Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to the Northrop Grumman's first quarter 2020 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. If at any time during the call you require assistance, please press star zero, and an operator will be happy to assist you. I would now like to turn the call over to your host today, Mr. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed.

Thanks, Josh. Good morning, everyone. Welcome to Northrop Grumman's first quarter 2020 conference call. We'll refer to a PowerPoint presentation that is posted to our IR webpage this morning. Before we start, matters discussed on today's call, including 2020 guidance, 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 that are reconciled in our earnings release and supplemental PowerPoint presentation. Our earnings release contains a reconciliation of non-GAAP operating measures to our GAAP results. On the call today are Kathy Wharton, our Chairman, CEO, and President, and Dave Koepper, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

Thank you, Todd. Good morning, everyone, and thank you for joining us today. Before turning to our quarterly earnings, I'd like to address the COVID-19 impact. I want to thank those who have been working to keep us safe, particularly those on the front lines in the healthcare and first responder communities. I also want to thank our Northrop Grumman employees. While each of us faces unique challenges, our team's dedication to the mission is allowing us to continue providing products and services to our customers. Our first priority is protecting the health, safety, and well-being of our team. We are requiring telecommuting for those who can do so, and we've enhanced the safety of workspaces for those who must come to work in person. Our facilities remain open, and we are taking extraordinary measures in an effort to maintain healthy working conditions. These include implementing staggered shifts, health monitoring, social distancing, face coverings, and more robust cleaning. In addition, we've expanded employee benefits and well-being programs. We are also supporting our suppliers with a particular focus on our small and mid-sized business partners. We are advancing approximately $30 million of payments per week to critical small and mid-sized suppliers, and we expect these payment advances will exceed $200 million. In addition, with the actions taken by the Department of Defense to increase progress payments, we are flowing that full supplier benefit to our suppliers in a timely fashion. While we've not had a material supply chain disruption, some are being impacted more than others, and our global supply chain team continues to actively engage with our suppliers to address issues and find new opportunities to help them. And we are supporting our local communities. We are donating to organizations involved in COVID-19 relief efforts. supporting frontline healthcare workers, first responders, and service members, providing funds to food banks, and helping students get access to technology for virtual learning. We're also providing in-kind donation. One example is a company-wide initiative to produce headbands and assemble thousands of face shields for hospitals. Turning to first quarter performance, as a result of our employees' effort, our company did not experience the material operating impact from the pandemic in the first quarter. We delivered a good operating quarter with 5% sales growth, solid operating margin, and a strong backlog. Looking ahead to the remainder of the year, we are adjusting our guidance to reflect our estimate of the pandemic's impact as we understand it today. We are updating our 2020 guidance for sales to between $35 and $35.4 billion, a little less than 1% lower than prior guidance at the midpoint. Our update to sales guidance reflects expected COVID-19-related impacts primarily at aeronautics, including their exposure to commercial aerospace markets. We are maintaining our guidance for segment operating margin rate, and we continue to expect our segment operating margin will range between 11.3 and 11.5%. Although we now expect a margin rate of approximately 10% at AS, this is being offset by an increase in mission systems outlook. We now expect mission systems will have a low to mid 14% margin rate. So as a result of the revenue impact, first quarter marketable securities impact, and interest related to the first quarter bond offering, we now expect our EPS will range between $21.80 and $22.20. And Dave will discuss each of these items in more detail. Cash from operations and free cash flow were negative in the quarter, as is our typical pattern. We continue to expect 2020 free cash flow will range between 3.15 billion and 3.45 billion, after capital spending of approximately 1.35 billion. With additional measures in place to help protect our employees, we continue to execute on our programs. And I want to highlight a few of our quarter achievements. At Aeronautics, through the end of the first quarter, we've delivered 656 F-35 center fuselages. AS delivered two E-2D advanced Hawkeyes to Japan in mid-March and two Global Hawks to the Republic of Korea shortly after