so there is a bit of that in Defense but really, it's more about the portfolio shift that we are making. One is the growth that we're seeing in munitions and particularly that demand which we expect to grow even more with the conflict in Ukraine. But we also see IBCS as a centerpiece of that growth, both domestically and internationally. I noted in my comments that we have gotten significantly more increased interest in demand coming out of Europe on IBCS over the last several months. So those are growth drivers. But those are offset by retirements of legacy platforms that we sustain out of the Defense Systems sector. And we’ve been talking about those as headwinds to AS for a while. But as those programs are retired, those platforms sustainment impacts are being felt in DS. So that would be programs like Joint STARS and Global Hawk. Operator: And our next question comes from the line of George Shapiro with Shapiro Research. George Shapiro: Dave, in terms of your margin guidance next year, how much lower are you expecting EACs to be? Because this year, they’re running so far like $150 million lower than last year and yet you’re getting help in AS but the margin looks like it’s going to turn out to be similar to where it was last year. Dave Keffer: Sure. George, as you know, we don't have a specific dollar for dollar expectation of net EACs on any one program or in fact, in aggregate, going into a typical year. What we do get a sense for is kind of trends in aggregate volume. And in 2021, for example, we had a unique trend associated with the benefit in our rates from the pension benefit. In 2022, we've had a couple of upside items, as you mentioned, in AS. But broadly speaking, the pressures that we've noted from the macro environment this year. And what I'd characterize '23 as is more of a continuation of some of those macro pressures, as Kathy outlined nicely earlier in the supply chain and the inflationary environment. And so we'd anticipate what I'd characterize as a continuation of the lower net EAC trend in '23 based on what we know today. But I wouldn't put too fine of a point on the dollar amount today. We'll give you more insights on that as we get into the January guidance call. George Shapiro: Yes, I’m just looking at the fact that this year’s segment margin is likely to be similar to last year’s and yet EACs are running already $150 million below where they were last year. So maybe they’ll be down $200 million for the year. And so you got to have a pretty sizable, maybe a bigger drop next year. I mean, otherwise, why wouldn’t the margin be similar to the high 11% like you’re seeing this year? Dave Keffer: That high 11% margin rate is predicated on a certain volume of both program performance and net EAC benefits. We're projecting a wider range currently in the mid-11s to the high 11s, because it's tough to project, as Kathy noted earlier, with too much specificity given the macro environment we're in today. Our program performance continues to be exceptional. But we think today, the appropriate outlook is about 20 basis points lower margin rate next year with continuation of -- kind of the second half trends we're seeing this year in net EACs. I think that's about as specific as we can be at this point in the process, George. George Shapiro: Okay. And then one quick one. How much contribution will GBSD and NGI beat to the $1 billion growth that you’re talking about in the Space in ‘23? Dave Keffer: We project GBSD to be a little less than half of that growth. NGI will also be a contributor but then there are a number of other programs. The wins we've talked about this year at Space Development Agency, continued growth in the GEM63 portfolio with the Amazon Kuiper expansion there. There are a number of drivers of growth across our Space portfolio, both national security, civilian and otherwise. Operator: And our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: Kathy and Dave, I know you are just in the early stages of 2023, so sorry to bring up 2024 but you guys have talked about cash flow target for that year and also segment margin, I think, in the 12% range. Are you still on target for reaching those goals? Dave Keffer: Sure. I can touch on that. As we noted today, we've continued to reaffirm our multiyear cash flow outlook. For '23, that's intact, for '24 as well. And as we noted on the call today, we expect another growth year in 2025. We'll be more specific in quantifying that on our January call when we'll do our typical update of the multiyear quantified free cash flow outlook. And so continued strength in the expected returns from the business. We'll update the specific numbers there based on Section 174 legislation status in January. On the margin rate side, as we noted, we were operating at that 12% level in the first half of this year. Businesses continued to execute well and mitigate broader macroeconomic challenges. We're anticipating about that 20 basis points of decline based on what we currently see in 2023. We do anticipate longer-term recovery. It's tough at this stage of the game to project whether that recovery back to the high 11s and the 12% level occurs as soon as 2024 or whether it's subsequent to that, a lot of that will depend on the pace of recovering these macroeconomic factors. But again, critically, the sales growth expansion we see next year, the acceleration of the 4% to 5% range, multiyear free cash flow guidance remaining intact, I think, is indicative of the kind of economic value we're delivering even in this environment. Seth Seifman: Great. And just as a quick follow-up, with the supply chain challenges lingering into 2023 and probably lessening through the year, should we expect a similar distribution of sales throughout the year in ‘23 that we’ve seen in ‘22 in terms of the percentage per quarter? Dave Keffer: It's premature for me to give you a percentage by quarter at this stage. We're doing our best to give you our latest insights into the full year outlook. Some of that quarterly profile ends up being determined by the timing of material receipts on large programs and across the business space. So give us a few more months to give you a quarterly profile. We'll certainly do so. We'll give you more insights on that in January as we typically do. Operator: Our next question comes from the line of Ken Herbert with RBC Capital Markets. Ken Herbert: Kathy, relative to – or Dave, relative to the initial expectations in the year, you’ve seen stronger bookings that you’ve called out as we’ve gone through the year. And I’m just wondering, if you can parse that out a little bit. I know you called out share gains but how much of that has been share gains versus maybe an acceleration or timing around contracts? And how much should we sort of read through or think about maybe an expanded opportunity set for you heading into ‘23 based on some of the stronger bookings this year? Kathy Warden: Thanks for the question. When we look at the portfolio, it has been broad-based in terms of the improvement that we've seen in our expectations for book-to-bill. All 4 segments now projecting over 1. And it has been most pronounced in Space, where we've called out some specific opportunities that were competitive. So to your point, taking share that we were able to secure that we may not have anticipated winning as many of those as we started the year as we ultimately have. We feel that we are in a good position with backlog in each of the businesses going into 2023, supporting the accelerated growth that we've laid out in our outlook for next year. We don't expect that our book-to-bill next year will be as robust as it was this year, because we do have quite a bit of backlog that we will be carrying into the year and the opportunities that is not as strong in 2023 but we do see then that picking up again in '24 and '25. So I would tell you, we tend not to look at awards on a single year basis and calculate book-to-bill only on a single year. We look at it on a running basis and our system is strong, as an aggregate over the last 3 years, we expect that to continue well into the future. Ken Herbert: That’s helpful. And as you think about the strength – the comment you just made on strength in the ‘24, would that be more on the Space side within Space or maybe more on the Launch and Missile side, or any color on that would be helpful? Kathy Warden: For Space, we've seen broad-based opportunities across both Launch and Missiles as well as our Space segment and we expect that to continue, there are multiple programs that will be selected for next phase and be awarded in that time frame in both elements of our Space business. Operator: And our next question comes from the line of Scott Deuschle with Credit Suisse. Scott Deuschle: Anything you can say about the equipment sales that impacted Q3 free cash flow? Is that similar in nature to the large equipment sales that AS booked a while back? Dave Keffer: It is actually cash flow associated with that equipment sale booked a while back. So it is the timing of payments driving a particular cash receipt this quarter but it is fully associated with the equipment sale you noted from the past. Scott Deuschle: Okay. Got it. And then, Kathy, just on NGI. Is it reasonable to think that you might be able to offer some cost savings to your customer there, if there’s product commonality between the Interceptor and then the GBSD booster? And would you potentially design for commonality there in order to drive that cost benefit to the customer? Kathy Warden: Well, it's an excellent question. And because we're in an active competition, I won't speak too much about our approach. But what I would say is that we constantly look for ways to deliver more value to the customer based on a broad set of capabilities, both in the case of Interceptors as well as our Missile Defense portfolio which I've noted, has been growing and we expect it to continue to grow. Taking a full mission understanding of the threat environment as it evolves and bringing it back into our product development strategy is key across the entire portfolio but NGI will also benefit from that level of expertise that we have with the threat, the solution elements and submission. Operator: And our next question comes from the line of David Strauss with Barclays. David Strauss: Kathy, F-35 cuts across a number of your businesses. I think you’ve talked about it being 10% of sales in total. Can you give us an idea of what you’ve got baked in for F-35 in total in 2023 from a – I assume, it’s declining a bit with DAS rolling off and so on? But can you give us an idea of what’s baked in for F-35 in ‘23? And whether as you look beyond ‘23, F-35 stabilizes or maybe even begins to grow again? Kathy Warden: Well, David, actually, when we look across the entirety of the company, F-35 is pretty flat going into 2023. So we have a lot of moving parts, as you indicated. In Aerospace, we have volume that is fairly consistent in our case. Because remember, we build a couple of years, about 18 months ahead of Lockheed Martin. And so we are maxing out at our limitations of capacity for building center fuselages. And so that project flattish into 2023, as Dave noted earlier. But in our Mission Systems side of the business, while we have DAS which is being replaced with new product insertion. We're also working on new products insertion in the other elements of the portfolio. So we have some development work going on in Block 4 that continues to grow and production there, too, is fairly stable as we look out over this time period and sustainment is growing. So when you take all of those elements across the entirety of our portfolio, F-35 is pretty flat going into 2023 and we expect to be relatively flat going into 2024, maybe a little bit of upside to that. David Strauss: All right. Perfect. That’s very helpful. And then on the – back on the margin guide for next year. Would you characterize the drop, I guess, before I think we were all thinking kind of flattish next year and then maybe improving a bit in ‘24. Would you characterize the lower guide, is that more mix related? Maybe your lower margin programs are accelerating faster than you had expected? Or is this inflation related or some combination of both? Dave Keffer: I would say, it's a combination of all of those factors but leaning more towards the macro factors. This is a unique environment that we're all operating in these days and we're eyes wide open to the continuation of a lot of those pressures in 2023. And that's why we think it's not a huge impact but call it, 20 basis points compared to the high levels we've been operating at in 2022. I think importantly, as you get down to the earnings per share line, excluding the noncash pension element of it, we anticipate EPS growth faster than even the 4% to 5% accelerated sales growth. So we're managing through these times, I think, particularly well when you think about the pace of EPS acceleration as well. Todd Ernst: All right. We're going to have to leave it there. I will give one more. All right. We’ll leave it there. I’ll turn it over to Kathy for closing remarks. Kathy Warden: Thanks, Todd. Look, before concluding today's call, I'd just like to take a moment to thank our entire team for another strong quarter in what we have appropriately characterized this challenging macroeconomic time. So business fundamentals for Northrop Grumman remain incredibly strong and that's due to the work of this entire team. But I want to especially think 1 of our team members, Mary Petryszyn, who will be retiring from Northrop Grumman in January. She has provided 10 years of outstanding service to our company, most recently as the Defense Systems front and we wish her the very best. On October 17, I'm sure you all noted that Roshan Roeder became our new President of Defense Systems. She is an experienced executive in our company. I'm very confident in her ability to take the business to the next level and I look forward to introducing her to many of you. So, thank you for joining our call today. I expect to see many of you in the coming months. But for those, I don’t see, let me wish you a healthy and happy holiday season and we look forward to talking to you in January. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Have a great day.

Operator: Good day ladies and gentlemen and welcome to the Northrop Grumman's Second Quarter 2022 Conference Call. Today's call is being recorded. My name is Victor and I will be your operator today. [Operator Instructions] I would now like to turn the call over to your host, Mr. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thank you, Victor and good morning, everyone and welcome to Northrop Grumman's second quarter 2022 conference call. We'll refer to a PowerPoint presentation that is posted to our IR web page this morning. Before we start, matters discussed on today's call, including 2022 guidance and beyond, including our outlooks reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties which are noted in today's press release and in our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On the call today are Kathy Warden, our Chair, CEO and President; and David Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone and thank you again for joining us. I'd like to start today's call by highlighting the James Webb space telescope and the incredible images released just a few weeks ago. This extraordinary telescope represents countless Northrop Grumman engineers, technicians, scientists and cross-functional teams working in partnership with NASA for over 2 decades. In addition to leading the industry team, we designed and built the deployable Sun Shield, provided the spacecraft, develop the Observatory subsystems and integrated the total system. The advanced technology we've created and the images it captures will inspire the next generation of innovators and scientists and we believe will be one of Webb's many legacies. Webb exemplifies the defining characteristic of our business strategy to develop and produce innovative technology solutions to address our customers' toughest challenges. This strategy differentiates us and aligns our portfolio with our customers' priorities. And as a result, we strengthened our position in the market. As a reminder, the 4 core focus areas of our strategy are technology leadership, sustainably and profitably growing our business, keeping a laser focus on performance and deploying capital in value-creating ways. This strategy continues to yield results. In the second quarter, we saw strong demand across our businesses with a book-to-bill ratio of 1.48, driven by awards for F-35, GEM 63 and restricted programs. All of our businesses had a book-to-bill ratio above 1 in the quarter, driving a 6% sequential increase in our backlog which now totals $80 billion. Given this backlog growth and our continued alignment to customers' budgets and priorities, we are even more confident we can accelerate our revenue in 2023 from the low single digits we're guiding this year. In the quarter, we did experience certain challenges from the broader macroeconomic environment, including a tight labor market and supply chain delays which impacted sales timing. However, we're pleased with the progress our team continues to make in addressing these challenges and hiring trends improved as we progressed through the second quarter, laying the foundation for sales growth in the second half of the year. As our business grows, we remain focused on performance and driving cost efficiencies across the business. This continued focus contributed to another quarter of solid margin performance. Our segment OM rate was a robust 12.2% in Q2 and stands at 12% year-to-date. Dave will cover further details of our quarterly results and guidance update momentarily but first, I'd like to touch on some highlights from the quarter. The technology developed for James Webb is one example of Northrop Grumman's innovation. Another example is how we are using technology to produce innovative and affordable solutions for our customers. To that end, we're investing in digital design capabilities and advanced manufacturing facilities. In close partnership with our customers, we are digitally transforming how we design, test and manufacture the next generation of systems. And you've heard our customers acknowledge the results. particularly with some of the largest programs, including B-21 and GBSD. We are marrying our world-class engineering talent with the latest digital tools, machine learning and agile principles. And as we announced this quarter, we are also investing in factories of the future, including our state-of-the-art manufacturing facility in West Virginia which will incorporate the latest in digital manufacturing, automation and modular work sells. Once operational in 2024, this facility will support production of up to 600 strike missiles per year, optimizing quality and reducing cost and cycle time as well as bolstering tactical weapon supply chain capacity for our customers. For the last few years, we've taken an enterprise-wide approach in mission-focused areas that are aligned with our customers' priorities. These are areas where we see opportunity to leverage our technology know-how and our domain expertise and high capabilities from across our businesses. Today, I want to highlight a few of them and the related results we've seen so far this year. One example of this is in national security space. Our customers have made it clear that space underpins many missions vital to our national security. And we recognize that we need to think about space differently as a rapidly evolving contested domain. Given this, our focus is on providing space based offerings that include a mix of exquisite solutions in combination with proliferated constellations of low earth orbit satellites, also known as LEO which together create a more resilient architecture. We've recently seen the benefits of this approach. For example, after the close of the second quarter, we received a $617 million contract for the SDA tracking layer which is a LEO constellation of 14 satellites designed to provide global warning, tracking and targeting of advanced missile threats, including hypersonic missiles. This builds on the SDA transport layer contract we were awarded in February which is also a LEO constellation of 42 satellites, providing resilience, low latency, high volume data transport in support of U.S. military missions around the world. In addition to these, we booked another $700 million in Q2 in restricted space awards and now have $11.3 billion of restricted space backlog. We continue to see the national security space area as one of the strongest growth drivers for our company. Another focus area where we are pulling capability and expertise from across the portfolio is missile defense and Counter Hypersonics. In the second quarter, we were awarded a contract from the Missile Defense Agency to continue development of the glide phase interceptor program. GPI will play a central role in ensuring the United States maintains the most reliable and advanced missile defense systems capable of outpacing and defeating evolving missile threats. This complements our missile defense modernization work already underway on NGI, HBTSS and IBCS. We have also been supporting international customers to modernize their missile defense system. For example, last week, we delivered the first of the 6 production IBCS engagement operation centers for Poland's medium-range air and missile defense system. Our capital deployment approach is also an important part of the strategy I just laid out for you. Our first priority is to invest in executing our business strategy. By investing in our factories, digital design tools and our people who are a key source of our technology leadership, we are creating long-term sustainable value. We also remain committed to returning at least 100% of free cash flow to shareholders this year. In the second quarter, we increased our dividend by 10%, marking our 19th consecutive annual increase. Our new quarterly dividend will be nearly double the level we paid in the beginning of 2017. We are also returning capital to shareholders through stock repurchases and we continue to target at least $1.5 billion in repurchases this year. Before Dave shares more details about our financial results, I'd like to briefly talk about the defense demand environment. We've seen a fundamental shift in global commitment of resources for defense and national security, particularly in Europe. Just this year, we've seen Finland and Sweden progress their membership in NATO and many European countries increase or state their plans to increase their defense budget. The geopolitical environment has highlighted an increased requirement for defense and deterrent. In the U.S., this has also resulted in strong bipartisan support for defense spending. Recently, the Congressional Arm Services Committee has marked up their version of the FY '23 defense bill with both providing bipartisan support for further increases in defense spending above the president budget. For Northrop Grumman, the U.S. FY '23 base defense budget request included strong support for key programs like T21, GBSD, NGI, IBCS, next-generation OPIR and Triton. And there is an opportunity for additional funding for GATOR, E-2D, F-35 and F-18 that we've seen in proposed plus ups from Congress. But I will note that as has become the norm in recent years, there is a high probability of starting the fiscal year on a CR, so we have anticipated this in our outlook for 2022. The budget is a strong reflection of the alignment of our company with our customers and reinforces my confidence that we are well positioned for this environment. So with that, I'll turn the call over to Dave and then I'll have a few closing remarks before we turn to Q&A. Dave? Dave Keffer: Okay. Thanks, Kathy and good morning, everyone. Overall, this was another solid quarter with similar themes to Q1. Near-term supply side pressures and a tight labor market have persisted but the demand environment continues to be quite strong with outstanding awards and backlog growth, driven by alignment with our customers' highest priorities, setting the stage for longer-term success. We generated $13 billion of new awards in the second quarter, a higher volume than we had expected due to excellent competitive wins and timing of a few large awards, including the latest F-35 block in our aeronautics sector. Our year-to-date book-to-bill is now 1.22, as a result of our strong bookings, we now expect award volume to be approximately equal to sales for the full year, higher than our previous projections. While these new business metrics position us for growth going forward, our Q2 sales of $8.8 billion and first half sales in total came in slightly below our expectations as we continue to manage through global supply chain and labor market challenges. These first half results and current trends point toward a full year sales outlook near the low end of our guidance range. with Q3 sales slightly over $9 billion and Q4 in the mid-$9 billion. These figures represent much stronger year-over-year growth in the second half than the first, requiring continued expansion in headcount and material receipts. In Q2, we drove incremental improvements in hiring as the quarter progressed, adding nearly 1,000 net employees in Q2 after being down slightly in Q1. Our material receipts forecast is also weighted toward the second half of the year based on timing of program demand. These factors, along with our growing backlog provides the foundation for faster revenue growth rates in the second half of the year and we expect that momentum to continue into 2023. Even with temporal top line headwinds, our execution remained strong in the quarter. Segment margins were 12.2%, in line with the high level from Q2 of last year, driving cost efficiencies and keeping a laser focus on performance are key elements of our strategy. These will be particularly important efforts in a higher inflationary environment than we've experienced in recent years. It starts by negotiating good business terms and delivering strong program performance but it doesn't end there. It also includes driving affordability in our rates, having a disciplined approach to risk management and optimizing our cost structure. For example, in the quarter, we sold a property in Bethpage, New York and recognized a $38 million gain. Continuing with our Q2 results, diluted earnings per share in the quarter were $6.06, down 6% compared to the second quarter of last year. EPS was lower, largely due to non-operational items, unfavorable returns on our marketable securities and lower net pension income contributed headwinds of $0.60 compared to Q2 of last year. And while our 17.7% tax rate was lower than last year, it was above Q1 and our full year expectation for 2022. Turning to full year guidance. I'll start with a few updates to our sector estimates. Our Space business continues to deliver excellent sales growth and bookings, including another quarter of record backlog, demonstrating the diversity of capabilities that we bring to market. As a result, we're again increasing its sales guidance to the high $11 billion range. At DS, we're tweaking our full year expectations to the mid-$5 billion based on a slower ramp on certain programs as well as broader staffing challenges. For operating margin rate, we are increasing our estimates at AS, DS and MS based on their strong year-to-date results. Offsetting these increases are a reduction in the space OM rate to approximately 10% based on better-than-expected success in winning new development programs. And at the company level, we're maintaining our full year guidance ranges for sales, segment margin rate, EPS and cash. Within those ranges, we currently expect that any softness in sales is likely to be offset by margin strength. Embedded in our earnings per share outlook are a few moving pieces. First, our corporate unallocated costs are now projected to be $210 million, down $60 million from our prior estimates. This is due to favorable state tax trends and other lower corporate expenses. We're also projecting modestly lower net interest expense. Offsetting these benefits is an unfavorable impact from our marketable securities that we've experienced year-to-date. There are no incremental mark-to-market impacts assumed in our guidance for the second half of the year. As we noted last quarter regarding corporate unallocated costs, we continue to project a onetime spike in state taxes recognized in the quarter in which the R&D tax amortization law is deferred. With respect to cash, second quarter free cash flow was an outflow of $460 million. Absent the cash taxes paid associated with R&D amortization, our free cash flow would have been roughly breakeven compared with the high hundreds of millions of dollars in an average Q2. A good portion of this delta was due to several large program collections expected toward the end of Q2 that were instead collected in Q3, including about $300 million collected on the first working day of July. The seasonality of our collections and disbursements is such that the second half of the year is expected to generate much stronger cash flows than the first. But as always, we'll need to keep our focus on execution and drive further working capital efficiencies to offset any ongoing timing issues and achieve our outlook. Our guidance continues to include 2 scenarios: 1 based on current tax law and the deferral scenario predicated on receiving refunds for payments made to date. Next, I wanted to take a moment to talk about our pension plans. Last quarter, I mentioned that while our pension plans contribute a component of our GAAP earnings, the FAS/CAS income is non-operational and not something we consider when assessing the company's performance. Slide 11 in our earnings deck provides an illustration of the pension headwind on GAAP earnings that we've experienced so far this year. As we look toward next year, we would expect this headwind to grow based on recent volatility in the financial markets. Year-to-date, our asset performance has been below our long-term expected rate of return and discount rates have had a historic rise. Of course, our pension plans aren't unique in experiencing these macroeconomic trends. If we snap the line at quarter end, these market conditions would translate to a significantly lower net pension income going forward, primarily in the nonoperating FAS pension line. Partially offsetting this GAAP earnings headwind would be a modest increase in projected CAS recoveries but our required cash contributions would remain very low for the next several years and our funded status remains healthy at over 96%. So while the GAAP earnings impact could be a headwind, from a cash or economic perspective, the changes would be modestly favorable. A lot can change in the financial markets over the course of the year, so we'll wait to provide more specific multiyear projections until later in the year. I'd point you to the pension sensitivity table that we provided in our January earnings deck for your modeling purposes. And with that, I'll turn the call back over to you, Kathy. Kathy Warden: Thanks, Dave. So in summary, demand remains robust and we saw outstanding bookings and backlog growth in the quarter and year-to-date. This demand is creating momentum that supports our expectation for accelerating growth for the remainder of this year and into next. Additionally, our capital deployment strategy is aimed at supporting long-term growth and creating value for our shareholders. We believe the investments we are making today in digital tools and factories of the future are already enabling stronger program performance and contributing to our operating results. So I'm incredibly proud of the Northrop Grumman team as we execute our strategy and position the company for long-term success. So with that, we're ready for Q&A. Operator: [Operator Instructions] Our first question will come from the line of Ron Epstein from Bank of America. Mariana Perez: This is Mariana Perez Mora on for Ron today. So on labor. Most of the industry is experiencing significant pressure from a tight labor market. And it seems that you are managing these challenges better and even seen some improvements in the second half. Could you please describe and give us some color on what are you doing to navigate these challenges? Kathy Warden: Well, thanks, Mariana. We absolutely have seen labor headwinds in the first half. But as we noted in our comments, we are starting to see those ease in the latter part of the second quarter and even the results that we're seeing in July so far. And what we're doing is aggressively across the enterprise, working both hiring and retention efforts. It is an all-hands-on-deck strategy to ensure that people know that Northrop Grumman is growing and hiring. And we are having good success in attracting people to our company. We've also been taking actions to retain the talent that we have and that has really started to take traction. I will also say that the market conditions play a significant role in any company's ability to hire and retain -- and we've seen the market conditions start to soften. You can't pick up a newspaper or read an article online these days without seeing a company that's talking about hiring freezes or even layoffs. And so that will have an impact on the labor market and we expect continued softening as a result of that in the second half which leads us to feel more confident that the second half will look more like our prepandemic experience than what we've experienced in the last 6 to 12 months. Mariana Perez: Perfect. And then on supply chain, how -- or what kind of tools do you have to improve your visibility or material lead times? Do you have flexibility to reach out long-term agreements in advance or increasing inventories to provide any potential future disruptions? Kathy Warden: Well, we do have those tools available to us. But what I would say is, I know you've heard from a host of manufacturing, including peers in aerospace and defense industry this week. That we're seeing longer lead times which impact timing of sales. And I believe those are a result of numerous factors but notably the labor availability we were just speaking about -- so as we noted earlier in the call, we do expect the labor market to soften a bit. And while it will still be a headwind in the second half, we don't see it being the same degree that it would be in the first half. And I'm basing this on the fact that we are deeply embedded with our suppliers. We have Northrop Grumman people on site with them. And so we believe we have a good handle on material timing delivery for the rest of the year and we've incorporated that into our thinking but of course, it's based on what we know today. And as we've seen in the last 12 months, COVID flare up, component demand fluctuations and a variety of smaller issues can cost an estimating volatility and around timing of supply. So our teams are managing this well. I feel like we have done this exceptionally well in the first half. while we were slightly short of our own revenue projections for Q2 which we said would be about 24.5% at the midpoint of our guide, that was very tight estimating variability in a very challenging market. So we have very detailed reviews of material timing. We're working mitigation strategies on a daily basis and we have a handle on what we need to deliver in the second half. Dave, anything you would add? Dave Keffer: I think that's well characterized, Kathy, at a program level, in addition to being confident in our ability to deliver more in the second half, the timing of demand is also more weighted toward the second half of this year as opposed to last year when the demand timing at a program level happened to be a bit more weighted toward the first half of the year. So that too contributes to the stronger year-over-year growth outlook for the second half of this year. Operator: Our next question will come from the line of Richard Safran from Seaport Global. Richard Safran: So, I wanted to ask you about the news, the FTC is making about Orbital. You probably were expecting this, at least I would guess. This was initially brought out when Lockheed was buying Aerojet. So I want to know if you could briefly talk to the issues that the FTC is focusing on. If you could discuss what the range of outcomes might be? And I know it's always a bit difficult but if you could speculate on the impact. Any comment you would give there would be appreciated. Kathy Warden: Yes. Thanks, Rich. So let me start by providing some context on the issue. We announced our intent to acquire Orbital ATK in 2018 and the Department of Defense and FTC spent many months looking at the pro-competitive aspects of the deals, of which there are many and any anticompetitive risk before they approve the deal. And so during this period, the government identified only 1 concern and it was around solid rocket motors. And so we agreed to a consent order to address that concern. Over the past 4 years, we've executed an extensive compliance program and worked with the government very closely in line with the terms of the order. So we believe we've been and we continue to be in compliance with the order. The FTC did raise 1 matter. They were investigating a few years ago. But to our knowledge, that investigation has not concluded. And we've shared the -- this in our 10-K and 10-Q filings. So you can refer to those for the details of that particular matter. And now to the point of your question, I know there's been some recent speculation both on the status of that investigation and a broad range of possible next steps that the government might attempt to take. But I'll say that we don't see merit or precedent for most of those scenarios. And we continue to maintain that we don't believe this matter will have a material adverse impact to our company. So I won't speculate on what the size will be because we believe it could be 0 and certainly isn't material. Richard Safran: Okay, that helps. As a quick follow-up here. On your comments about international, I want to know if you could expand a little bit on that. What type of equipment are you getting the most interest for? Could you discuss a little bit about the timing, how that's going to translate to the -- and flow into the P&L. And then just look a bit old school here with increasing international demand, we should expect more higher-margin commercial contract? I just want to know if that's -- if you think that's the case? Dave Keffer: Thanks, Rich. This is Dave. I'll take that one. We've gotten a lot of questions in the last few months given the evolving geopolitical global situation about near-term impact. I think the reality is in a business as long cycle as ours, these things take time to have an impact. And we are certainly engaged with U.S. and international customers talking about areas of particular demand -- we mentioned products like IBCS on the call today. I would say mission areas like missile defense or a particular international interest, as you'd expect. But it will take time for those things to have a financial impact. And so I'd hesitate to project in any specifics what that may be in the near term. It's something we'll keep you apprised of over the next several years as those opportunities become reality. Operator: Our next question comes from the line of Doug Harned from Bernstein. Doug Harned: When you look at Aeronautics, this has been complicated given a lot of mature programs ramping down B-21 going up F-35 but in