Q4 2020 Northrop Grumman Corp Earnings Call
And year end 'twenty 'twenty conference call today's call is being recorded my name is Shelby and I'll be your operator today at this time all participants are in a listen only mode. If at any time during the call you require assistance. Please press star zero and an operator will be happy to assist you.
I'd now like to turn the call over to your host Mr. Todd Ernst Treasurer, and Vice President Investor Relations. Mr. Arts. Please proceed.
Thanks, Shelby and welcome to Northrop Grumman as fourth quarter and full year 2020 conference call, we'll 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 guidance and the outlook for 2021 and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities laws.
Forward looking statements include 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.
Matters discussed on today's call will include non-GAAP financial measures that are reconciled on our earnings release and supplemental Powerpoint presentation. Our GAAP results reflect the mark to market method of accounting for our pension and other post retirement benefits.
Our references to adjusted earnings and adjusted earnings per share on today's call, we'll refer to earnings and EPS adjusted for Mark to market impact.
We also refer to adjusted free cash flow defined as operating cash flow less capital expenditures and plus the proceeds of the sale of equipment to a customer and the after tax impact of discretionary pension contributions. These are non-GAAP measures defined in our earnings release.
Our 'twenty 'twenty one guidance assumes the intended it services divestiture closes very soon on.
On the call today are Kathy Warden, our chairman CEO, and President and Dave Keffer, Our CFO at this time I'd like to turn the call over to Kathy Kathy.
Thank you Todd good morning, everyone. Thanks for joining us today.
I want to congratulate the Northrop Grumman team for delivering outstanding 'twenty 'twenty result.
I applaud our employees support for one another our customers and our communities in the face of Twenty-twenty multiple challenges.
Together with our suppliers and partners, we operated through the pandemic executed well on our program maintain superior performance on critical Global Security mission and one program that strengthen our foundation for the future.
We began 2020 operating in a new sector structure, which further aligns our unique capabilities in space missile advanced weapons mission systems and Aeronautics.
This alignment enables the capture of additional revenue synergies, particularly in space and advanced weapons as well as continued identification on the operating synergies.
Our 2020 results are tangible evidence that our strategy is creating value we had exceptionally strong fourth quarter operational performance and for the full year, we had strong bookings exceeded the high end of our guidance range for sales EPS and adjusted free cash flow and delivered strong segment op.
<unk> income through continued focus on performance and operating efficiencies.
For the third consecutive year, we achieved a book to bill greater than one <unk>.
New awards in 2020 totaled nearly $53 billion or one four times sales.
Total backlog increased 25% to $81 billion.
Sales rose, 9% to $36 8 billion and segment operating margin rate was 11, 4%.
Adjusted EPS increased 11, 5% to $23 65.
And adjusted free cash flow increased 18% to approximately $3 7 billion.
All four sectors captured important new awards hosted higher sales and operating income and sustained strong operating margin rates.
As expected our space business and its new configuration led growth in backlog in sales two.
2020 results demonstrate stay systems growing ability to drive the development of innovative and affordable offerings for our national security Civil and commercial customers.
We booked new business in each of these three markets.
More than doubled space systems backlog and increased sales by 18%.
In addition to $9 billion in restricted Space Award, we were awarded GBS see the most recent addition to our diverse portfolio of multi decade multibillion dollar franchise program.
Looking ahead, we expect space systems will continue to be our fastest growing sector based on GBS C and the planned recapitalization of our nation's space assets.
The funding for space based capabilities increased 6% in the U S. Vod FY 'twenty, one budget with growth expected to continue.
At Aeronautics systems, we booked solid awards, including 6 billion for restricted programs and substantial award for F 35, Triton E T D and global Hawk.
Our sales significantly exceeded our revenue guidance, principally due to an equipment sales to a restricted customer in the fourth quarter.
We continue to performed well on large franchise programs like F 35 E. Two D and B 21.
Our F 35 integrated Assembly line received aviation week Laureate Award in defense manufacturing for Revolutionizing military aircraft production through human ingenuity and advanced digital technology.
