Q2 2020 Northrop Grumman Corp Earnings Call
Good day, ladies and gentlemen, and welcome to Northrop Grumman second quarter 2020 conference call today's call is being recorded.
My name is Shelby and I'll be your operator today.
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I would now like to turn the call over to your host Mr., Todd Ernst Treasurer, and Vice President Investor Relations Mr. ours. Please proceed.
Thanks, Shelby good morning, everyone welcome to Northrop Grumman second quarter 2020 conference call.
I will refer to a powerpoint presentation that is posted on our IR web page. This morning.
Before we start matters discussed on today's call, including 2020 and 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.
Well 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 also include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release.
On the call today, our Kathy Award and our Chairman CEO, and President and Dave Kemper, 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 today, we hope you and your family are safe and healthy.
Let's start by thanking our employees and recognizing their resiliency and dedication in driving strong second quarter performance in the midst of the coven pandemic.
Along with our customers and suppliers, we quickly stood up new work processes and safe guard that allowed us to continue fulfilling customer commitments, while strengthening our foundation for the future.
And now as we see new outbreaks of Corona by risks in our community. We continue to prioritize the safety and wellbeing of our team.
This includes flexible work schedule teleworking, childcare assistance and stringent operating protocols aligned with CDC guidelines to help protect our employees and their loved ones.
We also continue to support our suppliers healthcare providers and communities through volunteer time supplies and financial resources.
Turning to the results for the quarter. Despite the challenges of the Corona virus, we delivered a very strong second quarter operationally and financially.
Sales grew 5% driven by 15% topline growth in state and continued growth in Aeronautics and mission systems.
Segment operating income grew 4% in line with sales growth.
And we generated an 11.6% segment operating margin rate.
Cash generation was particularly strong.
Cash from operations increased 45% to 2.3 billion.
Free cash flow increased 53% to 2.1 billion after capital spending of 269 million.
Our cash results reflect solid operational performance and benefited from actions taken by our customer to support the industrial base.
We passed the full supplier benefit of higher progress payments to our suppliers.
And we have also instituted our own acceleration of payments to many of our most vulnerable suppliers totaling nearly $500 million year to date.
In addition to those financial highlights in the quarter, we continued to execute our long term growth strategy.
Second quarter awards totaled $14.8 billion, a book to Bill of 1.7 times sale and our total backlog has increased 8% since year end 2019 to more than 70 billion.
The strength of our award demonstrates our portfolios alignment with the nation's most critical security priority, including state nuclear deterrence advanced weapon, and all domain command and control.
Our innovation and timely investments in these areas are enabling our customers vision for future operations.
In space rapidly evolving threats are driving an urgent need for advanced resilient capability and we are competing successfully in this domain.
In the second quarter, New awards that space systems totaled $9.2 billion, which included 5.9 billion of restricted award.
In addition to restricted awards, we also booked 1.9 billion to develop to polar orbiting satellites for Nextgen OPI, our and approximately 150 million for the preliminary design and development of Halo. The first quarter module for Nasa's noon orbiting base station as part of argument.
And we were selected by commercial customers to build for satellites under two separate awards totaling more than 400 million.
These awards support the federal communication commissions order to make the lower portion of the feedback on spectrum available to mobile network operators, enabling the rollout of critical Fiveg services.
We are also supporting the modernization of the nation's strategic deterrent with GBSD.
GBSD continues to be on track for late Summer Award.
We expect to booking of between $10 billion to $15 billion for the engineering manufacturing and development or MD phase of the program with production to be negotiated at a later date.
The successful completion of the preliminary design review in May validates that we are ready to enter the MD phase.
We look forward to delivering a secure reliable and effective nuclear deterrent capability to our nation.
Based on current backlog and future opportunities, we continue to expect Dave will be our fastest growing business.
In advanced weapon, we're providing innovative solutions that address the need for higher speed advanced sensors and precision capabilities.
Our broad portfolio advanced weapons capabilities, including Hypersonics precision system, directed energy and advanced munitions continues to be a source of growth.
After completing successful critical design review last quarter Argan E. R achieved another milestone in the second quarter. The Navy conduct is the first target. He our captive carry flight test on the F 18 Super morning, and we've begun wind tunnel testing.
This system provides opportunity to grow our share in the tactical missile market.
Also in the quarter, we announced that we surpassed the production and delivery of 50000 precision guidance kits for 155 millimeter artillery projectiles.
And year to date, we booked a 154 million in modifications to our big contract for PDK production with the US Army and US Marine Corps to produce additional kit.