Q2, if we take out the land sale gain, margins were well below 10%, revenues were low as well which really -- it looks like it makes H2 pretty challenging. Can you talk about how you see the path to guidance in H2? Dave Keffer: Sure, I'm happy to touch on that one, Doug. In the first quarter, we had an unusually high volume of favorable net EACs in the second quarter net EACs were light. This is the typical nature of a business like Aeronautics, where there is quarterly fluctuation. But in aggregate, we have even a slightly stronger outlook for the year, as we described earlier on the margin rate side than we did previously. So you need to look through and look past quarterly fluctuations in net EACs and toward the overall outlook. On the sales side, that net EAC fluctuation rolls through sales as well. And so I'd note that it was relatively stable in the first and second quarter. AS is another business, as we described earlier in our comments where we see a higher volume of material receipts projected in the second half than the first. And so I think, a reasonable second half ramp from where we are today and very consistent with the projections we've been providing for a couple of quarters now. Doug Harned: And well, as a follow-up, if I switch over to space, I mean your backlog there is now $39 billion. I mean it's a huge backlog. And I know you've got some pretty good revenue growth forecast here. But how should we look at the conversion of that backlog in terms of timing? How should we see that conversion move to revenues over the years here? Dave Keffer: Sure. We're -- as you mentioned, we're incredibly pleased with the backlog growth, the award volume that we've had in space programs like both the transport and tracking layers of the FDA architecture are great examples there of work we're doing, really at multiple layers with multiple products supporting multiple mission areas in the national security and civilian space markets. In terms of how that backlog then breaks down in terms of award volume over time -- or sales volume over time, it's been our fastest-growing business and we anticipate that it will continue to be our fastest-growing business and not just any 1 program, GBSD is obviously a large contributor to its growth last year and this year. But the growth is much broader based. And so while GBSD has grown about $0.5 billion in our '22 estimates and should show similar growth in '23, we would anticipate a similar volume of growth outside of GBSD going forward. and our growth outside of GBSD for this year is actually exceeding GBSD's growth on a dollar basis in space. So really broad-based outstanding growth, not just in backlog but to your point in converting to sales as well. Operator: Our next question comes from the line of Cai von Rumohr from Cowen. Cai von Rumohr: Yes. So you and your partner on MGI were selected for the glide phase interceptor that's an interceptor, NGI is an interceptor. Are there any read acrosses in terms of having one list that would make you better positioned for NGI if it goes sole source? And what do you think the chances are it goes to all source? Kathy Warden: So Cai, a very insightful question as always. And I would say that certainly, it is beneficial to be supporting multiple like missions and understanding, therefore, how these systems can draw from a common technology base. Given both are in competition I won't say anything more than that and I'm sure you respect that. In terms of what does this mean more broadly, I would simply say that missile defense is an area of great importance, not only in the U.S. but internationally. And as I outlined in my comments, we're taking a broad enterprise approach to thinking about how we best spring the capabilities of Northrop Grumman to bear on all of these opportunities. And so we feel we're positioned well to support what the government needs. I do think there is a balanced view, however, that we need a broad industrial days in all of our missile defense programs. And so I expect that there is some appetite to carry forward multiple providers for longer as we are seeing in NGI that down-select won't happen until 2025 likely and to your point, may extend even further or go sole-source. And we think that is supportive of Northrop Grumman growth no matter how it goes. And we just support the government in making those decisions about what's best for their industrial base capacity. Cai von Rumohr: And secondly, you also had a number of wins you alluded to in the LEO area. Can you -- as you look at the second half, are there any major opportunities we should keep our eye on competitive bids? Kathy Warden: There are a few, mostly what we see in the second half of new awards. And as Dave pointed out, we do expect now book to bill to be close to one which is improvement over our outlook at the beginning of the year because we've been having more success in competitive awards like the 2 I mentioned with FDA than we had anticipated. But as we look to the second half of the year, not as much competitive to be awarded more sole source to see about $1.5 billion of new awards in restricted within AS about the same in states. We do have a fairly significant competitive award that we're expecting any day in space, it's in the $1 billion class and then a lot of smaller things that add up to our full year expectation of close to one book to bill. Operator: Our next question comes from the line of Kristine Liwag from Morgan Stanley. Kristine Liwag: You mentioned earlier that there's been a fundamental shift in U.S. and European support for defense spending. And historically, when the economic environment is weaker and other federal budgets emerge defense budgets have come under pressure. So what's different this time? And how long do you think the support for defense will persist? Kathy Warden: Thanks for the question, Kristine. I was just in Europe a few weeks ago. And I would say that I see truly a fundamental shift in recognizing the threat environment is real and it's now, right? I think in recent years, within Europe, there's been a sense that we're working toward a longer-term threat horizon and perhaps the pacing of national and defense security spending would have been appropriate in that environment but the fact that the threat is more imminent is addressed in what you're seeing is planned or committed increases in defense spending across most of the European nations. That does take several years so to translate into specific needs, by plan and sales for companies like ours. So I do expect that there might be some modulation based on broader economic factors and other spending priorities. But I don't see there being another inflection point back to a view that defense spending isn't a high priority. So I just see it fairly ensuring. Kristine Liwag: And as a follow-up, how much urgency is there from your conversations with the customers to address the security landscape? And when do you think these demand signals might translate to revenue growth? Kathy Warden: Yes. So as I noted, despite the urgency, it does take generally at least 18 to 24 months to translate intent into specific programs aspirations, customer wanting to buy x quantity of certain systems in production. And it takes even a little longer if it's something that is not in production if it's a developmental program. And so that can be 3, 4, 5 years. So as I think about the landscape in Europe, obviously, the time is now to be advising and insights on what can address their highest priority demands just as we do with U.S. customers but I don't see it having a material impact on revenues for us or other AMC companies in the next 18 months. So I'd say it's more in the 2024 time horizon that we would look forward to have a more material impact. Operator: Our next question comes from the line of Rob Stallard from Vertical. Robert Stallard: Kathy, I just like to follow up actually on the question I asked you 3 months ago about inflation and fixed price contracts. I was wondering how things have evolved over the last quarter versus your expectations? And whether you are making any structural changes to the way you do business, considering we are in this higher inflation environment? Kathy Warden: Yes, good question. So I would -- our today view is very much in line with what it was in the first quarter and we certainly are not immune to impacts of inflation. So we're working with the government to quantify those impacts and work with them to mitigate them. And this includes ensuring that appropriate funding is available for the government program managers to acquire the system needed to support national defense in this inflationary environment. And to that end, we're very pleased to see that Congress is including funding to offset inflation in their FY '23 budget markup. There are some structural characteristics of our business that naturally mitigate some of these impacts. Dave talked about the importance of deal structure. These are things like our mix of cost plus work versus fixed price, the relatively short contract duration of our fixed price contracts that allow us to renegotiate based on current conditions within 1 to 2 years and in some cases, escalation clauses that allow us to reprice. As we are looking now at new deals that we're entering we are being more forceful in including those escalation clauses in our contract terms, making sure that we're matching our supplier terms with our overall contract terms as some examples of what we're doing differently to mitigate the impact. And then we also, within our organization are working to offset the impact. So this includes managing supply chain affordability, looking at second suppliers where we feel suppliers are not addressing affordability, reducing costs in our own areas of overhead costs, including the real estate footprint as we noted earlier today, so while inflation is something that we are managing on a daily basis, I would say we haven't seen a material impact to our financials so far this year but we have to continue to be diligent to make sure that it doesn't become an impact. And we're watching very closely to see if inflation is starting to modulate. Our indications would be that, that is starting to happen but we're watching the data just as you are. Robert Stallard: Okay. And then just a quick follow-up. There was a news report yesterday that the Air Force is looking to retire all its Global Hawks in, I think, 2027. I think is this in line with your expectations? Kathy Warden: It is and this is what we've been talking about for a while that the Global Hawk franchise would be phased out over time. And we -- yes, we were expecting this. And as you note, the Block 40s don't retire until 2027. So that's a bit out in the future and doesn't have an impact on any projections that we've outlined for this year or next but it is in line with our longer-term expectations. Operator: Our next question from Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: Maybe if we could just talk about the F-35 program, Kathy. How big is it today? And given some of the reset on production, how does that impact the cadence and outlook for Northrop? And what are some of the puts and takes just thinking about shifts on content and lead times within Mission versus AS. Kathy Warden: So Sheila, it continues to be about 10% of our annual sales in total across all aspects of our contribution to the program. As we have worked through our new contract for Lot 15 through 17, we have factored in the demand that Lockheed has for our components and we still see our outlook for '22 and even into '23 intact as a result of the new expectations around demand. As we look over a longer period of time, we still see production being the lion's share of our revenue volume. The sustainment is the fastest-growing element of our contribution to the program. And in Mission Systems, we have a combination of development and production because we're supporting the Block IV upgrades. And that most notably is revenue support for Mission Systems even as we phase out of the DAS program which also is in Mission Systems. We see Mission Systems revenue being fairly stable because of that increased volume around Block IV. Sheila Kahyaoglu: Great. And then maybe just a follow-up. You had some positive movement IBC, I think, first deliveries to Poland in the quarter. Maybe if you could remind us how you're sizing that program and timing to the Army versus other potential international opportunities. Dave Keffer: Sure. Happy to jump in on that one, Sheila. In aggregate, that you can think of that franchise in the 1% of sales range. But as you point out, they are important domestic and international components to that today and equally importantly, international opportunity going forward as well. Certainly, it's a critical mission set that our IBCS capability can meet by attaching a kind of previously disconnected sensors and shooters and bringing new capability to disparate systems which is really central to the modern mission set, both domestically and abroad. So we look for that to be a growing franchise. We're really pleased with the competitive awards of the past year. There should be some second half growth in the program. And again, it's a critical part of our Defense Systems franchise. Operator: Our next question comes from the line of David Strauss from Barclays. David Strauss: Kathy, I think on the last call, you kind of endorsed the current consensus revenue estimate for 2023 which I think is around $38 billion. Is that still the right way to think about the revenue trajectory next year? And it would seem like you would be able to get there pretty much on B-21 and GBSD growth. So are you assuming, what does the rest of the portfolio look like next year ex B-21 and GBSD in terms of growth? Kathy Warden: So we continue to believe we can accelerate our growth rate next year toward the mid-single-digit range which is how consensus is being developed. And so it would affirm that. And the demand environment is strong, as I outlined on the call. So that would provide some tailwinds. However, I would caution you just as I am thinking about this as we prepare to give you outlook and trends in October when we'll provide more detail that the supply side challenges that we are facing this year are real. And it depends on how they mitigate throughout the second half as to what that looks like going into 2023 and we certainly could be delivering higher revenue growth this year, if not for those supply side constraints. So it really isn't a demand question. And to your point, the budgets are strong enough for us to have even further accelerated growth into 2023 but we need to be able to deliver on that growth with the labor and the materials. And so we're monitoring that very closely and we'll have a better sense of what that looks like in October to be able to give you trends data into 2023. David Strauss: Okay. And Dave, thanks for the color on pension. Obviously with you guys, a lot of moving pieces with the mark-to-market and all of that. I think you had previously said FAS has relatively, I think, in total, relatively flat in '23 versus '22. I mean are based on more things today, I mean, can you help us at all? Are we looking at like a couple of hundred million dollar headwind '23 versus '22. Dave Keffer: I appreciate you raising that topic for a follow-up. We noted on the call that we direct your attention to the pension sensitivity slide we provide every January. So to give you a feel for the approximate impacts of an increase or decrease in a discount rate or a level of asset returns of a certain degree. The discount rate increase is the most significant effect that we would see on FAS/CAS income if the year were to end today, we've seen well over 100, perhaps even approaching 200 basis points of discount rate increase since the year began. And so as we noted in that sensitivity slide, every 25 basis points can have $1 billion or more impact on mark-to-market at the end of the year and a substantial impact on the FAS/CAS income going forward. Again, these are nonoperating GAAP earnings amounts. They're not cash flow drivers. If anything, as we noted, the CAS reimbursements are expected to tick up slightly. And so from an economic perspective, there's a small benefit there. From a GAAP earnings perspective, would draw your attention to the discount rate and asset return sensitivities. And of course, we'll see where the market moves over the next 6 months to give you a more final sense of the '23 FAS/CAS outlook. Operator: Our next question will come from the line of Seth Seifman from JPMorgan. Seth Seifman: Maybe just to keep everyone riveted, I'll ask a follow-up question on pension. And Dave, I wonder if you could talk about just thinking big picture and conceptually, we've seen Lockheed and their defined benefit plan and they're offloading a lot of their liability on to insurance companies. You guys still have DB. It's not huge. I think the service cost this year should be under $400 million. But when you think about what you want to do longer term, what makes most sense for Northrop, particularly as a government contractor and with the allowable cost framework, what do you want to do long term? Dave Keffer: Sure. Thanks, Seth. So I would point out a few things. One, we've had outstanding returns on our pension assets over any period you look at historically, over the last 20 years, well above market return expectations. We're really proud of the value that, that has generated and the benefit that, that is both to the company and to our government customers. As a result, we are very well funded today. We talked about a 96% funded status level that fluctuates day-to-day, given market movements. But again, we're in slightly better funded position today than we were even as of the first of this year, given the changes in the interest rate environment offset by the changes in the asset returns that you'd expect. So there's a lot of moving pieces under the surface. But in aggregate, we don't today feel a burning need to make a change to our long-term strategy. It has been working. It's been a value to the company, to the participants and to the government. And as a result, it's certainly something we'll continue to assess over time. But at this point, we're pleased with asset returns over any long period of time, Pleased with the funded status that results from that and we'll continue to keep you apprised if there are any changes along the way. Seth Seifman: Great. And then maybe to follow up, just on Aeronautics, I know you talked earlier about the kind of the absence of EACs in the quarter. I think they were a slight negative. I guess if we look back over the last several quarters. Given the size of the segment, the EACs in this segment team relatively light relative to others. What programs kind of give you visibility on that picking up in the coming years. And when we think about how margin expansion in the segment over time, how does the framework of underlying margin versus EACs play into that? Dave Keffer: Sure. In aggregate, for a sector like AS, we would expect, in a typical year, to have a healthy underlying OM rate. And in a typical year, we would have some volume of favorable net EAC adjustments. Of course, at any given time, we don't know which programs those may come from because we've factored our risks and opportunities into our current EACs and we need to perform well and retire risks in order to drive those improvements in EACs. So I'd be reticent to be able to point to any particular program that we think will be a key or much less the key driver of EAC benefits over time. But certainly, within our restricted and unrestricted portfolios, we need to continue to execute well, drive efficiencies in every one of those programs and again, continue to have some volume of net EAC pickups on top of the healthy underlying segment OM rate in the business. It's a segment whose execution we're proud of with some critical programs and we'll look to continue to build on that. Operator: Our next question comes from the line of Noah Poponak from Goldman Sachs. Noah Poponak: Why is there currently such a large variance between the pace of DoD budget outlay versus DoD budget authorization? Kathy Warden: So no, I honestly don't know why. I can speculate a few things that may be happening. One, as we are seeing these supply chain constraints, contracts may just not need additional funding, so it could just be a temporal issue of timing. Another is the labor constraints that we're facing, the government faces as well. So we have seen where some just shortage of people to get work done has impacted anything from outlays to invoice payment timing but that would be speculation on my part. I can't tell you why. What I can tell you is that for Northrop Grumman, we did not see that as a factor in second quarter. We had exceptionally strong book-to-bill, as I noted, at 1.48. We have seen acquisitions staying relatively on time and awards and outlays being in line with our expectations. Noah Poponak: Okay. Yes, it's just a strange dynamic. It's uncommon to see authorization humming along and then being pulsed up and discussions of higher in the future and then the outlays down double digits. But so for you, that's -- it's really a supply chain that's the bigger factor. And then it sounds like you think maybe it's possible that the customer knows their supply chain issue. So isn't cutting checks as fast as they normally would. Kathy Warden: Right. Without lays, we generally see on existing programs that we let the government know when we're reaching a certain threshold of spending against the funds that they've outlaid and that will trigger them to provide the next funding increment. It could just be that many companies and programs are trailing with their timing expectation would have been. You're seeing that in the results across the industry. And so they just didn't have the need to do the outlays in the quarter. Obviously, that's a trend we all want to see reverse, because to your point, the funding is there. Operator: Next question will come from the line of Rob Spingarn from Melius. Robert Spingarn: In AS, you've held the revenue guide despite the pressure in the first half, as you and Dave noted earlier but the margins are coming down just slightly. And you've talked about catching up in the second half but I wanted to ask if the labor to do that is going to be a little more expensive and maybe that's what's behind the margin. And to what extent that Palmdale might be a particular labor pinch point because it does seem like you and Lockheed are competing pretty intensely out there for talent. Kathy Warden: Let me start with the second half of the question and then Dave can join in on the first half. We are not seeing Palmdale to be more competitive than other labor market. Labor markets across the country where we're operating are all competitive. Palmdale is no different but we have been able to get the staffing there that we need to execute on our program. What we've seen more so and we talked about this towards the end of last year, particularly as it impacted the F-35 line is absenteeism that ebbs and flows with COVID has been a bigger challenge for us. So we have the workforce we need but if they aren't as productive because they aren't able to be there consistently that was creating more disruption for us. That has started to even out. Even with this latest set of COVID disruptions, we have not seen the same level of impact because we've taken some mitigating steps. The other thing that we've done in Palmdale is put our own training facility in place so that we can more quickly onboard people to our production programs. and provide them the training they need. It allows us to hire lesser skilled labor coming in. We provide the skills needed and that has opened up the pool from which we can recruit. So we aren't just taking talent from other people's production lines and vice versa. So those are some of the things that we've done and we're seeing good results. Robert Spingarn: And very helpful. And just -- I'm sorry, I was going to just ask a high-level one, if it's okay. Kathy Warden: Go ahead. Robert Spingarn: I just wanted to ask you to characterize your positioning for NGAD? Kathy Warden: Yes. So as we think about sixth-generation aircraft, we are in the process of building the first of those to B-21 and that's given us some fantastic experience and lessons that we believe we can apply to other sixth-generation aircraft. And so we're positioned as a competitor. I think our government desires to have a broad industrial base, able to prime these large opportunities as possible. And we have been clear that we are investing and building our own capabilities and capacities to be able to be a contender. Todd Ernst: I have to leave it there this morning. Kathy, turn it over to you for closing remarks. Kathy Warden: Great. Thanks, Todd and thank you all for joining our call today. I again want to acknowledge the extraordinary accomplishments by our team already this year and the momentum that I feel is creating for the future. So I hope each of you enjoy the remainder of your summer and we look forward to speaking with you in October. Thanks again. Operator: Ladies and gentlemen, this concludes today's conference call. Everyone, have a great day.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman’s First Quarter 2022 Conference Call. Today’s call is being recorded. My name is Renz, 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. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Renz. Good morning, everyone, and welcome to Northrop Grumman’s first quarter 2022 conference call. We’ll refer to a PowerPoint presentation that is posted on our IR website this morning. Before we start, matters discussed on today’s call, including 2022 guidance and beyond, including outlooks reflect the company’s judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, which are noted in today’s press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today’s call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On the call today are Kathy Warden, our Chair, CEO and President; and Dave Keffer, our CFO. At this time, I’d like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone, and thank you for joining us. We’ve seen significant changes to the geopolitical landscape since our last earnings call. Russia’s invasion of Ukraine has consequences for the stability of the region, in addition to creating a profound humanitarian crisis. Our thoughts are with the people of Ukraine as they defend their freedom and protect their way of life. Through the Northrop Grumman Foundation, we are committing aid to help the people of Ukraine, including matching our employees’ personal donations to select charitable organizations. This situation underscores the importance of having strong defensive capabilities to deter broader aggression and contain global conflicts. At Northrop Grumman, we’ve worked to ensure our country and its allies have these deterrent capabilities. Modern deterrence depends on our customer’s ability to maintain advantage over competitors in multiple domains from under sea to space and cyberspace and every domain in between. Northrop Grumman continues to demonstrate our ability to bring deterrent solutions to a more complicated world through unique capabilities in areas such as stealth, cyber, space, computing, propulsion, and communications to name a few. I’ll talk more specifically about our capabilities and our strategy in a few moments. But first, let’s address the budget trends we see in light of this threat environment. In the U.S., there is bipartisan support for increasing defense budgets. Congress finalized the fiscal year 2022 defense appropriations in March and the administration has since issued the fiscal year 2023 defense budget request. Both of these base budgets show solid 4% to 5% top line growth with additional potential in supplemental funding. Based on initial indications from Congress, the final fiscal year 2023 appropriations could be even higher than the initial request is Congress looks to address the evolving threat landscape, but also to offset inflationary pressures. Currently, the fiscal year 2023 budget request includes a 4% increase in the investment account. The main driver behind this increase is a 9% increase in R&D to fund development of critical capabilities, particularly in space and deterrence. Space continues to be one of the fastest growing defense budget areas with a 30% plus year-over-year increase. The request also fully funds modernization of the strategic deterrent, including initial production funding for B-21, as well as significant year-over-year increase in development funding for GBSD. And NASA budgets are also growing in support of a new era of space exploration. The FY2023 budget request includes an 8% increase over FY2022, including funding ongoing programs such as Artemis and new initiatives for Moon to Mars effort. And globally, there is an ongoing paradigm shift regarding national security and several allies have pledged to increase defense spending as a result. We stand ready to support them in achieving their national security objectives as well. With a budget environment as context, I’ll take a few minutes to step back and frame our business strategy. Our fundamental goal is to be the leading technology company enabling the U.S. and its allies to protect freedoms, deter conflict, and sustain our planet. Our business strategy, which we’ve been executing for several years is focused on four core areas. First is maintaining technology leadership and delivering innovative and affordable solutions with speed. Next is sustainably and profitably growing our business in our customer’s highest priority missions, while maintaining contracting discipline. Third is keeping a laser focus on performance and driving cost efficiency. And finally, we are focused on deploying our capital in value creating ways for our customers and investors. This strategy has created strong alignment with our customer priorities and strengthened our portfolio position. As we sit here today, we expect this will enable us to accelerate our revenue growth rate in 2023 from the low-single digits in our 2022 guidance. By 2024, we also expect that by growing our business and delivering strong operational performance, we will be able to drive our segment operating margin rate to approximately 12%. And we continue to expect to grow our transaction adjusted free cash flow at a double-digit CAGR through this period. From a capital deployment perspective, investing in our business to support this growth outlook remains our top priority. After making such investments, we are targeting the return of at least a 100% of our free cash flow to investors in 2022. Underlying these performance goals and expectations is our position in several priority growth areas for our customers. Our role in supporting deterrents across all domain is indirect alignment to the needs of today’s changing global national security environment. For nearly seven decades, the U.S. has successfully mitigated the risk of broader global conflict through strategic deterrents. Northrop Grumman is the prime contractor on two of this recurrent deterrents modernization program. For the B-21 program, the air force confirmed that the first aircraft has entered the ground test phase, pays being the way for first flight. And there are five additional test aircraft in various stages of assembly. This progress is partly enabled by our digital design capabilities and advanced manufacturing technologies, which reduced risk ahead of the aircraft first flight. And looking forward, we expect sales on the B-21 program to grow as the EMD phase continues and we progress into low rate initial production. This assumption underpins our expectations for aeronautics revenue to be flat next year and return to growth in 2024. For GBSD, we remain on schedule. The program is expected to continue to ramp over the next couple of years, as we execute on the $13 billion EMD contract, with nearly $1.9 billion in expected revenue in 2022. We still expect the program to enter production in the a 2026 timeframe with initial operating capability plan for 2029. GBSD production is expected to be a material growth driver in the middle of the decade, as it’s reflected in the President’s budget. In addition, our space business continues to experience rapid growth as our customers rearchitect their space-based capabilities. This growth is in response to adversaries developing more sophisticated weapons, the need for more capable missile defense warning systems, as well as the migration of some airborne missions to the space domain. In the first quarter, we’ve received several new awards that showcase the breadth of our space portfolio and our ability to compete and win in various domains, including ground systems and proliferated LEO constellations. These awards build on our significant backlog and positions our space business for expected double-digit growth once again this year. Notable wins in this quarter include a nearly $700 million award for 42 satellites in low earth orbit that provide high speed, low latency communications for the Space Development Agency’s transport layer. And we want a $340 million contract for deep space advance radar capability or DARC that dramatically improves situational awareness, particularly in geosynchronous orbits. And in Q2, we anticipate an approximately $2 billion award from ULA to provide GEM 63 motors for launch services, including in support of Amazon’s Project Kuiper. Another area, where we see meaningful future growth opportunities is in Mission Systems, particularly our Network Information Solutions business, which at its core is a communications and processing business. In this area, we have proven technology leadership in connecting and linking military systems with a broad portfolio of product, including networking systems and radios and cyber computing and AI capabilities. We’re seeing a rapid evolution in this area with ambitious goals from our customers to field open, distributed, secure networks that are more survivable. Initiatives like JADC2 are providing demand for our existing platform agnostic solutions, as well as providing opportunities for new technologies we are developing. And we are creating partnerships like the 5G partnership with AT&T that we announced this month to strengthen our competitive position. We believe this communications business will be the fastest growing area of MS over the next couple of years. Given all that I’ve just outlined, you can see that our portfolio is aligned to the evolving national security environment and priority areas for our customers. We continue to demonstrate our ability to deliver compelling solutions in this environment. Ultimately, executing on our strategy depends on having the right culture and people. This is one of the reasons we focus on remaining an industry leader in ESG. I encourage you to look at our annual sustainability report, which we published in March. It provides insights to our progressive governance structure, our culture, our commitment to ethics, diversity, equity and inclusion and environmental sustainability. As we shared in this year’s report, we are committing to net zero emissions in our operations by 2035. We also published our first TCFD report, which provides additional transparency around our approach to managing the climate related risks and opportunities across our business. So with that, I’m going to turn the call over to Dave to provide more detail on our results and guidance. And then we’ll move on to Q&A. Dave? Dave Keffer: Thanks, Kathy, and good morning, everyone. Our first quarter was a strong start to the year. We generated more bookings than we’ve been expecting, including competitive wins on several new programs. Our robust backlog of $76 billion continues to be over two times our annual sales and provides the foundation for future growth. First quarter sales totaled $8.8 billion down 2% organically and up sequentially from the fourth quarter of 2021. Q1 sales represented about 24% of our full year guidance in line with our prior projection. We experienced some temporal COVID related productivity and volume impacts to start the year, which receded as the quarter progressed. Continued tightness in the broader labor market represents a challenge that we’re working hard to mitigate as we ramp on large contracts and address strong market demand for our capabilities. We continue to make progress on this front and are pleased with the trajectory that we’re on. Our execution remains solid in the quarter. We delivered a segment operating margin of 11.8% in line with the midpoint of our full year guidance. And we made progress on several elements of our long-term cost efficiency strategy. At the program level, net EAC results varied across sectors as is common in any given quarter. One of the positive EAC changes in Q1 was a $67 million favorable adjustment on the B-21 program related to performance incentives. In addition to what Kathy noted, I wanted to take this opportunity to provide a bit more color on this franchise program. B-21 is currently in its cost type EMD phase with a variety of incentive fees for which we accrue based on anticipated achievement. Our projections for certain EMD incentives improved in Q1 leading to the favorable EAC adjustment. We are in a critical integration and test portion of the EMD phase this year. And we continue to focus on production efficiencies. The low rate initial production or LRIP phase will begin over the next year and run in parallel with EMD for a period of time. LRIP for B-21 is fixed price. And we expect to recognize revenue for the LRIP lots separately from EMD. The LRIP units were priced as part of our original bid for the program. The full rate production phase or FRP has yet to be negotiated and includes the majority of the aircraft volume in the program of record. Based on our current projections, which run roughly through the end of this decade, we continue to expect production to be priced and profitably executed within the program’s average procurement unit cost target. Now turning back to our Q1 results. Diluted earnings per share in the quarter were $6.10 reflecting our strong segment performance. Keep in mind we had a headwind of roughly $0.46 resulting from lower CAS pension costs in our overhead rates that we booked in the first quarter of last year. In aggregate, our transaction adjusted earnings per share were down 7% compared to Q1 2021, primarily due to non operational factors such as lower net FAS/CAS pension and the performance of marketable securities. It’s worth noting that the after tax net FAS/CAS pension adjustment in Q1 was nearly $250 million representing $1.58 of earnings per share. This was $40 million lower than Q1 a year ago and a $0.19 EPS headwind. We expect similar impacts in each of the remaining quarters in 2022. That total net FAS/CAS pension adjustment primarily reflects the actuarial gains and losses in our pension plans and is not something we consider when assessing the company’s operating performance. Moving to 2022 guidance. We have minimal changes. We’re increasing the sales guidance for our space business due to continued strong momentum and recent capture of new awards as Kathy outlined. We now estimate sales in the mid to high $11 billion range, which would result in another year of double digit sales growth. At defense systems, we’re adjusting our estimate to the mid to high $5 billion range to reflect a lower first quarter, particularly