Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to Northrop Grumman's fourth quarter and year-end 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 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.

Thanks, Shelby. Welcome to Northrop Grumman's fourth quarter and full year 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 guidance and the 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 include 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-DAP financial measures that are reconciled in our earnings release and supplemental PowerPoint presentation. Our GAAP results reflect the mark-to-market method of accounting for our pension and other post-retirement benefits. Our references to adjusted earnings and adjusted earnings per share on today's call We'll refer to earnings and EPS adjusted for mark-to-market impact. We also refer to adjusted free cash flow defined as operating cash flow, less capital expenditures, and plus the proceeds of the sale of equipment to a customer and the after-tax impact of discretionary pension contributions. These are non-GAAP measures defined in our earnings release. Our 2021 guidance assumes the intended IT services divestiture closes very soon. On the call today are Kathy Wharton, our Chairman, CEO, and President, and Dave Kapper, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

Thank you, Todd. Good morning, everyone. Thanks for joining us today. I want to congratulate the Northrop Grumman team for delivering outstanding 2020 results. I applaud our employees' support for one another, our customers, and our communities in the face of 2020's multiple challenges. Together with our suppliers and partners, We operated through the pandemic, executed well on our programs, maintained superior performance on critical global security missions, and won programs that strengthen our foundation for the future. We began 2020 operating in a new sector structure, which further aligns our unique capabilities in space, missiles, advanced weapons, mission systems, and aeronautics. This alignment enables the capture of additional revenue synergies particularly in space and advanced weapons, as well as continued identification of operating synergies. Our 2020 results are tangible evidence that our strategy is creating value. We had exceptionally strong fourth quarter operational performance. And for the full year, we had strong bookings, exceeded the high end of our guidance range for sales, EPS, and adjusted free cash flow, and delivered strong segment operating income through continued focus on performance and operating efficiencies. For the third consecutive year, we achieved a book-to-bill greater than one. New awards in 2020 totaled nearly $53 billion, or 1.4 times sales, and total backlog increased 25% to $81 billion. Sales rose 9% to $36.8 billion, and segment operating margin rate was 11.4%. Adjusted EPS increased 11.5% to $23.65, and adjusted free cash flow increased 18% to approximately $3.7 billion. All four sectors captured important new awards, hosted higher sales and operating income, and sustained strong operating margin rates. As expected, Our space business, in its new configuration, led growth in backlog and sales. 2020 results demonstrate space systems' growing ability to drive the development of innovative and affordable offerings for our national security, civil, and commercial customers. We booked new business in each of these three markets, more than doubled space systems' backlog, and increased sales by 18%. In addition to $9 billion of restricted space awards, we were awarded GBSD, the most recent addition to our diverse portfolio of multi-decade, multi-billion dollar franchise programs. Looking ahead, we expect space systems will continue to be our fastest growing sector based on GBSD and the planned recapitalization of our nation's space assets. The funding for space-based capabilities increased 6% in the USDOD FY21 budget, with growth expected to continue. At Aeronautic Systems, we booked solid awards, including $6 billion for restricted programs and substantial awards for F-35, Triton, E2D, and Global Hawk. AS sales significantly exceeded our revenue guidance, principally due to an equipment sale to a restricted customer in the fourth quarter. We continue to perform well on large franchise programs like F-35, E-2D, and B-21. Our F-35 integrated assembly line received Aviation Week's Laureate Award in Defense Manufacturing for revolutionizing military aircraft production through human ingenuity and advanced digital technology. And as you may have read, The U.S. Air Force recently disclosed that the production of the second B-21 stealth bomber is underway and that the first Raider is expected to roll out and fly in 2022. The team is making tremendous progress, and our partnership with the Air Force is strong. We are pleased with the maturity of the hardware and software, including recent flight testing on a surrogate testbed. Air Force leaders say these efforts, along with the team's modern approach to digital engineering, give them a lot of confidence about the program's path to first flight. I share this confidence, and our team looks forward to delivering the affordable and highly capable next-generation bomber our nation requires. In AS, our advanced technologies and integration expertise are well aligned to meet the requirements of next-generation systems. Our programs are performing well, and we're focused on near-term opportunities to drive operational efficiencies, and margin rate expansion. Defense systems results were also strong and reflect growth in core capabilities like C2, advanced weapon system, and sustainment and modernization. Earlier this month, the U.S. Army authorized our IBCS system to proceed to low-rate initial production following a successful limited user test in September and Milestone C approval in December. This is a