Q1 2020 Earnings Call
Good day, ladies and gentlemen, and welcome to the Northrop Grumman first quarter 2020 Conference call. Today's call is being recorded my name is Josh and I'll be operators.
At this time, all participants are in listen only mode.
Anytime during the call you require assistance. Please press star zero and an operator, we'll be happy to assist you I would now like turn call over to your hosts today Mr. taught earns treasurer and Vice President Investor Relations Mr. urge. Please proceed.
Thanks, Josh Good morning, everyone welcome to Northrop Grumman as first quarter 2020 conference call. We refer to a Powerpoint presentation that is posted to our IR web page. This morning.
Before we start matters discussed on today's call, including 2020 guidance reflect the company's judgment based on information available at the time of this call. They constitute forward looking statements pursuant to safe Harbor provision of federal Securities laws.
Looking statements involve risks and uncertainties, which are noted in today's press release and or efficacy filing. These risks and uncertainties may cause actual company results could differ materially.
Matters discussed on today's call will include non-GAAP financial measures that are reconciled in our earnings release and supplemental Powerpoint presentation.
Earnings release contains a reconciliation of non-GAAP operating majors to our GAAP results.
On the call today, our Kathy working our chairman CEO and President and gave temper our CFO at this time I'd like to turn the call was again.
Thank you Todd good morning, everyone. Thank you for joining us today.
Before turning to our quarterly earnings I'd like to address the cobot 19 impact.
I want to thank those who has been working to keep a safe, particularly those on the front lines in the health care in first responder communities.
I also want to think or Northrop Grumman employees, well each of us space. Its unique challenges our team's dedication to the mission is allowing us to continue providing products and services to our customers.
Our first priority is protecting the health safety and well being of our team.
We are requiring telecommuting for those who can do so and we've enhanced the safety of work spaces for those who must come to work in person.
Facilities remain open and we're taking extraordinary measures in an effort to maintain healthy working condition.
These include implementing staggered show health monitoring social distancing faced coverings and more robust cleaning.
In addition, we've expanded employee benefit and wellbeing program.
We're also supporting our suppliers with a particular focus on our small and midsize business partners.
We are advancing approximately 30 million of payments per week to critical small and midsized suppliers and we expect these payment advances will exceed $200 million.
In addition, with the actions taken by the Department of Defense to increase progress payments, we're flowing not full supplier benefit to our suppliers in a timely fashion.
Well, we've not had a material supply chain disruption summer being impacted more than others and our global supply chain team continues to actively engaged with our suppliers to address issues and find new opportunities to help them.
And we're supporting our local community.
We are donating to organizations involved in coated 19 relief effort.
Supporting frontline healthcare workers first responders and service members.
Providing fun to food banks, and helping students get access to technology for virtual learning.
We're also providing in kind donation. One example is a companywide initiative to produce had ban and a symbol thousands see shields for hospital.
Turning to first quarter performance.
As a result of our employees effort our company did not experience a material operating intact from the pandemic in the first quarter.
We delivered a good operating quarter with 5% sales growth solid operating margin and a strong backlog.
Looking ahead to the remainder of the here we are adjusting our guidance to reflect our estimate of the pandemics intact as we understand it today.
We are updating our 2020 guidance for sales to between 35 and $35.4 billion, a little less than 1% lower than prior guidance at the midpoint.
Our up do you like to sales guidance reflects expected coated 19 related impacts primarily it aeronautics, including their exposure to commercial aerospace markets.
We are maintaining our guidance for segment operating margin rate and we continue to expect or segment operating margin range between 11.3 and 11.5%.
Although we now expect a margin rate of approximately 10% an area. This is being offset by an increase in mission systems outlook. We now expect mission systems will have a low to mid 14% margin rate.
So as results of the revenue impact first quarter marketable securities impacts and interest related to the first quarter bond offering we now expect or E. P. S will range between $21, an 80 cents in $22 and 27 and Dave will discuss each of these items in more detail.
Cash from operations in free cash flow were negative in the quarter as is our typical pattern. We continue to expect 2020 free cash flow will range between 3.5, 0.1, 5 billion and 3.4 or 5 billion after capital spending of approximately 1.35 billion.
With additional measures in place to help protect our employees, we continue to execute on our program and I want to highlight a few of our quarter achievement.
At Aeronautics really into the first quarter, we've delivered 656 F 35 Center fuselages.
Yes deliver to eat to de it'd be a talk ice to Japan in mid March into global Hawk. So the Republic of Korea shortly after the into the quarter.
And our MQ foresee Triton was deployed to U.S. military commanders in the Pacific Superbike, Greater Maritime intelligence surveillance and reconnaissance.