Our overall weapons system bookings within our defense systems segment are up year to date with a 1.2 times book to Bill.
Through our successful integration of orbital ATK T.K. into the Northrop Grumman portfolio, we are realizing the strength of the combined team in our state and weapons business performance.
We're also proud to be enabling the next generation of Battle management.
Our networking and computer technology is being incorporated into demonstrations and systems of record showing the value of our open system, which are affordable and platform agnostic.
Next generation programs like joints, all domain command and control noticed ATSI too are aimed at creating an information architecture across all domains.
Our experience with the Army's IBCM program and Abiomed for the year Force will help enable the defense department to extends the any sensor any shooter capability across all services.
And we are making considerable progress.
Program.
Together with the Army, we entered the final round of preparation and trading for the systems multi week limited user tests that begin shortly after the end of second quarter.
Successful completion of this empty milestone will support IVC us production deployment and feeling to execute the Army's integrated air and missile defense modernization strategy.
We are on track for the miles seat milestone C decision later, this year, which positions the program to insert production.
For the current generation of mission systems and sensor, we continue to deliver advanced capabilities to address evolving threats.
In the mission systems sector, we delivered F 35 radar that CMC and I shipsets in quantities comparable to were better than the second quarter of 2019, despite the impact of Cowen.
Our SABR radar upgrades also continue during the quarter. The Air Force completed integration of our SABR radar on Air National Guard F 16 at its joint dates Andrews in New Jersey Air National Guard basis.
Seven additional bases are scheduled to receive sabre upgrades in the coming months.
In apps will also be supplying our radio frequency countermeasure systems for the C. One thirtys operated by the Air Force Special operations Command, our RFC and system will help to improve the C 130 aircraft survivability and protect Aircrews from air and land based enemy radar and missile system.
Looking ahead, we are competing for the next generation of electronic warfare capabilities, including Nextgen, GM or low band, which should be awarded later this year.
Turning to aeronautics sector through the end of the second quarter. We delivered 683 at 35 Center fuselages and we continue to manufacture at a pace this supports customer deliveries.
We adjusted our outlook for F 35 fuselage production volume for us in the first quarter to account for the anticipated impact of coated and this is not change.
In addition, during the quarter. We also received state department approval for the future sale of three to the of takeaways and related equipment to free up opening the door to a future award opportunity.
And Australia committed to the purchase of three trait near vehicle.
For the 21 Air Force public statements indicates we continue to make good progress in the Air Force currently expects the 21 to move into low rate production. Following key development milestones scheduled to complete in 2022.
We're also pleased by the policy changes announced last week regarding the export of unmanned aerial system.
It is critical for our national security that our export policies continue to keep pace with a rapid evolution of technology and support collaboration with our allies.
At the half point of the year, we're encouraged that despite the challenge of the pandemic our team is delivering strong operation well results.
As we speak about our full year guidance, we're assuming that our teams productivity as well as the operations of our customers and suppliers remains at or near current levels.
Our updated guidance incorporates the strength of year to date results, our current assumptions regarding the continuing pandemic risks and their impact on us.
And an expectation that demand for defense products and services remains strong.
Given that context, we are raising 2020 sales EPS and free cash flow guidance.
Based on our current assumptions, we now expect sales will increase to between 35.3 and $35.6 billion and EPS will range between $22 and $22.40.
And we are increasing guidance for 2020 free cash flow to a range of 3.15 and $3.55 billion after capital spending of approximately 1.35 billion.
We are maintaining our guidance for segment operating margin rate at 11.3% to 11.5%.
And Dave will discuss each of these items in more detail.
Turning to the west budget environment.
We expect to see continued strong bipartisan support for National security.
Even under scenarios of flattening or slightly declining defense budget, we believe our portfolio will remain well aligned to our customers highest priority investments.
Defense spending is largely threat driven.
The threat environment or as a strong defense.
Despite fiscal pressures emerging threats are intensifying and we believe both political parties are focused on effectively countering these emerging threats.
We saw demonstrated bipartisan support for defense spending in the recent house vote to pass the NDA.
Before I close I want to highlight that in 2020, Northrop Grumman was once again recognized as the top 50 company for diversity.
We are committed to a quality diversity and inclusion not only in Northrop Grumman, but in our supply chain and communities.
Our strong performance is enabled by the diversity of our team which continues to expand.
We have hired 8000, new employees in the first half of the year and we expect to hire more than 12000 by year end.
Through their second quarter performance, our team of dedicated men and women in partnership with their suppliers and customers demonstrated their commitment to national security and human advancement.
