Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to Northrop Grumman's fourth quarter year-end 2021 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, and good morning, everyone, and welcome to Northrop Grumman's fourth quarter 2021 conference call. We'll refer this morning to a PowerPoint presentation that is posted on our IR webpage. But before we start, I'd just like to go through a couple comments here. The matters discussed on today's call, including 2022 guidance and beyond, including our outlooks, 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. And on today's call are Kathy Warden, 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 year of solid operating performance in 2021 and positioned our business for continued growth in 2022. We are executing our strategy, which is to grow the business today and into the future by maintain excellent performance and reduce costs to deliver strong margin rates, and deploy our capital to create value. We made significant progress in executing this strategy again in 2021. Our organic sales growth for the year was 3%. Our segment operating margin was an exceptionally strong 11.8%, which increased 40 basis points compared to 2020, with performance more than offsetting mixed and COVID related headwinds. We grew our transaction adjusted EPS by 8% and generated a $3.1 billion of transaction adjusted free cash flow. Regarding capital deployment, we returned a record $4.7 billion to shareholders through dividends and share repurchases, including a $500 million accelerated share repurchase that we announced in November of 2021. We strengthened our balance sheet retiring over $2.2 billion of debt during the year, and achieving an increased credit rating in the process. And we continue to invest in our business, with over $1.4 billion in capital expenditures to create new technologies and support franchise programs. We also continue to add to our portfolio of franchise programs, with competitive wins on programs like the Integrated Battle Command System, or IBCS, as well as hypersonic and ballistic tracking space sensor and next generation interceptor. As we look forward to 22 and beyond, we expect our organic growth will continue as we win new business and convert the robust backlog we've built over the past several years into sales growth. And while we'll know more about the President's budget request in the coming weeks, we continue to believe that our portfolio is strongly aligned with the threat environment and the key investment priorities of our customers. Further, we expect strong margin performance as well as double-digit free cash flow growth from 2022 through 2024. 2022 guidance reflects our confidence in our strategy, our broad portfolio, and our ability to deliver continued growth and strong performance. As reported, the COVID pandemic continued to present challenges to labor availability parts supply and shipping delays across the economy, particularly in the second half of last year. We have felt these effects and the challenges as both our supply chain and our own labor availability. We will continue to take proactive steps to address such COVID risks, both to our employees and our business. And looking forward, our current guidance reflect the factors we know today and our best estimates for the remainder of the year. Dave's going to provide more details on the quarter, the full year, and our guidance in just a few minutes. But turning now to the budget environment, the federal government continues to operate under a continuing resolution that currently runs through February 18th. Negotiations on the fiscal year 2022 appropriations bills are continuing, and we remain optimistic that Congress will reach an agreement by the end of the first quarter. The National Defense Authorization Act contained a $25 billion increase to the defense budget that represents 5% growth compared to fiscal year 2021, which we expect to also be supported in the appropriations bill. In the NDAA, there is continued support for our major programs, and several of our programs received incremental funding above the President's budget request, including Triton, E2D, F35, F18, and Gator, among others. And finally, we expect the FY23 President's Budget to be delivered to Congress in March of this year, reflecting this administration's priorities in areas such as mission systems, space, missile defense, advanced weapons, and deterrence. Focusing now on highlights in the quarter, one of our proudest moments was the launch of the Webb Space Telescope on December 25th. Northrop Grumman is the prime contractor for NASA OnWeb, and we're honored to have partnered with NASA to provide the world with this revolutionary technology. Webb will peer more than 13.5 billion years into the past when the first stars and galaxies were formed, ushering in an exciting new era of space observation and expanding our understanding of the universe. In addition to Webb, we're also supporting NASA's Artemis mission, by producing the largest solid rocket motors ever built for the Space Launch Vehicle System, which is being developed to send the first woman and next man to the moon. In the fourth quarter, the space sector received a $3.2 billion award to support Artemis missions four through eight. Another important milestone in the quarter was the competitively awarded IBCS in our defense system sector. This program is a centerpiece of the U.S. Army's modernization strategy for air and missile defense and all domain command and control. It's a prime example of our capabilities to integrate assets in the battle space regardless of source, service, or domain. This is one of many examples of how we are helping our customers share data between systems and improve command and control in support of their JATC2 vision. In the area of missile defense, We had several milestones in the quarter, which position us to help our customers track and defend against hypersonic and ballistic missile threats. In the fourth quarter, we announced that HBTSS had passed its critical design review. These satellites are planned to be part of a multilayered network of spacecraft that will detect and track hypersonic missiles. Also in the quarter, we were selected by the Missile Defense Agency to design a glide phase interceptor for regional hypersonic missile defense. In our mission system sector, we continue to see our customers prioritizing development of capabilities that will increase the effectiveness and survivability of legacy systems, as well as new technologies for next generation systems. In the fourth quarter, MS received an accelerated award for F-16 Sabres for approximately $200 million and full-year awards of approximately $700 million. We have now received total contract awards for nearly 1,000 radars for this program, in support of the U.S. Air Force and National Guard, as well as several international customers. In addition, our network information systems business area within Mission Systems received approximately $1 billion in awards for advanced processing solutions. This portfolio delivers strategic microelectronics focused on high-performance computing and security, which helps our customers with connectivity and processing solutions. We anticipate additional awards in this segment of the portfolio for the next few years, and we expect it will be a significant growth driver for MS in 2022. Finally, in aeronautics, the military aircraft market is undergoing a transition as our customers focus their investment in next-generation programs while divesting some legacy platforms. As we've discussed, certain programs in our portfolio at Aeronautic Systems are maturing and experiencing headwinds. But there are also a number of exciting new opportunities that are emerging. This includes next-generation manned aircraft, as well as new unmanned opportunities, which U.S. Air Force Secretary Kendall recently announced. In addition to pursuing these longer-term opportunities, we remain focused on executing our programs and delivering for our customers. Another important aspect of our company's future is our strategy for sustainability. We strongly believe that our environmental, social, and governance programs play an important role in sustainable, profitable growth and in long-term value creation for our shareholders, customers, and employees. Northrop Grumman is a leader in conservation activity with a 44% reduction in greenhouse gas emissions since 2010. In the fourth quarter, S&P released its global corporate sustainability assessment scores, and we ranked in the 96th percentile. We were included on the Dow Jones Sustainability Index North America for the sixth consecutive year. and we were included in the Dow Jones Sustainability World Index for the first time. Our ESG strategy also includes portfolio management actions. As we've discussed on earnings calls last year, we committed to transition out of the small aging and surveillance contract that we had for cluster munitions, and that contract is complete. And while we continue to be an ammunition supplier, as both a prime and a merchant supplier, we have made the decision to transition our prime role in depleted uranium ammunition to another provider following one final single production year contract. We are currently working to establish our next set of sustainability goals and priorities, specifically as they relate to greenhouse gas emissions, water conservation, and solid waste diversion with a stronger emphasis on renewable energy. Overall, We're making substantial progress in our ESG journey, and we look forward to sharing more in our upcoming sustainability and TCFD reports. So with that, I'll turn it over to Dave to provide more detail on our sector results and guidance, and then I have a few additional comments before we move on to Q&A.