And as you may have read the U S. Air Force recently disclosed the production of the second B 21, stealth bomber is underway and that the first rater is expected to rollout and fly in 2022.
The team is making tremendous progress and our partnership with the Air Force is strong.
We are pleased with the maturity of the hardware and software, including recent flight testing on a surrogate testbed.
Are force leaders say these efforts along with the team's modern approach to digital engineering gives them a lot of confidence about the program path to first flight.
I share this confidence in our team looks forward to delivering the affordable and highly capable next generation bomber our nation requires.
In our.
Our advanced technologies and integration expertise are well aligned to meet the requirements of next generation systems. Our programs are performing well and we're focused on near term opportunities to drive operational efficiencies and margin rate expansion.
Defense systems results were also strong and reflect growth in core capabilities like <unk> advanced weapons system, and Sustainment and modernization.
Earlier this month the U S Army authorized our <unk> system to proceed to low rate initial production. Following a successful limited user test in September and milestone C approval in December.
This is a critical next step in moving <unk> closer to future deployment for the U S Army and Poland and it demonstrates the continuing success of our <unk> approach.
We look forward to competing for the U S Army full rate production contract, which we expect will be awarded late this year.
In addition, we continue to pursue additional international opportunities for RBC us as we demonstrate how that architecture can support joint all domain command and control.
Mission systems leadership in network Open architecture mission systems continues to be a competitive differentiator and as demonstrated by program milestones and New business Award.
MFS recently conducted a successful demonstration as part of the Air Force is joint all domain command and control effort also known as <unk>.
Our gateway technology enabled F 35, F 20, twos and other platforms to share data across multiple paths for the first time.
We expect to continue providing the underlying technology needed to enable the department's chassis to vision.
And this month MFS was chosen by the Air force to be the sole provider of the F 16 electric.
Electronic warfare suite, which will equip as many as 450 F sixteens, replacing several legacy systems with a modern digital solution.
This work has a potential value of $2 5 billion.
In addition to next generation capabilities for F 30, Fives and F. Sixteens Ines is on the team Japan selected as their FX integration support partner.
Our team brings proven experience and fifth generation technology to ensure FX capabilities and interoperability to strengthen the Japan U S Alliance.
We look forward to working with Mitsubishi heavy industries, the FX prime contractor.
With its deep portfolio of sensor technology and integration expertise in AST is enabling the modernization of weapons systems with the latest digital technology that provides our customers the capability to detect and defeat advanced out of this area in the electronic spectrum, providing the foundation for profitable growth.
Northrop Grumman portfolio remains well aligned with the National Defense strategy and supports critical modernization efforts underway to address evolving threats.
As you are aware the Congress passed the 2021 National Defense authorization and approved appropriations of approximately 740 billion for discretionary defense spending.
Arthur Grumman programs were well supported in the budget and we continue to have a robust opportunity set including next generation interceptor three dealer the upcoming F 35 block buy and multiple restricted opportunities.
Our success in growing the business and expanding earnings is delivering cash to support our capital deployment strategy.
2020 cash from operations totaled $4 $9 billion before of $750 million discretionary pension contribution and adjusted free cash flow totaled approximately $3 7 billion or about $22 per share.
Our strong liquidity enabled robust investment in our business.
Strengthening of our balance sheet, our 17th consecutive annual dividend increase and $490 million on share repurchases in 2020.
As we begin 2021 with $5 billion of cash on hand at year end and expected net proceeds of approximately $2 5 billion from the divestiture of our it services business, we have the resources and flexibility to take aggressive value creating actions.
These include robust investment for growth continuing strengthening of our balance sheet and the return of cash to shareholders through share repurchases and dividends.
Today, we announced that our board has approved a $3 billion increase in our share repurchase authority raising the total outstanding authorization to $5 $8 million.
We expect to use more than $3 million for 2021 share repurchases.
And beyond 2021, we expect share repurchases will continue to be a high priority use of our discretionary free cash flow. While we also continue to maintain a strong balance sheet and strengthen our platform for growth through disciplined investment and selective M&A.
Turning to guidance, which now includes depending on it services divestiture the.