While future impacts of the pandemic remain uncertain, we have a robust pipeline of opportunities and we're strengthening our foundation for growth.
Despite the challenges that coven 19 has presented for every business and individual the Northrop Grumman team remains committed to the safety and wellbeing of our people investing for the future.
Delivering value to our shareholders.
And meeting our commitments to our customer and all of our stakeholders.
So now I'll turn it over to Dave.
Thanks, Cathy and good morning, everyone. I'd also like to thank our employees for their strong performance. This quarter. My comments begin with second quarter highlights on slide three we delivered excellent bookings sales operating income EPS and cash.
And we're pleased to be increasing our sales EPS and free cash flow guidance for the year.
I'd also note that as of April 1st certain global compensation and other costs that we previously reflected in segment results are now in unallocated corporate expense. These are costs that are managed at the corporate level and we made this changes we began to operate within the new sector structure.
Due to impact of the change was minimal only increasing second quarter segment operating income by about $1 million.
This change has been applied retrospectively and re test results are presented in schedule seven of our earnings release.
Slide four provides a bridge between second quarter 2020 in second quarter 29 team earnings per share.
EPS increased 19% to $6 in one sense.
Operational performance drove 26 cents will be increase during the quarter. We recovered 23 cents of the negative return on marketable securities that we incurred in the first quarter and year over year. This translated to a 17 cents benefit.
Pension also contributed 49 cents will be year over year improvement.
Well begin to review of sector results on slide five.
An audit sales were up 7% for the quarter and 4% year to date sales and autonomous systems and manned aircraft were higher in both periods.
Higher volume on restricted programs in the two d. drove higher sales in both periods.
Along with higher trading volume in the second quarter.
Higher volume in these areas was partially offset by lower volume on the F 35 program due to cope with 19 impacts in both periods.
At defense systems sales decreased by 2% for the quarter.
Up 2% year to date.
Mission readiness programs had higher volume in both periods, principally due to higher restricted volume, partially offset by lower volume on the Hunter Sustainment program as it nears completion.
Battle management and missile systems had higher volume in both periods on programs like gamblers in Oregon, Youre, but these increases are being offset by programs nearing completion, including Lake city as that begins to ramp down and then international weapons program that is also winding down.
Mission systems sales were up 2% in the second quarter and 4% year to date.
Higher volume on airborne sensors, and networks programs, where we had higher volume on radar programs like Mesa in Sabre drove sales growth in both periods. These increases were partially offset in both periods by lower volume in cyber and intelligence mission solutions.
Due to a program nearing completion.
Space systems sales drove rose, 15% in the second quarter, and 11% year to date due to higher volume in both business areas.
Higher volume on restricted programs and other space programs like Smith next generation OPI or in the Arctic satellite broadband mission or a b SBM program.
Year to date is margin rate is 9.9%.
Both periods the margin rate trend reflects lower net positive EA see adjustments in autonomous programs as well as a change in contract mix demand aircraft.
These trends were partially offset by a 21 million dollar benefit in the second quarter related to the resolution of a government accounting matter that we had expected might occur later this year.
Defense systems operating income increased by 2% in the quarter and was comparable year to date.
Operating margin rate increased to 11.5% in the quarter due to improved performance in mission readiness programs.
And there year to date margin rate of 11% slightly lower principally due to favorable adjustments on certain small caliber programs in the first quarter of 29 team.
Operating income and mission systems rose, 3% in the quarter and 6% year to date.
Operating margin rate increased to 14.2% in the quarter into 14.6% year to date, reflecting improved performance in both periods.
Space systems operating income rose, 8% in the quarter and 7% year to date.
Second quarter operating margin rate declined to 10.2% due to delays in production on certain commercial space components.
And year to date operating margin rate declined to 10.3%.
Turning to slide seven based on better than expected Aeronautics sales in the second quarter, we're increasing sales guidance to the low to mid 11 billion dollar range.
However, as we look beyond this year in a us we expect to experience continued topline pressure in our commercial aerospace business and budget tightness in certain of our hail programs.
We continue to expect to margin rate of approximately 10% for us in 2020.
Sales and operating margin rate guidance for defense mission in space systems sectors are unchanged.
Moving to consolidated guidance on slide eight we're raising 2020 sales adjusted EPS and free cash flow guidance to reflect the strength of year to date results.
Driven by the increase in yes, we now expect 2020 sales will range between 35.3 and $35.6 billion, a two to 300 million dollar increase over prior guidance.
Our higher EPS guidance reflects 20 cents of operational improvement we experienced in the second quarter.