on some of our international training programs. These two adjustments offset each other and our full year company level sales guidance is unchanged. With respect to our quarter sales profile, we expect Q2 sales to be between 24% and 25% of our full year guidance midpoint with our expectation near the middle of that range. From there, we expect accelerating year-over-year growth in the second half of the year. Next, I wanted to take a moment to talk about cash. First quarter transaction adjusted free cash flow was consistent with our expectations and in line with our historical seasonal trends. The decrease compared to the first quarter of 2021 reflects timing of collections and disbursements and our full year guidances unchanged. After the quarter ended, we made our first cash tax payment of the year, which included the projected effect of current R&D tax law. Our next estimated tax payment is due June 15. We continue to project that cash taxes would be about $1 billion higher for the full year should the current law remain in effect. But we remain optimistic that we will see it deferred or eliminated given the broad bipartisan support for doing so. Our base case assumption for cash flow and P&L continues to be that section 174 R&D tax law will be changed. If and when that happens, we would expect to file for any appropriate refunds of taxes paid and also recognize a spike in corporate unallocated cost in that quarter associated with the reversal of the deferred state tax asset that had been building year-to-date. I note that we’ve already incorporated these items in our full year EPS guidance. We remain committed to providing excellent shareholder returns with at least $1.5 billion in share repurchases targeted for this year on top of a healthy competitive dividend. As Kathy mentioned, in aggregate, we expect to return at least 100% of our 2022 transaction adjusted free cash flow to shareholders via dividends and share repurchases Over time, we expect the cash on our balance sheet at a typical year end to be roughly $2 billion, which would continue to provide flexibility and liquidity. Our capital deployment strategy also prioritizes investing in our business. We continue to expect capital expenditures for 2022 to be in line with 2021 levels. And later today, we will file an S-4 with the SEC as the final step of the obligor exchange process that we executed last summer on certain debt instruments. Overall, we’re pleased with our first quarter results and achievements as we continue to build a strong foundation to accelerate growth and deliver on our long-term value creation strategy. And with that, we’ll open your call up for questions. Operator: Thank you, sir. [Operator Instructions] Thank you. Our first question is from the line of Doug Harned with Bernstein. Please go ahead. Doug Harned: Good morning. Thank you. Kathy, you talked about aeronautics and how you’re looking at the top line 2022 to 2024. But this has been complicated. You’ve got several mature programs that are set to decline this year, even F-35 trajectory looks complicated, E-2D appears to be ending in 2024, and then beneath that you’ve got high growth on the B-21 ahead. You’ve got a budget boost for Triton. Can you help us understand that puts and takes here that get you to those revenue expectations for the next few years? Kathy Warden: Sure, Doug, and you did a nice job of outlining the key moving parts in the aero portfolio. Let me start with the mature programs. These are the ones we’ve been talking about for several years, Global Hawk, Joint Stars that are in the air force plan for retirement, and that is happening in the near term. Then we have things like what you noted with E-2D, it will reach its program of record quantities over the next several years. We don’t see this as an issue in 2023 and 2024, but as we look to 2025 and beyond that program will be reliant on international sales. And I will say that we are building a quite a bit of international interest for E-2D and prosecuting on a pipeline there. But the Navy program of record will reach its full quantity. And then F-35, we look at that it fairly stable over the next couple of years is what we’ve been saying. And I know there’s question about the quantity and the budget request and how that impacts the Northrop Grumman quantities. It really doesn’t have a material impact because we already we’re planning to build toward our capacity and working with Lockheed Martin, it appears that that plan is still intact. And then as you know, there are some opportunities that layer additional sales into the plan over the next several years. B-21 being the most notable for the first time, the President’s budget shows the production lay in starting in 2023. And you can see that that grows significantly in that same timeframe. So lots of put and takes, but as we look forward to 2023, we see those netting out to about flat with where we expect to finish 2022, and then largely based on B-21 growth and not having any major headwinds in 2024 from the other programs I just outlined we see growth in 2024. Doug Harned: Well, and just as a follow-up within that, the new budget, there’s a big boost for Triton. And if I look at unmanned systems, this has been an area where I mean, at least a while back the company had talked a lot about differentiation because of the operating architectures that had been developed at Northrop Grumman, but we saw – we’ve seen Global Hawk come down, hail systems, I think there’s a Triton boost is good. But how do you think of growth potential in unmanned systems overall from this point? Kathy Warden: We still see both the Air Force and the Navy looking at unmanned systems as a key part of their architecture. But these won’t be either the highest quantity or the highest price assets in their fleet. So when you think about the overall materiality of unmanned systems in an aeronautics portfolio, whether it be ours or others, it’s not going to be one of the bigger drivers for growth over the next decade. But it’ll be important and the capabilities that we have, and that we have refined through our work on our hail platforms, as well as some smaller platforms, I think is highly relevant to our positioning for this market in the future. Doug Harned: Okay, great. Thank you. Operator: Thank you. Our next question is from the line of Robert Stallard with Vertical Research. Your line is open. Robert Stallard: Thanks so much. Good morning. Kathy Warden: Good morning, Rob. Robert Stallard: Kathy, thanks for the additional detail on the B-21 there. But I was wondering if we could – I don’t if we dig in any further on this. You mentioned that the LRIP portion is fixed price, and would’ve been signed a few years ago. I was wondering how this now stands with regard to the inflation that the whole world is dealing with and how you’re going to manage that? Kathy Warden: Yes. Thanks for the question, because this is an important thing for us to touch on it. Why we provided a bit more clarity on what production looks like on the B-21 program as we are approaching that phase. We did it’s a – that quantity. That quantity is not something I can share, but it’s a small portion of the overall program of record as part of the initial bid. And that is what constitutes LRIP. And that was bid is fixed price. And as we put that bid together, of course, we at the time laid in some expectations around growth inflation to adjust to this time period. And we will continue to look out whether those assumptions still hold. I’ll remind you we’re not really going to be into the production phase for a couple of years in any significant way. And so we still have a good bit of time and we expect inflation is going to modulate, and we’re not seen based on the assumptions we’ve made today, a material impact to the program. And part of why Dave shared how we think about the accounting on the program is so that we are already looking at those LRIP blocks [ph] since we are obligated under our initial proposal for those quantities, and still expect to be able to produce those within the government target price, which is published and is updated and adjusted for inflation on a regular basis. The last time the air force did that was in 2019, a little over 600 million APAC [ph]. And we continue to look at our own bids and makes sure that we see a path to executing those quantities profitably. And we reiterated that again today. Robert Stallard: That’s very helpful. Thank you. Operator: Thank you. Our next question is from the line of Sheila Kahyaoglu with Jefferies. Please go ahead. Sheila Kahyaoglu: Good morning, Kathy. Hey Todd. Thank you. Since we’re on the topic of profitability, Kathy you laid up some margin expansion targets through 2024. I think you mentioned 12% given the growth drivers you have, how are you also thinking about just mix again, you touched on inflation. It doesn’t seem a big deal and productivity overall? Kathy Warden: So mix is becoming less of a factor for us in the next few years. We had talked about our mix being roughly 50% cost type and 50% fixed plus price that’s exactly where we are as we sit here in the first quarter, and we don’t see that varying too much over the next couple of years, maybe a percentage point higher on cost plus or two, as we look at the next couple of years. When we see that inflection point to more fixed price is as both B-21 and GBSD start to move into their production phases. And so you can think of that notionally around the 2025, 2026 timeframe, the middle part of the decade. And even then we don’t see a very large swing in our mix because we still have development work that will be bidding and continuing to execute in the pipeline. So mix is less of a factor as we look forward at the company level. Now, I will note that when you get into the segment level, for instance, in space, those drivers are more pronounced. And so we do see a bit more of a mixed shift there. And you asked about how we think of that in terms of profitability. So mix no longer being a big driver when we think about profitability and cost efficiency and performance being the two big drivers that we are focused on. So I talked about that in our strategy in terms of cost efficiencies, we’ve put in place a dedicated team at the company level, and we’re working all elements of cost to ensure that we’re operating as sufficiently as possible. Sheila Kahyaoglu: Great. Thank you. Operator: Thank you. The next one we have the line of Peter Arment with Baird. Please go ahead. Peter Arment: Yes. Good morning, Kathy and Dave. Hey, Dave, maybe I could just follow-up on kind of the Kathy’s comments on the outlook, kind of through 2024. You mentioned double digit growth and free cash flow. How do we think about it from kind of the puts and takes on it, just an overall conversion rate, below a 100% currently and just what’s the right way to think about it as we look out through 2024? Dave Keffer: Sure. Thanks for the question, Peter. No significant changes to our free cash outlook from when we described it in some detail a quarter ago. It’s not a three-year outlook that we intend to modify on a quarterly basis unless there are material changes. And so the same drivers exist today. We do see an opportunity over the next few years for us to continue investing appropriately in the business, but to have CapEx come down slightly, especially in 2024 in comparison to 2022 and 2023. So that’s one of the drivers of free cash flow acceleration. We also have the end of the payroll tax deferral issue that benefited us in 2020 and as an outflow in the next in the following two years. And so that will benefit 2023 and 2024. On the kind of working capital side, as we’ve noted 2019, 2020, we’re very strong years of working capital efficiency. At this point, we’d put our working capital metrics up against any in the industry. We very proud of the efficiency of our balance sheet and the next year that we see opportunities for continued enhancement there is largely 2024 due to the timing of some payment expectations in that year, incentive milestones and such. So again, no changes to the outlook there. Those are some of the key moving pieces, relatively stable on the working capital front in 2022 and 2023 before seeing those opportunities in 2024. And as we’ve noted we do see expansion in the core business, both at the top line and the bottom line supporting that outlook over the next few years as well. Peter Arment: That’s great caller. Thanks so much. Operator: Thank you. Our next question is from the line of Ron Epstein with Bank of America. Your line is open. Ron Epstein: Yes. Hey. Good morning. Kathy, what have you seen in international markets? I mean, since the events in the Ukraine started to play out we’ve heard from several NATO members that they’re going to up their defense spending to 2% as a floor potentially, right? I mean, Germany kind of doubled their defense budget over a weekend. So what have you seen on the international front and customer interest there, and then I have a follow on after that. Kathy Warden: Sure. Ron, well, we’ve definitely seen interests pick up across Europe and we’ve been engaging with customers there to understand their needs and timelines. Of course, we haven’t seen a dramatic shift in immediate spending plans, part of what I know each of the countries is thinking their way through is what the need is and then what their requests will be and what their reliant on U.S. product will be. So we expect that to be more of a 2023, 2024 timeframe to get clarity and start to see real award opportunities. In the meantime, we are providing a good deal of support to Ukraine, just in the sense of our assets being used either by the U.S. or our NATO partners to provide surveillance intelligence and monitoring of the situation and as well, providing some additional capabilities into Poland. Ron Epstein: Got it. Got it. And then kind of the follow on there, more domestically focused. Do you expect the nuclear posture review, I guess isn’t out yet, and some changes in that and what that could mean for GBSD and some of the other programs you’re on in the wake of what’s gone on in Eastern Europe? Kathy Warden: Well, even though the nuclear posture review hasn’t been fully released, there has been executive summary provided and the President has supported all three legs of the triad in the nuclear posture review. As I was spending time on the hill just this week, I still see very strong bipartisan and support for all three legs of the triad. And to your point, I think that support has even grown in the last two months as a result of Russia’s invasion of Ukraine and a recognition of the importance of the triad to contain that conflict. So we see that continuing to be a tailwind to the modernization programs that are underway. Ron Epstein: Great. Thank you very much. Operator: Thank you. The next one we have the line of Mr. David Strauss with Barclays. Please go ahead. David Strauss: Thanks. Good morning. Kathy Warden: Good morning. David Strauss: Kathy, you talked about the upside in the fiscal 2022 enacted budget, the proposed 2023 budgets. Is there any way you can quantify what that might mean to your revenue growth trajectory in 2023 and 2024? I know it takes time to come through, but I guess relative to whatever you were thinking maybe 6 months to 12 months ago, I mean does this add a 100 basis points, 200 basis points, any sort of quantification you can give? Kathy Warden: Yes, David, as I mentioned in my remarks, we do expect our revenue growth to accelerate into 2023. Right now we see that in line with 2023 consensus. It’s really early even in this year, but we expect 2022 to be in low-single growth outlined in our guide and with the growth rate accelerating in the second half. So we do expect that momentum that we see in the second half of this year to carry into 2023. And of course, the 2023 President’s budget is a good indication that demand for our products is holding up extremely well. The one thing I would note is we’re really mindful of the supply site challenges that continue. Certainly, we saw those most notably at the beginning of this year and they have in our case really moderated as we looked at March and April performance, but we’re keeping up close eye on everything from the tight labor market to inflation and COVID-related headwinds that could slowdown our growth rate even though we have strong budget support for our programs. So and sum all that up by saying there’s reason for optimism and we have optimism, but it’s cautious optimism. And it’s a bit early in the year for me to try to put a number on our 2023 growth rate given all of those puts and takes, but we’ll certainly keep you updated on each quarterly call on our outlook for next year. David Strauss: Okay. That’s helpful color. And as a follow-up, you offered a little bit more detail on B-21. So I thought I would ask this, it looks like in the budget, there’s about a $2 billion funding increase in fiscal 2023 versus the rate that the levels that we’ve seen over the last several years. I mean is that the kind of revenue growth kind of increase we’re looking at B-21 looking out over the course of the next couple of years. Kathy Warden: Well, the government is looking at layering production on top of EMV. And so what you can see in the fight is pretty stark jump in 2023 is production gets layered in, but of course, keep in mind all of those dollars won’t be spent in calendar year 2023. And then there’s not as pronounced to step up after that. But production funding still remains healthy as EMV starts to come down. And that’s the profile we would typically see on a program like this, but it does project robust funding for B-21 through the decade. And we – that is what we are anticipating as well. David Strauss: All right. Thanks very much. Operator: Thank you. The next one we have the line of Seth Seifman with JPMorgan. Your line is now open. Seth Seifman: Thanks very much, and good morning. Just starting off with a quick clarification earlier about the move to the 12% segment margin. When you talked about the mix change in space, Kathy was that – I assume, was that getting more towards cost plus as you – when you work and GBSD grows and if so, is that a headwind? And if that’s the case, what are the segments where you expect to see margin expansion? Kathy Warden: Yes. So I should have been more clear extra pointing that out. We do expect more costless work in space over the next couple of years, as GBSD continues to grow. We’re also executing on next generation interceptor, which is a big growth driver and then some assorted classified efforts that are in the development phase in continuing to scale as well. In terms of other businesses that are moving in the opposite direction, so stronger margin rates, aeronautics is one that we see having stronger margin rates. You’ll – you already see that in our guide for this year being higher than last. And we anticipate that we’ll continue to see strong and healthy margin rates there. Defense and mission systems already perform at very strong margin rates. So we expect that to continue, but the real offset that we see is space and aero. And I will also say that in space, we’ve seen the bulk of that pressure already because keep in mind while GBSD will continue to grow in the EMV phase, not to the extent that we’ve seen it went from a couple hundred million a year to over $2 billion. And so over this time period, and the majority of that will already have happened through the 2022 period. Seth Seifman: Great. thank you. And then just a quick follow-up on rocket motors and [indiscernible] First of all, it seems like there’s some friction in the supply chain for rocket motors based on some comments this past week, I assume that’s not Northrop Grumman, but do you see any opportunity to take share as a result? And secondly, is there any supply chain or other friction for the Northrop space business as a result to disruption in the space supply chain from the war in Ukraine? Kathy Warden: Yes. So there’s a lot to unpack there. Let me start with commentary around rocket motor providers. We are performing well across the Board for our primes, and we do not believe that any comments that were made relate to Northrop Grumman performance. We continue to offer our capability to any who would like to have our rocket motors, and we’re going to continue to do that. And we’re investing in that business to make sure that we are a good and stable performer and provider. In terms of our exposure to Ukraine and Russian rocket motors, we do have some exposure on our CRS contract. So this is where your Antares launch vehicle, we procure rocket motors from Russia, and of course from Ukraine. We have what we need for the next two launches. And so there isn’t the immediate disruption and we have a plan in place that we could use other sources if needed beyond those two launches. But of course, it’s our preference to keep the relationships intact between Russia and the U.S. around the space station. And that’s what these rocket motors are used for to take cargo to the international space station. But we are working closely with NASA to make sure we’re following the U.S. government lead in that case. Seth Seifman: Great. Thank you very much. Operator: Thank you. The next one we have the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: Thanks. Good morning, guys. And Kathy taking a 30,000 foot view, I mean the outlook for the fed in the U.S. and our allies is positive. You’re on two legs with a nuclear triad, and there’s clear bipartisan support for these program. Free cash flow is stable. I mean when you take a step back, the company’s future is pretty visible here. And with the FTC blocking the Lockheed-Aerojet rocket dying deal, large M&A seems to be off the table for now. The company, so Northrop had bought back about half its shares outstanding in the past 15 years, if the priority is still buybacks at some point in the distant future, there may not be any more stock to buy. How do you think about long-term uses of cash especially as free cash flow remains positive, and you’ve got so much visibility? Kathy Warden: Well, it’s an excellent strategic question, Kristine, and one that we spend a good time deal of time thinking about. And I will say our first priority is investing in the business and you have seen us invested in elevated level both CapEx as well as there are R&D is the percentage of sales over the last several years, and we are not backing away from that core part of our strategy. I noted when I laid out our strategic plan, that technology leadership and innovation is core to how we have attained the position that we’re in and in my view will be the most important factor to retaining that position of strength. And so we will continue to invest in our business, but with that said, strong cash flows. And as you noted as strong outlook for growth to fuel those cash flows gives a us a lot of optionality in our capital deployment strategy. We do believe that at some point M&A may come back on the table, but for the immediate term, as you said, large needle moving M&A is likely not to be strategy that we can execute. And so we are looking at returning capital to our shareholders at this important time through a competitive dividend and share buyback. We do tend to prefer share repurchase in this environment just to give us a little more flexibility as environmental factors change, but share repurchase, it’s still a core part of our strategy, but it’s by no means the only method that we believe we create value for shareholders, and we stay focused on investing in our company. Kristine Liwag: Great. Thank you very much. Operator: Thank you. The next one we have the line of Cai von Rumohr with Cowen. Please go ahead. Cai von Rumohr: Yes, thanks so much. So I recall on the Q4 call that you talked about book-to-bill being I believe one or a little below one this year, you started out strong particularly in space. Could you tell us how has that changed? Can you – is any thought you could be above one and how should we think about all the areas because space looks like it’s on its way to being well above one? Kathy Warden: Yes. Cai, we do not expect book-to-bill to be over one this year. It is off to a stronger start than we expected. And so I will be clear. It is likely to be higher than we anticipated coming into the year, but still don’t see it crossing the 1.0 threshold and space is a key driver as you noted of that strength, but we see broad strength in booking this year beyond what we had expected, some nice competitive wins in our Defense Systems business and our aero business also having strong awards, particularly as we look to book lot 15 aggregate demand on F-35 this year. What we look at, and I’ve mentioned this on prior calls is a multi-year book-to-bill. And so having a portfolio where we’ve brought in some very sizeable long-term awards like B-21 and GBSD, we have a backward looking book-to-bill over 1.2 aggregate for the last three years. And so we don’t expect to have that kind of performance in book-to-bill every year, but we still expect our four-year average once we take 22 into consideration to be well over 1.1. So sustaining the backlog growth that we need to fuel the business growth we anticipate. Cai von Rumohr: Very good. And sort of as a follow-up, we have a strong FY2022 appropriation, we have a big 2023 request, which everyone expects to be plused up by Congress. Any color as you think about going forward. Is that book-to-bill likely to be – is your best guess that it goes up over the next couple of years. Any color you could provide would be great. Kathy Warden: I would just say that we see an environment, where we can keep that multi-year average well above one. Cai von Rumohr: Terrific. Thank you very much. Kathy Warden: Thank you. Operator: Thank you. The next one we have the line of Myles Walton with UBS. Please go ahead. Myles Walton: Thanks. Good morning. First one, just a clarification, maybe for Dave. The 100% free cash flow return to investors in 2022, is that before the amortization tax impact or how does that work? Dave Keffer: Thanks for the clarification, Myles. That is independent of the Section 174 determination. So we intend to return at least 100% of free cash flow in either case, whether it is deferred or not. Myles Walton: So if it is deferred, would you return the guided number that is not adjusted for the tax? So that is $2.5 billion to $2.8 billion or would you just be signing it to 100%. Dave Keffer: That’s correct. So we have roughly $1 billion run rate on the dividend side, we’ve committed to $1.5 billion of share repurchase. And so you can take from that, there would be incremental potential if Section 174 were deferred. Myles Walton: Okay, thanks. And then Kathy, is it within – in terms of supply chain issues, everybody sees something, are you seeing it within defense systems as relates to some of the munitions? Is that sort of where you might be seeing it? Or it doesn’t look like you’re being terribly affected or you’re forecasting it better than most. So maybe just give some color there. Kathy Warden: So Myles, I wouldn’t point to any one part of our business, where we are seeing dramatic impacts. Aero, where we have high volume line in F-35 we saw last year and we talked about that quite clearly. As we got into the first quarter of this year and the plan that we laid in place, we are meeting that plan on F-35, but there was impact. And we still are working to address that impact on the F-35. Other than that, there’s really no single program or area of the business that I point to just a little bit of sluggish attendance coming into this year, due to COVID cases, some light impact on electronic supply, both to Mission Systems and Defense Systems, but nothing material enough to really call out individually. Myles Walton: Okay. Thank you. Operator: Thank you. The next one, we have the line for Robert Spingarn with Melius Research. Robert Spingarn: Good morning. You’ve given us really great incremental detail on B-21, but I just wanted to perhaps flesh this out a little bit further, if you can, and talk about the revenue cadence with EMD. When EMD and LRIP overlap, are we going to have a peak revenue year or does the LRIP grow enough and the EMD small enough that its – we should see growth through the rest of the decade? Kathy Warden: Well, I would point you to the [indiscernible] So the budget does not show a peak revenue year through fiscal year 2027. So I can’t provide you much more than that, because quantities and the like are classified. But if you just look at what was in the – what the administration submitted now, of course, this has to go through appropriations and it’s always subject to annual revision as well. But what was submitted this year for the five year outlook does not show a peak year through 2027. Does that help? Robert Spingarn: Okay. And then – and just based on what you talked about with profitability and relative to EMD margins. Would it be fair to assume that the profit cadence is not the same as the revenue cadence? In other words, the margin mix, the margins would drop at some point because of the switch in contract. And then just Kathy, as a follow-up to that, do you think possibly going forward, we’ll see less fixed price development on new contracts. Just not so much focused on B-21, but what we’re seeing elsewhere in the industry – across the industry on all the charges on a lot of these programs. Kathy Warden: Well, I can’t really comment on B-21 mix of EMD and production rate. And so let me go straight to your broader strategic question, which is an important one on whether the government will likely shift away from fixed price development. I do believe that there will be a shift away. And I think we’ve already seen that to a large degree. And frankly, B-21, well, we were asked to bid fixed price LRIP. We did not have a fixed price development phase of that program. And there’s a very important distinction in my mind between production, even early stages of production at fixed price and the development phase being at fixed price. And of course, GBSD is a cost plus development program. So that’s why I suggest that we are already seeing a shift on major weapons systems developments to a costless development phase, which in my mind has always been the right approach for the government to contract for development. By definition, there is inherent technology development and risk associated with that phase. And you want to be able to apply resources to reduce that risk into production. And if the government doesn’t have that latitude, because they’re set at fixed price, then the contractor has to do that often out of their own profit, which is really tough decisions to make. And I think it impacts the ability then for the program to be successful over the full life cycle. And of course, the majority of the government’s costs are in the production and sustainment phases of the life cycle, not development. But I think the government recognizes this, and it’s why we’ve seen a shift away from fixed price development on these large weapons systems. Now, there still will be some fixed price development in the system, but I don’t see it being a material driver. Robert Spingarn: Thank you very much. Operator: Thank you. Our next question is from the line of George Shapiro with Shapiro Research. George Shapiro: Yes. Good morning. Dave, I wanted to ask unbilled receivables we’re up like $600 million in the quarter. Does that reflect the F-35 work that you’ve done, but you can’t show as revenues yet until the Lot 15 to 17 contract is signed? And if so then that $600 million first quarter revenues and will help sometime later in the year. So if you just comment on that. Dave Keffer: Thanks for the question, George. No, is the short answer. The unbilled receivable growth is not directly related to F-35 or any one other program in the portfolio. Rather, I would point you to the common seasonality that we tend to see in the first quarter, given the timing of receipts in that case. And we’re broadly speaking about free cash flow, seasonality, the timing of payments as well. We tend to have an outflow in the first quarter of the year, and this year is almost exactly in line with the average of the last four or five years. So no significant single items there. On F-35, the P&L, sales and other lines were not affected by the timing of contract negotiations to your point nor would they be anticipated to be in a meaningful way through the end of this year. George Shapiro: Because I noticed, I mean, the unbilled receivables were up like about double what they were in last year’s first quarter. That’s part of the reason for the question. Dave Keffer: I appreciate the question. Last year’s first quarter was actually the anomaly there, where we had a stronger free cash flow result and working capital change in the first quarter of the year than we had had in any of the prior five or six. And so this year is more in line with history. So it’s a very good point, last year was the unusual one. George Shapiro: Okay. And then just one for you, Kathy, I mean, defense looks like it’s going to be the weaker business going forward. It’s one of your smaller businesses. You considered divestiture of any pieces of that business. Kathy Warden: Well, George, as you know, we did look at the entirety of our portfolio and divested the IT services business that was in defense. And we were very intentional and thoughtful about that, but we looked at the rest of the portfolio and feel that it has nice energy with our business. And we do see opportunity to grow that business. Just a little bit of reset here that the business is experiencing. But the weapons portfolio continues to grow and we have nice synergy between the aircraft sustainment and modernization and our aeronautics business. And our IBCS portfolio sits in there, and we absolutely is that program now is maturing and we’ve won full rate production, sea growth there. So we’re happy with the portfolio, a little bit of transition to growth that we’re still working our way through here. But no, nothing else that I would look to the best in that portfolio right now. George Shapiro: Okay. Thanks very much. Operator: Thank you. The next one we have the line of Richard Safran with Seaport Research. Please go ahead. Richard Safran: Kathy, Dave, Todd, good morning. A lot’s been asked already. And so I have a general question regarding one of Dave’s opening remarks. With respect to major platforms and systems, you’ve rapidly gained a lot of share, a number of programs in development you’ve been talking about it all morning. Now, historically, one problem that comes along with that is having to use the A team then the B team, et cetera. And all the while maintaining execution, which, by the way, just judging from the incentive fee on the B-21 is actually pretty darn good. Now there are still opportunities out there. So my question is, is Northrop’s plates full. Dave, you mentioned labor, do both of you feel you have sufficient resources to support, bringing on additional programs and still maintain the current level of execution. Thanks. Dave Keffer: Thanks for the questions. Certainly, those are topics and priorities that are front of mind for us these days. You heard both Kathy and I comment in the opening remarks about the criticality of execution and labor, our people, our resources, the hearts and minds of this company are at the center of our execution capability. To your point, we’ve demonstrated ourselves well over the last few years of execution efficiency of maintaining costs and schedule on many key programs. And we devote a lot of resources to that. I wouldn’t say that we’re at a point where we’re at capacity where we couldn’t take on additional work. We’re certainly devoting all potential resources to bringing additional capacity on board and have ramped significantly over the last few years, both in headcount and key supplier relationships. So that’s certainly a priority for us. Certainly, we’re spending a lot of time in that area today. But we’re eager to continue to meet the key demands of our customers and feel that we’re well aligned with those areas of demand in the budget outlook, as we’ve described on the call. Richard Safran: Okay. Kathy Warden: And that’s probably a place to leave it. I think we are blessed to have a lot of A teams. So thanks everybody for calling in today and listening to our call. As always, we wish you well, and look forward to talking to you again in July. Take care. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's Fourth Quarter Year-End 2021 Conference Call. Today's call is being recorded. My name is Natalia, 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. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thank you, Natalia, and good morning, everyone, and welcome to Northrop Grumman's fourth quarter 2021 conference call. We'll refer this morning to a PowerPoint presentation that is posted on our IR web page. But before we start, I'd just like to go through a couple of comments here. The matters discussed on today's call, including 2022 guidance and beyond, including our outlooks reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. And on today's call are Kathy Warden, our Chairman, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thank you, Todd. Good morning, everyone, and thank you for joining us. We delivered another year of solid operating performance in 2021 and positioned our business for continued growth in 2022. We are executing our strategy, which is to grow the business today and into the future, maintain excellent performance and reduce costs to deliver strong margin rates and deploy our capital to create value. We made significant progress in executing this strategy again in 2021. Our organic sales growth for the year was 3%. Our segment operating margin was an exceptionally strong, 11.8%, which increased 40 basis points compared to 2020 with performance more than offsetting mixed and COVID-related headwinds. We grew our transaction adjusted EPS by 8% and generated a $3.1 billion of transaction adjusted free cash flow. Regarding capital deployment, we returned a record $4.7 billion to shareholders through dividends and share repurchases, including a $500 million accelerated share repurchase that we announced in November of 2021. We strengthened our balance sheet, retiring over $2.2 billion of debt during the year and achieving an increased credit rating in the process. And we continue to invest in our business with over $1.4 billion in capital expenditures to create new technologies and support franchise programs. We also continue to add to our portfolio of franchise programs. With competitive wins on programs like the Integrated Battle Command System or IBCS as well as hypersonic and ballistic tracking space sensor and next-generation interceptor. As we look forward to '22 and beyond, we expect our organic growth will continue as we win new business and convert the robust backlog we've built over the past several years into sales growth. And while we'll know more about the President's budget request in the coming weeks, we continue to believe that our portfolio is strongly aligned with the threat environment and the key investment priorities of our customers. Further, we expect strong margin performance as well as double-digit free cash flow growth from 2022 through 2024. 