At Defense systems, we completed the critical design review for the E.M.D. phase of argument E. R. The program remains on track with a successful CDR initial testing a sub systems, including the new extended range rocket motor.
In addition, he has supported the Ctcs coded 19 response effort by creating over 400 web pages in three languages that have received over 900 million page views, providing important information about the pm to make spread.
At mission systems are favor radar afraid program for up to 16 continues to expand.
Sabre now has production contracts for approximately 670 system across multiple customers.
The Air Force recently exercised an option for 105 radars under their $1 billion Sabre I'd like to contract.
This order included 33 radars for Air Combat command jet, which establishes sabre as the system of record for the active Air Force.
And in February the Marine Corps ordered two additional Gator system to complete their lot to award cater replaces five legacy systems with a single system, providing significant performance improvement in each of its most while reducing training logistics hands maintenance cost.
If they system, we were awarded two small, but strategically significant DARPA contract.
The first is glide breaker and R&D and demonstration program to develop component for a lightweight interceptor to defeat hypersonic boost glide weapons it very long range.
We previously discussed the successful docking of her first mission extension vehicle to the Intelsat nine to one spacecraft.
This is mark the first time to commercial satellite Stockton orbit and the first time it sounds like life extension services are being provided to a satellite and geosynchronous orbit.
This accomplishment laid the groundwork for the second DARPA Award, which establishes a partnership between DARPA and Northrop Grumman for the next generation of remote servicing of geosynchronous satellites.
Under the agreement DARPA will provide an advance robotic payload to integrate within Northrop Grumman provided spacecraft.
This disruptive technology could significantly expand on orbit servicing capability to include robotic services.
Under the agreement, we will retain the spacecraft payloads and IP for commercial use.
In the quarter space systems was also awarded restricted competitive prime contracts totally multiple billions of dollars in aggregate.
Well, we in the nation are keenly focused on this eating 'cause. It 19, we must also continue to address a myriad of other national security threats.
Our portfolio and investments continue to be closely aligned with the national defense strategy and our customers long term priorities.
This is evident in the President's budget request for fiscal year, 2021, which propose increased funding for strategic deterrence hypersonic weapons missile defense advance networks cyber and space system.
The department of Defense, our primary customer is seeking robust fiscal 2021 funding, which will be the subject of congressional debate later this year.
Video de budget request supports investments in our current capabilities, including be 21, Sabre you to de advanced weapons, OPI or and other space program.
While also increasing funding for future opportunities, along with our investments, including CBSP, Chad FY, two and missile defense program like IVC, Yes. It next generation interceptor.
Turning to capital deployment first quarter share repurchases totaled approximately $350 million and we retired approximately 1 million shares.
In April under an established repurchase program, we bought approximately 400000 shares for $130 million.
Combining first quarter repurchases with April them, now, we have met or approximate target for the year.
We remain committed to offer in a competitive dividend. In addition, deleveraging the balance sheet remains a priority and we expect to retire the $1 billion and maturing debt. This fall.
In closing, we remain well positioned to create value going forward.
We are fortunate that through the first quarter, our operations have not been materially disrupted.
Well future impacts of the pandemic remain uncertain, we have a robust pipeline of opportunities, including GBSD, which continues on track for an award later this year.
We also continue to lay the foundation for the future. We're actively recruiting for 10000 open position and we hired more than 3500 people in the first quarter, which included more than 1300, new hires in March.
We appreciate the government's action to support the industry's most vulnerable businesses, including increasing progress payments kobin related cost recovery through the carriers that accelerated and timely award and support for essential work designation.
Despite the challenges that could 19 has presented for every business and into just individual through the dedication of our talented workforce, we remain committed to investing for the future delivering value to our shareholders and meeting our commitments to our customers and all of our stakeholders.
Now I'll turn it over to Dave.
Thanks, Cathy and good morning, everyone before I begin my comments I'd call your attention to this morning's 8-K filing the reach a certain sections of our 29 team form 10-K to reflect our new sector alignment.
We also provided a schedule in our earnings release, the pro Bugs retail sales and operating income by sector for the last three years in each of the quarters and 29 team.
My comments begin with first quarter highlights on slide three excluding the impacts of the pandemic or first quarter results were about as expected.
Sales were up 5%, reflecting topline growth in all four of our businesses.
<unk> AUM was solid at 11.1% and mid awards totaled $7.9 billion.
Awards were particularly strong up space, where total backlog increased 3%.
Earnings per share increased 2% to $5.15.
Slide four provides a bridge between first quarter 2019 S. In first quarter 2020 bps, well, we did not have material cobot 19 operational impacts in Q1, no businesses performed largely as expected.
The volatility in capital markets did impact earnings as losses on marketable securities and the related tax impacts reduced this year's first quarter earnings.