No changes to expected tax rate or year end weighted average share count.
Based on our second quarter results and current expectations for the remainder of the year, we expect mark to market adjusted EPS to be between $22 and $22.40.
For free cash flow, we're raising the top of our guidance hundred million dollars to 3.55 billion.
Our Q2 cash flow reflected a combined benefit of approximately $300 million for the cure that payroll tax deferrals and an increase in certain progress payments from our customers.
For the year, we expect to combine benefit of $400 million to $500 million from these changes.
We expect these benefits to working capital will be partially offset by accelerated payments to our suppliers and potential impacts of cobot on the timing of certain collections.
But given our expectations for the overall effect of these changes in the strength of our Q2 cash flow results. We've increased the top end of our free cash flow guidance range.
Slide nine provides a bridge between april's guidance in today's full year EPS outlook.
The increase in guidance reflects 20 cents of second quarter operational improvement.
I would note that were not increasing guidance for this quarter's positive returns on marketable securities as there's still a long way to go until year end and asset returns may continue to be volatile.
Regarding cash deployment, we continue to pursue a balanced capital deployment strategy that includes investing in the business.
Managing the balance sheet, and returning cash to shareholders through dividends and share repurchases.
During the pandemic, we're also especially closely monitoring the health of our supply chain and we're accelerating certain payments to help us continue to execute on commitments to our customers.
Through the end of the second quarter, our year to date share repurchases totaled approximately $500 million and we've met our approximate share count target for 2020.
Share repurchases remain an important part of our capital deployment strategy.
We continue to be committed to paying is competitive dividend.
And then May we raised our dividend by approximately 10%.
We're also focused on deleveraging the balance sheet.
And we expect to retire $1 billion in maturing debt this fall.
Before closing one topic that I want to touch on as the potential upcoming R&D tax change.
The tax cuts and jobs Act currently requires a shift from expensing R&D costs for tax purposes to amortizing them over five years starting in 2022.
As many of you know this law would affect Northrop Grumman and many of our industry peers, given the substantial R&D investments that we make each year.
If the laws not changed before 2022, we would estimate of potential cash flow impact the could be approximately $1 billion that year.
We would expect that impact would decline by about 20% each year for the following four years as the amortized costs approach a steady state closer to todays level of expense expense costs.
Closing, we're very pleased with our second quarter and year to date results.
While our cobot 19 impacts in Q2 were less significant than we originally expected the future path of the pandemic and its various related impacts on us remain uncertain and we continue to monitor the situation closely.
Overall for portfolio is well aligned with evolving customer port priorities.
We continue to execute to deliver value for our shareholders and we continue to invest in the future.
With that Tom I think we're ready to open up the call for today.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your Touchtone telephone again press star one to ask a question.
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Your first question comes from Ron Epstein of Bank of America.
Hey, good morning.
Got it could you just give us maybe a quick update if you can on where we stand ready GBS.
And when you might expect that decision.
Yes wrong thing.
We still expect that the air force will meet its schedule of making the award for the MD phases. The program in late August of this year.
And we are in the process of discussion with them to meet that objective.
Your next question is from Sheila Carlyle you of Jefferies.
Hi, good morning, everyone and thank you.
Kathy maybe for you you talked about moving pieces within Aeronautics margins you had a father settlement in the quarter, but overall profitability with better.
Can you talk about some of the puts and takes maybe a risk around co bad versus the offsets and then I think you mentioned continued top line pressure and commercial era, which is obvious baron some budget tightening take it could elaborate on that.
Sure I'm happy to to kick that one offs Sheila so.
A few of the points you mentioned I think are worth talking about now in yes. We did have a very strong operational Q2, we talked on our last call about the cobot impacts on the business at the time of the call Im going to Q2 to date basis.
Following that timeline, there was quicker than expected recovery.
From the business impacts of coded on our AST business.
And as the quarter progress. We also had favorable timing on some materials that boosted results for the quarter.
And the the non operational items that we talked about an hour scripted comments and mentioned in our filings around the government accounting matter helped Q2, and we thought that may occur later in the year. So a very strong operational quarter combined with those other factors I mentioned.
On an ongoing basis to your point there are obviously continued pressures on the commercial portion of the business, but we're certainly pleased with the Q2 results of.
Yes.
Your next question is from Peter Arment of Baird.
Yes, good morning, Kathy David Nice quarter Kathy.
Okay Fair picture question on the space segment, just kind of touching upon the kind of long term trends on the margin front I mean, you're getting all this growth I assume you're going to have GBSD kind of work flowing through your in any significant way and given that over 70% of the mix.