2022 guidance reflects our confidence in our strategy, our broad portfolio and our ability to deliver continued growth and strong performance. As reported, the COVID pandemic continued to present challenges to labor availability, parts supply and shipping delays across the economy, particularly in the second half of last year. We have felt these effects and the challenges at both our supply chain and our own labor availability. We will continue to take proactive steps to address such covered risks, both to our employees and our business. And looking forward, our current guidance reflect the factors we know today and our best estimate for the remainder of the year. Dave is going to provide more details on the quarter, the full year and our guidance in just a few minutes. Turning now to the budget environment. The federal government continues to operate under a continuing resolution that currently run through February 18. Negotiations on the fiscal year 2022 appropriation bills are continuing. And we remain optimistic that Congress will reach an agreement by the end of the first quarter. The National Defense Authorization Act contained a $25 billion increase to the defense budget that represents 5% growth compared to fiscal year 2021, which we expect to also be supported in the appropriation bill. In the NDAA, there is continued support for our mutual programs, and several of our programs received incremental funding above the President's budget request, including Triton, E-2D F-35, F-18 and GATR, among others. And finally, we expect the FY '23 president budget to be delivered to Congress in March of this year, reflecting this administration's priorities in areas such as Mission Systems, space, missile defense, advanced weapons and deterrent. Focusing now on highlights in the quarter, one of our proudest moments with the launch of the web-based telescope on December 25. Northrop Grumman is the prime contractor for NASA on web, and we're honored to have partnered with NASA to provide the world with this revolutionary technology. West will appear more than 13.5 billion years into the past when the first Stars and Galaxy's were formed, ushering in an exciting new era of space observation and expanding our understanding of the universe. In addition to web, we're also supporting NASA's Artemis mission by producing the largest solid rocket motors ever built for the space launch vehicle system, which is being developed to send the first woman and next man to the moon. In the fourth quarter, the space sector received a $3.2 billion award to support Artemis missions 4 through 8. Another important milestone in the quarter was the competitively awarded IBCS in our Defense Systems sector. This program is a centrepiece of the U.S. Army's modernization strategy for air and missile defense and all-domain command and control. It's a prime example of our capabilities to integrate assets in the battle space regardless of source, service or domain. This is one of many examples of how we are helping our customers share data between systems and improve command and control in support of their JADC2 vision. In the area of missile defense, we had several milestones in the quarter, which position us to help our customers track and defend against hypersonic and ballistic missile threats. In the fourth quarter, we announced that HBTSS had passed its critical design review. These satellites are planned to be part of a multilayered network of spacecraft that will detect and track hypersonic missiles. Also in the quarter, we were selected by the Missile Defense Agency to design a glide phase interceptor for regional hypersonic missile defense. In our Mission Systems sector, we continue to see our customers prioritizing development of capabilities that will increase the effectiveness and survivability of legacy systems, as well as new technologies for next-generation systems. In the fourth quarter, MS received an accelerated award for F-16 SABR’s for approximately $200 million, and full year awards of approximately $700 million. We have now received total contract awards for near 1,000 radars for this program in support of the U.S. Air Force and National Guard as well as several international customers. In addition, our Network Information Systems business area within Mission Systems received approximately $1 billion in award for advanced processing solutions. This portfolio delivers strategic microelectronics focused on high-performance computing and security, which helps our customers with connectivity and processing solutions. We anticipate additional awards in this segment of the portfolio for the next few years, and we expect it will be a significant growth driver for MS in 2022. Finally, in aeronautics. The military aircraft market is undergoing a transition as our customers focus their investment in next-generation programs while divesting some legacy platforms. As we discussed certain programs in our portfolio at Aeronautics systems are maturing and experiencing headwinds. But there are also a number of exciting new opportunities that are emerging. This includes next-generation manned aircraft as well as new unmanned opportunities, which U.S. Air Force Secretary Kendall recently announced. In addition to pursuing these longer-term opportunities, we remain focused on executing our programs and delivering for our customers. Another important aspect of our company's future is our strategy for sustainability. We strongly believe that our environmental, social and governance programs play an important role in sustainable, profitable growth and in long-term value creation for our shareholders, customers and employees. Northrop Grumman is a leader in conservation activity with a 44% reduction in greenhouse gas emissions since 2010. In the fourth quarter, S&P released its global corporate sustainability assessment scores, and we ranked in the 96 percentile. We were included on the Dow Jones Sustainability Index North America for the sixth consecutive year, and we were included in the Dow Jones Sustainability World Index for the first time. Our ESG strategy also includes portfolio management actions. As we've discussed on earnings calls last year, we committed to transition out of the small aging and surveillance contract that we have for cluster munitions, and that contract is complete. And while we continue to be an ammunition supplier as both a prime and a merchant supplier, we have made the decision to transition our prime role in depleted uranium inhibition to another provider, following one final single production year contract. We are currently working to establish our next set of sustainability goals and priorities, specifically as they relate to greenhouse gas emissions, water conservation and solid waste diversion with a stronger emphasis on renewable energy. Overall, we're making substantial progress in our ESG journey, and we look forward to sharing more in our upcoming sustainability and TCFD report. So with that, I'll turn it over to Dave to provide more detail on our sector results and guidance. And then I have a few additional comments before we move on to Q&A. David Keffer: Okay. Thanks, Kathy, and good morning, everyone. 2021 was another strong year of performance for the company. Before going through the details of our results and guidance, I'd like to note a few items to keep in mind when comparing Q4 to the same period last year. As we previewed in prior quarters, the divested IT services business, the equipment sale at AS and 4 more working days in Q4 2020 represented over $1.6 billion of sales when compared to Q4 2021. With that said, sales per working day in 2021 were at their highest level in Q4. Moving to sector results. We continue to see certain COVID-related effects on our labor and supply chain in Q4, and these effects were most significant in our aeronautics sector. The Q4 decline in AS sales was partially driven by fewer working days and the 2020 equipment sale, and it also included a $93 million unfavorable EAC adjustment on F-35. Turning to Defense Systems. Sales declined in Q4 and 2021, primarily due to the IT services divestiture. Organic sales were down 9% in Q4 and 4% for the full year, driven by the completion of our contract at the Lake City ammunition plant, which generated almost $400 million of sales in 2020. Mission Systems organic sales were down 3% in the fourth quarter, primarily due to the reduction in working days and up 6% for the full year. Higher 2021 sales were driven by increased volume on GATR, GBSD, SABR, J.Crew and restricted programs, among others. And lastly, Space Systems Q4 and full year organic sales rose by 6% and 24%, respectively. We continued to ramp significantly on franchise programs, including a $1.1 billion increase on GBSD in 2021. Growth was also driven by restricted space programs as well as NGI and Artemis. Moving to segment operating income and margin rate. AS operating margin rate decreased to 8.4% in the quarter and 9.7% for the full year due to the unfavorable EAC adjustment on F-35. In our other 3 sectors, segment operating margin rates met or exceeded the high end of our prior 2021 guidance ranges. Defense Systems operating margin rate increased 90 basis points to 12.1% in the quarter and 80 basis points to 12% for the full year. Higher operating margin rate was largely due to improved performance as well as recent contract completions. At Mission Systems, operating income and rate grew in both periods. As a result of higher EAC adjustments and business mix changes, operating margin rate grew to 15.9% in the fourth quarter and 15.6% for the full year. And at Space Systems, operating margin rate was 9.6% in the quarter and 10.6% for the full year. Favorable EAC adjustments from strong performance on commercial space programs helped offset mix pressures for the year. And keep in mind that space, along with AS and MS, benefited from the pension-related overhead benefits that we recognized in the first quarter of 2021. At the total company level, segment operating margin rate in the fourth quarter was the same as Q4 2020. The even with the F-35 charge in 2021, and it increased 40 basis points for the full year to 11.8%. Turning to EPS. Our transaction adjusted EPS declined to 9% from Q4 2020 to Q4 2021, primarily due to lower sales volume from the factors I described earlier. For the full year EPS we exceeded the high end of the EPS guidance range we provided in October. Transaction adjusted EPS grew 8% in 2021 due to strong segment performance and lower corporate unallocated costs. Lower corporate unallocated was driven by 2 items we've discussed in prior quarters: the $60 million benefit from an insurance settlement related to the former Orbital ATK business; and lower state taxes. Regarding our pension plans, asset performance was strong again in 2021 at nearly 11%, the third year in a row of double-digit asset returns. Our FAS discount rate increased 30 basis points to 2.98%. These factors resulted in a mark-to-market benefit of roughly $2.4 billion in 2021. In addition, our net pension funding status has improved by over $3 billion. And on a PBO basis, is now over 93% funded. We continue to project minimal cash pension contributions over the next several years. Also summarized to our pension cost estimates for the years 2022 through 2024. CAS recoveries are projected to continue declining over the planning period. And while this causes an EPS headwind, particularly in 2022, it makes our rates more competitive and our products more affordable. Our CAS prepayment credit is approximately $1.7 billion as of January 1 of this year. Now turning to cash. We generated nearly $3.6 billion of operating cash flow and $3.1 billion of transaction-adjusted free cash flow in 2021, in line with our expectations. In the fourth quarter, we made our final federal and state tax payments associated with the IT services divestiture of almost $200 million. We also made our first payment of roughly $200 million of deferred payroll taxes from the Cares Act legislation. The remaining payment of the same amount will occur this December. Looking ahead to 2022, our sector guidance is shown on Slide 9. This outlook assumes that appropriation bills are passed by the end of Q1, and it assumes a relatively consistent level of impact from the effects of COVID that we experienced in 2021. At aeronautics, we expect sales in the mid- to high $10 billion range. As we noted last quarter, we're projecting headwinds in our hail portfolio as well as lower sales on JSTARS, F-18 and our restricted business. Sales on F-35 are expected to be slightly higher in 2021 due to the EAC adjustment we booked in Q4. We expect an AS margin rate of approximately 10%, which is up 30 basis points year-over-year. For Defense Systems, we expect sales to be in the high $5 billion range as this business returns to modest organic growth following the IT services divestiture and in the completion of our Lake City contract. Operating margin rate is expected to remain very strong in the high 11% range. Mission Systems sales are projected to be in the mid-$10 billion range, up from $10.1 billion of organic sales in 2021, reflecting continued strength in demand for our products. Operating margin rate is expected in the low 15% range. Space Systems is expected to remain our fastest-growing business and to become our largest segment in 2022. Sales are projected in the mid-$11 billion range, up from -- up about $1 billion from 2021 with a margin rate in the low 10% range. Turning to Slide 10. Our total revenue guidance is $36.2 billion to $36.6 billion, representing a range of 2% to 3% organic growth, consistent with the rate we estimated in October 2021. This growth is enabled by our strong backlog, which stands at over $76 billion, and covers more than 2 years of annual sales. The 2021 book-to-bill of 0.9 times was lower than our prior expectation due to the AS F-35 award shift to 2022. More importantly, our 3-year trailing average book-to-bill is approximately 1.22, and remains the foundation of our current and future growth. As COVID-related headwinds that we experienced late in 2021 continue into early 2022, we anticipate that first quarter 2022 sales will be less than 25% of the full year. We have increased the segment operating margin rate outlook that we provided in October, as we now expect a rate roughly consistent with 2021 in the range of 11.7% to 11.9%. This projection reflects our continued disciplined approach to cost management in our efforts to offset mix headwinds with strong program performance. Altogether, we expect transaction adjusted earnings per share to be between $24.50 and $25.10, based on approximately 155 million weighted shares outstanding. As shown on Slide 11, this includes roughly $2 of year-to-year EPS headwinds from lower net pension benefits driven by the reduction in CAS recoveries and higher corporate unallocated expense due to the onetime benefits in 2021. Earnings volume from sales growth strong operating margin performance and the lower share count will help to offset those nonoperational items. We project 2022 transaction-adjusted free cash flow of $2.5 billion to $2.8 billion, assuming the R&D tax amortization law is deferred or repealed. We continue to project about $1 billion of higher cash taxes should current tax law remain in effect. As I mentioned, our cash tax outlook includes the final payroll tax payment from the CARES Act of approximately $200 million. CapEx is expected to remain roughly consistent with 2021 on an absolute dollar basis and slightly lower as a percentage of sales. Slide 12 provides our longer-term outlook on cash. The midpoint of our 2022 transaction-adjusted free cash flow guidance is $2.65 billion, and includes roughly $375 million of lower CAS recoveries than 2021. From there, we expect a double-digit free cash flow CAGR through 2024, driven by operational performance, lower CapEx and the absence of the payroll tax headwind. Our base case again assumes deferral of the R&D tax for all periods. Speaking of taxes, we're projecting an effective tax rate of approximately 17% going forward, roughly consistent with 2021, excluding the divestiture or mark-to-market pension effects. Also, we anticipate the resolution of an appeals process for certain open years of legacy OATK tax filings in 2022. Audit and appeals processes are underway, but in earlier stages for certain Northrop tax years. We refer you to our 10-K for additional details on the key items, both timing related and permanent in nature to be resolved in those processes. In closing, we're proud of our 2021 performance and we're focused on continuing to execute well on our business and financial strategy in 2022. With that, I'll turn the call back over to you, Kathy. Kathy Warden: Thanks, Dave. In summary, we have strong franchise programs that are well aligned to budget priorities. We are focused on capturing and investing in new growth opportunities while also executing to drive earnings and cash flow growth. We delivered a solid set of results in 2021, and we are well positioned to continue growing and performing in 2022 and beyond. Our top priority for cash deployment remains shareholder return, including a competitive dividend and share repurchases. With that in mind, our Board of Directors recently approved an increase in our share repurchase authorization of $2 billion. And based on our outlook today, we plan on returning at least $1.5 billion to shareholders via share repurchase in 2022. Before turning to your questions, I would like to thank the Northrop Grumman team for delivering solid operational results with dedication and for severance. We have extraordinary talent, and this includes our leadership team. As we announced in November, Blake Larson, is retiring after a 40-year career with Northrop Grumman and its heritage companies. Blake has helped to position our space business for incredible growth and as important, a focus on performance and quality. We are grateful for his contributions to our company and our country. And I'd also like to welcome Tom Wilson to my leadership team as he succeeds Blake. Tom brings strong experience in the space market. He was part of the Space team, and I'm confident in his ability to lead this business. So with that, we'll go ahead and open the call up for questions. Natalia, back to you. Operator: [Operator Instructions] Your first question is from the line Kristine Liwag with Morgan Stanley. Kristine Liwag: Kathy, can you elaborate more on the labor and supply chain issues experienced in the quarter at aeronautics? Are these the same issues flagged last year? How long do you expect these issues to persist? Kathy Warden: There are similar issues to what we flagged in the third quarter of last year, and they are related largely to labor availability in our own workforce as well as what we're seeing in our suppliers. And when I talk about labor availability, that's really with the Delta variant in the late part of the third quarter, early part of the fourth quarter and then Omicron again in the late part of the fourth quarter and now early part of 2022. We see higher levels of absenteeism. We -- our employee safety is our first priority. We encourage people to be out of work if they're experiencing any symptoms, and we also isolate people who have been in close contact. And so as a result, absenteeism has been higher in these surges, and it has an impact, particularly in our high-rate, high-volume production lines where people are in closer proximity and where whole work cells might be impacted if we have 1 person sick or out. And so that's why you see it more pronounced in our aeronautic sector because that's where we have really only 1 high-rate, high-volume production program, the F-35. And we've talked specifically about the impact to that program. Across the rest of the business, it's not that we aren't experiencing the same conditions, but we're able to mitigate them better, and you see less of a pronounced impact in any 1 period. But certainly, we would have expected to see a stronger fourth quarter top line had we not experienced those 2 surges. Kristine Liwag: And also, you outlined what sounds like a fairly comprehensive ESG strategy. When you look at your portfolio, are there other areas where you're reevaluating your exposure? Kathy Warden: So we've taken a very comprehensive look, not only at our strategy, but our portfolio and assessed what that exposure is. I do want to be clear. We are a defense contractor. And so we are supporting global security missions, largely in areas of deterrents, but also inclusive of weapon systems. And we expect to continue in those businesses because we believe they actually promote global human rights proliferation, not the contrary. But with that said, we have evaluated some portions of our portfolio that I've talked about in the past like cluster munitions. And today, making the confirmation that we plan to exit depleted uranium ammo as parts of the portfolio that we no longer wanted to support directly. Operator: Your next question is from the line of Seth Seifman with JPMorgan. Seth Seifman: I wonder if you could talk a little bit about where aeronautics goes from here and how much the headwinds that are coming in 2022, persist into the out years? And then at the risk of asking about a classified program, when we think further out towards the middle of the decade and beyond, if every place that you're a prime contractor gets up to kind of the expected full rates of production in very rough and qualitative terms. What that means in terms of the Aeronautics top line several years down the line? Kathy Warden: Seth, so I'll start and then ask Dave to provide a little more color and specificity. I see our aeronautic sector as having headwinds this year that will dissipate going into 2023. So we don't expect the same levels of decline as we move into next year. And then that trend reversing in the 2024 time frame. And I won't point to any particular program, but it is at that point in time that we expect some of the headwinds that we've discussed to be largely behind us and the opportunities for growth in higher volume of production in aeronautics to start to kick in. And so that would have both an upward trajectory for top line, but we also see their margin rates progressively improving over that period as well. So that gives you the macro view. Dave, anything you'd like to add to that? David Keffer: I think you covered it well, Kathy. I think our '22 outlook is consistent both in the mid-single-digit decline and the sources of that decline with what we talked about in recent calls. As you pointed out, we expect 23 to be more stable and have growth opportunities beyond that. The other thing I'd point out is we're very focused on managing the business well in the meantime, cost management, managing our capital expenditures. And so we're focused on execution on delivery every day in that business and looking to optimize that outlook. Operator: Next question is from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Kathy, thanks for the aeronautics color. I was wondering if maybe we could transition to the space, and if you could bridge us on the growth for space, it seemed like GBSD was maybe more additive in '21 than prior expectations. So how do we think about that growth cadence? And how do we think about the balance of growth across the other space portfolio? Kathy Warden: So GBSD has been a significant component of space business growth in the last 2 years, and we expect that to start to level out. But GBSD continues to be a growth element in space for the foreseeable. But with that said, you're right to point out that there was significant growth in the rest of the base portfolio as well. Balancing about 50-50 with GBSD and contributing last year, and we expect that same trend to continue this year with the $1 billion or so of sales growth that we're projecting in space. And that really is broad-based growth. It's coming from all areas of the business, the propulsion, satellites as well as components. It's coming from both restricted and classified work as well as unclassified work and it's coming from a variety of customers, the new pace for COS Air Force as well as NASA as I highlighted today. So we really are seeing space growth be quite balanced, even in 2023 or 2022, but even more so as we look forward to 2023. And we expect it to continue to be one of, if not the fastest-growing sector for the foreseeable future. Operator: Your next question is from the line of Ron Epstein with Bank of America. Ron Epstein: Yes. I was wondering if you could speak to -- you've seen some of the -- your HALE portfolio assets, maybe some of the legacy stuff start to fade away. Are there opportunities to replace that? What's out there in that world? Because it's hard to believe that, that asset class is just going to go away. So if you could speak to, are there opportunities for Northrop Grumman to replace those assets in the future? Kathy Warden: Yes, Ron, and thanks for that question because we've talked a good bit about the headwinds in our HALE portfolio. And that's coming off of production of Global Hawk, which was not only for the U.S. Air Force, with several international customers; and then Triton, which is still early in its production. And those headwinds were the plateauing more of Triton and the production pause and then the Global Hawk phasing out. But the reality is autonomous systems are still an important part of both the U.S. Air Force and U.S. Navy strategies going forward as well as an important asset in the portfolio for our international customers. So we see that market is continuing to evolve. With some specificity to your question, I mentioned earlier in this call that the U.S. Air Force Secretary Kendall has recently been more specific about launching some new efforts in unmanned systems within the Air Force, and we do see those as opportunities that we will pursue. So there's starting to be some more meat on the bones as to what those specific opportunities will be. We do see the market as continuing to be attractive. Operator: Your next question is from the line of Doug Harned with Bernstein. Doug Harned: You gave guidance today for cash, free cash flow in 2022, 2023, 2024. And I guess, cash -- I mean, I understand you can project some things around pension, but cash is really the most volatile quantity here. And can you give us a sense of what type of sales and earnings profile actually drives those numbers in '23 and '24? David Keffer: Doug, it's Dave. I'm happy to dig into that. I appreciate the question. I think you'll find today's outlook is consistent again with what we had projected at a higher level on our October call. I think it's important to provide some context when we talk about our free cash flow outlook over these next few years. Our CAS pension reimbursements were over $800 million just 2 years ago in 2020, and we were projecting them to reach $1 billion by this point in 2020. After new legislation and a couple of years of fantastic asset returns, that CAS reimbursement is now really just a de minimis benefit to us along with much improved funded status on the pension side. And that's the primary driver of the change over the last couple of years. But what that does for us is create a great foundation for us in '22 to build off of and grow more rapidly over the next few years. And that supports that 10-plus percent CAGR we've been talking about. So '21 free cash flow was around $3.1 billion. And as we talked about, CAS reimbursement is down almost $400 million in '22 from '21. The working capital assumption over the next year is roughly unchanged, similar in '23 before creating more opportunity in '24 and beyond. We talked a bit about the payroll tax deferral that ends with a payment in late '22. So that, too, creates a tailwind as we enter '23 and '24. And the other is around lower CapEx as we get into particularly '24 and beyond. So that, combined with the working capital opportunities we see from performance-based payment timing and incentive timing, really make us optimistic about that really strong CAGR over the next couple of years. Now of course, the corollary there is that puts us in a nice position to be able to return a healthy volume of cash to our shareholders. And we've noted on this call and others that, that remains our top priority for cash deployment over the next couple of years with $1.5 billion as our repo target in 2022, for example. So while I wouldn't read too carefully into a specific sales or margin target in these out-years related to cash, we'll get more into that guidance as we get closer to those years. Certainly, we'll look to continue to grow the company and deliver strong performance along the way. Kathy Warden: Part of what you are asking is what is our outlook. And while we're not going to provide specific numbers, as Dave said, I'll point you to some of the comments that I made. We expect continued top line growth in this business beyond 2022. And we expect the earnings expansion. And so those are factored in, both to our 2023 and 2024 expectations for cash. And you can draw some conclusion that we see an accelerated growth profile going from '23 into '24 on earnings. And that would be a fair assumption to make as well based on what we've outlined for you. Doug Harned: And then just as a follow-up, one piece of this. If I go back a few years, missiles was one of the hottest areas in the budget. And I know we had this discussion around really Northrop Grumman working to become a third missile supplier. But over that time period, we've seen essentially missile budgets turn over and legacy, certainly, a lot of the large legacy programs, demand is considerably less. You've got some important programs now and missiles development programs, but how do you see that market? Is this still the same kind of opportunity you were looking at a few years ago? Kathy Warden: Doug, when we were looking at this a few years ago, I would say our expectations were more balanced between space and missile. And what we've seen is space has outperformed our expectations. Missiles has been more in line to date with expectations, maybe not as much opportunity as we project out into the out-years, but space is more than offsetting that. And we feel we've gotten a return on investment. I will say that we continue to be a strong merchant supplier in the missiles space. And so as that market continues to grow and expand -- and we do expect it will, particularly in hypersonics, we are partnered with the larger weapons providers to provide them important components of those weapon systems. And so we, by no means, believe that our return on investment is not maturing in the weapons space. It's just maturing more quickly and more significantly in space. Operator: Your next question is from the line of Robert Stallard with Vertical Research. Robert Stallard: I had a follow-up on Doug's question really, and that's Slide 12. And you've got that projected large pickup in free cash flow in 2024. I was wondering if you could maybe qualitatively walk through what some of the moving parts are leading to that particularly strong growth in a couple of years' time? David Keffer: Sure. Happy to. Like I mentioned, the 10-plus percent CAGR over the next couple of years really shows up particularly strongly in that 2024 time line. And it's for a couple of the reasons that we've described, and I'll go into a bit more detail on those. One is around our expectation of lower CapEx in 2024. We've talked about that coming down gradually as a percentage of sales, and we start to see that in our '22 and '23 guidance. As we get to '24, we expect that to continue to come down on a dollar basis and a percentage of sales as we see the level of demand for CapEx beginning to decline a bit further in '24. On the working capital side, we have quite a few programs, obviously, none of them of too much significance in the overall sales or balance sheet of the company. But when we aggregate all of that, we see more opportunity for working capital efficiency drives in that '24 time line than we do in '22 or '23, given the timing of some particular performance-based payments and milestones and incentives. So we're excited about the opportunity as we look at '24 and beyond for free cash improvement. And of course, for the flexibility that, that provides us on the deployment side as well. I mentioned the other factor earlier, which is more just the timing of the payroll tax deferral that we had as a benefit in 2020 that we're now paying half of in '21 and '22. So that's the only kind of unique item I'd add to that mix. Hope that helps. Robert Stallard: So it doesn't sound like there's anything really on the operations side that's massively accelerating in '24. It's sort of nonoperating items then. David Keffer: I think that's a good way to characterize it. I think Kathy covered well our expectations for growth and performance over the next couple of years and these cash flow timing issues are layered onto that outlook. Robert Stallard: Yes. Okay. And then just a quick follow-up on the cash. You mentioned that the -- if they don't sort out this R&D tax credit thing, it could be $1 billion hit in '22. What's your latest thinking on the potential hit in '23 and '24, if this legislation doesn't get changed? David Keffer: Yes. Thanks for the follow-up question on that. I should note it's approximately 20% lower per year after 2022, not exactly given some of the idiosyncrasies in the timing and such. But think of that $1 billion in '22 potential coming down to about $800 million and $600 million over the next 2 years. As you can imagine, it eventually levels off and normalizes when we get to 2026 or so. So we are certainly still optimistic about resolving Section 174 through deferral or repeal. In the meantime, there continues to be good, broad bipartisan support for doing so. It's really just a matter of finding the right legislative vehicle. And of course, that has proven challenging so far. So that's why we wanted to give you a sense for that volume on today's call. Operator: Your next question is from the line of Noah Poponak with Goldman Sachs. Noah Poponak: The profit margins in space have come down as you've layered in a significant amount of new revenue. As the growth rate sort of transitions there, how should we think about how much recovery you could see in the profitability in that business? Kathy Warden: So Noah, if I look at that business, we continue to layer in new development work. We talked about a few of those things today: the glide phase interceptor, the NGI program. And so it's not just the GBSD phenomena that is causing that mix headwind. But as GBSD transition from a development phase even into the early stages of production, we would expect to see that be the biggest driver in a tailwind to margin rate. And that happens around the middle of the decade. In the meantime, that business continues to perform exceptionally well, and the margin rate for our space business are very solid in comparison to others. So we're really pleased with that performance as we ingest all of this development work and believe that we can maintain those rates in line with what we have projected for 2022 and see increases towards the middle of the decade. Noah Poponak: Great. Understood. And then, Dave, just quickly following up on that -- on the free cash flow math. If I take each of the years you've now provided, back out the CapEx and then back out all the pension inputs you've provided, which sort of gets to a clean number relative to the business segments excluding anything with cash tax or working capital. That number as a ratio of the business segments is pretty low compared to where you've been in the past. So that would indicate that you are specifically assuming a working capital headwind or some other headwind outside of the business segments. Is that the case? Or is my math wrong? David Keffer: Sure. Happy to get into those details another time if you'd like to dig further. Noah Poponak: Yes, it could be easier with the same numbers in front of us. David Keffer: Right, exactly. In aggregate, I think the important headline here is we've had great working capital performance over the last couple of years. We project more stable working capital performance over the next couple of years before seeing that opportunity expand again in 2024. And I think that may be the summary of what you're seeing is after a couple of years of just outstanding working capital performance, especially in 2020, when we had things like the progress payment improvement and other tailwinds from the kind of industry perspective on cash. We're in a more normalized period in 2022 and 2023, before seeing that opportunity expand again in '24. So again, happy to follow up with that sometime. But I think that gives you a feel for it. Noah Poponak: It does. But it's not -- you're not assuming an actual incremental working capital headwind, '22, '23. It's just sort of relatively no change year-over-year. David Keffer: Yes. That's correct. Operator: Your next question is from the line of Cai von Rumohr with Cowen and Company. Cai von Rumohr: Yes. So I mean, it's pretty clear that in space, your mix is shifting toward GBSD and NGI. And so I assume that's, because they're in the development stage, means lower margins '22, probably '23. And therefore, maybe '24, they move up, but that would be the profile for space. And you mentioned in aeronautical that you saw a reversal in '24, but you mentioned dissipation in '23 of headwinds. I read dissipation, meaning that margins can get better in '23. But does dissipation mean it's just going to go down but not quite at the same level? So I guess, the bottom line is for -- looking at the total company, '24, '25, we can see the margins maybe getting better, but maybe they're flat to down over the next 2 years. Is that a fair assessment? Kathy Warden: At the company level, Cai, what we are seeing is continued growth on the top line and margin expansion opportunity. But just as we've demonstrated, right, we've seen 40 basis points of improvement going from '20 to '21. As we look at 2022, we're holding that range constant with where we ended 2021, and that's largely because we have offset these mix pressures as we've brought more development work into the portfolio. And so what we are suggesting is that, that would continue to be the case until we move the mix more in the direction of production. But we are having performance improvements and cost efficiencies that are providing tailwinds on margin rates. So you would expect us to continue to work those levers even with this current mix, and we see opportunity for margins even as we look into 2023. Operator: Your next question is from the line of Myles Walton with UBS. Myles Walton: Kathy, I was wondering if you could comment on the backlog and bookings opportunities in '22. And F-35, NGI, I imagine, are big movers there. But do you expect the year to end at a higher backlog? And then, Dave, just a clarification on the $1.7 billion of prepaid credit. It's not clear that you ever recover that based on the slide of funding and CAS recoveries. Can you just clarify? Kathy Warden: I'll start with your question about year '22 awards and backlog expectations. We do not expect to have book-to-bill of 1 in 2022. We see fewer new competitive opportunities this year. It's just timing. And we also see fewer multiyear awards, with the exception being the AS F-35 award, which has pushed into this year. We tend not to focus so much on singular year book-to-bill but instead a longer-term view because we have so many multiyear awards. And as Dave mentioned, when we look at the last 3 years, our average book-to-bill was 1.22. So it established a really strong foundation for us to continue to grow. As we look at this year, we still expect to end this year with 4-year then trailing average of over 1.1. So it just gives you a sense that we expect to not only have a strong backlog, but an average book-to-bill that continues to support the growth that we are outlining into the future. David Keffer: And then just briefly on the $1.7 billion CAS prepayment credit. We show you the next 3 years of current projections in a multi-decade future for our pension plans, both from a FAS and CAS perspective. And so wouldn't indicate that we'd expect that to be final or resolved over the next 3 years in this particular forecast period. We've got many, many years ahead of us there, a lot of market movement ahead of us there. But I think the bottom line on the pension side is we're really enthusiastic about the continued double-digit return performance in 2021, and that has put us at a better funded position than we've been at in many years. So really a good news story as of today on the pension side of things. Operator: Your next question is from the line of Richard Safran with Seaport Global. Richard Safran: I wanted to ask you, if I could, a capital deployment question. In 2021, you had adjusted free cash flow of $3.1 billion, but you paid $4.7 billion in dividends and repurchases. With respect to the long-term free cash flow guide and expectations to return the majority of free cash flow to shareholders, I'm trying to get a sense of what majority means and if your actions in '21 reflect how you're thinking long term about capital deployment. For example, could you draw down the balance sheet cash a bit further? Given the recent credit upgrade, are you planning any -- on retiring any more debt? Just was curious about, given your long-term cash flow guide, how you might be thinking about capital deployment over the longer term. Kathy Warden: Yes. And let me just start with this past year. We had the IT services divestiture, which generated cash that we also deployed back into the business, as we committed we would. And so that's what drove that higher level of capital deployment opportunity even above our free cash flow in 2021. As we're looking forward, when we talk about majority of our cash being returned to shareholders, we talked about at least $1.5 billion of share repurchase this year, and that is against the $2.6 billion at the midpoint or so of our guide in free cash flow. So -- and of course, dividends on top of that, which we have committed to continue paying competitive dividend, which our Board will take up again early this year. So that gives you a sense of what we mean by majority. There's also opportunity in that we have paid down debt and really solidified our balance sheet. So we currently have a cash balance that's higher than what we have stated our target to be, which is around $2 billion. And so that gives us some flexibility as we look at not only 2022 but beyond as well. And we really don't have any major debt tranches coming due. We have 1 in 2023 that we've outlined, but we have flexibility on whether to refinance or to pay that at this point based on where our credit rating sits. So that's how we're thinking about capital deployment. Richard Safran: Okay. And just real quick, your contract mix right now, roughly 50-50 cost plus fixed price. I'm just wondering if you -- again, thinking longer term, how you think that might trend when you might start thinking about when the portfolio starts leaning towards more fixed-price contracts? Is that something that's a '23 or possibly '24 event? Kathy Warden: It gets a little higher over the next couple of years, never significantly out of balance with that 50-50 ratio. And then in 2025 is when we expect it to start to shift in the other direction. Todd Ernst: All right. We have time for one more question. Operator: Your last question is from the line of Robert Spingarn with Melius Research. Robert Spingarn: This actually touches on contract type. Seth asked about the longer-term, end of decade aeronautics revenues. I wanted to ask about the risk profile and classified aeronautics nearer term as certain programs transition from development to LRIP. And just especially in light of the cost pressure, supply chain and so forth. Kathy Warden: So as we look at our classified portfolio, just as we do on all of our programs, we incorporate those low-rate, initial production lots that were priced into our estimate-at-complete process. And so we're looking at that on an ongoing basis. That risk is not only being monitored, but reflected in our financial statements based on expectations as we know them today. And so the production experience that we have, even early on in test aircraft and such, all inform how we think about those low-rate initial production lots. Robert Spingarn: Is there a way to talk about how the revenues transition in '22 from cost plus to fixed price? Or is this all in '23? Kathy Warden: So not at a particular program level, but we do talk about that in aggregate. And so as I said, our balance, even in aeronautics being specific to the sector, is about 50-50. And we expect that to continue to be the case in 2022. So I think we are out of time. I'm going to go ahead and wrap up. Thanks again for joining us today. Again, I wanted to thank our team also for another strong year in 2021 and for positioning us so well for 2022 and beyond. We had solid performance, and our innovation and investments are positioning us to continue delivering the products that our customers want with the urgency that they need. So thanks again for your support. We look forward to talking to you in April. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's Third Quarter 2021 Conference Call. Today's call is being recorded. My name is Catherine and I will be your operator today. At this time, all participants are in a listen-only mode. If at any time during the call you require assistance, please press star 0 and an operator will be happy to assist you. I'd now like to turn the call over to your host, Mr. Todd Ernst, Treasurer and Vice President Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Catherine. And good morning, everyone. Welcome to Northrop Grumman's Third Quarter 2021 conference call. We will refer to a PowerPoint presentation that is posted on the IR webpage. Before we start, matters discussed on today's call, including 2021 guidance and beyond, reflect the Company's judgment based on information available at the time of this call, they constitute forward-looking statements pursuant to Safe Harbor Provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual Company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On the call, today, are Kathy Warden, our Chairman, CEO, and President, and Dave Keffer our CFO. At this time, I would like to turn the call over to Kathy. Kathy. Kathy Warden: Thank you Todd. Good morning everyone, and thank you for joining us. We delivered another quarter of strong results in an increasingly complex environment. In the last quarter, we've seen developments in the global fight against COVID-19 and macroeconomic changes such as the tightening labor market, supply chain challenges, and growing inflation. But we've also seen evolving threats to our national security, which have further eliminated the value of Northrop Grumman products and services. On today's call, we will provide insights into these developments and their effects on our business to date, as well as discuss our third-quarter performance results and provide our updated outlook for this year and an initial look at 2022. I'd like to thank our employees and our extended Northrop Grumman team, including our suppliers, for their relentless focus on delivering for our customers and our shareholders. I am proud of how our team has demonstrated remarkable resiliency and adaptability during these dynamic time. Our Company continues to deliver strong operating performance. As we announced earlier today, we had a segment operating margin rate of 11.9% in the third quarter and year-to-date an exceptional segment operating margin rate of 12%. In addition, earnings per share in the quarter were $6.63, an increase of 13% compared to last year. And our transaction adjusted free cash generation continues to be strong, increasing 15% year-to-date. We ended the quarter with just over $4 billion in cash, providing significant flexibility in support of our capital deployment initiative. With respect to the top-line, our year-to-date organic growth was 8%. This robust growth reflects the alignment and strength of our broad portfolio to our customers priorities and future needs. As expected, our organic growth rate slowed in the quarter from the rapid pace that we saw in the first half of the year. In addition to having viewing -- fewer working days in the second half of the year, which we discussed on each of our last two calls. We are also seeing an impact on our sales from the broader economic environment due to COVID-19. During the third quarter, this included employee leave-taking at a higher level than planned, a tighter labor market, and certain supply chain challenges. We continue to focus on the safety and well-being of our employees, customers, and partners as we work to mitigate the impact of these factors. As you know, the President recently issued an Executive Order generally requiring employees or federal contractors, to be fully vaccinated by early December. We have shared the details to this mandate with our U.S. workforce and we are working to help them meet the requirements. We also increased our hiring plans for the fourth quarter to help mitigate the potential impact of any increased attrition. Based on the team's strong third quarter performance, and in consideration of macroeconomic factors as we see them today, we are increasing our guidance for segment OM and EPS for the year, and narrowing our sales guidance to approximately 36 billion. Dave will provide more details on the quarter, our updated guide, as well as our initial outlook for 2022. Turning to budget updates from Washington, we're seeing strong bipartisan support for national security broadly and Northrop Grumman programs specifically. We're pleased that an agreement was reached on the continuing resolution and debt-ceiling that will fund the government through December third. We are hopeful that Congress will finalized the fiscal year 2022 appropriations and avoid a protracted continuing resolution. With respect to the FY 22 defense budget overall, we see bipartisan support for increased defense spending, including adding funding above the president's budget request. We are hopeful that this additional funding will be supported in final appropriations. Over the past several weeks, senior customers, members of Congress, and the administration officials has made increasingly public comments about strategic competition in the national security environment and the need to counter and deter evolving threats. One clear and consistent message has been the need to investing, and more rapidly field advanced capabilities. Our Company's portfolio and capabilities are strongly aligned to the find national security priority areas, particularly in advanced weapons, strategic deterrence, Mission Systems, and Space. And we're using digital technologies to develop and deploy capabilities faster and more efficiently than ever before across our entire portfolio. I'll share a few highlights to demonstrate how our performance today continues to position us for the future. With the emergence of more sophisticated Air Defense Systems, the need for standoff capabilities and speed to target is critical for our customers. To address this requirement, Northrop Grumman developed our gum ER a high-speed long-range Air-To-Ground Missile. And in the third quarter, after just 28 months in engineering, manufacturing and development, we achieved a critical milestone, clearing the way for production. In September, we received our first low rate initial production award for the program. Also during the quarter, we along with our industry partner Raytheon, successfully tested the hypersonic air-breathing weapon concept known as Hawk. know as HAWC. Northrop Grumman's supplies to scram Jet Propulsion system for HAWC, allowing speeds of greater than Mach 5 (ph) argum ER and HAWC are just two examples of how we're providing the higher speed and longer-range weapons needed to be relevant in today's threat environment. Another key area where we are supporting our customers, is in the need and urgency to enhance our country's strategic deterrence capability. Especially in light of recent disclosures of investments, other nations are making in modernizing their strategic capabilities. The triad is the foundation of the security strategy for the U.S. and its allies and it's been an effective deterrent for decades, preserving peace and detouring aggression. As highlighted by recent customer and administration comments, modernizing the Tri-Ed remains a high priority. Northrop Grumman is the prime on likes of the Tri-Ed with the bomber and strategic missiles, and we are a significant supplier for submarines as well. For the bomber, the B-21 program continues to advance. As air force secretary Frank Kendall recently noted, there are now 5 units in various stages of production. And the systems are in his word, making good progress to real fielded capability. For strategic missiles, we continue to make solid progress on the EMD portion of the Ground-Based Strategic Deterrent program. We completed key milestones earlier this year, and we are tracking toward our first flight as planned. The GBSD program has ramped significantly this year, and we now expect that it will add just over 1billion in incremental revenue to our 2021 results, and another approximately 500 million of incremental revenue in 2022. For both the 21 and GBSD, we have applied digital transformation concepts as a key enabler to reduce risk, increased productivity, shorten cycle time, and improve the system's ability to adapt to changing threat. In today's rapidly changing threat environment, our Mission Systems portfolio, including in communications and artificial intelligence, is making a critical contribution in the advancement of technology and capability needed to allow legacy platform to be more capable, and survivable, and therefore more relevant towards addressing the increasingly sophisticated threats. To this end during the third quarter, our next-generation electronic warfare system, which will equip domestics, had its first test flight on a testbed aircraft at the Northern lightning exercise. This system in conjunction with our Saber radar, demonstrated full interoperability in a stimulated contested electromagnetic spectrum environment. With the radio frequency spectrum becoming increasingly contested. That's critical set of electronic warfare capabilities will allow the platform to remain survivable. We anticipate EMD contract for next-generation electronic warfare in 2022 with an overall lifetime opportunity of up to $3 billion. And in missile defense, emerging threats from hypersonic missiles are creating new challenges for customers. We're helping to provide differentiated solutions to these challenges by applying our advanced technology and domain expertise. Earlier this year, we were awarded a contract to deliver prototypes satellite as part of the MDA's hypersonic and ballistic tracking space sensor program. This program is designed to detect and track hypersonic vehicles, which have a very different flight profile and signature than ballistic missiles. They required new sensing capabilities in order to detect and track them. In September, we conducted a successful HV TSS critical design review and are progressing towards a 2023 launch. In a Space domain, Northrop Grumman is working with our customers on advanced capabilities to address a range of new and evolving threats. Many of these programs are classified and consistent with increased demand in this area, we received $1.2 billion in restricted space awards in the third quarter. I've touched on several major contributions that we've made this quarter to national security, all of which highlight our strong performance, technology, leadership, and broad portfolio. I also want to share examples to our collaboration with partners to accelerate innovation in create discriminating technologies. As I've noted before, we are actively engaging and partnering with early stage technology and non-traditional defense companies. In the quarter, we closed an investment in orbit fab, a space logistics Company whose goal is to put gas stations in space. Their vision fits well with our on-orbit satellite refueling and Space logistics capabilities. We also continue to work with Deepwave Digital, an innovative Company we invested in at the end of last year. Deepwave Digital provides a hardware and software solution enabling very efficient AI enhanced software-defined radios for deep learning applications at the edge, which we believe will enhance our efforts in both autonomy and jets C2. These partnerships, as well as other venture investments, support our strategy to create solutions at speed for our customer's toughest national security challenges. Now, I will turn the call over to Dave, who will provide more detail on our Third Quarter results, our updated 2021 guidance, and our 2022 outlook. Dave? Dave Keffer: Okay. Thanks, Kathy, and good morning, everyone. I'll begin my comments with Third Quarter highlights on slide 3. We continued to generate strong operating results, delivering another quarter of solid organic sales growth, higher segment operating margin rate, and outstanding earnings per share, and transaction adjusted free cash flow. We continued to return cash to shareholders through our buyback program and quarterly dividend, returning over $800 million in the quarter. Slide 4 provides a bridge between third quarter 2020, and third quarter 2021 sales. Excluding sales from the IT services divestiture, our organic growth was three percent. This rate was below our first half growth due in part to the broader labor market and supply chain trends that Kathy outlined. Next, I will review our earnings per share results on Slide 5 compared to the Third Quarter of 2020, our EPS increased 13% to $6.63. Strong segment operational performance contributed about $0.14 of growth and lower corporate unallocated added another $0.55. This included a $60 million benefit from insurance settlements related to shareholder litigation involving the former Orbital ATK business prior to our acquisition. Corporate on allocated expense also decreased due to a change in deferred state income taxes, as well as lower intangible asset amortization and PP&E step-up depreciation. Pension costs contributed $0.17 of growth driven by higher non-service FAS income. Our marketable securities performance represented a headwind of $0.17 compared to the third quarter of 2020, which benefited from particularly strong equity markets. Lastly, we experienced a slightly higher federal tax rate in the period due to lower benefits from foreign derived Intangible Income. Turning to sector results on slide six, we saw some broad-based COVID -related impact. The most significant of which were in our Aeronautics sector. Aeronautics sales declined 6% for the quarter. Year-to-date it's sales are down 1%. As we've described in recent quarters, several programs in our AS portfolio are plateaus, or entering a phase of their life cycle where you would not expect to see growth. This quarter, we experienced slightly lower volume across the portfolio, including restricted efforts. F-35, B2B, DMS, and Global Hawk programs. We expect this overall trend to continue at AS in 2022, which we'll discuss in more detail momentarily. At defense systems, sales decreased by 24% in the quarter and 22% year-to-date. On an organic basis, sales were down roughly 2% in the quarter and year-to-date periods driven by the completion of our activities on the Lake City, small-caliber ammunition contract last year. Lake City represented a sales headwind of roughly $75 million in the quarter and $335 million year-to-date. This was partially offset by higher volume on several mission readiness programs. Mission Systems sales were down 5% in the quarter, and up 4% year-to-date. Organically, MS sales increased 1% in Q3, and year-to-date, they're up a robust 9%. As we've noted previously, the timing of material volume at MS has been weighted more towards the first half of 2021 than the second. Organic sales growth in the third quarter and year-to-date periods was broad-based across programs such as Gator, J Crew, and various restricted efforts. Finally, based systems continues to deliver outstanding sales growth, increasing 22% in the third quarter and 28% year-to-date. Sales in both business areas were higher in the quarter and year-to-date periods, reflecting continued ramp-up on GBSD and NGI, as well as higher volume unrestricted programs and Artemis. Turning to Segment Operating income and Margin rate on slide 7, we delivered another quarter of excellent performance, with segment operating margin rate at 11.9%. Aeronautics Third Quarter operating income decreased 10% due to lower sales volume and a $42 million unfavorable EAC adjustment on the F-35 program. The adjustment was driven by labor-related production inefficiencies, reflecting COVID related impacts on the program. The AS Operating margin rate decreased to 9.7% in Q3 as a result of this adjustment, with year-to-date operating margin slightly ahead of last year at 10.1%. Defense Systems operating income decreased by 19% in the quarter and 16% year-to-date, largely due to the impact of the IT services divestiture. Operating margin rate increased to 12.4% in the quarter and 12 percent year-to-date, largely driven by improved performance in contract mix, in battle management and missile systems, partially offset by lower net favorable EAC adjustments. At mission systems, operating income was relatively flat in the quarter and up 10% year-to-date, third quarter operating margin rate improved to 15.3% in year-to-date was 15.5%, reflecting strong program performance and changes in business mix as a result of the IT services divestiture. Space Systems operating income rose 29% in the quarter, and 36% year-to-date, driven by higher sales volume. Operating margin rate was also higher at 10.7% in the quarter and 10.9% year-to-date, driven by higher net favorable EAC adjustments. Moving to sector guidance on slide 8, note that this outlook assumes a relatively consistent level of impact in Q4 with what we've been experiencing so far this year from the effects of COVID on the workforce and supply chain. And it does not include any potential financial impacts on the Company related to the vaccine mandate. We have updated our 2021 sales estimates for each segment based on our year-to-date results and current expectations for Q4. For operating margin rate, we're increasing our guidance at defense and Space, and the margin rates at AS and MS remain unchanged. Before we get to our consolidated guidance, I'd also like to take a moment to discuss some of the factors to consider in comparing our fourth-quarter revenue to last year on Slide 9. In Q4 of 2020, the IT services business contributed almost $600 million of sales and the equipment sale at AS generated over $400 million. Q4 of 2021 also has 4 fewer working days than the same period in 2020, representing a headwind of about 6%. Adjusting for these 3 items, our Q4 2021 sales would grow at 3% to percent based on our latest full-year guidance. Moving to slide 10. Based on what we now see, we expect sales of approximately $36 billion. We're raising our 2021 outlook for segment and total operating margin and for EPS. Our segment operating margin rate guidance is 10 basis points higher at 11.7% to 11.9%, reflecting our continued strong performance. Our net FAS/CAS, pension adjustment has increased $60 million for the full year. As a result of the annual demographic update we performed in Q3. Other corporate unllocated costs are $70 million below our previous guidance. Now at approximately $120 million for the year. As I mentioned, our corporate unallocated costs benefited from a $60 million insurance settlement in Q3, as well as additional benefits from state taxes. These updates translate into an increase of 50 basis points in our operating margin rate to a range of 16% to 16.2% in our updated guidance. Remember that the gain from the IT services divestiture in Q1 contributed approximately 5 percentage points of overall operating margin benefit for the full year. We continue to project the 2021 effective federal tax rate in the high 17% range, excluding the effects of the divestiture, which is consistent with our prior guidance. Lastly, we're raising our EPS guidance, which we'll cover on Slide 11. Segment performance is contributing about $0.15 of the increase, with the benefits to corporate on allocated and pension contributing the remainder. In total, this represents an $0.80 improvement in our transaction adjusted EPS guidance. With this latest increase our 2021 EPS guidance is up by about $2 since our initial guidance in the beginning of the year. Before we move to 2022, I wanted to give you an update on our cash performance. Year-to-date, we have generated over $2.1 billion of transaction adjusted free cash flow up 15 percent compared to 2020. And we ended the quarter with over $4 billion in cash on the balance sheet. Keep in mind that we have a roughly $200 million payroll tax payment in Q4 from the Cares Act legislation. With the second similar payment in 2022. Additionally, we expect to pay the balance of our transaction-related tax from the IT services divestiture in the fourth quarter. Our healthy cash position has enabled us to repurchase over $2.7 billion of stocks so far this year, on track with our full-year target of $3 billion or more. As we look ahead to 2022 on slide 12, our outlook is based on the same set of assumptions that we described for 2021 guidance, regarding the COVID environment and vaccine mandate. It also assumes that the continuing resolution does not extend beyond 2021, and like our 2021 guidance, it assumes that we do not experience a b reach of the debt ceiling. We expect space to be our fastest-growing segment again in 2022, driven by GBSD, NGI and several restricted efforts as they continue to ramp. Mission Systems and Defense Systems should also produce organic growth. Regarding Aeronautics Systems, after several years of strong growth, our latest 2021 sales guidance calls for a mid-single-digit decline. And we see that trend continuing in 2022. We've talked in recent quarters about the headwinds in our hail portfolio. We're also projecting lower sales on Jay stars, F/A-18, as well as our restricted portfolio. Looking further to the future, it's an exciting decade for defense aerospace. Rapidly evolving threats are sparing a new wave of all-time this vehicle, and 6th-generation fighter development. So the opportunity set in AS remains solid. And we will continue to invest in the cutting-edge technologies that allow our customers to stay ahead of the threat environment. Altogether, we currently expect 2022 sales at the Company level to reflect continued organic growth. Looking at segment margin, we expect the strong results we've demonstrated in 2021 to continue in 2022 with excellent program performance, offsetting a portion of the 20 to 30 basis point benefit we generated from pension-related overhead rate changes in Q1 of 2021. While we project higher sales and strong segment operating margin, we expect transaction adjusted earnings per share to be down next year as a result of several non-operational headwinds. Lower CAS pension recoveries, and higher corporate unallocated expenses are currently projected to create an EPS headwind next year of more than $2. For FAS pension, our outlook for 2022 will depend on our updated actuarial assumptions, including discount rates and plan asset returns, which we will determine at the end of the year. Earnings per share driven from sales growth, strong operating margin performance, and lower share count will help to offset these non-operational items. Next, I'd like to spend a moment discussing cash. We expect relatively stable cash flow at the program level in 2022. But there are a few temporal items that should be factored into the year-over-year comparison of overall free cash flow. First is lower CAS pension recoveries. As you can see on Slide 13, our CAS recoveries are currently expected to be lower by $350 million next year. The second is cash taxes. Excluding the impact of the IT services transaction we expect cash taxes to be modestly higher next year. In addition, as we've noted in the past, current tax law would require companies to amortize costs, so we're 5 years starting in 2022, which would increase our cash taxes by around $1 billion next year in smaller amounts in subsequent years. There continues to be uncertainty in the tax environment with potential new legislation that could change the R&D amortization provision and other provisions. We will provide updates on each of these items on our January call. Taking all of these cash flow factors into consideration, we would expect to decline in 2022 transaction adjusted free Cash Flow, followed by a double-digit growth CAGR through 2024, driven by strong operational performance. Regarding capital deployment, investing in the business through disciplined R&D and capital spending continues to be our priority. We expect CAPEX to be roughly flat next year in absolute dollar terms. We believe these investments allow us to stay at the forefront of technology as we invest in our business. As we've said, we continue to expect to return the majority of our 2022 free cash flow to shareholders through dividends and share repurchases. With that, I will turn the call back over to you, Kathy. Kathy Warden: Thanks, Dave. In summary, we have delivered excellent year-to-date results and operating performance, and we are pleased to be increasing our full-year EPS Guidance for the third consecutive quarter. We are actively engaged with our supply chain and our employees as we work to mitigate broader COVID related risks and continue to keep our programs on track. As shown by the many milestones in the quarter, we have highly relevant capabilities and programs that align well to national security requirements, and our customer funding priorities. So as we look forward, 2022 is expected to deliver another year of organic sales growth and excellent performance paving the way for longer term, margin expansion, and free cash flow growth. We remain focused on protecting the safety and well-being of our employees, delivering the capabilities our customers need to protect national security and sustain our planet and delivering value to our shareholders. So, with that Catherine, if you would please open the phone line for questions. Operator: Ladies and gentlemen, if you wish to ask a question, please press star, followed by one on your touchtone telephone. Again, press star one to ask a question. If your question has been answered, or if you wish to exit the question queue. Press the pound key to exit the queue, and to be respectful of time, please limit yourself to one question and one follow-up question. Please press star 0 at any time for operator assistance. And your first question comes from Robert Stallard with Vertical Research. Robert Stallard: Good morning. Kathy Warden: Good morning. Rob. Robert Stallard: Kathy or Dave, just on the 2022 expectations for AS, your decline that you're expecting -- I was wondering if you could give a little bit more detail on the puts and takes, consciously you can't talk that much about classified, but if you could give some sort of scale of the moving parts, that would be very helpful. Thank you. Dave Keffer: Sure, Robert, I can touch on that a bit further. As we mentioned, we're projecting a mid-single-digit growth decline this year in AS, and that's about the same trend that we anticipate next year in light of where we are in the life cycle of a lot of our key programs in A.S at this point. There is no single factor or even 2 or 3 factors that contribute the lion's share of that decline, but rather a fairly consistent trend in the trajectory across a lot of our key programs in the sector. You mentioned, we can't say much about our restricted portfolio, certainly agreed on that front. We have mentioned that the Global Hawk portfolio is projected to decline next year as black 20's and 30's continue in their retirement process. F-18 is projecting a decline for our portion of that program. Jay stars is another -- I would highlight there. And so across the board, these are fairly consistent drivers, F-35, we've talked about some of the COVID impacts there in Q3. And it's kind of pattern going forward in the AS portion of the program is relatively flat to modestly declining as we look at the '22 outlook. So hopefully that gives you a sense of some of the key drivers, as I mentioned, it's not anyone's specific program. Robert Stallard: And just a quick follow up Dave -- sorry. Kathy Warden: Quickly Rob, the only thing I would add is that our AS sector has been and we expect may continue to be the most impacted by the COVID related challenges that we spoke about. Robert Stallard: Just a follow-up. Do you think 2022 is likely the trough for these issues as some of these other less mature programs start to grow in 23 beyond? Dave Keffer: Obviously, we'll provide more insight on 2023 as we get to a similar point in 2022, and throughout the year, we will talk more about specific programs within that portfolio. I think for some, the trends will continue, for others they won't and we will defer to later date to give you more specifics as we look at the 23 outlook and beyond. Robert Stallard: Okay, thank you very much. Operator: Your next question comes from the line of Myles Walton with UBS. Myles Walton: Thanks. Good morning. I was hoping Kathy Warden: Good morning. Myles Walton: You could touch a bit on the cash commentary for 22 and just so we can all get to the same base level, you're thinking about, Dave. Is that -- when you talk about the cash taxes being a headwind, is that assuming the amortization rule sticks around and you have that billion-dollar headwind? Are you taking cash taxes or headwind? Regardless, and then a similar question related to the double-digit growth through 2024. Dave Keffer: Sure. So, the kind of high level view we gave you on 22 through 24 assumes that the amortization of those R&D costs does not go into effect. Though the trend line would be similar, it would be lowest in 22 with an increase in 23 and 24. But let's talk about it, assuming that guidance does not go into effect. What I think you can expect from us in '22 is to continue to drive a similar volume of working capital improvements to what we've done this year, which certainly had a good track record over the last couple of years of working capital efficiency across our business and that will help to provide that steady level of program driven cash that we talked about on the call. We also talked about pretty steady capex next year, slightly lower as a percentage of sales. With the sales growth, but a fairly consistent volume on a dollar basis. That means the kind of non-operating items or what we expect to provide the year-over-year reduction, $350 million less cash pension recovery is what we project today. I think of that more as a purification of our free cash flow stream. That day was going to come for a while and so, we're reaching that point now where we've reached the sustainably lower level of cash reimbursement. On the cash tax side, we'd projected those would be modestly higher without the R&D amortization provision, or other changes in the rate or other key provisions legislatively. Of course, legislation could then change that further if we don't have a removal or for all of the R&D tax item, for example. So more to come on, all of those fronts on the January call. Myles Walton: Okay. Dave Keffer: But hopefully that gives you a sense for it today. As we think about '23 and '24, we do expect continued decline in capital expenditures as a percent of sales. We will also benefit from not having the payroll tax to payroll in '23 and '24 as we have in '21 and '22, and at the program level, we expect continued working capital efficiencies on some of our key programs in '23 and '24, which is what gives us the confidence in that increase in those years. Myles Walton: Okay, and just one quick clarification. The prior CAS outlook had slightly moderate growth in CAS recoveries in '23, that trend line still holds? Dave Keffer: At this point, yes. I think -- Myles Walton: Okay. Dave Keffer: You'll see much less significant changes in 23 and 24, again, based on what we see today and based on the actuarial environment today. From 21 to 22, as well as 20 to 21, we've had significant reductions in cash recovery. We no longer expect significant movement really in either direction in those out-years. Myles Walton: Okay. Thank you. Operator: Your next question comes from the line of Doug Harned with Bernstein. Doug Harned: Good morning. Thank you. I want to go back to Aeronautics. And when you described the lower Aeronautics revenues in 2022, you referred to opportunities long term to reverse that, those were things like the sixth-gen fighter, new autonomous systems. But I think of those as being fairly long term and fairly uncertain. If you look at that revenue trajectory, the B-21, we should certainly see a strong growth come about from that. Do you see that as sufficient to reverse this trend? And when might that grow to a point that we would see that? Dave Keffer: Sure, Doug, obviously that's one that we can't get into much detail on, and so I guess, I'll refer you to the overall trends that programs tend to see as they're in these phases of the lifecycle that we've described on B-21 and maybe more importantly that our customer has described on that program. Certainly it has been a contributor to our growth as in the restricted AS portfolio over the last several years as we've described but the go-forward trajectory and the pace and timing of that growth is something we can't say much more about. So we've given you a sense for the 22 outlook there and where the program stands in its life cycle and that's about what we're able to say at this phase. Doug Harned: Okay. If I switched to F-35 and perhaps go outside of Aeronautics, I think of the kinds of things that you're doing on the F-35 is right at the heart of tech refresh 3 systems upgrades. Now that has with it, I'd say some good news as there should be a lot of -- I would expect growth there. But, they have also been quite a few challenges that have been highlighted around tech refresh 3, can you talk about both the growth opportunity that you have on F-35 there, as well as how you're dealing with some of the challenges that have come up? Kathy Warden: Sure, Doug, this is Kathy, I'll take that. So as you noted, there is opportunity, particularly in our Mission Systems sectors. We've look at the tech refresh on the F-35 and the Mission Systems that we provide to the aircraft. There has been some delays that has been noted this year. They have had some minimal impacts just on the timing of our work in the funding to support our work. But we have not experienced performance issues as a result of those delays, it's just shifted some sales out of this year into next. And in terms of our overall outlook for our Mission Systems work, we do see that and we think consistent in saying this as upside