Well begin to review of sector results on slide five.
Aeronautics sales were up 1% for the quarter with higher volume at book Autonomous systems and manner manned aircraft.
Higher volume on restricted programs in global Hawk drove the increase partially offset by ramp Downs MB, two dms and middle age, yes, as those programs near completion.
Well not a significant factor in first quarter results later in March we did begin to see filled with 19 related volume pressure in the supply chain and in employee attendance, particularly at certain manufacturing facilities, we'll talk more about this when we cover Doug.
That defense systems sales rose, 6% due to higher volume and both its business areas Battle management and because in missile systems growth was driven by higher volume for GE or us, Oregon and other missile brought a.
Higher sales admission readiness reflect higher volume on in international training program and higher volume on Sema in an aircraft Sustainment program.
Mission systems sales were also up 6%.
Higher volume for airborne radar programs, including a 35 and sabre drove higher sales in our airborne sensors and networks business.
Maritime limb systems and sensors also grew sales due to higher volume on marine systems and restricted programs.
Space system sales rose, 8% due to higher volume of restricted programs.
And other space programs like next generation, OPI or and the Arctic satellite broadband mission program.
Increases in space programs were partially offset by lower volume in launching strategic missiles.
Trends in that business reflects lower volume for the ground based midcourse defense program and SLS booster, partially offset by increases in hypersonic activities in the GBSD technology maturation risk reduction program.
Turning to segment operating income on slide six.
Aeronautics operating income declined 16% and margin rate declined to 9.1%.
Lower net positive you see adjustments in autonomous systems programs as well as the timing of F 35 risk retirements in contract mix in manned aircraft programs were the primary drivers will be operating income trend at aeronautics.
A defense systems operating income to decreased 3% and operating margin rate declined to 10.4%.
This trend reflects a difficult comparison to the prior years quarter in which we had favorable adjustments on certain small caliber ammunition programs.
Operating income at mission systems Rose, 9% in operating margin rate increased 40 basis points to 14.8%.
Hi, or operating income reflects higher sales as well as improved performance on airborne sensor and networks programs.
Partially offset by contract mix that maritime land systems, and sensors and the timing of risk retirements for navigation targeting and survivability programs.
Space systems operating income rose, 6% and operating margin rate was comparable to last year the 10.2%.
Additional higher sales space operating income also reflects the timing of favorable negotiations on certain commercial contracts in 2019.
Turning to slide seven you can see that we've updated guidance for aeronautics emission systems.
The volume impacts were projecting it is are associated with commercial aerospace structures customers.
Risks in our supply chain.
Changes in employee attendance and productivity in certain areas, we expected the supply chain and employee attendance impacts of cool. The 19 that we began to see toward the end of March will be significant enough to impact or financial performance in certain production areas, particularly in Q2.
We're also now planning for weekend commercial aerostructure demand commercial Aero structures represents about 1% total company revenue and demand has declined as global travel has been impacted by the pandemic.
The decrease in total company sales guidance is driven by the expected cobot 19 related impacts that yes, I would also note that our guidance continues to contemplate growth in restricted activities and manned aircraft, partially offset by lower growth in F 35, due to the pandemic.
We now expect sales and below $11 billion range that aeronautics.
Regarding yes, 2020 margin rate guidance, we do expect their margin rate to return to the 10% plus range in the second half of the year.
We currently expect a margin rate of approximately 10% at Aeronautics this year.
Based on strong Q1 performance at mission systems, We now expect their 2020 margin rate will be in the low to mid 14% range.
And we'll offset much of the decline in aeronautics.
Our prior guidance for defense systems, and space systems sales and margin rates is unchanged.
Moving to consolidated guidance on slide eight the update to sales guidance reflects the this impacts we've discussed.
We are reaffirming or segment operating margin rate guidance of 11.3% to 11.5% as we expect better performance at Emmis will largely offset margin pressure is.
We also continue to expect total operating margin rate in the 10.8% to 11% range with no change to unallocated corporate expense and other items.
As you're aware, we issued $2.25 billion in debt in March and we now expect interest expense of $590 million.
No change to expected tax rate or year end weighted average share count.
Based on first quarter results and expectations for the remainder of the year, we expect mark to market adjusted EPS to range between $21.80 in $22.20.
Slide nine summarizes our expected cobot 19 impacts on our outlook.
Well there can be no assurances as to the future impacts of the pandemic.
Our guidance assumes that we're able to offset higher cobot 19 related costs with other cost reductions.
It also assumes that supply chain and labor impacts are greatest in the second quarter.
It operational pace recovers in the second half a year.
This means we currently expect that second quarter sales and margin rate will be more impacted by Cobra 19 related factors than the other quarters of 2020.