Cost plus is this a segment that can hold to kind of a 10% margin or how should we think about just given all the growth success.
So Peter as we think about the margins for space, you're hitting on the right point.
The mix will be the biggest driver of margin rate over time.
But we do expect to see significant growth in that segment. Some margin dollar expansion, we're expecting to be quite solid but on the races. So as you noted as we see that mix already a heavy preponderance toward cost type contracts and then adding GBSD, which will also be a cost type program.
For the MDC.
For quite a while we will have mix that lends itself to a lower margin rate than what we would experience. If we had a higher volume of that business in production, but many of the program in that business will move to production sooner than GBSD. So GTSP is one of the longest.
Goal of the programs in that portfolio will be in the four through 2029.
With other program that we're booking into stay as you've seen our bookings grow quite nicely will transition to production in a shorter period of time, So we'll see that mix.
Certainly evolved in the near term.
Over the long term, we will still have a considerable amount of cost plus business.
In that portfolio.
Your next question is from Seth Seifman of JP Morgan.
Okay, Thanks, very much and good morning.
Dave you mentioned.
The headwinds on the topline in Aero next year and it just is there a way to calibrate that a little more should we expect gross in the segment next year.
And it's just will be more moderate because of those headwinds or do those headwinds are present growth and the segments.
So as we speak about arrow on a go forward basis.
I would point to our year to date growth of about 4% in that business, which is in line with what we had expected for the year and what we're guiding and.
No we're not guiding into next year at this point until you the longer term trajectory for that business is that it won't be one of our fastest growing segments, we've seen a good bit about portfolio.
Began to shift also to cost type work that grew significantly in now is leveling out production also on our T program. There is more in a steady state. So the fastest growing segment in our portfolio will certainly be space, but arrow will be a nice contributor to the portfolio.
In terms of them stable and steady program.
Our large contributors not only to growth, but solid margin rate performance.
Your next question is from Robert Stallard, a vertical research.
Thanks, so much good morning.
Hi, good morning, everything yes.
Hey, guys good quarter EFO order intake in Q2 and I was wondering if any of these awards will result in an increase in self funded R&D will capex in terms of seed funding in the stock. Thank you.
Rob It's Dave so.
It was a really strong quarter, particularly for restricted awards.
And particularly for awards in our space sector. So we're really pleased with the backlog growth in those portions of the business.
You are we havent changed our capex outlook for the year longer term. We've we've said in the past that we expect a similar volume of Capex in 2021.
For that begins to decline as a percentage of revenue thereafter.
We think that Capex outlook remains our best information as of today.
And we'll continue to really focus those capex investments on the portion of our business in the portions of our business with the strongest growth potential.
Key customers key capabilities.
To drive.
You know differentiated capability in areas that are consistent with the national defense strategy.
Your next question is from Jon Raviv of Citi.
Thank you and good morning.
Kathy just kind of going back a big picture here, obviously a lot of conversation.
You addressed also in terms of pressured budget environment.
But what is your perspective on on on accelerating growth not just sales, but really EBIT dollar growth segment EBIT dollar growth.
Going forward.
Hi, guys. The budget slows down I think that's a little or sort of.
Digression that that maybe to always appreciated that you guys can actually accelerate growth, while the market might slow.
Thanks, John Yes is our backlog is growing quite nicely, we see that providing a strong foundation for growth. We also are encouraged by our portfolios alignment with the priority in the National Defense strategy and I would tell you that goes.
On the defense strategy as it's written today. It really is the look at our portfolio compared to the threat that our nation and our allies are facing and we certainly see space as a domain, where there will continue to be evolution of capability to address.
Recently advanced threats from other nations and is just the.
That's for spaces. The domain that now can offer much more we're fighting capability to our nation in its allies. That's one example, but I could give you the thing as we talked about weapons in the evolution of weapon system or the importance of networking, although Steve we're fighting assets for advanced commands and can.
Troll and so that type of alignment of our portfolio says that it's the thrusts continues to evolve in the way that it is today, there will be durability and our ability to continue to grow.
And I'd point to one other thing which is the innovation that we are driving as a company that addresses some of the nation, most critical threats and that's allowing us to win the work that you're showing up.
Seen show up in our booking.
That innovation is as Dave alluded to targeted investments that we're making in R&D and our capex to be able to demonstrate for our customers. The maturity of technology to address the evolving threat and I'm quite proud of how our team is doing that and it will be an increasingly.
Part of the increasing part of the selection process that the government uses to determine the partners. They will work with on a go forward basis.