opportunity while the production volume is flat, and price pressure is driving overall production sales volume down slightly across the board. The other area you didn't ask about, sustainment continues to be an opportunity as well. And we see that in all three sectors that predominantly led through our Defense Systems business for the aircraft, the airframe, and our Mission Systems business with sustainment contracts for the Mission Systems. Doug Harned: Very good. Thank you. Operator: Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Good morning, guys. Thank you for the time. Kathy, maybe to follow up on an earlier question, just thinking about the 2022 revenue framework, you noted Aeronautics is down, but GBSD is growing $500 million, which was less than what we thought. What are any other major headwinds. And if we roll it up, is it fair to think about 3% to 4% revenue growth for 2022? And maybe as a follow-up to that, you gave some space color. Maybe if you could just talk about how you think about the rest of the portfolio outside GBSD? Kathy Warden: Yes, thanks for the question, Sheila. So to unpack the space growth for this year and the trends that we expect to continue into next year, GBSD has contributed roughly 50% -- a little bit over 50% to the sales growth in space in 2021. And we expect that trend to continue into 2022. To your point about 500 million of growth next calendar year being less than you might have anticipated, you might be looking at budget data which showed an incremental billion in each of the two years. But I'll remind you that a quarter at ' 22 government year is in 2021. So, we've seen a more significant ramp over the course of the 12 months in 2021, than we anticipate in our calendar year 2022. So, it's not a change in profile, it's nothing different. It's just how that fall into our calendar year. With regard to your broader question on how that translates to our outlook for the Company overall. I think it is safe at this point based on what we know today, to suggest that low-single-digit growth in 2022 is a reasonable expectation. At this point in the year, we see some COVID impacts that we've referenced. We saw them in 3Q. We're anticipating those to stay at that same level in Q4. But it is difficult to project what that impact maybe in early 2022, but what I will say is, we see those more as speed bumps than we do speed rumpers. Our fundamentals are intact, we have strong backlog, strong pipeline, and great portfolio alignment to budget priorities, so we still see the path to growth that we've been talking about. We just have some of these COVID, as I call them, speed bumps that we're working our way through. Hopefully that helps. Sheila Kahyaoglu: Sure. thank you so much. Operator: Your next question comes from the line of Ron Epstein with Bank of America. Ron Epstein: Good morning. Maybe just following up on a whole series of questions, Kathy. I because I think this is a question that's on a lot of people's mind. And obviously I'm not asking for guidance clearly, would be kind of out of the game, but how do we think about kind of medium-term growth, right? So when the speed bumps are behind us. And we're kind of in production on B-21, GBSD is kind of humming along. Whatever else is coming along. So if we step out over the next couple of years, how do we think about medium-term growth? Kathy Warden: We see a path to continuing to grow this business and it's based not only on the strength of the backlog we have with programs you were referencing like B-21 and GBSD. But it's also a pipeline that includes continued new award and I highlighted a few of those today of programs that are roofing into phase where they will see production award in the next couple of years. We still see a path to growth over the medium-term, and it's just a matter of how quickly that growth comes in the next several quarters as a result of some slowdowns that we've seen. And I should say, Ron and I appreciate the opportunity to address that. We've seen fairly minimal supply chain impacts because we have a relatively high labor content on our jobs versus external supplier content. We've talked a bit about the leave taking that we saw being higher in the third quarter, but they up to is finite because as people take leave of course they're burning down their leave balances. And, when I look over a longer-term period at trends like labor market issues that may drive labor rates up or inflation, we have in the industry at one of the highest levels of cost plus work. So those costs get passed on and shared with our customer. Now I do want to emphasize that we in no way, it want to pass those costs onto our customers, so we are working to minimize those impacts for their benefit. But our shareholders, they're not carrying that exposure. So, I feel really good about the portfolio that we have in our ability to weather any of these short-term impacts or what we expect to be short-term impacts and still be on a path to grow. Ron Epstein: Great. Thank you. Operator: Your next question comes from the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: Hey, good morning guys. Kathy Warden: Good morning. Kristine Liwag: Kathy just following up on that supply chain challenge, can you provide more specifics in terms of what you're seeing, why they're more prevalent in Aeronautics versus the other segments? And also right on labor, if the vaccine mandate does come into effect December 8, how are you thinking about the potential impact? Kathy Warden: So, we are implementing the vaccine requirements across our U.S. workforce as the mandate requires us to do. We are certainly early in our stage of collecting data about our employee status and have a good sense that a vast majority of our employees are vaccinated or in the process of being vaccinated, and with other employees, we are working through their options to meet that requirement by December 8, It's really too early to predict what those impacts might be until we have a better sense of, not just the pure quantum of employees who may not meet their requirement, but where they work and what they do in our Company and therefore, how we would mitigate those impact. But as I mentioned, we are proactively increasing our hiring now in anticipation that we may have some loss of workers. And we are ensuring that we have training and skill building programs in place. So, as we bring those new employees into the workplace they can get productive and efficient as quickly as possible. So actively working to mitigate impacts, they're just too difficult to really quantify for you at this time. Kristine Liwag: Great. And the specifics on the supply chain challenges with Aeronautics? Kathy Warden: For us, they've been relatively minimal as we have seen our own increases in leave taken, we've seen the same thing in our suppliers and that was primarily driven by 2 things in the third quarter. We estimate one was the delta variant. We saw increased case counts and therefore people out of the workforce while they either recovered from COVID or we're staying out based on close contact and we understood those supplier similar phenomenon. Then the other was that people had not been taking leave at the same rate, but as things started to open up, people actually took some well needed and deserved vacation. So, those are the two primary drivers that we saw and our suppliers saw the same which slowed down deliveries a bit. But as I noted, we see those as being temporal in that leave taking is somewhat limited at that point in time. Kristine Liwag: Thank you. Operator: Your next question comes from the line of Noah Poponak with Goldman Sachs. Hi Noah, your line is open. Noah Poponak: Hi, can you hear me? Kathy Warden: Yes. Good morning. Noah Poponak: Hi. Good morning, everybody. Dave, in the cash flow projection that you talked about on I will tell you Dave Keffer: Noah, we lost you. Are you there? Operator: Can we get to the next question. I will go right back to Noah. Dave Keffer: Sure. Operator: We have David. Oh Noah, your line is open. Are you there? Noah Poponak: Hi, sorry. Yeah, I was just wondering David, if you could speak to what you're assuming directionally from margins in that projection on a total Company basis. Thank you. Dave Keffer: Sure. We're really pleased to have been able to increase our 2021 segment operating margin rate guidance for the 2nd time now to another ten-basis point increase this year. As we noted in 2022 we won't have the 20 to 30 basis point benefit that we have this year from the pension driven overhead rate benefits that we experienced in our EACs in the first quarter of the year. And we anticipate being able to offset a portion of that reduction as we look to 2022. I don't think it's requires a specific assumption for '23 and '24 margin rate to get to the general trend that we're providing for those years. We'll be more specific about margin rate outlook as we get closer to those years. But, I think a relatively stable margin rate would get you to the trends that we've talked about in '23 and 4, with a healthy double-digit CAGR as it relates to free cash flow from the '22 base up to that '24 level. Again, no payroll tax deferral, a bit of efficiency on the capital expenditure side and some program-driven opportunities are what really drives that. Noah Poponak: Okay, thank you. Operator: Your next question comes from the line of David Strauss with Barclays. David Strauss: Thanks for taking the question, Loraine (ph). Just Dave to follow up on that so I'm Clear. Your guiding segment margin overall lower versus I guess whatever that call it, 118 midpoint for 2021, you're guiding it lower in '22 and then in terms of free cash flow on an absolute basis is '23 and '24 free cash flow higher than 2021 transaction adjusted free cash flow just on an absolute basis? Dave Keffer: Sure. Let me address both of those, David. On the segment OM rate, you're right to think about the 2 factors we've described in '22 compared with our increased guidance for 2021. We'll look to offset a portion of the 20 to the 30 basis points reduction that we would see from the absence of those rate benefits in '22, we'll look to offset a portion of that 20 to 30 basis points through continued strong operating performance, but not all of the 20 to 30 basis points on the OM rate side. And look, in terms of the 23 and 24 free cash flow, we've got a lot of moving pieces yet to be determined on the tech side, as we mentioned, things can continue to move as they often do on the pension side. Based on what we know today, I think what's best to say today as we anticipate that healthy growth outlook in 23 and 24, as we get to January and provide more specifics on the 22 level of free cash flow and know more than we could note today, in terms of tax legislation and such. We'll provide a bit further detail on the 23 and 24 growth rate in comparison to where we are today also. David Strauss: All right, thank you. Operator: Your Next question comes from the line of George Shapiro with Shapiro Research. George Shapiro: Yes Dave, I wanted clarification when you say AS declined at a rate similar to 21, is that -- because organically it's more like down 2% with equipment sale s taken out of it or are you talking the 5% that you just see? Dave Keffer: Right. We're comparing to the actual mid-single-digit decline in 2021 when we say we are having a -- expecting a similar trajectory in 2022. It's a good question. Thanks for the clarification, George. George Shapiro: Okay. And then what changed, if anything, or what changed to -- that the CAS pension dropped so much next year? I know you've talked about it coming down, but I hadn't expected it to come down the magnitude that it is. Dave Keffer: Sure. The $350 million number is pretty consistent with what we've been projecting in recent months and in the July and April earnings calls, there was legislation regarding pension earlier this year that affected some of the actuarial assumptions used for CAS purposes and reduced that number. Then the other factor is in 2021, that CAS number came up by about $60 million, as we noted on the call today. The compare from 2021 to 2022 got $60 million tougher, but the 22 level has been pretty stable for us since that new legislation came out in the spring. George Shapiro: Okay. Thanks very much. Dave Keffer: You bet. Operator: Your next question comes from the line of Cai von Rumohr with Cowen. Cai Von Rumohr: Yes, thank you so much for taking the call. So by the middle of '22 we'll know about the R&D tax credit. And as you look at '23, '24, you're saying, "Hey, we don't have the payroll tax repayment. We have lower CapEx. We have better ops and we have less downside in terms of cas h". So your basically saying we're going to have considerably better cash flow. And you also have a strong balance sheet, good low net debt to EBITDA ratio. Your major peer, basically in a somewhat similar situation, although they have CAS going against them, has taken a more aggressive stance toward their strategic use of share repurchase and dividend hikes to return value to shareholders. Your situation looks actually similar, if not better. Is that something you would consider? Kathy Warden: Cai, it's not just something We would consider we have been articulating throughout the year that we do see a majority of our free cash flow being returned to shareholders over this period and, it is in part by, we increased the dividend again this year and we have committed to at least $3 billion of share repurchase in 2021. You could expect to see those trends for cash returning to shareholders in the next couple of years as well. Cai Von Rumohr: But actually Lockheed is implying that their net debt will go up, if you consider all of their number. So they're basically saying they're looking at net debt because EBITDA is going up, that basically increasing the net debt somewhat because of the strength of their balance sheet. Is that something you would consider or is it basically just the cash flow that's available? Dave Keffer: Sure, Cai, I think you noted appropriately at the beginning that we'll know more in the next few quarters than we do today about tax legislation and other factors. We'll know more about the COVID environment, the budget environment and so, all of these are factors that we think about as we look at our capital allocation plans. I mean, Kathy's point is the important one around the priority for us over the next couple of years will remain first and foremost, after making critical investments in our businesses, we've said we will continue to do the next priority is around returning cash to shareholders over these next couple of years. Whether we choose to change our net debt balance over the next few years or not will in some ways be affected by those broader factors, and we'll update you and others as we know more and get into 2022 on that front.This year, we achieved our credit rating targets and feel like, we're in a good stable position there. So again, we'll know more and update you all, as we do. Todd Ernst: And Catherine -- Cai Von Rumohr: Good answer. Thanks so much. Todd Ernst: If we have more question. Operator: Alright, your last question will come from Seth Seifman with JPMorgan. Seth Seifman: Great. Thanks very much. Thanks for getting me on. I think I got one more here. So, I guess as far as backlog, when would you expect backlog to stabilize and given the decline we've seen year-to-date in the Defense Systems backlog, what gives you confidence on the growth outlook there? Kathy Warden: So, Seth, we see our book-to-bill being close to 1 again this year have been significant awards that we anticipate in the Fourth Quarter. And our backlog has grown over 90% since the end of 2017, so to your point is there -- we don't expect that kind of accelerated growth in our backlog it currently sits at over two times sales, so it's quite strong, and we feel supports the continued growth of the business for several years to come. Seth Seifman: Great. [Indiscernible] then on defense? Kathy Warden: Sure. What is the specific question on Defense [Indiscernible]? Seth Seifman: Just that the Defense backlog has been down fairly significantly year-to-date and calling for growth next year. I know there are some kind of growth programs in that segment but what gives you confidence in the Defense Systems business growing next year? Kathy Warden: That business also has some key awards in fourth quarter of this year that would position for its growth next year. We also in defense see it's our shortest cycle business, so they do tend to run more of a one-to-one backlog to sales ratio. And the only other thing I would point to there is we have been trailing off Lake City and that of course, has impacted new awards and a tough year-over-year compare. But as we look forward, that will stabilize in -- looking at the backlog to sales ratio in that business. Anything you add, Dave? Dave Keffer: Yeah, of course, the year-over-year backlog comparisons in DS in particular would be affected by the divestiture of the IT services business to a lesser degree in MS and Space. But certainly, thinking of more of an organic change in that DS backlog is important in this particular year. Seth Seifman: Great. Thank you very much. Todd Ernst: I will leave it there, Kathy? Kathy Warden: Yes, well, once again, I want to thank the Northrop Grumman for delivering another solid quarter. We are actively working to mitigate the COVID related risks that we talked about today and finish this year strong with robust sales growth, and other strong EPS performance, and solid free cash flow. Our initial 2022 outlook as we've said, is expected to continue to deliver growth and strong operating performance again next year and we look forward to providing you some details around that guidance in our January call, so, we wish you all well, and thanks again for joining our call today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: Good day ladies and gentlemen and welcome to Northrop Grumman's second quarter 2021 conference call. Today's call is being recorded. My name is Nicole 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. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks Nicole. Good morning everyone and welcome to Northrop Grumman's second quarter 2021 conference call. We will refer to a PowerPoint presentation that is posted on our IR web page this morning. Before we start, matters discussed on today's call, including 2021 guidance and beyond reflect the company's judgment based on information available at time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On today's call are Kathy Warden, our Chairman, CEO and President and Dave Keffer, our CFO. At this time, I would like to turn the call over to Kathy. Kathy? Kathy Warden: Thank you, Todd. Good morning everyone and thank you for joining us. Today, we are very pleased to announce another strong quarter. I will begin by recognizing our Northrop Grumman employees for their continued focus on operational excellence. Our results represents the successful execution of our strategy, the strength of our portfolio and the commitment of our team to deliver for our customers and shareholders. As the global environment continues to rapidly evolve and other nations gain more complex and sophisticated capabilities, our customers need innovative and affordable solution to be delivered with increasing speed and agility. With the investments we have made in advanced technologies combined with our talented workforce and adoption of digital transformation capabilities, Northrop Grumman is well-positioned to meet our customers' need and continue to strengthen our position for the future. This quarter, we once again delivered strong growth and operating performance. Our sales increased by 3% to $9.2 billion. Adjusting for the effects of our first quarter divestiture of the IT services business, organic sales increased 10%. While we do expect this growth rate to moderate in the second half of the year, we continue to have a robust pipeline of opportunities in 2021 and beyond. Additionally, program execution across the portfolio was exceptional which drove our segment operating margin to exceed 12%. This follows on strong Q1 performance, resulting in a year-to-date segment operating margin of 12.1%. And we continue to expect solid performance for the remainder of the year. Earnings per share increased 7% this quarter and transaction adjusted EPS has increased 16% year-to-date. Transaction adjusted free cash flow has also trended favorably and has increased 26% year-to-date. As a result, we ended the quarter with just under $4 billion in cash on the balance sheet. This provides us continued flexibility for capital deployment. We completed the $2 billion accelerated share repurchase in Q2 and continue to expect to repurchase over $3 billion for the year. Additionally, we increased our dividend by 8% in May. We are executing a balanced capital deployment strategy, which includes investing in the solutions our customers need and also returning cash to investors. Over the next couple of years, we continue to expect to return the majority of our free cash flow to shareholders through share repurchases and dividends. In terms of budget updates from Washington, the Biden administration issued its budget request for fiscal year 2022 in May and it reinforces the administration's statements around investing in capabilities to maintain U.S. national security advantages. The request aligns well with the investments we have made at Northrop Grumman as we position our portfolio for the future. And while it's still relatively early in the budget process, we are pleased to see strong support for national security from the Congress, including $25 billion increase to the President's budget request approved last week by the Senate Armed Services Committee. Both the House Appropriations Committee and SASC have voiced strong support for many of our programs, including B-21, GBSD, Triton and F-35, to name a few. We look forward to working with the Congress and the administration as they make progress on the fiscal year 2022 budget. NASA was also well supported in the budget with a 7% year-over-year increase in proposed funding. NASA priorities include returning to the moon via the Artemis program where we are a key supplier of critical technologies, including the Habitat and Logistics Outpost or HALO and the solid rocket boosters for the Space Launch System, also known as SLS. This provides meaningful opportunity for the company and it demonstrates the diverse nature of our space business. Turning to business highlights from the quarter, I will share a few examples that help to demonstrate the strength of our portfolio and our technology leadership across key markets. In partnership with the Air Force, the B-21 program remains on track with two test aircraft in production today and we continue to make solid progress towards first flight. This program leverages the confluence of Northrop Grumman's long history in aircraft development and advanced low observability capabilities. The Air Force recently published an artist rendering and a B-21 fact sheet that provides additional insights into the program. The fact sheet highlights that the B-21 is being designed with open systems architecture to reduce integration risk and enable future modernization efforts to allow for the aircraft to evolve as the threat environment changes. As we have discussed on many of these calls, Northrop Grumman is a leader in communications and networking solutions, providing the connective tissue for military platform, sensors and systems that weren't designed to communicate with one another. Passing information and data using secure open systems, similar to how we use the Internet and 5G in our day-to-day lives. Our system played an important role in the Northern Edge 2021 joint exercise which was held in May and showcased how we enabled warfighters to easily communicate and securely share actionable information regardless of platform. As part of the exercise, Northrop Grumman systems were validated on three separate platforms. Our Freedom Pod was the part of a demonstration with the Air National Guard and our Freedom Radios were a key part of two demonstrations centered on advanced 5th-generation communication. And as a reminder, the Freedom Radios equip both the F-35 and F-22. We are also enabling Joint All Domain Command and Control for our Integrated Air and Missile Defense Battle Command System or IBCS. In July, the U.S. Army successfully engaged a cruise missile target in a highly contested electronic attack environment during the developmental flight test using Northrop Grumman's IBCS. This latest flight test integrated the widest variety of sensors to-date, including a Marine Corps G/ATOR Radar, which is our candidate's expeditionary radar that entered full rate production last year as well as F-35 and other ground sensors and interceptors. This would be eighth successful flight test performed for the IBCS program and the program is on track for a competitive downselect a full rate production later this year. In addition, we are making great progress on the GBSD program. In the second quarter, the team officially closed out the EMD baseline review with our Air Force customer and we completed the Integrated Baseline Review. The IVR is a critical step in setting cost and schedule baselines and is an important milestone for the program. And earlier this month, we were awarded a contract to continue our support of the Minuteman III Ground Subsystems until their successful transition to the GBSD system. So taking a step back, the examples that I provided highlight our strong performance, technology leadership and broad portfolio and its tight connection to national security priorities from modernizing our strategic deterrent to breakthrough technologies that connect our forces. Based on the strong results and performance of our company year-to-date and our latest outlook for the remainder of the year, we are increasing our 2021 revenue segment OM rate and transaction adjusted EPS guidance. Additionally, after two years of book-to-bill over 1.3, we expect our book-to-bill for the full year to be close to one this year with fee booking opportunities in the second half of the year that includes HALO, SLS, F-35 and several restricted programs laying the foundation for continued growth. Before I turn the call over to Dave, I would like to talk about ESG. We are very proud of our ESG record and the high marks we received in many environmental and in social rankings. We have built an organization with a robust governance structure, diverse and inclusive working environment and an ongoing and evolving focus on responsible environment stewardship. In May, we published our most recent sustainability report. It provides transparency into the progress and actions we have taken in these areas and more. To help ensure we adhere to these priorities every day, key components of our ESG goals are reflected in non-financial metrics that are incorporated into the leadership team annual incentive compensation. And just last week, we announced the appointment of a Chief Sustainability Officer who will report to me and drive further enhancements to our ESG program. I want to again thank all of our employees for stepping up to the challenge our nation is facing and for remaining focused on delivering for our customers and our shareholders. Our second quarter results and enhanced 2021 outlook demonstrate that our strong fundamental trends continue. Over the long term, we are well-positioned to provide our customers innovative and affordable solutions to help address national security threat while driving profitable growth and value creation for our shareholders. So with that, I will turn the call over to Dave who will provide more detail on our sector results and our updated 2021 guidance. Dave? Dave Keffer: Thanks Kathy and good morning everyone. My comments begin with second quarter highlights on slide three. We delivered another quarter of excellent organic sales growth and outstanding segment operating margin rate and higher EPS. Our year-to-date transaction adjusted free cash flow increased 26% and we continued to returning cash to shareholders through our buyback program and our quarterly dividend which we increased by 8% in Q2. As a result of our outstanding first half performance and enhanced outlook for the year, we are pleased to be raising our sales, segment operating margin rate and EPS guidance. Slide four provides a bridge between second quarter 2020 and second quarter 2021 sales. Normalizing for the IT services divestiture, which was a $585 million headwind in the second quarter of 2021, our organic sales increased 10% compared to last year. Working days were the same in both periods. Moving to slide five which compares our earnings per share between Q2 2020 and Q2 2021. Our EPS increased 7% to $6.42. Operational performance contributed $0.60 of growth and lower unallocated corporate costs driven by state tax changes added another $0.22. Our marketable securities performance was a modest earnings benefit in Q2 but compared to the even more favorable equity markets experienced in the same quarter last year, it represented a year-over-year headwind of $0.18. Lastly, we experienced a higher federal tax rate in the period due to a change in tax revenue recognition on certain contracts for years prior to the 2017 Tax Cuts and Jobs Act. Next, I will begin a review of sector results on slide six. Aeronautics sales were roughly flat for the quarter and up 2% year-to-date. Sales in both periods were higher in manned aircraft, principally due to higher volume on restricted programs and E-2D, partially offset by lower production activity on A350 and lower volume in autonomous systems. At defense systems, sales decreased by 24% in the quarter and 21% year-to-date. And on an organic basis, sales were down roughly 3% in both periods. Lower organic sales were driven by the completion of our Lake City activities, which represented a headwind of $120 million in the quarter and $260 million year-to-date. This was partially offset by higher volume in both periods on GMLRS as well as ramp up on the Global Hawk Contractor Logistics Support program for the Republic of Korea. Mission systems sales were up 6% in the second quarter and 8% year-to-date. On an organic basis, MS delivered another double digit sales increase in the quarter of almost 12%. And organic sales were higher in all four of its business units in both periods. Turning to space systems. Sales continued to grow at a robust rate rising 34% in the second quarter and 32% year-to-date. Sales in both business areas were higher in the quarter and year-to-date periods reflecting continued ramp-up on GBSD and NGI, as well as higher volume on restricted programs, Artemis and Next Generation OPIR. Moving to segment operating income and margin rate on slide seven. We had an outstanding operational quarter with segment margin rate at 12.2%. Aeronautics Q2 operating income decreased 3% due to benefit of $21 million recognized in the second quarter of 2020 from the resolution of a government accounting matter. Operating margin rate was consistent at 10.3% in Q2 and the year-to-date period. At defense systems, operating income decreased by 18% in the quarter and 15% year-to-date, primarily due to the impact of the IT services divestiture. Operating margin rate increased to 12.4% in the quarter and 11.8% year-to-date. The increase in operating margin rate was largely driven by improved business performance and business mix in battle management and missile systems programs. Operating income at mission systems rose 18% in the quarter and 15% year-to-date due to higher sales volume and improved performance. Operating margin rate increased to 15.8% in the quarter and benefited from the favorable resolution of certain cost accounting matters as well as changes in business mix as a result of the IT services divestiture. Year-to-date, operating margin rate increased to 15.5%. Space systems operating income rose 44% in the quarter and 40% year-to-date and operating margin rate was 11% in both periods. Higher operating income is primarily a result of the higher sales volume along with the timing of risk retirements contributing to higher net favorable earnings adjustments in both periods. Now turning to sector guidance on slide eight. You will note that we are now providing quantified ranges for sales and OM rates instead of the broader descriptions such as low to mid or mid to high, given the improved visibility that we have as we pass the midpoint of this fiscal year. We are increasing the sales outlooks of our defense, mission systems and space sectors, given the strong volume that each produced in the first half and solid outlooks for second half performance. We are slightly reducing sales guidance for aeronautics, reflecting the continued plateauing of several of our production programs after years of outsized growth. For operating margin rate, we are increasing our guidance at defense, MS and space and the margin rate at AS remains unchanged. Moving to consolidated guidance on slide nine. We are raising our 2021 outlook for several key metrics. For sales, we are increasing the midpoint of our guide by $500 million to a range of $35.8 billion to $36.2 billion. This translates to full year organic growth of over 4% and over 5% excluding the 2020 equipment sale at AS. As you review our sales trends, keep in mind that the first half benefited from one month of the IT services business and had seven more working days than the second half will have. We expect the company to have higher organic sales per working day in the second half of the year than the first. We are also increasing both our segment operating margin rate and our overall operating margin rate ranges by 10 basis points to 11.6% to 11.8% and 15.5% to 15.7%, respectively. Keep in mind that the gain from the IT services divestiture contributed approximately five points of our overall operating margin benefit. We are proud of our profit performance in the first half and continue to expect strong results in the second half of the year. First half net favorable EAC adjustments were particularly strong with lower rates driving Q1 outperformance and program risk retirements contributing to Q2 strength. For unallocated corporate expense, our updated guidance reflects a $30 million reduction associated with state tax changes. And we now foresee an effective federal tax rate in the high 17% range, excluding effects of the divestiture, which is an increase from our prior guidance. We project a federal tax rate of approximately 22.5% on a GAAP basis. Finally, we are raising our EPS guidance which I will highlights on slide 11. The increase in guidance is driven by $0.40 of segment operational improvement. Lower unallocated corporate costs almost fully offset the headwind from the higher federal tax rate leading to an increase in our transaction adjusted EPS guidance of $0.35 at the midpoint. Next, I would like to take a moment to talk about cash. Since our in January, we have raised the midpoint of our sales guide by $700 million. With those additional sales come additional working capital needs to fuel the growth. But in light of our outstanding first half cash flow performance, we project that we can absorb that additional working capital in our existing transaction adjusted free cash flow guidance of $3 billion to $3.3 billion. We believe this range reflects continued strength in cash conversion balanced with prudent investments in key growth segments of our market. I also wanted to provide more information on the projected impact on our 2022 CAS pension recoveries from the American Rescue Plan Act, which was passed this spring. While asset returns and actuarial assumptions will continue to influence the final number, our current estimate is approximately $185 million of CAS recoveries in 2022, down $55 million from our January guide and down about $300 million from our expected 2021 level. We continue to expect minimal required pension contributions over the next several years. Regarding cash deployment, as Kathy mentioned, we completed our $2 billion accelerated share repurchase in the second quarter retiring over six million shares at an average price of around $327 per share. And we continue to target over $3 billion of total buybacks in 2021. At the end of the second quarter, we had approximately $3.7 billion of remaining share repurchase authorization. In conclusion, we are very pleased to have delivered another quarter of rapid growth, outstanding program performance, strong cash flow and accretive cash deployment. And with that, Todd, I think we are ready to open up the call for Q&A. Todd Ernst: And Nicole, remind everyone how to get in the queue. Operator: [Operator Instructions]. The first question will come from the line of Doug Harned with Bernstein. Doug Harned: Good morning. Kathy Warden: Good morning Doug. Doug Harned: Space is now such a big area for you, I wondered if you could give us a sense of how you look at this sort of a broader environment because we are seeing many new entrants in space, commercial players, some doing small sats, launch vehicles, other things. So when you look at that this evolution for Northrop Grumman, where do these players present competition for you? Where can they present partnership opportunities? How do you see this world evolving? Kathy Warden: Thanks for the question, Doug. It's because if we look at our portfolio, as I said before it's is quite broad both in terms of the technologies that we offer, the integration capability that we provide. And so, in each segment of the market, we follow a strategy of both partnering and meeting and combining partner capabilities into our own team. In national security space, for example, we are operating as both a strategic partner to many other primes while also being able to lead efforts on our own that integrate our technologies into others. In the case of civil space, in particular NASA with space exploration, the same is true. Our HALO program is an example of where we were leading. We were awarded that full force, but we do have partners on that program that are bringing differentiating technologies. While at the same time, on Human Lander, we chose to partner, in that case, with Blue Origin. So, in each case, we look at the capabilities that our team has to bring to the overall mission requirements and whether it's best for us to lead or follow. In order to do that, we need to have strong partnerships, both with the more traditional space companies in our industry as well as some of the new entrants like SpaceX and Blue that are of a larger scale. And I also don't want any of us to forget that there are a number of smaller companies that also have been very good partners for us in this area and will continue to be in the future and there are dozens of them. We tend not to go forward with singular and focused partnerships in one particular company. But instead have a wide variety of partners that we work with in this area and that's what we plan to continue to do as the space evolves. Doug Harned: Well, when you look at this and one area is small sats, for example, where I think a lot of aspects of the people now look at it as becoming more commoditized and there's a number of small players. Raytheon made the decision to acquire Blue Canyon. How do you look at the part of the universe here in terms of what you see as a differentiated capability at Northrop Grumman that clearly your position is going to be very strong for a long time and then