Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to the Northrop Grumman's third quarter 2020 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. 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.

Thank you, Natalia. Good morning, everyone, and welcome to Northrop Grumman's third quarter 2020 conference call. This morning, we will refer to PowerPoint presentation that is posted on our website. Before we start, matters discussed on today's call, including 2020 guidance and remarks regarding 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. Today's call will include non-GAAP financial measures that are reconciled to our GAAP financial results in our earnings release. On the call today are Kathy Worden, our Chairman, CEO, and President, and Dave Kaffer, 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 well. As you all know, we continue to operate in the midst of a global pandemic. Our focus remains on the safety and well-being of our people, delivering on our customer commitments, and supporting our suppliers and communities. As the pandemic continues, We are operating under protocols that we instituted earlier in the year to help preserve the wellbeing of our employees. And these are helping us to meet our commitments to customers and deliver strong operating results while also continuing to strengthen our foundation for the future. In addition to COVID-19, we have experienced locally devastating natural disasters this summer. I especially want to recognize our Northrop Grumman employees in Lake Charles, Louisiana, who have persevered through two hurricanes in the last two months. Despite experiencing personal loss, they have returned to work and continue to support the U.S. Air Force through sustainment of the JSTARS aircraft. Their resiliency embodies the spirit of Northrop Grumman employees everywhere. Also, before I discuss this quarter's results, I want to take this opportunity to thank Yanis Pamelyan, who is retiring as president of Aeronautics Systems. In his more than 34 years with Northrop Grumman, he has made significant contributions to the business through his leadership and unwavering commitment to our employees and customers. And I want to congratulate Tom Jones, who will succeed Yanis on January 1st. Tom currently leads airborne sensors and networks in mission systems. This business delivers large-scale mission-critical C4ISR systems and complex hardware and software products for airborne platforms, including many in aeronautics. Tom is a seasoned executive with 30 years of aerospace and defense experience, and we're fortunate he will be leading our aeronautics business as it continues to deliver critical national security solutions. Now, focusing on our third quarter results, I want to thank our employees for their dedication to delivering for our customers and shareholders. We had a strong third quarter, and based on year-to-date results, we are raising our guidance for the year. Our sales grew 7% in the quarter and 6% year-to-date, driven by sales growth in space, mission systems, and aeronautics. Space continues to be our most robust growth driver, with sales increasing 17% in the third quarter and 13% year-to-date, and mission systems was our second fastest growing sector. Strong performance from all of our sectors generated segment operating income growth of 10% in the quarter and 4% year to date, and we delivered an 11.5% segment operating margin rate in both periods. Earnings per share grew 7% in the third quarter and 9% year to date. Third quarter free cash flow increased 22% to $1.1 billion after capital spending of $287 million. Year to date, free cash flow has increased 80% to $1.9 billion, reflecting solid operational performance, as well as the benefit of customer actions to support the industrial base. Our new business awards are again a highlight. Third quarter bookings totaled more than $20 billion, or 2.2 times sales. And year to date, we've captured $43 billion in new business which brings our year-to-date book-to-bill to 1.6. As of the end of the quarter, our total backlog stood at more than 81 million, a 25% increase from year-end and a new record for Northrop Grumman. This year's new awards demonstrate our portfolio's alignment with the nation's highest priority global security mission, including space, nuclear deterrence, advanced weapons, electronic warfare, and all domain commands and controls. Turning to sector highlights, I'll begin with space. In early September, the Air Force awarded Northrop Grumman a $13.3 billion contract for the engineering and manufacturing development phase of the ground-based strategic deterrent. I want to congratulate the members of our nationwide team for their exceptional work on this program. This next phase of our nation's program to replace the Minuteman III ICBMs, which were first fielded in 1970, culminates more than 10 years of planning across two presidential administrations, as well as a series of competitions. The E&Z award includes weapons system design, qualification, test and evaluation, and nuclear certification. And we expect awards for the production phases of the program. Now that the EMD phase has been awarded, GBSD ramps quickly. For 2021, we expect GBSD to contribute nearly $1 billion of incremental growth at space systems. Our nationwide team looks forward to delivering a secure, reliable, and effective nuclear deterrent capability to our nation. An award of this size impacts business mix by increasing cost type development work as a percent of sales. particularly at Space, and to a lesser extent, the entire company. While we expect this mixed shift will pressure next year's margin rate at Space, we will work to offset this pressure across the company through program performance and cost management. In addition to GBSD, Space also captured one of three Evolved Strategic SATCOM, or ESS, awards to rapidly prototype a strategic communications payload with enhanced resilience and cybersecurity capabilities. ESS will be designed to seamlessly interoperate with and eventually replace the advanced extremely high frequency system. This effort is critical to extending our nation's secure satellite communications infrastructure and we expect will represent a multi-billion dollar competitive opportunity. Program milestones achieved in space this quarter included the successful test of the Space Launch System booster for NASA's Artemis program and the MEV-2 launch in August. And shortly after the end of the third quarter, our Cygnet spacecraft was launched