Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to the Northrop Grumman's second quarter 2022 conference call. Today's call is being recorded. My name is Victor, and I'll be your operator today. At this time, all participants are in a listen-only mode. 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, Victor, and good morning, everyone, and welcome to Northrop Grumman's second quarter 2022 conference call. We'll refer to a PowerPoint presentation that is posted to our IR webpage this morning. Before we start, 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. Forelooking statements involve risks and uncertainties, which are noted in today's press release and in 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 Chair, CEO, and President, and Dave Kepper, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

Thanks, Todd. Good morning, everyone, and thank you again for joining us. I'd like to start today's call by highlighting the James Webb Space Telescope and the incredible images released just a few weeks ago. This extraordinary telescope represents countless Northrop Grumman engineers, technicians, scientists, and cross-functional teams working in partnership with NASA for over two decades. In addition to leading the industry team, we designed and built the deployable sunshield, provided the spacecraft, developed the observatory subsystems, and integrated the total system. The advanced technology we've created and the images it captures will inspire the next generation of innovators and scientists, and we believe will be one of Webb's many legacies. Webb exemplifies the defining characteristic of our business strategy, to develop and produce innovative technology solutions to address our customers' toughest challenges. This strategy differentiates us. and aligns our portfolio with our customers' priorities. And as a result, we've strengthened our position in the market. As a reminder, the four core focus areas of our strategy are technology leadership, sustainably and profitably growing our business, keeping a laser focus on performance, and deploying capital in value-creating ways. This strategy continues to yield results. In the second quarter, we saw strong demand across our businesses with a book-to-bill ratio of 1.48, driven by awards for F35, GEM 63, and restricted programs. All of our businesses had a book-to-bill ratio above one in the quarter, driving a 6% sequential increase in our backlog, which now totals $80 billion. Given this backlog growth and our continued alignment to customers' budgets and priorities, we are even more confident we can accelerate our revenue in 2023 from the low single digits we're guiding this year. In the quarter, we did experience certain challenges from the broader macroeconomic environment, including a tight labor market and supply chain delays, which impacted sales timing. However, we're pleased with the progress our team continues to make in addressing these challenges. And hiring trends improved as we progressed through the second quarter, laying the foundation for sales growth in the second half of the year. As our business grows, we remain focused on performance and driving cost efficiencies across the business. This continued focus contributed to another quarter of solid margin performance. Our segment OM rate was a robust 12.2% in Q2 and stands at 12% year to date. Dave will cover further details of our quarterly results and guidance updates momentarily. But first, I'd like to touch on some highlights from the quarter. The technology developed for James Webb is one example of Northrop Grumman's innovation. Another example is how we are using technology to produce innovative and affordable solutions for our customers. To that end, we're investing in digital design capabilities and advanced manufacturing facilities. In close partnership with our customers, We are digitally transforming how we design, test, and manufacture the next generation of systems. And you've heard our customers acknowledge the results, particularly with some of the largest programs, including B21 and GBSC. We are marrying our world-class engineering talent with the latest digital tools, machine learning, and agile principles. And as we announced this quarter, we are also investing in factories of the future. including our state-of-the-art manufacturing facility in West Virginia, which will incorporate the latest in digital manufacturing, automation, and modular work cells. Once operational in 2024, this facility will support production of up to 600 strike missiles per year, optimizing quality and reducing costs and cycle time, as well as bolstering tactical weapons supply chain capacity for our customers. For the last few years, we've taken an enterprise-wide approach in mission-focused areas that are aligned with our customers' priorities. These are areas where we see opportunity to leverage our technology know-how and our domain expertise and tie capabilities from across our businesses. Today, I want to highlight a few of them and the related results we've seen so far this year. One example of this is in national security space. Our customers have made it clear that space underpins many missions vital to our national security. And we recognize that we need to think about space differently as a rapidly evolving contested domain. Given this, our focus is on providing space-based offerings that include a mix of exquisite solutions in combination with proliferated constellations of low Earth orbit satellites, also known as LEOs, which together create a more resilient architecture. We've recently seen the benefits of this approach. For example, after the close of the second quarter, we received a $617 million contract for the SDA tracking layer, which is a LEO constellation of 14 satellites designed to provide global warning, tracking, and targeting of advanced missile threats, including hypersonic missiles. This builds on the SDA transport layer contract we were awarded in February, which is also a LEO constellation of 42 satellites, providing resilient, low latency, high volume data transport in support of US military missions around the world. In addition to these, we booked another $700 million in Q2 in restricted space awards and now have $11.3 billion of restricted space backlog. We continue to see the national security space area as one of the strongest growth drivers for our company. Another focus area where we are pulling capability and expertise from across the portfolio is missile defense and counter hypersonics. In the second quarter, we were awarded a contract from the Missile Defense Agency to continue development of the Glide Phase Interceptor Program. GPI will play a central role in ensuring the United States maintains the most reliable and advanced missile defense systems, capable of outpacing and defeating evolving missile threats. This complements our missile defense modernization work already underway on NGI, HBTSS, and IBCS. We have also been supporting international customers to modernize their missile defense system. For example, last week we delivered the first of the six production IBCS engagement operation centers for Poland's medium range air and missile defense system. Our capital deployment approach is also an important part of the strategy I just laid out for you. Our first priority is to invest in executing our business strategy. By investing in our factories, digital design tools, and our people, who are a key source of our technology leadership, we are creating long-term sustainable value. We also remain committed to returning at least 100% of free cash flow to shareholders this year. In the second quarter, we increased our dividend by 10%, marking our 19th consecutive annual increase. Our new quarterly dividend will be nearly double the level we paid in the beginning of 2017. We are also returning capital shareholders through stock repurchases, and we continue to target at least one and a half billion in repurchases this year. Before Dave shares more details about our financial results, I'd like to briefly talk about the defense demand environment. We've seen a fundamental shift in global commitment of resources for defense and national security, particularly in Europe. Just this year, we've seen Finland and Sweden progress their membership in NATO. And many European countries increase or state their plans to increase their defense budget. The geopolitical environment has highlighted an increased requirement for defense and deterrence. In the U.S., this has also resulted in strong bipartisan support for defense spending. Recently, the Congressional Armed Services Committees marked up their version of the FY23 defense bill. with both providing bipartisan support for further increases in defense spending above the President's budget. For Northrop Grumman, the U.S. FY23-based defense budget request included strong support for key programs like V21, GBSD, NGI, IBCS, Next Generation OPIR, and Triton. And there is an opportunity for additional funding for Gator, E2D, F35, and F18, that we've seen in proposed plus ups from Congress. But I will note that as has become the norm in recent years, there is a high probability of starting the fiscal year on a CR. So we have anticipated this in our outlook for 2022. The budget is a strong reflection of the alignment of our company with our customers and reinforces my confidence that we are well positioned for this environment. So with that, I'll turn the call over to Dave And then I'll have a few closing remarks before we turn to Q&A. Dave?