perhaps some other areas and small sat bus could be one where you could own it or not own it? How do you think of the divisions between those two? Kathy Warden: Well, as I was noting, we believe that we should own what is most important to fully integrated offering that meets mission requirements and we particularly are focused, in our case, on national security space and space exploration. And so we don't feel we need to own everything. Our acquisition of Orbital ATK rounded out our portfolio nicely. We now have both bus offerings as well as the ability to develop satellites on small scale rapidly as well as more exquisite payloads for more sophisticated missions. And we like that breadth of our portfolio as it exists today. That's not to say we have everything we need, which is where partnering comes in. But we don't feel we need to take an equity quarter or acquire companies to get access to those capabilities. Doug Harned: Okay. Very good. Thank you. Operator: The next question will come from the line of Ron Epstein with Bank of America. Ron Epstein: Hi. Good morning. Kathy, I was just wondering of maybe two things. Could you remind us what's on the horizon in terms of competitions latter half of this year into next year? And then the second point, in terms of capital deployment itself, is there any areas that you are looking or how you are think about that? Kathy Warden: Thanks Ron. So I will start with the competitions that we have seen in the latter half of this year. Most of our second half awards are actually noncompetitive. We are looking at F-35 SLS awards in the latter half of the year. There are several restricted programs, which are competitive that we are looking to book in the second half and we also have IBCS which I mentioned earlier on the call, which will be selected for full rate production in the second half of this year. As we look longer term, there are aircraft development programs in the pipeline, but those are a bit further out. And so those are areas, to the second part of your question, that we are investing to position for that are not necessarily evident in our short range plan. The other areas that we are investing in, when I became CEO in 2019 we defined mission campaigns and I have talked about several of them in the past. They include areas like national security space, strategic missiles where we have made significant progress in the last couple of years executing those campaign strategies, booking new awards and moving our position in those market segments materially. We continue with that focus. And so looking forward, major areas include future manned aircraft and unmanned aircraft. We also see continued growth in our advanced weapons portfolio and our advanced networking and communications portfolio, just to name a few. Ron Epstein: Great. Thank you. Thank you very much. Operator: The next question will come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Good morning. Kathy, Dave and Todd. So going back to space, Kathy, a hot topic right now, 37% growth in the quarter, very good. How do we kind of think about this business over the medium term? Does it continue at double digits outside of GBSD growth? Maybe if you could talk about that given the deceleration you have in for the second half with high single digit? And just the margin contraction, is that related to some of the new programs that you are starting in space? Kathy Warden: Yes. Sheila, why don't I start and then I am going to Dave to walk through a few of the specific structural items. There is no doubt that our space business is performing exceptionally. There are some structural items to consider when you look at the first half compared to the second half. We walked through a few of those, working days, the timing of our pension cost reductions that flow through our program EACs and the impact on margin and then timing of particular programs like GBSD, which started to ramp in the second half of last year and therefore create a tougher compare in the second half of this. But with that said, this business has exceeded our expectations, frankly, since it was set up 19 month ago. And we aren't betting against it in the second half. But generally, we don't forecast that kind of success that the business is having. But we certainly strive to deliver it. And that's what the team has been doing all year to this point. So I am going to turn it over to Dave because he can walk you through some of those structural items that I mentioned, as you model the second half compared to the first. But I want to leave you with the impression that we still have significant opportunity in the pipeline for this business, I talked about the second half awards and great momentum that will enable this business to continue to grow. Dave Keffer: Thanks Kathy. That's a great summary. The first half of the year was just an outstanding half for space and we continue to see a strong second half in store. You mentioned the working day impact on organic growth in the first quarter. As we noted, that was three extra working days for a 5% or so benefit to growth in Q4. It's four fewer working days for a 6% to 7% headwind for growth. But of course, those are just timing items. More broadly speaking, we had the GBSD and NGI programs ramping up in the first half and that will continue going forward. In the second quarter, we noted that we had really strong program performance in particular on some commercial programs where we had net EAC benefits in the quarter that contributed to that really strong margin rate performance you saw from space in the first half in addition to the first quarter indirect rate improvements that we talked about on our April call. So in aggregate, a really strong first half for the business. In the second half, we expect continued strong performance. We had originally guided this business to be about a 10% margin rate business for this year. We are outperforming that number of this year. We continue to see that as a reasonable expectation in that 10% margin rate range after this year. And so, it's a really strong business in a great part of the market and we intend to continue gaining share there. Sheila Kahyaoglu: Thank you. Operator: Our next question will come from the line of Seth Seifman with JPMorgan. Seth Seifman: Thanks very much and good morning everyone. Kathy, you mentioned HALO has an award coming up for, I think, you probably it seems like you have it in the third quarter. And I noticed there was a firm-fixed-price contract, I guess and for something in space where we all know how much risk there can be involved in space programs. How do you think about taking on a firm-fixed-price contract for an important space opportunity? And what does it say about the way that you and your customers are looking at risk in the space area more broadly? Kathy Warden: Thanks. The Halo program is a firm-fixed-price contract. We don't see it as a development effort for say, it's building off of the habitat that we have built in the past and so a lot of commonality with prior efforts and strong experience in this area. And that goes to how we think about bidding more generally. You know that we have a track record of not bidding when we assess the risk as too great to be able to mitigate prior to putting in a fixed-price proposal. And we have walked away in the past from opportunities as a result of finding ourselves in that situation. We are getting more sophisticated in being able to shape these opportunities and do risk reduction prior to the bid so that we can get comfortable that those risks are well understood and that we have a plan to mitigate them. And that indeed is the case with HALO. With that said, we have very little fixed-price development work in our portfolio. And so as we look across the portfolio and think about that risk exposure, I think part of your question is going to, are we doing more of that. And the reality is that we are not doing more fixed-price development work today than we have in the past and we don't see that as a broad trend in the industry. Seth Seifman: Great. Thanks very much. Operator: The next question will come from the line of Richard Safran with Seaport Global. Richard Safran: Kathy, Dave and Todd, good morning. How are you? Kathy Warden: Good morning. Richard Safran: Either Kathy or David, with a number of programs advancing from development to production, I thought now might be a good time to ask how you are managing cost and cost takeout, both internally and with the supply chain? So I am just wondering how you are incentivizing and challenging the business segments and suppliers to takeout cost and drive productivity improvements? I know it's a general question but any insight into how you think about this would be helpful as we just consider how to Northrop for longer term? Kathy Warden: Thanks Rich. It is an important question at this point in time as we do see a transition to more production work. We continue to focus on cost control across the company and it is aided now by our digital transformation efforts. It is an enterprisewide effort led out of my office and we are streamlining and automating processes both for our product development, so taking cost out of the product development cycle and manufacturing as well as the back office, both of which contribute to margin improvement opportunity. And those will evolve over the next several years as we implement different phases of that digital transformation. We are also monitoring labor cost, something you didn't ask specifically about. But we have not yet seen significant pressure upward on labor costs but we are tracking it because as you all know, nationwide attrition and movement is upward trending. And we have not seen that in our company. Our attrition is fairly similar to what it was pre-COVID. But we do continue to monitor that and expect to be able to fully offset that with the efficiencies I referenced in our digital transformation into that part of what we are thinking about as we are setting those goals. With regard to supplier pricing, we have seen some modest pressure in supplier pricing. It's mostly related to areas where there are supply bottlenecks. Think semi conductors, certain commodities. But we expect those to be transitory and to be more than offset by the internal efficiencies I spoke about. And in Dave's team where we manage our enterprise supplier work, is they are doing some really good things to get ahead contractually and through supplier management of those pressures. So Dave, why don't I turn it to you for any additional comments you would like to make. Dave Keffer: Sure. Thanks Kathy. We have a keen focus on the supply chain these days, certainly where we are looking at COVID-driven pressures over the past year and felt those were mitigated well. We are continuing to track that, of course on the inflationary side. I think those pressures have been modest so far and focused on a few particular commodities but have not been anything we haven't been able to mitigate. Kathy mentioned contract structures do reduce that risk. About half of our work is cost type work and of the remainder, the majority is priced over short durations and so we get to reprice those frequently enough to mitigate that pressure. On the semiconductor side, we have seen in certain areas and pockets, I would say, we have seen extended lead times but nothing we haven't been able to mitigate broadly by partnering with our suppliers, by sharing demand signals well in advance and being in tight communication with those in the challenging pockets of that semiconductor community. We are also continuing to make use of our own foundry where appropriate and where in the best interest of our customers. So taking a step back and kind of summarizing, certainly the [indiscernible] is critical to our cost management efforts and to our execution efforts in general and more broadly speaking cost management is a keen focus of ours everyday. We don't talk about it a lot on these calls but certainly it's something that is part and parcel of everything we do, our IT costs, our real estate costs. As Kathy mentioned, we are careful about labor and semiconductor costs and other key elements of our supply chain as well. So these are areas that we are keenly focused on. Certainly, digital transformation is the next key initiative that will have a significant beneficial impact. But broadly speaking, it's something that's high on our radar. Richard Safran: That was really great color. Thanks. Operator: The next question comes from the line of Cai von Rumohr with Cowen and Company. Cai von Rumohr: Yes. Thank you. Excellent results again. Space margins, I think we have always talked about, is the mix becoming more production, is it more development and obviously, with all the wins you had in space, GBSD, NGI, it looks like the mix is becoming more development. So I am a little surprised by the very strong margin that you delivered in space. I mean it looks like in the second half you are looking at about 10% or a little bit under. But maybe talk to us, is that by your sectors, mainly space, mission and aeronautics, is the net shift in the mix toward production or toward development or is it essentially balanced going forward? Dave Keffer: So I can start on that, Cai. It's a good question. On the space side, we have touched on some of this But certainly, to your point, we have been really pleased to be able to increase the margin rate guide there from 10% at the start of the year to 110.2% to 10.4% in our latest guidance. That's driven by the strength of our first half performance across programs in that portfolio. I mentioned it on the commercial side of the portfolio. There was particular strength in Q2. The indirect rate reductions in the first quarter were also beneficial there. And the second half margin rate continues to look solid. And longer term, we continue to think of it as about a 10% business though there that mix pressure that you describe. And so that 10% margin is in the face of that pressure and really driven by the strength of operating performance that we continue to see in the business to include direct and indirect cost performance as well as program execution milestones. And so it's certainly been a favorable story as we have seen the cost type development work begin to grow in space and one that we expect to continue. MS and AS have a bit of a different picture moving forward that is, to some degree, offset the cost type increase in space, MS, in particular, has had a mix shift toward a more fixed price this year, partially driven by the divestiture, which removed a portion of it's cost type portfolio. And in AS, the broader long term trend would shift a bit more towards fixed price as well. So again, this is one of those scenarios where it's helpful to have broad portfolio with different types of businesses at different phases of their lifecycles and that's what we see unfolding in the coming years. Cai von Rumohr: Great answer. Thanks so much. Operator: The next question will come from the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: Hi. Good morning, everyone. Kathy Warden: Good morning. Kristine Liwag: Kathy, circling back on the Artemis Lunar Lander program, Blue Origin has proposed to NASA to waive $2 billion of fees. How does this affect your partnership with Blue Origin? And what's your appetite to support a loss leader approach in space? Kathy Warden: Thanks Kristine. So let's get back to the question Doug was asking as well, when we think about partnership and clearly when we lead an effort, we will choose to make sizable investment to protect that program and increase our probability of win over it's life because of the advantage that you have got when you are the leader, the prime only effort. And that's exactly what Blue Origin is doing. And it's important to also note that the business case for Blue extends well beyond the NASA program as they think about their aspirations for commercial space travel. In the case of Northrop Grumman, we have to do that similar business case assessment and we have come to different answers in terms of what our contribution should be to the overall program financials and that's expected. In any good partnership that you lay out, the clear expectations of each party, but also the benefits to be gained by each party and aligning of expectations for financial investment. Kristine Liwag: Thanks Kathy. And maybe switching gears to your nuclear business. We saw the nuclear enterprise get solid support in the fiscal year 2022 budget. But now the new administration is undertaking its own nuclear posture review and it sounds like it's going to be integrated with their new national defense strategy as well. With your exposure with the two legs of a nuclear triad with B-21 and GBSD,, what are you watching for when you get a document like this?. And do you anticipate to see any major changes? Kathy Warden: Well, first, I am very pleased that the administration is looking at the national defense strategy and the nuclear posture review in an integrated way because it is the threat environment that should define the overall defense strategy and the role of the strategic deterrence of a nuclear program as part of that strategy. So it's an indication to me that that's exactly how the administration is thinking about it. They have been clear that their assessment of the threat, particularly with Russia being the pacing threat with regard to nuclear and China being an emerging but very rapidly growing threat and recent intelligence just further supports that, that with that basis, they will look at what each administration before them has done, our overall nuclear posture review and ensure that the programs and the modernization plans indeed measure up against that threat. We are very confident that once again the threat assessments, the affordability of these programs and the requirements being met by these program will line up well to both the NDS and the NPR and that should play out over the next six months or so. Kristine Liwag: Great. Thank you very much. Operator: The next question will come from the line of Robert Spingarn with Credit Suisse. Robert Spingarn: Hi Good morning. Kathy Warden: Good morning. Robert Spingarn: Hi. Dave, I have got one for you on just cash flow cadence and just the smoother cash flow we saw this year. I think last quarter, you talked about some of the working capital improvements that drove a smaller outflow there. So now with the first half in the books, how does the second half shakeout Q3 to Q4 in terms of free cash flow? Is it going to be flat? Or do we have a bigger Q4 that we typically see? And if it is flatter, is that something you can hold on to long term? Dave Keffer: Sure. Thanks for the question, Rob. We don't give quarterly guidance but we did talk about the general trends. And I think you should expect our second half trends this year to be similar to prior years. We had a smoother first half than usual, as you mentioned. We are pleased with that and that's something we will strive for going forward. As we look at the second half, overall, as I mentioned, we are driving for the $3 billion to $3.3 billion free cash flow target that we have had since we started the year. As we mentioned at the beginning of the year, as you alluded to, that required some working capital enhancements given the growth that we were seeing and in order to offset the lower pension reimbursements the outflows associated with payroll tax deferral this year and a couple hundred million dollars of divestiture-related free cash flow that we had been generating each year prior. And so in aggregate, it required substantial working capital improvements. We have now delivered on those in the first half of the year and are really pleased with the progress through the first half. Without giving a quarterly outlook for the second half, we expect continued strength in the third and fourth quarters. That leads to a strong $3 billion to $3.3 billion as we mentioned in our guidance for the year. I would also note, I think of that as a pure free cash flow number than we have had in prior years, given the CAS pension dynamics which, as we noted on the call, will continue into next year. So that purification of the cash flow, the strength in working capital, I think, are good news stories as it relates to fee cash. Robert Spingarn: Thanks Dave. Operator: The next question comes from the line of Robert Stallard with Vertical Research. Robert Stallard: Thanks so much. Good morning. Kathy Warden: Good morning. Robert Stallard: Dave, this one for you. Can you elaborate on what the programs are in aerospace that are going to be plateauing out going forward from here? Dave Keffer: Sure. I will be happy to start on that one, Rob. We would noted if there were one or two programs driving that. It's really broader based than that. We have been talking about the trends and the lifecycles of various AS programs on the unrestricted side over the last couple of years. And our comments there will be consistent with that. On the F-35 program, we have noted in the past that we deliver ahead of the primes timeline. And so in this case, we would expect to plateau ahead of our prime on that. And so that's among the programs we would note here. On the unmanned side, in the HALO portfolio, we touched about the budget dynamics associated there. And so there is some ongoing budget decision-making to occur for both Global Hawk and Triton. But certainly I would include those in the plateauing list. I would include F-18 as well. And so broadly speaking, it's not any one program but a series of them. On the commercial side of our aerostructures business, there has been pressure really over the last year since the COVID dynamics occurred. And so there is long term growth opportunity there as the commercial market recovers a bit in the near term. That smaller portion of our portfolio has faced some pressure as well. Robert Stallard: Okay. That's very helpful. And Kathy, maybe one for you. You mentioned JADC2 in your commentary. It seems to be the buzzword in the DoD these days. I was wondering how you think this program is going to evolve? Are we going to see one mega program or lots of smaller efforts contributing to this theme? And what could be the opportunities for Northrop Grumman? Kathy Warden: So I absolutely see this being a collection of smaller efforts rather than one large program. And that supports the ability for the government to make this architecture a reality. Digesting it by upgrading platforms and sensors with the ability to communicate with one another, share data and be part of an architecture is a much better solution, in my view, then trying to go with a single party or a single platform to be the network of choice because the mission requirements vary so greatly. When you think about a contested space and the kind of architecture that you need, it's very different than when you are operating in an uncontested environment like we have been over the last 20 years in the Middle East. So there will be many architectures to be able to support different theaters and mission requirements in JADC2 and therefore an opportunity for all of industry to participate. Where Northrop Grumman is particularly strong is in our advanced networking as those capabilities are the core of helping platforms and systems that were not designed to share data to be able to do so in the future. And I would also note that's a much more affordable answer to getting a platform modernized to be part of a JADC2 architecture than completely redesigning or replacing the platform itself. Robert Stallard: That make sense. Thank you very much. Operator: The next question will come from the line of Myles Walton with UBS. Myles Walton: Thanks. Good morning. Dave, back to the cash for a second. The working capital headwinds you observed, can you maybe just size that? And also a couple years of elevated growth and likely some moderation in the growth next year, should we expect the working capital to start to flow out in 2022 and 2023 in a more measurable sense? Dave Keffer: Yes. Thanks for the question, Myles. It's tough to size exactly the nature of the pressure from the increased growth this year. As we mentioned, we have increased our guidance now by $700 million in sales since the beginning of the year. And so you can apply a reasonable days of working capital metrics there and it's $100 million or so of pressure on that metric that we are able to overcome, in part due to strong first half performance and the strength and outlook that that gives us as a result. As we look at 2022 and beyond, we are certainly not finished in our efforts to drive working capital efficiency and effectiveness. Like what we talked about earlier with cost management, that's something we wake up every day and focus on. And that the focus will continue. So I will look for continued opportunities in 2022 and 2023. More broadly, as we think about free cash in 2022 and beyond, we had the pension dynamics I mentioned earlier that we will need to overcome. And then on the tax side, everyone is awaiting news on legislative environment there as it relates to the R&D amortization issues and such. So we are focused, as you would imagine, on the things we can control which are around working capital efficiency, being prudent with our capital expenditures, focusing those on key growth areas of the market. And at this point, we feel confident that we are doing a good job in both of those areas. Myles Walton: All right. Thank you. Operator: The next question comes from the line of David Strauss with Barclays. David Strauss: Thanks. Good morning everyone. Kathy Warden: Hi David. David Strauss: Back on the space, Kathy. So it looks like with your revised revenue guidance, you are talking about $2 billion revenue increase year-over-year adjusting for the divested revenues as well. I think previously you had said GBSD was $800 million to $900 million. Does that still hold within that? Or has that improved? And then if you could just break out the big chunks that are driving that extra $1 billion or so revenue growth this year? Kathy Warden: Yes. So GBSD is still close to $1 billion of incremental revenue this year as we anticipated and about 60% of the growth is non-GBSD in the midpoint of our guide as we project out for the remainder of the year. So healthy growth across the entirety of the portfolio, not just GBSD. And I will note and I have spoken about this before, GBSD will continue to grow into next year and 2023. So it has a long ramp, if you will. But it's just amazing to hear you repeat it, $2 billion of growth in that segment is just tremendous. The team is executing and winning work at a rate that I haven't seen in my time in the industry. So kudos to them. David Strauss: And Kathy, that non-GBSD portion, I think you said 60%, does that bucket grow next year as well? Kathy Warden: We expect it to. Again, we will provide more color on our 2022 guidance. But we expect space to continue to be our fastest-growing segment. It will modulate from this year certainly. There just aren't the same number of opportunities going into 2022 that there are in 2021. We still have confidence in the team's ability to win. But we do see that modulating a bit. But still plenty of growth drivers for 2022. David Strauss: Terrific. Thanks very much for the color. Kathy Warden: Thank you. Todd Ernst: We have time for one more question. Operator: The final question will come from the line of Mike Maugeri with Wolfe Research Mike Maugeri: Hi. Good morning. Thank you. Kathy, I would be curious to hear your thoughts on cyber domain. Maybe just how you see that trending relative to the budget at a high-level? Where do you see Northrop in the landscape? How big is it for you? And then how it trends for Northrop relative to the rest of Northrop? Kathy Warden: So cyber continues to be an important standalone market segment. When we think about the work we are doing for customer to enable secure processing, secure communication, oftentimes those programs are wrapped up under those umbrellas when we talked about a processing program or a communications program. In addition, now the ability to securely command and control or communicate is a differentiator in many of the programs that we are bidding and winning. It was true on GBSD. Secure command and control was an essential requirement and we were able to bring forward a solution to that requirement based on the strength of our cyber expertise that we gained largely from our direct work with the governments on securing their assets that then apply internally as we build new weapon system. So, a lot of synergy with our standalone cyber portfolio even though it, in of itself, is not that large. It does drive opportunity and differentiation across the entirety of the business. And we see it continuing to grow. It has been running for a decade and we expect that trend to continue. It's just about every weapons now have requirements for secure. Todd Ernst: Great. All right. We will it leave it there and turn over to Kathy for some closing remarks. Kathy Warden: Thank you Todd. Well, again, this quarter, we demonstrated our ability to execute our strategy and deliver growth, operational excellence and balanced capital deployment. So our strong performance, all the credit goes to the team and I want to thank them again for their hard work and continued efforts. As we look forward, I have great confidence in our future. Thanks for joining us today. I look forward to our next call in October. Operator: Ladies and gentlemen, this concludes today's conference call. Thank for your participation. You may now disconnect.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's First Quarter 2021 Conference Call. Today's call is being recorded. My name is Mariama, 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. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Good morning, and welcome to Northrop Grumman's first quarter 2021 conference call. This morning, we will refer to a PowerPoint presentation that is posted on our IR web page. And before we start, I'd just like to remind you that matters discussed on today's call, including guidance and our outlook for 2021 and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Matters discussed on today's call will include non-GAAP financial measures, which are defined and reconciled in our earnings release and supplemental PowerPoint presentation. On the call today are Kathy Warden, our Chairman, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden: Thank you, Todd. Good morning, everyone. Thanks for joining us today. I want to congratulate the Northrop Grumman team for a very strong start to 2021. One year after the onset of the pandemic, we have adjusted to a new way of working and we continue to support our employees, our customers, our suppliers and our communities, which has enabled us to deliver outstanding results to our shareholders. Our results demonstrate the strength of our team, our portfolio, our strategy and our operating performance. Our solid bookings and competitive wins, robust organic sales growth and excellent operational performance resulted in strong margin rates, earnings and cash in the quarter. We also closed the divestiture of our IT services business, and successfully transitioned those employees and programs to Peraton. Elaborating on financial highlights. We booked new awards of $8.9 billion, grew sales 6% and increased segment operating income, 13%. GAAP EPS of $13.43 reflects the IT services gain and transaction-adjusted EPS increased 28% in the quarter. First quarter operating cash improved by more than $900 million year-over-year. Using cash on the balance sheet and divestiture proceeds, we executed a $2 billion accelerated share repurchase agreement that retired an initial 5.9 million shares. We also retired $2.2 billion in debt, including early redemptions of $1.5 billion. Even with share repurchases, dividends and deleveraging, all of which totaled more than $4.4 billion, we exceeded the first -- we ended the first quarter with $3.5 billion of cash on the balance sheet. As I outlined in January, this year's capital deployment plans continue to include robust investment to drive innovation and affordability and at least $1 billion of additional share repurchases. Based on what we see now over the next couple of years, we expect to return the majority of our free cash flow to our shareholders through share repurchases and dividends. With the strength of our first quarter results, a solid outlook for the remainder of the year and confidence in our portfolio, we are raising our sales and EPS guidance. We now expect sales will increase to between $35.3 billion and $35.7 billion, a $200 million increase to the prior range. And we are raising transaction-adjusted EPS guidance by $0.85 to a range of $24 to $24.50. As we look forward, we believe our capabilities will remain well aligned with U.S. national security priorities. In early policy guidance, such as its interim national security strategy, the Biden administration has signaled that it views competition with China as the most pressing long-term security challenge, and will invest in the capabilities needed to maintain U.S. national security advantages. In its recent budget framework for fiscal year 2022, the administration described several priority efforts that are closely aligned with our portfolio and technology leadership. These include space, modernizing the nuclear deterrent, advanced weapons and long-range fires capabilities and R&D for breakthrough technologies, such as artificial intelligence, advanced computing and cyber. Turning to operational highlights in the quarter. Our Space business doubled its backlog in 2020 and achieved 30% revenue growth in each of the last two quarters. This performance confirms our competitive capabilities and our ability to capture market share as our nation ramps up investment in Space. Three competitive awards in the first quarter are good examples: The hypersonic and ballistic tracking space sensor; the protected tactical SATCOM, rapid prototype program; and the next-generation interceptor. On HBTSS, we received $155 million award to build a prototype sensor satellite capability capable of tracking hypersonic weapons from space. For protected tactical SATCOM, we were down selected for a follow-on award to proceed with our ongoing prototype development with a flight demonstration of our PTS payload expected in 2024. We also were awarded a $2.6 billion contract for the next phase of the Missile Defense Agency's next-generation interceptor, known as NGI, with a period of performance through 2026. This contract is for the rapid development and flight test of an interceptor designed to defend against the most complex long-range threats. Opportunities for Northrop Grumman Space also extend to civil and commercial space. NASA's fiscal year 2022 discretionary requests is $24.7 billion, a 6.3% increase over the 2021 enacted level. Importantly, the request supports human exploration of the moon, Mars and beyond. Support for the NASA budget enables our efforts on space launch systems and Halo, the Habitation and Logistics Outpost program. And in commercial space, MEV1 continues to provide life extension services to an Intelsat satellite and have received via satellite technology of the year award. The award recognizes the technology breakthrough that reshapes the way the satellite industry works now and for years to come. I'm also pleased to report that earlier this month, MEV-2 successfully docked with another Intelsat satellite. MEV-2 will provide five years of service before undocking and moving on to provide services for a new mission. Northrop Grumman is a pioneer in this field and remains the only provider of flight-proven life extension services for satellites. As the U.S. continues modernizing its strategic deterrent capabilities, we are proud to be the prime contractor for two legs of the TRIAD: The B-21 bomber; and the ground-based strategic deterrent, or GBSD; as well as a key supplier on the third leg. These modernization programs, which were initiated in the Obama administration, are expected to begin filling at the end of this decade. Both GBSD and B-21 are benefiting from our use of innovative digital tools to reduce technical risk and cost. As the Air Force has noted, B-21 development has been unique in that the test aircraft are more mature than other systems have been at this point, allowing us to validate our production processes much sooner in the program life cycle. And our GBSD program successfully completed two major milestone reviews and remains on track to field an initial operating capability by 2029. We are working closely with the Air Force partner and industry teammates to use digital engineering and agile software development to reduce risk and shorten development time lines as we modernize this critical system. The GBSD program has earned the E-Series designation from the U.S. Air Force, affirming the program's cutting-edge approach to digital transformation. All four of our sectors are aligned to the high priority investment areas needed to maintain military superiority. In addition to developing new platforms and weapon systems, we are enabling the modernization of existing platforms to ensure our war fighters have the best technology that their platforms can be modularly upgraded to counter evolving threats. In the first quarter, we received orders totaling approximately $500 million for additional Sabre radar systems for the F-16. With these additional orders, we're now under contract to produce approximately 900 systems in the support of F-16 upgrades and new jet procurements for 8 FMS countries, as well as upgrades to our U.S. Air Force, Guard and Reserve F-16 fleets. Also on the F-16 for the U.S. Air Force, we were down selected as the sole offer for the EMD in production of a modern electronic warfare fleet to provide next-generation threat protection and ensure an upgrade path for advanced capabilities against highly agile future threats. And during the quarter, the U.S. Army approved our Kirkham system, for full rate production following a successful six month initial operational test and evaluation on its helicopters. We also continue to demonstrate how we can connect platforms and sensors to enable joint all domain command and control or JADC2. Our fifth generation connectivity solutions will be featured on multiple platforms in the upcoming Northern Edge 21 Exercise in May. We expect to participate in several other exercises over the next 12 months, including the Army's project Convergence, where IBCS is expected to be featured. And we're responding to the ABMS digital infrastructure investment priority, requiring secure processing, connectivity and data management. And finally, we are maturing our advanced weaponry and long-range fires capabilities. We conducted a successful live fire demonstration of our integrated counter UAS solutions this quarter. The demonstration showcased our next-generation proximity ammunition and its capability to defeat Class 1, 2 and 3 unmanned aerial systems. In addition, AARGM-ER had two successful static motor tests of a rocket motor, marketing nine consecutive successful tests in preparation for the upcoming flight tests. All of these successes reflects the quality of our team and the benefits of our recent investment in new technology to support national security for the U.S. and our allies. We are focused on competing and winning the programs that enable continued growth and affordably delivering the capability our customers need. This quarter was