As Cathy said, we're maintaining our free cash flow guidance, as we assume or government customers and other prime contractors will continue to make timely payments.
Expect the positive impacts of higher progress payments and payroll tax benefits. So upset currently anticipated cobot 19 related impacts and higher interest expense.
Slide 10 provides a bridge between our January guns in today's full year EPS outlook.
Operational impacts represent approximately 35 cents driven by the expected cobot 19 related revenue decline.
We're assuming that the marketable securities loss in Q1 carries through the year and reduces our EPS by approximately 30 cents.
And higher interest expense as a result of our recent debt offering is expected to add another 30 cents.
The debt offerings should give us some additional flexibility to support our customers employees and suppliers during the pandemic into position our company well for the long term.
Of upcoming debt maturities, including $1 billion later, this year and $700 million in early 2021, and we expect to utilize excess cash to retire these.
In closing well, we didnt experienced significant cobot 19 impacts in Q1 or outlook contemplates our current estimate of the potential impact for the balance will be year.
Continue to monitor the situation closely.
Overall or portfolio is well aligned with evolving customer priorities, we continue to execute to deliver value for shareholders, while managing the cobot 19 risk and we continue to invest in the future.
With that Todd I think we're ready to open the call up for today.
Ladies and gentlemen, if you wish to ask your question. Please press star followed by one on your touched on telephone again press Star one to asking question. If your question has been answered or if you wish to exit the questions Q press the pound key to exit the Q.
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Your first question comes from Robert Stallard with vertical research you May proceed with your question.
Thanks, so much good morning.
Good morning, Rob.
The question I have on GBSD, there's been some tool that the air Force may move quicker.
Awarding this contract I was wondering if this might make any sort of material impact on your results a twentytwenty audience really flowing through like yes. Thank you.
So Rob Yes, we are working with the Air force and negotiating the contract now and we are prepared through actions we've been taking to move it's easier for us is able to accelerate this award, but it would be a modest acceleration we anticipate.
Right. The word was already planned for third quarter of this year and what we see instead, it would likely be only a month or two of acceleration if acceleration happen. So we don't expect that to have a material impact on 2020, but certainly getting started more quickly.
De risks the program to some extent and allows us to be more confident and meeting those milestones along the path to the 2029 Io Cdeight for the program.
That's great. Thank you.
Thank you. Our next question comes from Jon Rigby.
With Citi.
Thank you and good morning, I'm, just kind of no big Big picture here. How are you guys thinking about the business positioning not only the current environment, but sort of what the environment is going to be going forward understanding you have a lot of products and capabilities installed on current national defense strategy.
Acquirements.
But anyway, how would you aligned to meet future government spending priorities you mentioned your work with the CDC. For example in recent weeks, how do you think about where you line or where you could align elsewhere going forward.
Well certainly John we see the demands for our product remaining strong and that's primarily driven by the threat environment and I noted a few areas where there we are seeing the presidential budget for 21 reflect significant increases areas like space.
Missile defense Hypersonics and other advanced weapons and so those areas. We expect to continue to be in focus as well as the deterrents strategy of our nation, which depends on the Tri Ed and has obviously modernization happening across all three legs of the triad. So those area.
You are going to continue to be areas, so strengthen our portfolio, but areas of importance as we look at demand near and long term. We are very pleased Cindy supporting the government in other areas that has become increasingly important in dealing with a pandemic I noted the work that we're doing.
Currently for the CDC and we're very proud of that work, we've been doing that for a number of years and while it has been relevant previously it's never been is relevant as it is today and the amount of information that we're able to share around the globe to help people make informed decisions about the CMBS spreads and.
Now to reduce the spread is certainly something that we'll continue to do and work that we're very proud of.
Thank you.
Thank you. Our next question comes from Robert Spingarn with Credit Suisse.
Good morning.
[laughter] Kathy I wanted to ask you just high level question about the budget.
Now that we've had it and what you might be hearing from the hill in terms of Ah.
We're programs and how they're doing and specifically if you could touch on Triton and the and the fact that that program was zeroed out at least from a procurement quantity perspective.
Thanks, Rob.
So we are overall pleased with the 21 budget request as I noted in the previous questions. There are areas of significant but should increase that are well aligned with our priorities and certainly we were pleased to see that we also have a number of programs that are well supported in the budget I noted a few of those in mice.
Opening comment areas like Sabre Etwo D. Certainly F 35 continues to be well supported as well as we look at areas, where we saw some perturbation on our programs trait and being an example.
What we see in the budget request is the pause in production with the intent of putting resources toward R&D on a new sensor and we had anticipated that so it will be somewhat of an offset to the production pause the work that will.
Are you in the R&D, we also have the sale and Triton, which will provide some quantity that bridge the U.S. production costs as well and of course, we continue to work with Congress as they deliberate on the budget to determine if we can get those two aircraft out.
