Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to Northrop Grumman's second quarter 2020 conference call. Today's call is being recorded. My name is Shelby, and I'll be your operator today. At this time, all participants are in 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, Mr. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed.

Thanks, Shelby. Good morning, everyone. Welcome to Northrop Grumman's second quarter 2020 conference call. We'll refer to a PowerPoint presentation that is posted on our IR webpage this morning. Before we start, matters discussed on today's call, including 2020 and guidance and beyond, reflect the company's judgment based on information available at the time of this call. They constitute four looking statements pursuant to safe harbor provisions of federal securities laws. Forelooking 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 also include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. On the call today are Kathy Worden, our Chairman, CEO, and President, and Dave Keffer, 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. We hope you and your families are safe and healthy. I want to start by thanking our employees and recognizing their resiliency and dedication in driving strong second quarter performance in the midst of the COVID pandemic. Along with our customers and suppliers, we quickly stood up new work processes and safeguards that allowed us to continue fulfilling customer commitments while strengthening our foundation for the future. And now, as we see new outbreaks of coronavirus in our communities, we continue to prioritize the safety and well-being of our team. This includes flexible work schedules, teleworking, childcare assistance, and stringent operating protocols aligned with CDC guidelines to help protect our employees and their loved ones. We also continue to support our suppliers, healthcare providers, and communities through volunteer time, supplies, and financial resources. Turning to the results for the quarter, despite the challenges of the coronavirus, we delivered a very strong second quarter operationally and financially. Sales grew 5%, driven by 15% top-line growth in space and continued growth at aeronautics and mission systems. Segment operating income grew 4% in line with sales growth, and we generated an 11.6% segment operating margin rate. Cash generation was particularly strong. Cash from operations increased 45% to $2.3 billion, and free cash flow increased 53% to $2.1 billion after capital spending of $269 million. Our cash results reflect solid operational performance and benefited from actions taken by our customer to support the industrial base. We passed the full supplier benefit of higher progress payments to our suppliers, and we have also instituted our own acceleration of payments to many of our most vulnerable suppliers, totaling nearly $500 million year-to-date. In addition to those financial highlights in the quarter, we continue to execute our long-term growth strategy. Second quarter awards totaled $14.8 billion, a book-to-bill of 1.7 times sales, and our total backlog has increased 8% since year end 2019 to more than $70 billion. The strength of our awards demonstrates our portfolio's alignment with the nation's most critical security priorities, including space, nuclear deterrence, advanced weapons, and all domain command and control. Our innovation and timely investments in these areas are enabling our customers' vision for future operations. In space, rapidly evolving threats are driving an urgent need for advanced, resilient capabilities, and we are competing successfully in this domain. In the second quarter, new awards at Space Systems totaled $9.2 billion, which included $5.9 billion of restricted awards. In addition to restricted awards, we also booked $1.9 billion to develop two polar-orbiting satellites for NextGen OPIR, and approximately $150 million for the preliminary design and development of HALO, the first crew module for NASA's moon-orbiting space station, as part of Artemis. And we were selected by commercial customers to build four satellites under two separate awards, totaling more than $400 million. These awards support the Federal Communication Commission's order to make the lower portion of the C-band spectrum available to mobile network operators, enabling the rollout of critical 5G services. We are also supporting the modernization of the nation's strategic deterrent with GBSD. GBSD continues to be on track for a late summer award. We expect a booking of between $10 to $15 billion for the engineering, manufacturing, and development, or EMV phase of the program, with production to be negotiated at a later date. The successful completion of the preliminary design review in May validates that we are ready to enter the EMV phase. We look forward to delivering a secure, reliable, and effective nuclear deterrent capability to our nation. Based on current backlog and future opportunities, We continue to expect space will be our fastest growing business. In advanced weapons, we are providing innovative solutions that address the need for higher speed, advanced sensors, and precision capabilities. Our broad portfolio of advanced weapons capabilities, including hypersonics, precision systems, directed energy, and advanced munitions, continues to be a source of growth. After completing successful critical design review last quarter, Argun ER achieved another milestone in the second quarter. The Navy conducted the first Argun ER captive-carry flight test on the F-18 Super Hornet, and we've begun wind tunnel testing. This system provides opportunity to grow our share in the tactical missile market. Also in the quarter, we announced that we've surpassed the production and delivery of 50,000 precision guidance kits for 155-millimeter artillery projectiles. And year-to-date, we've booked $154 million in modifications to our base contract for PGK production with the U.S. Army and U.S. Marine Corps to produce additional kits. Our overall weapons systems bookings within our defense systems segment are up year-to-date with a 1.2 times book-to-bill. Through our successful integration of Orbital ATK into the Northrop Grumman portfolio, we are realizing the strength of the combined team in our space and weapons business performance. We are also proud to be enabling the next generation of battle management. Our networking and computer technology is being incorporated into demonstrations and systems of records, showing the value of our open systems, which are affordable and platform agnostic. Next generation programs like Joint's All-Domain Command and Control, known as JADC2, are aimed at creating an information architecture across all domains. Our experience with the Army's IBCS program and ABMS for the Air Force will help enable the Defense Department to extend the any-sensor, any-shooter capability across all services. And we are making considerable progress on the IBCS program. Together with the Army, we entered the final round of preparation and training for the system's multi-week limited-user test that began shortly after the end of the second quarter. Successful completion of this EMD milestone will support IBCS production, deployment, and fielding to execute the Army's integrated air and missile defense modernization strategy. We are on track for the milestone C decision later this year, which positions the program to enter production. For the current generation of mission systems and sensors, we continue to deliver advanced capabilities to address evolving threats. In the mission system sector, we delivered F-35 radars, DATs, and CNI shipsets in quantities comparable to or better than the second quarter of 2019, despite the impacts of COVID. Our Sabre radar upgrades also continue. During the quarter, the Air Force completed integration of our Sabre radars on Air National Guard F-16s at its Joint Base Andrews and New Jersey Air National Guard bases. Seven additional bases are scheduled to receive Sabre upgrades in the coming months. NS will also be supplying our radio frequency countermeasure systems for the C-130s operated by the Air Force Special Operations Command. Our RFCN system will help to improve the C-130s aircraft survivability and protect air crews from air and land-based enemy radar and missile systems. Looking ahead, we are competing for the next generation of electronic warfare capabilities, including next-gen jammer low-band, which should be awarded later this year. Turning to aeronautics sector, through the end of the second quarter, we delivered 683 F-35 center fuselages, and we continue to manufacture at a pace that supports customer deliveries. We adjusted our outlook for F-35 fuselage production volume for AS in the first quarter to account for the anticipated impact of COVID, and this has not changed. In addition, during the quarter, we also received State Department approval for the future sale of three E-2D advanced Hawkeyes and related equipment to France, opening the door to a future award opportunity. And Australia committed to the purchase of three Triton air vehicles. For the B-21, as Air Force public statements indicate, we continue to make good progress. and the Air Force currently expects B-21 to move into low-rate production following key development milestones scheduled to complete in 2022. We are also pleased by the policy changes announced last week regarding the export of unmanned aerial systems. It is critical for our national security that our export policies continue to keep pace with the rapid evolution of technology and support collaboration with our allies. At the half point of the year, we're encouraged that despite the challenge of the pandemic, our team is delivering strong operational results. As we think about our full year guidance, we are assuming that our team's productivity, as well as the operations of our customers and suppliers, remains at or near current levels. Our update to guidance incorporates the strength of year-to-date results, our current assumptions regarding the continuing pandemic risks and their impact on us, and an expectation that demand for our defense products and services remain strong. Given that context, we are raising 2020 sales, EPS, and free cash flow guidance. Based on our current assumptions, we now expect sales will increase to between $35.3 and $35.6 billion. and EPS will range between $22 and $22.40. And we are increasing guidance for 2020 free cash flow to a range of 3.15 and $3.55 billion after capital spending of approximately 1.35 billion. We are maintaining our guidance for segment operating margin rate at 11.3 to 11.5%. And Dave will discuss each of these items in more detail. Turning to the US budget environment, we expect to see continued strong bipartisan support for national security. Even under scenarios of flattening or slightly declining defense budgets, we believe our portfolio will remain well aligned to our customers' highest priority investments. Defense spending is largely threat-driven, and the threat environment warrants a strong defense. Despite fiscal pressures, emerging threats are intensifying, And we believe both political parties are focused on effectively countering these emerging threats. We saw demonstrated bipartisan support for defense spending in the recent House vote to pass the NDAA. Before I close, I want to highlight that in 2020, Northrop Grumman was once again recognized as a top 50 company for diversity. We are committed to equality, diversity, and inclusion, not only in Northrop Grumman, but in our supply chain and communities. Our strong performance is enabled by the diversity of our team, which continues to expand. We have hired 8,000 new employees in the first half of the year and we expect to hire more than 12,000 by year end. Through their second quarter performance, our team of dedicated men and women, in partnership with their suppliers and customers, demonstrated their commitment to national security and human advancement. While future impacts of the pandemic remain uncertain, we have a robust pipeline of opportunities and we are strengthening our foundation for growth. Despite the challenges that COVID-19 has presented for every business and individual, the Northrop Grumman team remains committed to the safety and well-being of our people, investing for the future, delivering value to our shareholders, and meeting our commitments to our customers and all of our stakeholders. So now I'll turn it over to Dave.