the end of the quarter. and our MQ-4C Triton was deployed to U.S. military commanders in the Pacific to provide greater maritime intelligence, surveillance, and reconnaissance. At Defense Systems, we completed the critical design review for the EMV phase of ARGM-ER. The program remains on track with a successful CDR and initial testing of subsystems, including the new extended range rocket motor. In addition, DS supported the CDC's COVID-19 response effort by creating over 400 web pages in three languages that have received over 900 million page views, providing important information about the pandemic spread. At Mission Systems, our Saber radar upgrade program for F-16s continues to expand. Saber now has production contracts for approximately 670 systems across multiple customers. The Air Force recently exercised an option for 105 radars under their $1 billion Sabre IDIQ contract. This order included 33 radars for air combat command jets, which establishes Sabre as the system of record for the active Air Force. And in February, the Marine Corps ordered two additional Gator systems to complete their Lot 2 award. Gator replaces five legacy systems with a single system, providing significant performance improvement in each of its modes while reducing training, logistics, and maintenance costs. At Space Systems, we rewarded two small but strategically significant DARPA contracts. The first is GlideBreaker, an R&D and demonstration program to develop components for a lightweight interceptor to defeat hypersonic boost glide weapons at very long range. We previously discussed the successful docking of our first mission extension vehicle to the Intelsat 901 spacecraft. This marked the first time two commercial satellites docked in orbit and the first time that satellite life extension services are being provided to a satellite in geosynchronous orbit. This accomplishment laid the groundwork for the second DARPA award, which establishes a partnership between DARPA and Northrop Grumman for the next generation of remote servicing of geosynchronous satellites. Under the agreement, DARPA will provide an advanced robotic payload to integrate with the Northrop Grumman provided spacecraft. This disruptive technology could significantly expand on-orbit servicing capability to include robotic services. Under the agreement, we will retain the spacecraft, payload, and IP for commercial use. In the quarter, Space Systems was also awarded restricted competitive prime contracts, totaling multiple billions of dollars in aggregate. While we in the nation are keenly focused on defeating COVID-19, we must also continue to address a myriad of other national security threats. Our portfolio and investments continue to be closely aligned with the National Defense Strategy and our customers' long-term priorities. This is evident in the President's budget request for fiscal year 2021, which proposes increased funding for strategic deterrence, hypersonic weapons, missile defense, advanced networks, cyber, and space systems. The Department of Defense, our primary customer, is seeking robust fiscal 2021 funding, which will be the subject of congressional debate later this year. The DoD budget request supports investments in our current capabilities, including B21, SABRE, E2D, Advanced Weapons, OPIR, and other space programs, while also increasing funding for future opportunities aligned with our investments, including GBSD, JADC2, and missile defense programs like IVCS and Next Generation Interceptor. Turning to capital deployment, first quarter share repurchases totaled approximately $350 million, and we retired approximately 1 million shares. In April, under an established repurchase program, we bought approximately 400,000 shares for $130 million. Combining first quarter repurchases with April amounts, we have met our approximate target for the year. We remain committed to offering a competitive dividend. In addition, deleveraging the balance sheet remains a priority, and we expect to retire the $1 billion in maturing debt this fall. In closing, We remain well positioned to create value going forward. We are fortunate that through the first quarter, our operations have not been materially disrupted. While future impacts of the pandemic remain uncertain, we have a robust pipeline of opportunities, including GBSD, which continues on track for an award later this year. We also continue to lay the foundation for the future. We are actively recruiting for 10,000 open positions. and we hired more than 3,500 people in the first quarter, which included more than 1,300 new hires in March. We appreciate the government's actions to support the industry's most vulnerable businesses, including increasing progress payments, COVID-related cost recovery through the CARES Act, accelerated and timely awards, and support for essential work designations. Despite the challenges that COVID-19 has presented for every business and individual, through the dedication of our talented workforce, we remain committed to investing for the future, delivering value to our shareholders, and meeting our commitments to our customers and all of our stakeholders. Now, I'll turn it over to Dave.