And back so those are some of the actions that we're taking with Triton, but we do you see that it is not just a production pause. This is the continued commitment to the program and investment in additional sensors to make the program and the and the Hell platform were robust.
Thank you.
Thank you. Our next question comes from SAP season, with JP Morgan.
Oh, thanks, very much on a good morning.
Was wondering if you could talk a little bit about you mentioned higher or second half margins and.
Aeronautics and its implied by the guidance as well. So I was wondering if you could talk a little bit more specifically about what gives you the confidence after that.
Nine ish percent in Q1, and what seems like operationally it will be more challenging Q2, because of the virus kind of what gives you that confidence in that in the second half life.
Seth it's Dave.
Oh, good started on that wouldn't be ER.
Our outlook for the year for yes margins.
And for total company margins is that we expect the second half to be stronger than the first.
Largely because of you know the easing of cobot impacts on the second half, particularly compared to Q2, yes in particular, a lot of the margin rate movement from quarter to quarter in that business is timing related or on a year over year basis, we so.
But the timing of some risk reductions, particularly around F 35.
Made for a tough compare year over year, Oh, we do see opportunity for for greater margins going forward in that business, both near and long term than than those that have delivered in the first quarter.
And so we expect that kind of strength in the second half of the year to to materialize.
Yes, I think of it as largely timing driven around keep.
Program profit milestones and risk reductions that are that we see more likely coming into second half than the first.
Okay, great. Thank you very much.
Thank you. Our next question comes from Peter I met with Baird.
Yes, thanks, good morning caffeine Dave.
Hey, just you mentioned some of these supplier disruptions and where are you starting to see that a little bit from covert 19.
Maybe just give us a little more color on kind of your assessment on the supply chain and you know your confidence around whether there's alternative sources or what kind of audits you went through to kind of assess the impacts going forward. Thanks.
Yes. Thank you Peter as I mentioned, our supply chain management team has been very active and monitoring our supply chain for and risks and mitigation strategies. They can counter those risk we have not seen significant disruption to this point, but every sub.
Flyer has unique circumstances with some we have worked to enable them to continue operations by sharing best practices for social distance scene and other safety protocols with others. We have advanced payment to help with liquidity concerns as I noted in my script and then in addition, we have.
I was continued to monitor for disruption in the supply chain to our production line. We've seen a few modest impacts at this point in time.
Nothing that is causing us considerable program interruption, but we as I said the Q2 impact is where we expect to see the most significant so we're not through the disruption at this point in time that we are seeing positive trends, both in our own facilities and with our supply.
Flyers, we're starting to see absenteeism reduce and more people coming to work in the production facilities. We are seeing small businesses that had to pause operations for a short period of time resuming their operation and so I would say that the trajectory is positive.
But we still have uncertainty ahead.
Appreciate it thank you.
Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies.
Hi, Good morning, Kathy and welcome Dave Kathy Your question for you. Please your overall business is set to grow 3% to 5% this year.
Given restricted as a higher proportion relative to peers. How do you think about the trajectory of <unk> growth and are there areas a specific areas outside of space that you have higher confidence and the growth outlook irrespective of what happens what the budgets.
[noise] Sheila good morning. Thank you for the question, we do see restricted continuing to grow faster than the remainder of our business and in those first quarter is just an indicator. We saw 1.3 book to Bill in our restricted portfolio. This was largely driven by spaced awards.
As you know we have significant restricted work across the portfolio within the past talked a good deal about the aeronautics restricted business that space is also growing rapidly as his mission systems and so it really is a wide spread that we are seeing that restricted growth and we anticipate that continuing as we look forward at offer.
Attunitys that we have for the remainder of the year as well as programs in the portfolio today in their growth rate, we anticipate that share for strictly business to continue to grow it's up to about 20% now and as we have previously said, we expect that to go even higher.
Thanks.
Thank you. Our next question comes from David Charles with Barclays.
Thanks, Good morning.
Good morning.
Kathy one das you see you commented on the impact from commercial aerospace I assume that's all the three CSD can you just touch on that and then on GBS D. Thank you talked about 250 million or revenue. This year can you can you give us some color on how that's going to ramp over the course in next couple of years a one.
When does that program become bigger them be 21. Thanks.
So it David I'll start on the question about commercial Aero, our commercial Aero work is actually spread over a three different out for the largest of which is the athree hundred 50, and we are expecting impact across all of those effort and we will begin to see that in Q2, but it will persist.
It's largely driven by the demand in commercial Aero.
And so that is why in particular aeronautics sector is contributing to the slight decline that we have in our revenue guide for the year.
In.