aboard an Antares rocket to complete our 14th resupply mission to the International Space Station. At the aeronautics sector, in addition to higher restricted volume, F-35 deliveries have recovered to first quarter levels. Through the end of the third quarter, we've now delivered 719 F-35 center fuselage units, and we are continuing to manufacture at a pace that supports our scheduled deliveries. On the E-2D program, we've now delivered 44 of the 75 aircraft under contract. The U.S. Navy has an approved 11 plane increase to that program of record and is now working to identify funding for this additional aircraft. I would also note that international opportunities for E2D continue to be promising. In addition to Japan's 13 E2Ds, France and Taiwan are expected to procure E2Ds in the coming year. In autonomous systems, Triton's inaugural deployment to Guam occurred in January and led to an early operational decision by the Navy in May. Following these critical milestones, Triton is quickly becoming an invaluable asset in the 7th Fleet's Maritime Patrol and Reconnaissance Command. Despite the likely budget pressure on our hail portfolio beyond this year, we have a promising set of future autonomous opportunities, including Skyborg and the MQ-9 replacement, among others. Turning to defense systems. In the third quarter, the U.S. Army conducted live-fire tests of our IBCS system and successfully engaged multiple targets. These exercises, conducted as part of the IBCS Limited User Test, demonstrated our system's ability to maintain continuous track of the targets despite contested environment conditions by fusing data from multiple sensors. These successful tests of the ability to share data across platforms and sensors are significant demonstrations of our underlying architecture, which is applicable to joint all domain operations and increases the value and power of our customers' legacy platforms and weapon systems. DS also completed the first environmental test of Argom ER's new extended range rocket motor. a major milestone toward motor qualification and first live fire flight test in 2021. And in hypersonics, we successfully completed captive carry tests in support of the DARPA and U.S. Air Force HAWC program. With a prime contractor, we are on track to proceed to free flight testing, and we are now establishing manufacturing plans to meet initial low-rate production quantities. And finally, admission systems. We continue to meet or exceed prior year deliveries for the F-35 program. In the third quarter, MS delivered 41 radars consistent with 2019 quantities and delivered 47 DASH shipsets and 50 CNI shipsets. Year-over-year increases of 30% and 40% respectively. Mission Systems also received a task order contract valued at $690 million for the Defense Intelligence Agency's TALOS system. This effort focuses on the build of new big data systems for the DIA, including MARS, the Mission Assisted Rapid Repository System. Transforming current databases into multidimensional, flexible, and rigorous data environments, MARS is expected to create a military intelligence environment accessible for up-to-date information by the intelligence community and warfighters. And DARPA awarded MS a contract for its Game Breaker program. This innovative program seeks to develop and apply artificial intelligence to existing real-time strategy games. The Game Breaker effort gives us an opportunity to evaluate and develop artificial intelligence technology to improve flexible planning, optimization, and discovery in products that operate dynamic environments. Looking ahead, We believe our customers will require integrated artificial intelligence and machine learning capabilities in the same way cyber resiliency is now broadly required in products and systems. And Northrop Grumman is well positioned to support this emerging customer requirement. We're extremely proud of our team's results for the third quarter and year to date. and I want to recognize the rebound in productivity our workforce has demonstrated since late March and early April. As we look ahead to the remainder of the year, our guidance assumes that our team's productivity, as well as the operations of our customers and suppliers, remain at or near current levels. It also reflects the strength of year-to-date results and our expectations for a strong fourth quarter. Based on our current assumptions, We now expect 2020 sales of 35.7 to 36 billion, which is 6% top line growth at the midpoint. EPS should grow to between $22.25 and $22.65, which is also 6% growth at the midpoint. And we now expect free cash flow to increase to between 3.3 and $3.6 billion, a 14% increase over 2019 at the midpoint. Regarding capital deployment, we continue to focus on a balance strategy that calls for robust investment, strengthening of the balance sheet through debt reduction and funding of our pension plan, and returning cash to shareholders, which we will do by resuming share repurchases and maintaining a competitive dividend. We believe our strong cash flow and current cash balances will allow us to address all of these value-creating deployment opportunities. Turning to the U.S. budget environment, we expect to see continued strong bipartisan support for national security in the future, as indicated by the $740 billion targeted for FY 2021 appropriations. We are pleased that Congress and the administration agreed to a continuing resolution that funds the government through December 11th and avoids disruption in the execution of critical national security missions. And I will note that funding under continuing resolutions supports our programs, including GBSD, even if the continuing resolution is extended into early next year. We continue to believe that bipartisan support for defense spending will endure, and that our portfolio is well aligned to support our national defense strategy. While we plan for various budget scenarios, defense spending is largely threat-driven, and today's threat environment warrants a strong defense. Emerging threats are intensifying, and we believe both political parties are committed to effectively countering these threats. While there are many external uncertainties, Northrop Grumman has a strengthening foundation for growth and the capabilities and people necessary to address our nation's most challenging problems. We are 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 to provide more detail on our sector's results, 2020 guidance updates, as well as a preview of certain trends in 2021. Dave?