So those three elements of how we're executing gives me confidence that this business can continue to thrive even in a flat or slightly declining budget environment.
Yes, I think the primary it is the threat vector continue to be aligned with what it is today and we expect that to be the kit.
Your next question is from Doug Carnett of Bernstein.
As.
Thank you.
I wanted to go to Aeronautics and specifically on F 35, and if.
Do you think about F 35, as now basically new production.
Upgrades sustainment.
A lot of this would appear that.
You'll be topping out kind of a new production, but that upgrade some steam and are going to be.
Growth opportunities.
How does Northrop Grumman play in those three and how do you see that collectively.
Contributing to growth over the next few years.
Doug This is Kathy.
35 program will continue to be a really important part of our portfolio. We are involved in all three.
Stages of the lifecycle on the program and I would characterize those as production modernization and Sustainment.
And for production as we've noted before we tend to run about 18 months ahead of Lockheed Martin and delivering a center fuselage and ahead also in the delivery of mission system. So we will reach peak production sooner than Lockheed, but if you look at the quantity that their pro.
Adjusting we don't reach peak for a while on that program modernization is interested in it for them mission systems, We actually will go back to retrofitting all platform. So the production volume there once we get through the development stage of the upgrade program will increase.
Production once again in mission systems, and then of course and Sustainment, we're seeing that part of the portfolio grow as we get more aircraft fielded and that's not just in the U.S., but as our global partners are also.
Taking possession of the aircraft so each of the stages as the program present opportunity for us in the near term in longer term the modernization payment.
That will support growth.
Your next question is from Carter Copeland of millions research.
Hey, good morning.
Capping out I wanted to ask you about the the reimbursement of of covert costs and whatnot I I noted that in that the industry's letter or on the reimbursement of those costs. It Northrop and it wasn't didnt participate in that and I have just wonder does it do you guys have you know a lower a lower coal would impact or you have better ability to.
Absorb those costs I, just kind of an interesting I'm wondering if you can give us some color on it. Thanks.
So yes, it's true that I chose not to sign onto those letters I want to make it clear, though that we are supportive of a strong national defense and recognize that funds need to be appropriated to support that objective and we are directly engage and supporting that cod.
However, we.
We did see that our impact from coated were less significant than we are seeing a projected elsewhere and therefore, we have continued to focus on that very issue, making these impacts this small impossible.
So that we are not a in a position where we have an additional bill for taxpayers to get capability delivered and will continue to be focused on that as our primary objective and that includes everything from keeping our workplaces safe. So that our employees can continue to come to work and feel.
Oh that they can be productive, it's continuing to partner with our suppliers to ensure they have what they need to continue operating effectively and continue to work with our customers to be innovators and how we continue to get work done even in light of constraint and how.
We would normally conduct operations and I would say on all fronts. Our team has done a both innovative as well as strong partners to our teammates in customer to be able to navigate their way through and that's allowed us to how the lesser impact than we anticipated.
As we thought here a quarter ago.
Your next question is from David Strauss of Barclays.
Thanks, Good morning.
Good morning.
Hi class found the right.
Good news prepared remarks, you highlight.
Hi, Quinn.
There are seen as we walk out the 21 in aerospace systems.
I'll have to your thinking around modeling 20 warrant we should think about.
In terms of falling on headwinds, but.
Mike will have a bit of I have one from what's good evening soon as well as telescope.
Just trying to think about that as we look out for 21 cents.
So I'll start and then Dave can walk you through some of the detail as we look forward into 2021, there's nothing additional that we haven't already spoken about the present significant headwind.
We know of as we sit here today.
Three things that I would point you to and then you can walk you through them is like city as you said the James Webb Space Telescope will launch next year and so we have expected volume to continue to decline as we near completion on that satellite you may have noticed that the data.
The launch moved slightly next year from March to October based on some coven related impact that program is in final integration in test and as the results. There are a number of observer from NASA and the testing was impacted slightly by people inability.
He to travel and work full a shift to during coated so we did see a slight movement there in schedule, but we do still anticipate it to launch next year and does the results that program.
We'll continue to decline in year for your sale and then third thing that I would point you to that we've spoken about on prior calls or some headwinds in the hail portfolio with both Triton and global Hawk and as we work through this year, but should we are well get better clarification on what those headwinds.
Might be they don't present bearskin twentytwenty, but as we look forward into Twentytwenty, one that could start to present some headwind. So did anything you'd like to add on any of those three or anything additional sort of just a little more color on on each of those topics on lake city, just to quantify that a bit further with the.
The the 21 headwind is likely to be around 1% of revenue that's consistent with the within your range. We've given in the past or an estimate we provided before James Webb as Kathy mentioned I.
I think we'll end up being more of a 22 headwind than a 21 headwind given the timing that program is smaller and its and its annual revenue then Lake city.
And then on the Hill portfolio I think there are more moving pieces and.
Your budget to terminations to be made in such wouldn't begin to quantify that that challenge next year or beyond.
Of course, all of this you know they should be.
Yes, as well with the latest space program, which is expected or the space business is expected to to be our largest and or I'm, sorry, our fastest growing business not only this year, but beyond the large new development programs in that business that of.
Bolstered its backlog this year and should continue to do so ore sources of nice top line opportunity in 21 and beyond.
Your next question is from Joseph Denardi of Stifel.
Hey, good morning.
I think can you just give us an update on the space logistics that mission extension vehicle opportunity that you kind of acquired through orbital.
Maybe what some of the conversations are like there with with customers I think that's kind of a unique capability for you all and then could you be a little bit more specific on when peak is for F. 35, you said, it's a while couldn't be any more specific thank you.
<unk>.
Sure, let me start with our mission extension vehicle.
Some of you may recall we.
Returned to customer satellite Intelsat minor one to service in April of this year and it was the first stocking of a.
Life extension vehicle to enact a satellite ever accomplished and I'm very proud of the team for that first of a kind it's opening up a whole new set of opportunities in mission extension and under the terms of.
That contract we are going to be working with me through space logistics for five years to provide those services at the same time, we have been working on our second mission extension vehicle and it has arrived at its launch site and French Guyana, and we actually expect that launch to occur in the next.
Good day, and then any too well dock with another Intelsat satellite supervised life extension services for it that docking should occur in early 2021 and it just gives you a little color on what's happening on the program, but to the broader point. This is a market area that we are pioneer.
During the first in commercial and see application of it also into military grade satellite.
As the the future hold and this is something that our ORV, Italy Teekay team had started but as we have integrated into Northrop Grumman has continued and we're leveraging the expertise and experience the whole team as we look at the future set of opportunities.
You also asked about F 35.
Really I would not provide any additional color or guidance as we do 2021 guidance, we'll share more insight into what we plan for the three components of the program that I spoke about production.
Statement and modernization.
Say that each of those three pieces of the program and in the two sectors. The two sectors that primarily support the program and then there are a number of moving part on those assumptions due to cope with 19 impact we're working very closely with Lockheed Martin to understand what the quantities are and we'll be able to provide too.
Insight as we guide for 2021.
Your next question is from Myles Walton of <unk>.
Thanks, Good morning.
First one is a clarification Kathy on the 5.9 billion across fight awards in spaces that dominated by a single award and I'm not sure you never got one quite that size before and then.
The other is if you could just make a comment on the national security space launch.
Contract outcome or over our competition outcome and what's your on pension is for Omega if it if it doesn't go your way thanks.
Sure.
So the large award in restricted states is indeed, driven by a single award and it is quite significant I can't provide any color on what it is but suffices to say this is a long term program.
Lots of the size.
Of the effort.
And in a answer to your second question on National Security space launch.
We are expecting that award to calm later this quarter.
And we have been progressing as you know to prepare our Omega profit for the requirements of of the award which would be to launch next year. In 2021. We are on track, we would be able to meet those requirements.
Through our offering and if we are not six Oh, we would continue to leverage that investment that we in the Air Force has made through the first two phases of the program into other propulsion activity.
And our GMT business. So this is a area that we like many.
[noise] selected to make this investment not only for the potential of a single contract award. It represented in National Security space launch, but because it was a way to share our research and development.
Investment across the product line that we can now utilized for other endeavors.
Your next question comes from Robert Spingarn of Credit Suisse.
Hi, good morning.
Kathy I want to try to phrase. This question in a way that you can hopefully answer but typically when you go from M.D. to production on manned aircraft do you tend to see margins on those first few l. roadblocks below equal to or above.
The margins that you saw toward the end of M.D. and is there any reason to think that that behavior.
Would change in the future. Thank you.
The Rob it depends on the contract on any given manned aircraft as to whether those first production units are incorporated into what's already been negotiated or whether they are indeed part as a new contract and.
So if they were contracted part of the initial award you would not expect to see the booking rate change because their costs for development would already be incorporated into the booking rate of.
That effort.
Your next question comes from Cai von Rumohr of Cowen.