The 2021 outlook reflects organic sales growth and segment margin rate expansion, we expect sales between $35, one and $35 $5 billion with a segment operating margin rate of 11, 5% to 11, 7%.
We now expect adjusted EPS, excluding the gain on sale in one time transaction related costs to range between $23 15.
And $23 65 zone.
And adjusted free cash flow of three to $3 $3 billion.
While delivering financial results is a primary company focus we are very proud of our ESG record and earn high marks in many environmental and social ranking.
We achieved the leadership a minor CDP ranking for environmental sustainability for the ninth consecutive year and we earned a place in the Dow Jones Sustainability Index North America for the fifth consecutive year.
Diversity, Inc. Named US a top 50 company for diversity ranking of 15, and Northrop Grumman with the only aerospace and defense company that earned a place in <unk> top 25, gender equality index.
In addition, we remain mindful of the role our products and services play around the world as.
As we continue to consider our portfolio, we have decided to exit by year's end, our legacy orbital ATK, Adrian and surveillance contract that supports testing of cluster munition component.
In our endeavors to enable global security and human advancement, we recognize the importance of our environmental social and governance responsibilities and we expect to continue leading our industry forward.
In closing I want to thank the nearly 100000 members of the Northrop Grumman team for this year is outstanding performance, and particularly I want to recognize the more than 6000 employees, who will become part of the paradigm team upon closing of our it services divestiture for their contributions to Northrop.
On it.
I'll turn the call over to Dave now for a more detailed discussion of our financial results guidance and trends Dave.
Okay, Thanks, Kathy and good morning, everyone.
Also want to thank the team for their outstanding performance in the fourth quarter and the full year.
On a few minutes on 2020 results and then discuss our 2021 guidance in more detail, including the planned effects of the <unk> services divestiture and the latest updates to our pension metrics.
Turning to the highlights on slide three we exceeded the high ends of our guidance ranges for revenue adjusted EPS and adjusted free cash flow in 2020 revenue grew 17% in Q4 and 9% for the full year as a result of our robust bookings over the last two years and our team's strong performance across all four.
Our sectors.
Potential upside in sales that we noted last quarter did occur in Q4, as we booked a $444 million of equipment sale and our restricted portfolio.
Revenue growth for the quarter and the year were quite strong even excluding this unique item, especially in light of impacts from the continuing pandemic.
As shown on slide five our mark to market adjusted EPS grew 17% from Q4 of 2019 to Q4 of 2020, driven by a 42 cents of segment performance as well as 35 submit pension costs in 'twenty one.
Interest and other items.
Slide six shows the full year view.
Adjusted EPS grew 11, 5% in 2020, driven again by segment performance in net pension costs with higher net interest expense, partially offset by tax share count and other items.
Referring to sector results on slide seven.
Aeronautics systems sales rose, 24% for the quarter and 9% for the year largely due to higher levels of restricted activity in both periods.
We're restricted volume reflects in part the equipment sale I noted.
$444 million of revenue was booked in Q4, along with an immaterial amount of associated margin.
Cash proceeds from the sale will be spread between 2020 in which we received $205 million in 2021, when we expect to receive the remaining $239 million.
Excluding this item higher volume for manned aircraft programs, primarily restricted in the <unk> drove fourth quarter growth for.
For the year, both manned aircraft and autonomous systems contributed to growth with restricted programs.
<unk> and <unk> being the primary contributors.
I would note that as we've moved through 2000 20-F, 35 production volume begin to plateau.
This is consistent with the lifecycle of assets portion of the program and as a trend we expect to continue in 2021.
Turning to defense systems.
Fourth quarter, and full year sales increased 2% and 1% respectively.
Upward trends in both periods reflect higher volume on tactical missiles, and sub systems, including <unk> and arguably are as well as certain restricted programs.
Mission systems fourth quarter, and full year sales rose, 10% and 7% respectively.
With higher sales in all four business areas for both periods.
In both the quarter and full year, we had sales growth in airborne sensors and networks, reflecting higher volume for restricted activities electronic warfare and F 35 programs.
Obligation targeting and survivability sales increased principally due to higher volume on targeting programs, including lightning. So.