another demonstration of our commitment to maintain strong returns and cash flows while growing the business. I'll turn the call over to Dave now for a more detailed discussion of our financial guidance, results and trends. Dave? Dave Keffer: Thanks, Kathy, and good morning, everyone. I'd also like to thank our team for another quarter of outstanding performance. My comments begin with Q1 sales growth on Slide 4, which provides a bridge between our first quarter of 2020 and first quarter of 2021. We reported Q1 sales growth of approximately 6%. And as you can see, the IT services divestiture was an approximately $400 million headwind to first quarter sales. In addition, due to the timing of our accounting calendar convention, we had three more working days in the first quarter of 2021 than in the first quarter of 2020. We view this tailwind as purely timing as it normalizes in Q4 when we will have four fewer days than in the fourth quarter of 2020. The three additional days in Q1 2021 result in an approximately 5% benefit to sales across all of our segments for your modeling purposes. So at the consolidated level, the divestiture and extra working days are largely offsetting for Q1. Adjusting for these two items, revenue growth was 6.4%. As I review the sector results, I'll refer to organic sales growth, adjusting only for the IT services divestiture. Slide 5 provides a bridge of our earnings per share between first quarter 2020 and first quarter 2021. GAAP earnings per share increased to $13.43, primarily due to the gain on sale. When we adjust for the divestiture-related items, transaction adjusted earnings per share are up 28% to $6.57. The increase reflects strong segment performance, which drove $0.75 of the year-over-year improvement. Recovery in the equity markets generated favorable earnings on our marketable securities, especially compared to the volatility we experienced in the equity markets last March. Corporate unallocated expense contributed $0.27, primarily due to lower state tax and lower amortization expense in the period. Referring to sector results on Slide 6. Aeronautics Systems sales were up 5% for the quarter, reflecting higher Manned Aircraft sales due to stronger on restricted programs and E2D, partially offset by lower sales in Autonomous Systems as certain global hub production programs near completion. At Defense Systems, first quarter sales decreased 17% or 2% on an organic basis. Lower organic sales reflect the closeout of our Lake City activities, which represented a headwind of roughly $140 million this quarter. Higher volume on GMLRS and AARGM helped to offset that impact. Turning to Mission Systems, we saw a third consecutive quarter of double-digit sales growth, with revenues up 10% or 15% on an organic basis. Organic sales were higher in all four MS business areas as its diversified portfolio continues its strong momentum from last year. In Airborne Multifunction Sensors, we had higher volume for the Sabre and Meso radar programs and higher restricted sales. Maritime land systems and sensors increased primarily due to ramp up on the G/ATOR program as well as higher volume on marine systems. Navigation, targeting and survivability sales increased principally due to higher volume on targeting programs, including LITNING. Networked Information Solutions sales were driven by higher volume on electronic warfare programs, including JCREW and restricted programs. Space systems continues to be our fastest-growing segment, with sales up 29% in the quarter, or 32% on an organic basis. Sales were higher in both business areas, with continued ramp-up on the GBSD program, driving revenue growth in launch and strategic missiles. Space programs were driven by higher volume on restricted programs, NASA's Artemis programs and the next-gen OPIR program. Turning to operating income on Slide 7. Segment operating income includes a Q1 benefit of approximately $100 million from lower overhead rates, a reflection of our disciplined approach to cost and affordability. This quarter's benefit includes the reduction in projected CAS pension costs that we mentioned on last quarter's call. While lower CAS costs do present a modest revenue and cash flow headwind going forward, they improve our competitiveness by making our solutions more affordable, and that will be a key competitive differentiator in a flattening budget environment. At AS, operating income increased 17% and margin rate increased to 10.3% due to higher net favorable EAC adjustments driven by reduced overhead rates. Defense Systems' operating income decreased 11%, primarily due to the IT services divestiture, and operating margin rate increased 80 basis points to 11.3%. The increase in operating margin rate was largely driven by improved performance in battle management and missile systems programs. Operating income at Mission Systems rose 12%, and operating margin rate increased to 15.3%. Higher operating income reflects higher sales as well as the benefit recognized from reduced overhead rates, partially offset by lower net favorable EAC adjustments at Network Information Solutions. Space Systems operating income increased 37%, primarily due to higher sales volume. Operating margin rate rose to 10.9% due to higher net favorable EAC adjustments, driven by the reduction in overhead rates. At the total company level, segment operating income increased 13% in Q1, and operating margin rate increased to 12%. Higher operating income was driven principally by favorable overhead rates, as well as operational performance at the sectors, which more than offset the lower business base due to the IT services divestiture. Turning to sector guidance on Slide 8. As a result of a continued robust growth in our Space business and the recent win of the NGI program, we are increasing Space sales guidance to approximately $10 billion. Sales guidance remains unchanged for AS, DS and MS, as does operating margin rate guidance at all four sectors. Moving to consolidated guidance. Slide 9 provides a bridge to our updated guidance, reflecting the improvement in operations as well as the effects of the divestiture on our overall outlook. We are raising our 2021 sales and transaction adjusted EPS guidance to reflect the strength of first quarter results. We now expect 2021 sales will range between $35.3 billion and $35.7 billion, a $200 million increase to prior guidance. Keep in mind that our fourth quarter year-over-year revenue comparison will include headwinds of fewer working days and the $444 million equipment sale at AS in addition to the divestiture. Our updated guidance on corporate unallocated expenses is driven by the net gain on the IT services transaction and also reflects favorable deferred state tax benefits and other lower unallocated costs. Our operating margin rate guidance includes both the lower corporate unallocated expense and the benefit from the divestiture. Moving to taxes. You can see the estimated tax rate reflects the impact from the divestiture, and our underlying effective tax rate is unchanged. Our year-end weighted average diluted shares count guidance has been reduced to reflect the ASR. Turning to EPS. Slide 10 provides a bridge between our January guidance and today's transaction adjusted guidance. We are increasing our transaction adjusted EPS to a range of $24 to $24.50 from our prior guidance range of $23.15 to $23.65. Our higher guidance reflects strong segment performance as well as lower corporate unallocated expenses, favorable pension trends and lower weighted average shares outstanding. Lastly, I want to take a moment to talk about cash. We continue to pursue a balanced capital deployment strategy that includes investing in the business, returning cash to shareholders through dividends and share repurchases and managing the balance sheet. In the first quarter, we delevered our balance sheet, obtained improved ratings from two credit rating agencies and executed the ASR program to further reduce our share count. The recently passed American Rescue Plan Act is expected to begin affecting our CAS pension recoveries in 2022. Asset returns and other actuarial assumptions will continue to influence these numbers. But all else being equal, the legislation would further reduce our CAS recoveries. I'd also note that we had already lowered our projected CAS pension cost to a relatively low level in our January outlook, primarily due to outstanding asset performance in 2020. I'd reiterate that we expect minimal cash pension contributions over the next several years. As Kathy mentioned, first quarter operating cash flow increased more than $900 million from Q1 2020. This improvement largely reflects timing of collections and disbursements, and we have not changed our transaction-adjusted free cash flow or capital expenditure guidance for the year. It's worth mentioning that while the divestiture of the IT services business closed in Q1, federal and state cash taxes of approximately $800 million will be paid over the remainder of the year. In closing, we are very pleased with our first quarter results as we continue to deliver for our customers, employees and shareholders. Our portfolio's shaping and continued investment in the business put us in a strong position to sustain our momentum in value creation and robust cash generation. Okay, Todd. I think we're ready for Q&A. Todd Ernst: Mariama, please inform the analysts how they enter the queue and ask questions. Thank you. Operator: [Operator Instructions] Your first question comes from the line of Robert Stallard with Vertical Research. Your line is open. Robert Stallard: Kathy, on Space, clearly, a very strong quarter here and tracking very nicely for another strong year. But how do you see this going forward? You're obviously going to be up against a tough comparison in 2022, for example, but you have got this new NGI wins. So I was wondering if you could give us some idea of what is sort of sustainable top line growth rate could be for this division. Kathy Warden: Well, without getting into specific outlook for 2022, let me talk about some of the major drivers that we see. You noted that GBSD will have a tougher compare '22 to '21 because we'll have a full year of GBSD this year. However, I would point to the fact that GBSD is expected to continue to ramp into 2022. The budget shows another, approximately $1 billion increase going from '21 to 2022. So not all of that is the Northrop Grumman program. That's the entire budget. But you can see that there is still escalation and growth anticipated for the program going into next year. But more importantly, as you highlighted, there are other activities that we have underway that have a growth profile from '21 to '22. NGI is one of those. The other two awards that I mentioned today are to others. And so we do see the opportunity for Space to continue to grow. It is true that when we look at this business, it grew 18% last year. We are projecting high-teen growth again this year. So those are very robust growth rates. But we do see the potential for Space to continue to be a growth driver for our business and indeed, our fastest-growing segment. Operator: Your next question comes from the line of Robert Spingarn with Crédit Suisse. Your line is open. Robert Spingarn: Just sticking with Space. Kathy, you touched on this a little earlier in your prepared remarks, but you've had some really nice success recently with Space logistics and your satellite mission extension vehicle. Wondering if you could elaborate a little bit on the opportunity longer-term and update us on how discussions with customers are trending now that the technology is proven. And just wondering if satellite MRO can ultimately be comparable to something like aviation MRO as a very strong recurring business? Kathy Warden: Thanks for the question, Rob. We certainly see this business is transforming the way companies think about satellite life extension. And we see that with Intelsat, and of course, we started in the commercial space. Because we had in Intelsat, a willing partner to pioneer with us, and that's really what this is. As I noted, we're still the only company providing this kind of mission life extension capability. And Intelsat has been a fabulous partner in being able to demonstrate those capabilities on two of their satellites. And MEV-2 is docked with a satellite that is currently providing mission service. MEV-1, I'll remind you, was taking a satellite that was out of service and bringing it back to service. So as we continue to demonstrate that we can even dock with a moving satellite, providing service and not disrupt those services, I do expect that other customers will see the value. And that business will continue to grow. We also see the opportunity, as we work with our defense customers, to bring those capabilities to military and special systems that our national security relies upon, now that we have demonstrated the capability with commercial clients. Operator: Your next question comes from the line of Seth Seifman with JPMorgan. Your line is open. Seth Seifman: I wanted to ask about -- so Aeronautics, you called out the headwind in autonomous, and that's something that you've discussed before. Does that headwind go away by the end of this year? Or does it persist into 2022 on Global Hawk? And I guess, are there any other sort of legacy type of platforms we should be thinking about that might come into the budget cross hairs going forward? Dave Keffer: Sure, Seth, it's Dave. I'll get started on that one for you. So yes. As you noted, the Manned Portfolio in AS outgrew the unmanned in Q1. Overall, the sector delivered a strong 5% organic growth rate year-over-year and does project organic growth for the full year, when you exclude the unique equipment sale from last year. In terms of the headwinds you mentioned around Global Hawk. Certainly, there are puts and takes on the Global Hawk program and on the HALE portfolio altogether and no more when we see the updated budget numbers in the coming weeks. But I think in aggregate, it's been a strong start to 2021 for the AS portfolio. There are pockets of new opportunity in the unmanned business has been in the news in recent months. Certainly, we have healthy long-term opportunity set in unmanned. And we'll see about the trajectory of the current HALE portfolio. I think in general, that's a flatter portfolio than some of our other higher growth product sets on the manned side that we've talked about in the past. So again, we'll provide more guidance on '22 and beyond as we get further into this year. But that at least gives you a thumbnail sketch of what we're seeing in AS. Operator: Your next question comes from the line of Carter Copeland with Melius Research. Your line is open. Carter Copeland: Kathy, I wonder, if I could just ask briefly about the F-35. I think once it go beyond lots 14 and get to 15, 16, 17, the number of aircraft in those lots is planning to step down a little bit. I know you guys have a bit of a lead in terms of the revenue recognition on your own cost and your own work on that program versus what we may see from the prime contractor. And I just wondered, maybe give us some perspective on the timing of that, and what it means for that F-35 business in those revenues, how we should be thinking about that going forward? Kathy Warden: So Carter, as we look at F-35 in its three pieces, I think you're primarily asking about production volume. And, in particular, at Aeronautics, we see that volume relatively flat for the next few years based on the demand signal that we've gotten from Lockheed and what they ask us to quote. Now price continues to come down as we do our part to contribute to the affordability of the aircraft. So that's a little bit of an offset to a flat volume. At the same time, so when you look at the other pieces of the program, modernization and sustainment, those are growing over that period of time. And so all in all, we see our F-35 franchise within Northrop Grumman being relatively flat over the next several years. Operator: Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open. Sheila Kahyaoglu: Maybe how do you guys think about productivity and margin opportunities post divestiture here? Great margins in the first quarter, 12% ahead of your guidance. When we think about the remainder of the year, whether it's mix or R&D, what sort of headwinds come up? And I guess, how do you think about profitability now that you've streamlined the portfolio? Dave Keffer: Sure. Thanks, Sheila. So as you mentioned, we're off to a really strong start in Q1 on the margin front, both in terms of rate and dollar volume at a 12% rate for the first quarter. That is ahead of our full year guide of 11.5% to 11.7% segment OM rate. I'd note that from a timing perspective, Q1 did benefit from the lower overhead rates as we talked about, a portion of which was driven by the lower CAS pension costs and the rest of which was really just strong cost management across the business, overcoming the lower base from the divestiture and such. So we're really pleased with the level of disciplined cost management that we've already demonstrated in 2021. As we look to the rest of the year, we continue to project that 11 05 to 1107 segment OM rate, which is 10 basis points to 30 basis points better than last year's performance, which was already at a strong level of 11.4%. Going forward, I think you're right to think of mix as one of the drivers. But obviously, we'll continue to strive operationally for both efficiency and the way we execute the program and the deliver product, as well as the way we manage the business. Our digital transformation efforts are a good example of that efficiency initiative, again, having been touted on some of our key and newer programs. And certainly, that's also part and parcel of the way we're looking to manage the overall business with as much efficiency and consistency as we can to really deliver that affordability and cost efficiency that drives continued strong margins over time. Operator: Your next question comes from the line of George Shapiro with Shapiro Research. Your line is open. George Shapiro: If you could it looks like the EAC or the CAS benefit of about $100 million, that's consistent with the drop in CAS you projected in Q4. So I assume there's been no change from the ARPU -- from ARPU as a result of that. And then also, what's your current pre-funding level for CAS? And how does that play out over time? Dave Keffer: The current pre-funding level is just under $2 billion, it was as of the first of the year this year. The ARPU adjustment to CAS are more limited in their impact to the business in 2021 than the benefits we've talked about in terms of Q1 EACs, which were primarily driven by the asset performance and other actuarial changes as of our last earnings call when we provided the broader outlook. I think what I'd point you to is we've already reduced those CAS pension projections substantially in the January call down to levels of $240 million next year, $340 million in 2023. So there's limited ongoing reduction possible from the ARPU changes. And obviously, there will be other effects or other influences on that number very much to include ongoing asset returns from pension. So it's a modest headwind to free cash flow and even more modest to revenue going forward. In Q1, it was one of the items contributing to the strong margin rate. But obviously, we continue to project a healthy margin rate for the full year, and thus, for the remaining quarters, driven by the strong programming performance and the continued strong cost management we've talked about. Operator: Your next question comes from the line of Jon Raviv with Citigroup. Your line is open. Jon Raviv: Kathy, you mentioned in your prepared remarks that you're seeing that majority or most of your free cash flow going to shareholders over the next few years. Just what's behind -- what's the perspective on talking about that kind of dynamic in terms of how you see the market developing here and what your other capital deployment opportunities are? And then within that context, any preliminary thoughts on how you're thinking about that free cash flow opportunity over multiple years versus this year's free cash flow guide? Any particular big moving pieces we should be aware of, like payroll tax or the R&D dynamic? Kathy Warden: So why don't we have Dave start with the second part of your question, which will give you more sense of the capital we have to deploy, and then I'll talk to the deployment strategy. Dave Keffer: Sure. Thanks, Kathy. So as we talked about on our last call, our guidance for free cash flow for this year of $3 billion to $3.3 billion requires working capital management improvements from 2020. And we're really pleased with the start we've gotten off to in 2021, having already delivered on some of those working capital enhancements. And you can see the really strong year-over-year compare of our Q1 '21 free cash flow to Q1 2020. So that gives us a good feeling for free cash flow as we enter the final three quarters of the year. Over the next few years, obviously, we'll provide more insights in the coming quarters. But I think you touched on a few of the right points. Certainly, first and foremost for us is what's in our control, and that is continued really strong working capital management in the business, efficiency in our billing and collections process, efficiency in the way we manage our supply base on the payable side, while continuing to maintain a healthy supply base as we have through the accelerated payments we've made now over the last year plus. So those are all critical factors for us on the operational side. We do expect capital expenditures to continue to -- or to come down in '22 and beyond as a percentage of revenue, as we've signaled in the past. And then you get into some of the CAS pension dynamics I mentioned shortly ago, which should have -- should be a modest headwind if all else is equal. Obviously, it remains to be seen what influence asset returns and overall market conditions have on CAS pension going forward. And so we'll update you there as we see the year progress. And then on the tax side, new legislation possible certainly to remove the existing R&D amortization rules scheduled to go in place in '22 that would be favorable for us. There's obviously also discussion of the long-term corporate tax rate that could influence our cash taxes going forward. So again, our first priority is what we can control, and we're optimistic about continuing to drive really strong cash flows from the operations of the business. Kathy, over to you for capital deployment. Kathy Warden: Thanks, Dave. And so as Dave outlined, our capital deployment strategy has remained consistent. We invest in the business, but we have signaled and continued to see our CapEx as a percentage of revenue starting to come down in 2022, just based on the opportunity set that we have and the robust investments that we've been doing over the last couple of years. We've also been active in portfolio shaping and are pleased with the portfolio that we have now and its alignment to the National Defense strategy. So we've been using proceeds to mature our cash balance and really get to a place for our balance sheet is where we'd like it to be. And we're in a position, therefore, to now focus on dividends and share repurchase. So my comments really reflect that as we sit here today, that we do expect the majority of our cash proceeds over the next couple of years will go to those two methods of returning cash to shareholders. Operator: Your next question comes from the line of David Strauss with Barclays. Your line is open. David Strauss: I wanted to touch on the Space margins. They were up a fair amount despite 30-some percent growth, I assume most of that being on a cost-plus basis. So could you maybe, Dave, touch on why the Space margins start to come down from here based on your guidance? And then I know you touched on additional working days you had in Q1. But I think your sales -- implied sales guidance for Q1 both came in -- your sales came in well above your implied guidance. So was there any sort of pull forward in the quarter or anything that -- other than the working days that kind of reverses go -- or goes back the other way later in the year? Dave Keffer: Sure. Two good topics there I'm happy to touch on. First, as it relates to Space margins. Space was one of the segments that did benefit from the overhead rate reduction in Q1, which, of course, lifted their margin rate performance in the quarter. The expansion of their base is also a contributor there and the efficiency with which they executed their programs in the quarter and with which they manage the business were both contributors as well. It was a really strong operational quarter for Space, building on a really strong 2020 for Space. For the rest of the year, I wouldn't signal any dramatic change there. Obviously, we have this full year margin rate guidance around 10%, consistent with the past guidance for Space and reflective of the mix moving more towards cost type development work, as you mentioned, but obviously off to a strong start there in part due to those EAC benefits because of the operational and cost efficiency in the quarter. You mentioned the working days and the overall revenue profile for the year. It's, I think, an important topic to talk through because there are a couple of moving pieces there. So let me give you a bit of a sense for some of the key quarterly items there. Q1 did include a month of the now divested IT services business. And as we've mentioned, about a 5% benefit in each sector from the additional three working days. In terms of other items, I would say, in general, we had strength at the end of the quarter in terms of the timing of materials and deliveries, which did benefit the quarter. I would call that broad-based across the businesses, not any one particular program or sector. Thinking about the rest of the year, Q4, as we mentioned in our scripted remarks, will be a tough compare. It will have four fewer working days than the prior year. And as we mentioned on our last call, Q4 of 2020 benefited by the $444 million equipment sale in AS. So on top of the divestiture impact on Q4 compare from a revenue perspective, we'll have those other two unique items. As we think about Q2 and Q3, we expect continued solid organic growth in those quarters, consistent with what we've been able to deliver of late. From a GAAP sales perspective, those will be offset by the divestiture, of course. But again, really strong momentum in the business of late, and that's reflected in our guidance. And in particular, in the $200 million increase that we provided to our sales guidance with the bottom and the top end of that range. As we enter Q2, Q3 and beyond, we'll continue to have an eye on strength of new business performance and backlog success as the year progresses and evaluate our outlook further as the year continues. Operator: Your next question comes from the line of Cai von Rumohr with Cowen. Your line is open. Cai von Rumohr: Yes. So Kathy, with the decreasing cost of access to Space and the increasing capability of smaller LEO satellites, there's been kind of a proliferation of lots of these smaller satellite builders and rocket builders getting large amounts from stacks. Do you have any aspirations for any forward integration into launchers or commercial -- additional new commercial space ventures? Because it looks like you guys have the capability to do so. Kathy Warden: Okay, I appreciate the question. And the reflection on the breadth of our portfolio, you're absolutely right. We already are an important partner to launch providers, including companies that we've been working with and some that are newer entrants into the space. We are working with companies that are new entrants into the defense space that provide unique capabilities in areas like communication or other areas of expertise that we feel can be applied to national security. But our focus, really as a company, remains on our expertise in National Security space. That's where the predominance of the growth in our portfolio is coming from today. And we'll look to use capabilities and products that we build for commercial and space exploration applications just as we do today. But you can expect the predominance of Northrop Grumman's investment as well as our growth to continue to come from National Security space. Operator: Your next question comes from the line of Kristine Liwag with Morgan Stanley. You line is open. Kristine Liwag: Kathy, following up on Cai's question about some of these new space companies. I guess what we're seeing with your peers is that they're starting to invest in strategic partnerships. We've seen that with Lockheed and ABL and Raytheon and HawkEye 360. How do you think about strategic partnerships to expand your national security offerings in Space? Would you pursue that, do M&A or invest organically? And are there areas of your portfolio that you're interested in bolstering? Kathy Warden: So we're really pleased with the acquisition that we did with Orbital ATK to build out our space portfolio, we saw that as our big investment and as you know, they brought not only capability in National Security space, but commercial space and civil space exploration as well. And so we're quite confident that our portfolio allows us to participate across that wide spectrum of growth and investment in space. We also have partnerships. We tend not to advertise those partnerships, and they aren't always aligned with an investment in other companies, but they are relationships that we have, providing our capability to and through them, or their capability through us to our customers. Look, at the end of the day, we see new entrants in the market as partners in areas like launch, comms, exploration. And the investment that they're making is oftentimes complementary to ours. But we combine them on a solution-by-solution basis, because that's the business that we're in. We look for the best partner for each system that we are bidding and delivering. And so that's been our partnership model, and I expect that to continue to be our partnership model. Operator: Your next question comes from the line of Ron Epstein with Bank of America. Your line is open. Ron Epstein: So Kathy, on the heels of the NGI down select, GBSD, had some really important wins recently. When we look out in the pipeline, what are you looking at next? What's the team focused on or kind of key areas or key programs that you'd like to win in the near-term and maybe even in the medium term? Kathy Warden: So Ron two years ago, when I sit into the role, I talked a lot about the desire for the company to focus in on campaign areas that were closely aligned to where we believe the National Defense strategy with Space investment, and we continue to believe that those campaigns are focused in the right areas. We see Space continuing to grow faster than other parts of the market, and we see ourselves being able to continue to grow our portfolio and take share there. Strategic missiles continues to be an important area. Our work on GBSD, the down-select, on NGI, so now the interceptor side of that equation, as well as more modernization that the Missile Defense Agency has to do in protective systems against [adversary] CBM, and we see that stretching across domain. So even in Space, we see a tremendous amount of free capitalization in missile tracking and the ability to detect new missile types, like hypersonics and I talked about the HBTSS award that we have. So space and missiles, very complementary in terms of our strategic focus in both of those areas and still more growth that we see in both of those. Another key area that we've been focused on is joint all-domain command and control. And we were doing it before it was called JADC2 with programs like IBCS, which really fit what the government looks for in being able to integrate sensors and shooters and provide that sort of architecture. It has elements of communications and connectivity, which is an investment area, an area of technical excellence for our company. It has elements of computing and the advancement that's needed to process fortune office data it has advancements in artificial intelligence. And these are all areas that our company continues to invest in and have leadership positions in. So those are just a few examples of the campaigns that we outlined in 2019 that we continue to execute against and see good success. So no new strategy. It's continuing to execute that strategy, which is working well for us and still have legs, we believe, well into the future. Operator: Your next question comes from the line of Doug Harned with Bernstein. Your line is open. Doug Harned: When you look at Northrop Grumman's position now, you're a major player on major airborne space platforms. But you've -- you're also important provider of electronic systems to other platforms. If you go back historically, there's always been this tension where people have tried to have a platform and then ensure that their own systems get on it. And then those have been typically shot down and they've been competed separately. So today, since you're on both sides of this, when you look at the way technology is evolving, the way the threat is evolving, how do you see the competitive landscape? Do you think it will stay the same? Do you think there'll be the ability for people to try and vertically integrate more between platforms and systems? Where do you see this going? Kathy Warden: So Doug, it's an excellent question and one that we spend a lot of time thinking about strategically because our portfolio, as you know, does have a good bit of vertical integration opportunity. But that doesn't mean that it's always the right answer to put our systems on our platform. And so we take a very objective look when we are an integrator onto a platform at where the best technology comes from. And that may be inside of Northrop Grumman, it may be with an industry partner. And to the earlier point in Space, increasingly, maybe new entrants and companies that aren't particularly focused on National Security, but have capability to bring to bear. I would also, though, point out that being a strong competitor in Mission Systems and being able to have the technology that is the winning technology on a platform means that you have to invest and that you have to prioritize in that area, and we have done that quite successfully. So there are many cases where our technology is the best to go on a platform. And even if it's not our platform and another company's desire to vertically integrate, they will not choose, I don't believe, to put their own kit on a platform if it's not the best technology to compete at the platform level. And we've seen that play out time and time again, where there was a fear that our Mission Systems would not be selected by other competitors because they would want to integrate their own capabilities. But at the end of the day, it's incumbent upon the platform primes, our self included, to make unbiased choices and look at what is the best capability to provide to our ultimate customer to meet the requirements. And that's where our Mission Systems team has excelled staying at the forefront of technology so that we do compete and we emerge as the best provider. It's why our Mission Systems business has a good deal of full force work. I talked about the F-16 upgrades on the radar, but also the EW fleet now that we're working with the Air Force that is because we have the best technology. And we are now being selected to move to deliver that capability. Operator: Your next question comes from the line of Mike Maugeri of Wolfe Research. Your line is open. Mike Maugeri: Dave, you mentioned that lower CAS expense, it can help make you a little bit more competitive in a flattening budget environment. So in light of that point, I just want to ask, how do you think about B&P discipline and a flattening or contracting budget environment relative to when the budget is expanding? Dave Keffer: Sure. We look across our businesses at investment opportunities, both capital expenditures, R&D, B&P, and really make decisions specific to the market conditions and market opportunity sets that we see in different parts of the business. With the overall budget flattening, are expected to flatten over the coming years, we still have a space business that grew nearly 30% this quarter and over 30% last quarter. And so clearly, the opportunity set there is such that significant ongoing investment in R&D and capital expenditures, B&P has been the right decision for the company to have made and continues to be. We have a very healthy outlook there. Really across the business, I wouldn't say we're yet feeling opportunity constrained. And so certainly, we are careful with our investment dollars, and we look at returns on investment dollars in each of those buckets. But at this point, we continue to see a healthy opportunity set in the markets we serve. And to make appropriate investments as a result. Our R&D costs are continuing to be around 3% of revenue, and that's been a healthy level for us over the last couple of years, continues at approximately that level in 2021. I'd certainly put B&P in that same category, again, reflective of the positioning we have with the faster-growing parts of the budget. Todd Ernst: Mariama, we have time for one more question. Operator: Your next question comes from the line of Myles Walton with UBS. Your line is open. Myles Walton: Maybe a clarification, Dave, on the slide deck, you called out $0.35 from corporate unallocated. Just how much of that is more corporate unallocated run rate as opposed to one-off? And then, Kathy, as you look at Talent acquisition, I think you grew the workforce, 7,000 or so in 2020. Given the pipeline of business that you're having, what is the market for growing that pipeline? And where do you think that number might end up at the end of '21. Dave Keffer: Sure. On the lower corporate unallocated, I'd call that a mix of items more unique to this year and other items that will be sustained in future years. As we mentioned, the state tax costs are a bit lower this year than we had anticipated. In other areas, there's ongoing careful cost management and discipline that's led to that efficiency. So I'd call it a mix on that front. Kathy Warden: And Myles, on our Talent strategy and specifically the growth that we expect. We hired almost 14,000 people last year. And as you noted, yielded about 7,000 new headcount, and that's largely because attrition has slowed. And we expect that, that will continue into this year. But perhaps with other companies beginning to grow and the labor market tightening that could go up. So we expect to net about the same headcount growth this year, but we're monitoring closely the moving parts of how many hires we need to make with another attrition to get there. Todd Ernst: Okay. We'll leave it there. I'll turn it over to Kathy for closing remarks. Kathy Warden: Well, thanks, Todd. As you've heard, the year is off to a great start with our new awards. We had robust sales growth and strong margins in the quarter. And I want to recognize that the foundation of executing our strategy is the strength of this team and their outstanding performance. So let me conclude by once again thanking the Northrop Grumman team for their innovation and hard work. So that concludes our call. We look forward to talking to you again next quarter and thanks for joining. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation.