Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to Northrop Grumman's fourth quarter and year-end 2022 conference call. Today's call is being recorded. My name is Norma, 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 conference over to your host today, Mr. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed.

Thanks, Norma. Good morning, and welcome to Northrop Grumman's fourth quarter 2022 conference call. We 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 outlooks for 2023 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, including those 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 includes non-GAAP financial measures that are reconciled to our GAAP results and our earnings release. On today's call are Cathy Warden, our chair, CEO, and president, and Dave Kepfer, our CFO. At this time, I'd like to turn the call over to Cathy.

Thanks, Todd. Good morning, everyone, and thank you for joining us. The Northrop Grumman team delivered another year of strong performance in 2022, positioning our company for the coming year and beyond. A growing global demand environment and the team's success in capitalizing on competitive opportunities drove exceptional bookings. Topline growth accelerated throughout the year, driven in part by improving labor trends. I'll note that we set our sales and EPS guidance ranges at the beginning of 2022, and even in a dynamic macro environment, we navigated the challenges to deliver at or above the high end of those ranges, and importantly, to deliver capability for our customers. This performance highlights our solid operating execution, our ability to win new business, and the alignment of Northrop Grumman's portfolio to our customers' priorities. We enter 2023 with a backlog of more than two times our annual sales. This strong backlog, along with increasing demand and rising global defense budget, supports our expectation for continued growth. Given this, and supported by robust headcount growth, we have increased our 2023 sales guidance range from our October outlook. We are projecting solid segment margin performance that takes into consideration inflationary pressures and supply chain disruptions consistent with the expectations we outlined on the October call. And we expect a greater than 20% compound annual growth in our multi-year cash flow outlook that supports continued investments in the business and significant returns of capital to shareholders. Before providing more details on our outlook, I'm going to highlight a few notable achievements from the previous year that underscore the tenets of our long-term strategy and illustrate our positioning for the future. In 2022, the James Webb Space Telescope proved its status as the world's most powerful space telescope and an engineering marvel. It achieved full operational status, shared first images in July, and continues to discover and inspire with its incredible insights into distant galaxies. This project is just one example of the technology innovation and leadership our team brings to our customers. And it has provided an excellent platform for attracting talent to our industry and our company. In 2022, we continued to win new competitive awards across the company, achieving a book-to-bill ratio of 1.07. Two notable new awards are the Space Development Agency's tracking and transport layers. As our customers look to expand their resilient national security space capabilities, these programs leverage our advanced space solutions for low Earth orbit and showcase our ability to compete and win programs across a range of missions. We also completed over 40 successful launch and space missions in the year, exemplifying our end-to-end capabilities in the space market and our ability to perform at scale. Further, our solid rocket boosters helped propel NASA's Space Launch System as part of the Artemis I mission, with the largest human-rated solid rocket boosters ever built. We also received a $2 billion award for GEM-63 solid rocket boosters in support of Amazon's Project Kuiper. Together, SLS and Kuiper validate the robust investments that we've made in solid rocket motor capabilities. We also delivered advanced architectures that integrate sensors to provide unprecedented situational awareness for our customers. One example is our IBCS solution. After successful testing in the fourth quarter, IBCS is poised to transition from LRIP to full-rate production in 2023. IBCS integrates systems that weren't designed to work together, creating a seamless air and missile defense network and allowing customers to better utilize their defense assets. This capability is needed more than ever to address advanced threats, and it's one where we've seen a significant increase in interest across our global customer base. with 10 additional countries expressing interest in obtaining this system. We continue to keep our focus on innovating and leveraging our strong position in advanced technology. This includes the development of a new radar for the F-35. This radar is capable of defeating current and projected adversarial air and surface threats and is compatible with variants of the F-35 aircraft. And we capped off a strong year with the historic unveiling of the B-21 Raider. The B-21 is a multifunctional platform with unmatched range, stealth, and survivability, and it will be the backbone of future US air power for decades to come. We continue to perform well on the program and remain on track for first flight later this year. As the program transitions into low-rate initial production, we are working to address macroeconomic conditions. especially related to inflation and their impact on material, suppliers, and labor. Importantly, I want to highlight that our B-21 unit cost projections remain below the government's independent cost estimate. The program has strong support from the U.S. Air Force, Congress, and our suppliers. And in the words of Secretary Austin from last month's rollout, this aircraft is proof of the department's commitment to building advanced capabilities that will fortify America's ability to deter aggression today and in the future. Our 2022 achievements underscore the breadth of our portfolio across a wide range of domains and technologies and the strong performance of the entire Northrop Grumman team. As we look forward, defense budgets are on the rise. And we see our global customers continuing to seek proven solutions to address rapidly evolving and increasingly sophisticated threats. We are meeting their urgent needs in areas such as air and missile defense solutions, medium and large caliber ammunitions and armaments, advanced radar capabilities, and global surveillance, to name just a few. And we are partnering to expand our opportunity set and positioning our international business for future growth. We clearly saw increased demand in 2022, and we continue to expect to grow our international business over the next several years. In the U.S., we are encouraged by the continued strong support for national security, including overwhelming bipartisan support for a 10% spending increase in the fiscal year 2023 defense budget that was passed in December. Our portfolio and the capabilities we offer are well supported by the administration and Congress. Growing security challenges will test our resolve in ways not seen for a generation, and we are confident this administration and the new Congress will find ways to work together to meet them. We expect the President's fiscal year 2024 budget request to support robust funding for the highest priority capabilities outlined in the National Defense Strategy. And our strategy has positioned us well. We're clearly maintaining our technology leadership and growing our portfolio of offerings, which is aligned to customer priorities. Another key element of our long-term strategy is keeping a laser focus on performance and driving cost efficiencies throughout the business. The current macroeconomic environment reinforces the importance of doing so. An example of our effort is the implementation of digital solutions across the company. Beyond the benefit of transforming how we design, test, and manufacture the next generation of systems, our digital initiatives are streamlining business functions and increasing productivity. We are also optimizing our facilities and consolidating our real estate footprint. Every day, we seek new and innovative ways to drive performance and increase efficiency while remaining agile and meeting our customers' expectations. Our capital deployment strategy supports our business strategy. We are investing to not only drive efficiencies, but also to allow our customers to stay ahead of the threat environment. In 2022, we invested over 7% of revenue in R&D and capital expenditures to provide the capability and capacity needed to address the threats of today and tomorrow. We also continue to return cash to shareholders. Last year, we increased our dividend by 10%, which was the 19th consecutive increase. And during the year, we delivered over $1 billion to shareholders through the dividend and returned another $1.5 billion through share repurchases. So looking forward to 2023, we are well positioned for continued growth, and our revenue outlook has improved from the high $37 billion range we shared in October. We now expect sales to be in the range of 38 to $38.4 billion, representing about 4.5% growth at the midpoint. Margins are expected to remain solid in the 11.3% to 11.5% range. We are projecting strong free cash flow growth that supports our capital deployment strategy. And we expect to return more than 100% of free cash flow to shareholders again in 2023. Our backlog, strong recent global demand growth, and our ability to deliver products that address an increasingly complex security environment give us confidence in our outlook. So with that, I'll hand it over to Dave to cover the details of our financial results and more on guidance.