critical next step in moving IBCS closer to future deployment for the U.S. Army and Poland, and it demonstrates the continuing success of our C2 approach. We look forward to competing for the U.S. Army full-rate production contract, which we expect will be awarded late this year. In addition, we continue to pursue additional international opportunities for IBCS as we demonstrate how that architecture can support joint all-domain command and control. Mission systems leadership in networked open architecture mission systems continues to be a competitive differentiator as demonstrated by program milestones and new business awards. MS recently conducted a successful demonstration as part of the Air Force's joint all-domain command and control effort, also known as SHAD-C2. Our gateway technology enabled F-35s, F-22s, and other platforms to share data across multiple paths for the first time. We expect to continue providing the underlying technology needed to enable the department's JADC2 vision. And this month, MS was chosen by the Air Force to be the sole provider of the F-16 electronic warfare suite, which will equip as many as 450 F-16s, replacing several legacy systems with a modern digital solution. This work has a potential value of $2.5 billion. In addition to next-generation capabilities for F-35s and F-16s, MS is on the team Japan selected as their FX integration support partner. Our team brings proven experience in fifth-generation technologies to ensure FX capabilities and interoperability to strengthen the Japan-U.S. alliance. We look forward to working with Mitsubishi Heavy Industries, the FX prime contractor. With its deep portfolio of sensor technology and integration expertise, MS is enabling the modernization of weapon systems with the latest digital technology that provides our customers the capability to detect and defeat advanced adversaries in the electronic spectrum, providing the foundation for profitable growth. Northrop Grumman's portfolio remains well aligned with the National Defense Strategy and supports critical modernization efforts underway to address evolving threats. As you are aware, the Congress passed the 2021 National Defense Authorization and approved appropriations of approximately $740 billion for discretionary defense spending. Northrop Grumman programs were well supported in the budget, and we continue to have a robust opportunity set, including Next Generation Interceptor, 3Dealer, the upcoming F-35 Block Buy, and multiple restricted opportunities. Our success in growing the business and expanding earnings is delivering cash to support our capital deployment strategy. 2020 cash from operations totaled $4.9 billion before a $750 million discretionary pension contribution. And adjusted free cash flow totaled approximately $3.7 billion, or about $22 per share. Our strong liquidity enabled robust investment in our business, strengthening of our balance sheet, a 17th consecutive annual dividend increase, and $490 million in share repurchases in 2020. As we begin 2021 with $5 billion of cash on hand at year end and expected net proceeds of approximately $2.5 billion from the divestiture of our IT services business, we have the resources and flexibility to take aggressive value-creating action. These include robust investment for growth, continuing strengthening of our balance sheet, and the return of cash to shareholders through share repurchases and dividends. Today, we announced that our Board has approved a $3 billion increase in our share repurchase authority, raising the total outstanding authorization to $5.8 billion. We expect to use more than $3 billion for 2021 share repurchases. And beyond 2021, we expect share repurchase will continue to be a high priority use of our discretionary free cash flow, while we also continue to maintain a strong balance sheet, and strengthen our platform for growth through disciplined investment and selective M&A. Turning to guidance, which now includes the pending IT services to Beth Chester. The 2021 outlook reflects organic sales growth and segment margin rate expansion. We expect sales between $35.1 and $35.5 billion this with a segment operating margin rate of 11.5 to 11.7%. We now expect adjusted EPS, excluding the gain on sale and one-time transaction-related costs, to range between $23.15 and $23.65, and adjusted free cash flow of $3 to $3.3 billion. While delivering financial results is a primary company focus, we are very proud of our ESG record, and earned high marks in many environmental and social rankings. We achieved the Leadership A-minus CDP ranking for environmental sustainability for the ninth consecutive year, and we earned a place in the Dow Jones Sustainability Index North America for the fifth consecutive year. Diversity, Inc. named us the top 50 company for diversity, ranking us 15th, and Northrop Grumman was the only aerospace and defense company that earned a place in Equilep's top 25 gender equality index. In addition, we remain mindful of the role our products and services play around the world. As we continue to consider our portfolio, we have decided to exit, by year's end, a legacy Orbital ATK aging and surveillance contract that supports testing of cluster munition components. In our endeavors to enable global security and human advancement, We recognize the importance of our environmental, social, and governance responsibilities, and we expect to continue leading our industry forward. In closing, I want to thank the nearly 100,000 members of the Northrop Grumman team for this year's outstanding performance. And particularly, I want to recognize the more than 6,000 employees who will become part of the Periton team upon closing of our IT services divestiture for their contributions to Northrop Grumman. I'll turn the call over to Dave now for a more detailed discussion of our financial results, guidance, and trends. Dave?