Response to your question about CBS D and the ramp we expect that to be a gradual ramp is this the cases when you start MD contract the engineering phase tends to be very labor, driven and so we will be adding headcount and rising actually needs over the next.
Several years and we wouldn't see eightyc in that program a for a while I was not going to specifically address the part of the question about when it becomes larger than be 21, I know what you're trying to do there was little bit more information on B 21.
To do but as certainly GBSD will be a significant program in our portfolio as well be 21.
Okay. Thanks Charles.
[laughter] goods right [laughter].
Thank you. Our next question comes from Joe Denardi with Stifel.
Hey, good morning.
Kathy can you just talk a little bit about the opportunity for the in orbit servicing.
More work that you're doing I think thats, a that was a program or an opportunity that orbital was pretty excited about longer term are there certain milestones that you're looking for there and then just kind of what's the optimistic scenario for what that could look like eventually thank you.
Yeah, Joe and we continue to be excited about that opportunity and as I noted. This award from DARPA that we received in the first quarter now will add capability to what we can do with the servicing mission. So at this point, we are able to do life extension.
And as we are doing on the until something I know one satellite with our first operation, but the robotic service seen will allow us to provide other servicing functionality. So it opens up the market in that regard and clearly is an indicator that we would be able to service not only commercial but potentially government satellite.
So as well so when we look at the market.
We are bullish but cautious in that this is the first of a kind and we want to continue to March through milestones of a session that would lead us to believes that we can accomplish this much broader set of servicing mission, but certainly life extension servicing which.
We have already accomplished with the Intelsat satellite is something we feel comfortable will be a robust and growing market for us.
Thanks.
Thank you. Our next question comes from goes Arnold with.
Bernstein.
Yes. Good morning, Thank you.
You know in the new organization structure and.
I'm interested in understanding what how this works now in other words.
Both in terms of any.
Costs, you're still working through on integration, but then also [noise].
In this structure, what should we now see as the benefits going forward and I would say that I'm on two sides.
One of them.
In revenue synergies and the other and the ability to actually improve margins a little bit as you looked at the next couple of years.
So Doug it's certainly with the integration that we're doing we have already met our cost targets for the integration of relatively T.K. and the next logical step that we took at the beginning of this year was realigning the sector structure, we see continued opportunity for cost reduction.
Through the new sector alignment and not as a clear objectives that we had for doing that realignment at the beginning of this year one of the other and I would say the more importance is the ability to capture the revenue synergy and successfully execute on those programs. So that was the primary reason why we did the new sector.
Our alignment, but certainly cost reduction was also a part of our objective out for the team and I'm pleased with the progress that we're making there is a matter of fact as we look at this year. We have some increased cobot 19 related cost as any company does as we do more of the safety protocols cleaning social just insane and Wi Fi.
Fully expect as we said in our guidance that we can offset those through other cost reduction measures that we anticipate taking this year. So we are looking ahead, a and believe that not only the sector realignment, but actions that we will continue to take as the sectors operated this new structure will allow us.
Some cost reduction opportunity.
They have anything else you'd like to and.
As you mentioned, Doug we're going through the the standard process now around realigning of systems and Ray pools in such a kind of on the administrative side of the the realignment, but I think the bigger picture Kathy mentioned as is the important one which is that.
The realignment enables both topline synergy going forward as well as a.
Further improvements in cost management around the business and that those are timely given.
The environment, we find ourselves in 2020.
Okay. Thank you.
Thank you. Our next question comes from Myles Walton would you be us.
Thanks, Good morning kept you want to hone in on our comments you made about hiring actually which were 2000 jobs on filled or posted and 3500 hires in the first quarter.
But on a 90000 employee base I'm just wondering how much of this is he's going to be net growth.
And should we use that as a calibration as to the speed of revenue grow because you're looking into 2021. Thanks.
Thanks miles so as we look at our hiring we have a number of open positions both to support existing business. It also in anticipation of future Awards. So you know I would tell you that we only do that hiring if we indeed get those awards as we look forward. So open positions are not message.
Clearly a direct correlation to the number of hires that will ultimately make and as we look at this year in particular, we go into a year with an assumption around attrition. So that gets us to a net head and the labor market was very tight at the beginning of this year as we are.
Working through the last two months, we're seeing that attrition is dropping as you might expect as other opportunities are becoming more scarce and so we're in the process of looking at what that May.
Presented those challenge and opportunity for us going forward and so we are actively working on hiring and being very successful in hiring as I noted still even as we were dealing with the challenges of the pandemic in March we fell 1300, plus hires and April continues to also be strong.
Long, we're we've moved virtual as you might expect to accommodate most of that hiring and so as we look forward. The the net head I wouldn't put a number on it but we do expect significant headcount growth. This year because that's the program volume increases that we have the sales growth.
