Northrop Grumman Corporation

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 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, Catherine, and good morning, everyone. Welcome to Northrop Grumman's third quarter 2021 conference call. We'll 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 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. 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 a tightening labor market, supply chain challenges, and growing inflation. But we've also seen evolving threats to our national security, which has further illuminated 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 times. 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 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 of federal contractors to be fully vaccinated by early December. We have shared the details of 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 impacts 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 that 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 are pleased that an agreement was reached on the continuing resolution and debt ceiling that will fund the government through December 3rd. We are hopeful that Congress will finalize the fiscal year 2022 appropriations and avoid a protracted continuing resolution. With respect to the FY22 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 administration officials have 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 invest in and more rapidly field advanced capabilities. Our company's portfolio and capabilities are strongly aligned to the five 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 Argom 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 HAWC. Northrop Grumman supplies the scramjet propulsion system for HAWC, allowing speeds of greater than Mach 5. Argom 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 capabilities, 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 deterring aggression. As highlighted by recent customer and administration comments, modernizing the triad remains a high priority. Northrop Grumman is the prime on two of the three legs of the triad with the bomber and strategic missiles, and we're 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 five units in various stages of production, and the systems are, in his words, 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 GBSC program has ramped significantly this year, and we now expect that it will add just over $1 billion in incremental revenue to our 2021 results, and another approximately $500 million of incremental revenue in 2022. For both B21 and GBSC, we have applied digital transformation concepts as a key enabler to reduce risk, increase productivity, shorten cycle time, and improve the system's ability to adapt to changing threats. 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 platforms to be more capable and survivable, and therefore more relevant toward addressing the increasingly sophisticated threats. To this end, during the third quarter, our next-generation electronic warfare system, which will equip domestic F-16s, had its first test flight on a testbed aircraft at the Northern Lightning Exercise. This system, in conjunction with our Sabre radar, demonstrated full interoperability in a simulated contested electromagnetic spectrum environment. With the radio frequency spectrum becoming increasingly contested, this critical set of electronic warfare capabilities will allow the platform to remain survivable. We anticipate an 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 are 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 a prototype satellite as part of MDA's Hypersonic and Ballistic Tracking Space Sensor, HBTSS program. This program is designed to detect and track hypersonic vehicles, which have a very different flight profile and signature than ballistic missiles. It required new sensing capabilities in order to detect and track them. In September, we conducted a successful HBTSS critical design review and are progressing towards a 2023 launch. In the 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 of our collaboration with partners to accelerate innovation and create discriminating technologies. As I've noted before, we are actively engaging in partnering with early-stage technology and nontraditional defense companies. In the quarter, we closed an investment in OrbitFab, 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 JET C2. These partnerships, as well as other venture investments, support our strategy to create solutions at speed for our customers' toughest national security challenges. Now, I'll 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?