Yes. Thank you. Thank you very much so talking started alternate highlighting all the brands and space and you also mentioned the GBS. He is still expected in August and I think on the first quarter call. You said you know it might be about 200 million two plus years.
Given all these wins.
Though is there a decent chance we will see space volume built in the second half and so instead of being low 8 billion dollar revenue number.
Let's see closer to a mid $8 billion number.
Well look I'm really comfortable with our guide which is.
Approximately.
Yes, yes.
Yeah, well away and so if you take first half revenue you get a number that's slightly below eight.
So to your point there is some growth that needs to occur in the second half.
But as I said, we're very comfortable with the guy that that growth is reasonable based on what we know today.
Your next question is from Richard Safranek Seaport Global.
Good morning, Kathy, Dave and Todd how are you doing well listen I would like to ask you to if you could expand on your comments on contract mix it space.
The company overall, given your knowledge of new programs could you discuss how you see the overall and long term contract mix changing in terms of fixed pricing cost for us how that might impact margins and any ramps or could you also update us on the expected long term growth of classified versus on classified contracts.
Sure, it's Dave I'll be happy to to provide that answer.
Today as we've talked about in the past were around 50 50 or in terms of fixed price versus cost plus a in our mix.
And that as you know is heavily determined by the phase of a of the lifecycle programs that are that we happened to be in any given time and the key drivers of that mix on a going forward basis, given some of the awards we've talked about to date and those that are expected in the second half of the year in particular those.
A large development efforts in the space business, we would anticipate that the cost plus mix would increase.
Above the 50% level in the fixed price would would decline. These are figures at the the company level as opposed to that any at any particular segment level.
Of course cost plus business.
Well, perhaps more predictable and stable in emerging rates a in a typical scenario does tend to be at a lower margin rates than that or overall fixed price business and so as that mix shifts.
Finally, we expect it to lead to to margin dollar growth and we'll look to offset a portion of that impact on an overall margins through really strong contract performance program performance.
Careful management of our costs et cetera. So that's the overall kind of trend that I think you should be expecting as we have these large new development programs entering the portfolio.
Your next question is from Hunter Kaye of Wolfe Research.
Hi, everybody good morning.
Kathy can can you talk about the potential long term opportunity for NJ D. I realize this is not a new program concept, but it feels like it's kind of coming into form with the Air Force is digital century series initiatives. So can you help me frame.
How you're thinking about Angie the opportunity through that lens.
Thank you.
<unk>.
So we think about any new.
Development program through a couple of.
What do we have a capability that we can offer a value add to the government and two should we priming of for or should we partner.
With the effort and with.
Our business and the opportunity for us to do work both on the platform itself into the mission systems, we sometimes make those decisions together and sometimes make them.
Separately I would say for digital century series, because the way, it's developing and it's meant to be incremental and rapid we continue to look at each increment and make the determination of where we can best value. So both our mission systems and our aeronautics sector.
Our engaged in meaningful dialogue with the Air Force.
On the program and have work associated with the effort.
But Steve increments will each represent different opportunities based on the requirement and whether we would play of the prime or at the platform level or as primarily emission system provider.
Okay.
Your next question is from George Shapiro with Shapiro research.
Yes, good morning [noise].
[noise] Kathy if you can.
I won some caught more color on the F. 35, it was kind of surprising to me that your revenues are down and Lockheed showed double digit a gain so is that reflecting the 18 months to cheering you're ahead of them or this was quoted was just unique to cultivate or any additional color you could.
Provide contrasting to tick there.
Numbers.
Sure we won't go so far as to tell you whether anyone else's results, but who will give you a sense for hours in the quarter. There were some cobot impacts on the program in the quarter.
We talked about about the impacts on a on F 35, among other similar programs on our last call and experienced those impacts in the quarter, which did affect the year over year growth rate for the program in the quarter as Kathy mentioned earlier, you know the timing of our of our busy.
This related to F 35 in both be Aeronautics segment in the mission systems segment are different than the primes timing given the nature of the work and so if you can expect oh slightly different kind of trends in those businesses overtime as we've had in the past.
I think over it impacts were the primary Q2 item of note though.
All right and we're at the end of the time here, So let turn it over to cast for some closing comments.
Todd I'm going to conclude by thanking the Northrop Grumman team for their dedication and perseverance, which has enabled us to continue to operate so well during this level pandemic you know, it's taken innovation partnership with our suppliers and customers and just sheer determination and I'm really proud of what they have accomplished.
This quarter and expect it will continue I want to wish you and your family's continued good health and thanks for joining us on the call today I really look forward to engaging with you in the weeks and months ahead take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
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