As well as the anticipated awards in the latter half of this year.
Okay.
Thank you.
Thank you. Our next question comes from Carter Copeland with May of this research.
Hey, good morning, I wondered if you could just expand briefly on the hiring at it looks like obviously that the classified portion of the business.
Is a is increasing and its share and and I wondered if you might just speak to.
You know.
What portion of that hiring that you mentioned that 10000 jobs is cleared personnel and maybe just give us a sense of if there is a challenge given the growth in and.
Restricted work that you expect in terms of getting either clear personnel on are getting folks hired him and getting them cleared.
Just help us understand good kind of that dynamic and and and how you're dealing with it. Thanks.
Thanks girder, yes, a significant portion of that hiring is for cleared personnel. We don't always higher in individual who is already cleared we have other opportunities that we're able to put people on while they await their clearance and we've also seen the department take actions that have.
Accelerated clearance processing and those have been very helpful. Oh, we still obviously have a waiting period for those individuals but it is getting shorter three the actions that the government is taking and so what we do is we do both hiring of individuals who already have clearance direct.
We onto those restricted programs as well as pipelining through or unclassified work with the intention of moving those individuals unrestricted programs once they're clearance come through and we've been doing that for years and it's worked well for us it's not something that striking and on an inordinate amount of increased cost to our business because.
Cause we have this portfolio that has so much both on classified and classified work and I'll note that plus the vacation is relative to their different levels of clearances required and so people can step through those a clearance levels as well.
Great. Thanks.
Thank you. Our next question comes from Cogs on rumor with Cowen and company.
Yes, thank you very much so.
Could you give us any color on the significant classifies space awards in the first quarter and secondly, you know it was a little stronger for first quarter in terms of total bookings and maybe some of US expected where do you see the backlog going by year end what are the key drivers to got it.
Yes.
So high in terms of backlog for the year, we still anticipate it to be above one even without CBS see clearly GBSD would we expect to be a sizeable award if we receive it and so that would drive book to Bill well above one is we look.
At the first quarter, we did have less than one book to Bill that we had anticipated that as you said and it signals that we expected.
Most of our significant awards to happen later in the year, we didnt have the large space restricted award that we noted and why we can't provide any detail about what they are who therefore or the value of them. They were ones that we had been working for a period of time and did anticipate.
Getting but they were competitive so we clearly had a factor them to some extent in our plans for the year and we're very pleased to be selected an award at those contracts this quarter.
Thank you very much.
Thank you and next question comes from Hunter change with Wolfe Research.
Hey, good morning.
Good morning.
Thank you I saw I was wondering to follow up to the exchange, we had with with Doug earlier I'm kind of curious about.
Can you maybe give me some examples or even better quantify the amount of costs were taking out specifically from Corona virus and this is obviously primarily in aerospace conversation how many of those how much of those costs can you actually keep out once you resume normal production rates and again, if you could maybe quantify the margin potential.
I'm, just basing trying to figure out if you can use this as an opportunity to take out cost that you wanted to take out before and maybe keep him out if you understand thank you.
Sure I'll be happy to start on that one hunter.
It's tough to quantify the specific volumes of cost pick up that are possible both.
Near term and then on a permanent basis as you mentioned certainly there's.
An opportunity to to reduce costs during the so pandemic related to travel and conferences and trade shows and other kind of low hanging fruit like that that are that are naturally declining in the business and we'll look to two harbors those cost savings and continue to manage.
Those areas throughout the rest of the year, but then we're also taking this opportunity to to look around at the business and find other areas of deficiency. Kathy has been clear over the past year about driving increased efficiency strong performance around the business being an agile company that.
Moves quickly and ER and reduces bureaucracy.
And so that's you know a part and parcel of what we're looking at today and ER and that's not in any one sector more than others, nor more than at the corporate level at all levels were taking a look at those opportunities.
The margin impacts will will depend to a degree on them the business mix by segment and so those that have more cost plus work of less margin impact, but but greater impact on.
On the competitiveness of their businesses as we as we look for opportunities to take out costs. So there's a different impact depending on the segment.
But abroad company effort to drive that efficiency this year.
Thank you.
Thank you and I was a reminder.
You have a follow up question. Please press star 100 until.
Our next question comes from normal popping up with Goldman Sachs.
Hey, good morning, everybody.
I know a.
Just want to make sure I mean.
And all the moving pieces in the aeronautics margin in the quarter.
In the releases sites, the you see me and autonomous.
F 35 risk retirement, I mentioned, that's a mix.
Maybe possible to size news in terms of.
How much of the year over year change canyon from each of them.
Was there any one time kind of charge related to the commercial aerospace pieces, it's going to fully understand that year over year change and then if you have heard any thoughts you could share on where that segment's profitability can go longer term three to five years out.
Wed love to hear about thank you.
Sure. Thanks, No Oh, just started on that when the or the two buckets you mentioned were approximately even in overall size.
Well I think is important to note is that no one specific program.
Had a material enough impact to be called out individually.
And so year over year. It was a tough compare quarter for I guess given that there were the timing of some of those risk reductions in last year's Q1 created a tough compare but in this years Q1, there were pressures on a few programs fewer upsides on others than we might typically see any given quarter again much of that is timing related and we try to take.
That into account as we look at the rest of year I think the other thing it's important to note. There is in a more typical year, we we would've.
Expected to see more opportunity to mitigate those Q1 challenges in Q2 through Q4 would of course or or timing is increasingly short there given the the impacts of.
Cobot pandemic on Q2, particularly in.
The volume pressures that we're seeing yes, and so that.
Makes it more difficult to to mitigate those Q1 pressures than a typical year would.
Would provide.
And no on your question about the longer term and where we think as margins can go.
Certainly all things being equal we expect three to five years, though to have a higher production mix than we have today, because we have some significant development program in aeronautics as we sit here today and that would naturally create opportunity for margin improvement during that period.
Thanks very much.
Thank you. Our next question comes from George Shapiro with Shapiro Research.
Yes, good morning.
I had a wanted to know the expectation has been that your sales would grow faster than other people, but it hasn't happened that way can you point to you know some inflection point or what quarter or a year, we might start to see the sales growth to better than others are much better than the budget, that's going to decline over the.
Next several years.
So George I wouldn't want to try to predict a quarter at which point, we would see an inflection compared to peers.
Have you cite into our peers I do you feel like we've performed well relative to the market. We have increased our competitive win rate and that's a strong indicator of performance in the competitive marketplace. We have also showed significant improvement in our backlog.
And we're pleased with where it sits and also have a number of opportunities that we've outlined to build that backlog. This year and we anticipate doing so so what I really focused on is looking forward. How are we positioned regardless of what defense budget do.
In this country and around the globe do we have a portfolio that well aligned to the highest growth areas and the answer to that is yes. As we sit here today and we believe we'll continue to be areas of exposure like the strategic deterrence program that indicate that the 21, we've already captured.
In the case of GBSD, we anticipate being awarded later this year.
In the case of space, which is the fastest growing in the President's 21 budget for this year, we certainly have good exposure with Hypersonics and other advanced weapons now in the portfolio and expect that we can continue to grow off of what is today of small base, but an area, where we expect to have significant demand and we believe.
Those areas of demand will be key regardless of what the topline budget looks like because they are based on the advancement of our adversaries capabilities and the threats that they impose so based on that we feel positive about how our portfolio is positioned for growth.
And you know we anticipate that we can continue to create strong shareholder value through that growth successful execution and turning that into earning.
Operator, we have time for one more question.
Thank you our last question comes from Ron Epstein with Bank of America.
Yeah, good good morning, everyone.
Got my Ron.
There's been discussion and industrial policy office in the deferred the about accelerating progress payments and getting that pushed down in the supply chain.
How's that how's that impacted you when you think about your supply base, particularly those suppliers, who have significant commercial aerospace businesses do you worry about disruptions there and how are you handling that.
Yes, Ryan we have seen the impact of the increase in progress payments to 90% that the department has offered and we are flowing that full supplier benefit down to our suppliers in a timely fashion and as I noted earlier in my comments. In addition to that we're also doing some advances for suppliers pain.
In advance because we want to help them with the challenges, they're happy, particularly those suppliers that straddle both defense programs and commercial aerospace program.
And so we believed that our suppliers are well supported.
By us today, but we monitor that on a daily basis, because it's an evolving situation for them, particularly those that are exposed on that demand side to the commercial aero market.
It would add to that is oh, we have fewer progress payment contracts than some of our similarly sized peers do and that we are being sure to quickly flow through to our suppliers there portion of that benefit so when you.
Aggregates summit benefit to Northrop Grumman certainly we appreciate the work of our customers to to increase that that benefit, but it doesn't change our cash flow guidance for the year on the upside we have some additional benefit from the progress payments as well as potential tax benefits, we mentioned on the call.
Offsetting those we have the impacts of silver that we discussed to include the interest on the new bomb so that keeps us in the same range of cash flow that we were projecting previously.
Okay, great. Thank you.
Alright, great. Thank you and I'll turn it over to cat.
Thanks, Todd well I'm very pleased to have Dave on our team and helping to lead for the challenges of the pandemic, we and the entire Northrop Grumman team remain resolute and managing three these challenges and being well positioned for the future. We look forward to speaking with you again in July and until then please stay well.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
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