So protection programs.
Cyber and intelligence mission solutions sales increased primarily as a result of higher restricted volume.
Maritime land systems, and sensors sales increased primarily due to higher volume on land and marine systems.
And finally as Kathy touched on space systems continued to deliver robust double digit sales growth.
Sales increased 31% in the quarter and 18% for the year.
Active programs net.
Next Gen <unk>, Nasa's Artemis programs, and GBS D had significantly higher volume in both periods.
And in the fourth quarter material purchases from the newly awarded extension missions for the commercial resupply service contracts contributed to strong growth in our launch and strategic missile areas.
Turning to operating income on slide eight as operating income increased by 10% in the quarter and 2% for the full year the.
The decline in the fourth quarter and full year operating margin rate is primarily a function of the low margin on the equipment sales.
Excluding that item sales margin rate would have been 10, 7% for the quarter and 10, 2% for the year.
Higher than the guidance of approximately 10% that we gave last quarter.
Defense systems operating income increased 22% in the fourth quarter and 7% for the full year.
Operating margin rate was 11, 2% for both periods slightly above our guidance of approximately 11%.
Mission systems fourth quarter operating income was slightly lower than the prior year period, which included a $20 million gain on a property sale.
For the full year operating income rose, 4% for Q4, EMS operating margin rate was 14, 2%.
For the full year its operating margin rate was 14, 5% consistent with our guidance and demonstrating solid execution across the mission systems portfolio.
Space systems operating income increased 17% in Q4 and 12% for the full year.
Operating margin decreased to 10, 1% in the fourth quarter due in part to a higher percentage of early stage development work than on the prior year period for.
For the full year space operating margin rate was 10, 2% in line with our guidance of below 10% in part.
Reflecting a changing business mix more leveraged to development work.
At the total company level segment operating income increased 8% in Q4 and for the full year it increased 5% to $4 2 billion.
On the margin rate of 11, 4%, excluding the equipment sales segment operating margin rate for 2020 would have been at the high end of our guidance range of 11, 3% to 11, 5%.
Total operating income for the full year increased to approximately $4 1 billion.
With an operating margin rate of 11%.
Now turning to cash we had a very strong fourth quarter as is our typical pattern for the year cash from operations before the after tax impact of the discretionary pension contribution was approximately $4 9 billion.
As you saw on our press release, our adjusted free cash flow, which is before the pension contribution and includes the $205 million cash proceeds from the equipment sale totaled approximately $3 7 billion.
The equipment sale proceeds are included in adjusted free cash flow because the result from a customer transaction and serve as an offset to capital spending booked in prior periods.
In addition, it's important to note that we accelerated over $1 2 billion of payments to small and vulnerable suppliers. During 2020, and we're continuing that program in 2021 to help our supply chain manage the ongoing impacts of COVID-19.
Now for an update on our pension plans beginning on slide nine.
Our 2020 asset returns were approximately 16% our second straight year of excellent performance well above our expected long term rate of return.
Our discount rate declined from $3, three 9% to 268%, which resulted in a mark to market charge of approximately $1 billion.
But our net pension liability is lower than it was a year ago and our funded ratio has increased to 86%.
Due in part to the $750 million discretionary contribution we made at the end of 2020.
We have updated certain pension plan assumptions, including a reduction in our expected long term rate of return from 8% to seven 5%.
Slide 10 summarizes our pension estimates for years 2021 through 2023, and slide 11 summarizes sensitivities to changes to our 2021 assumptions.
It is important to note that our discretionary pension contribution in December along with strong recent asset returns, resulting in minimal cash pension contributions going forward likely until 2025.
Our cash prepayment credit is approximately $1 9 billion.
January one of this year.
Also on the cash side.
Our updated assumptions as well as the outstanding asset performance have resulted in lower projected pension cost reimbursement over the next few years in 2021 for example, chaz reimbursement of $465 million would be $362 million lower than 2020.
This results in a modest 2021 revenue growth headwind of less than 1%.
Higher margin rate performance on certain fixed price programs and lower operating and free cash flow is less cost flows through our indirect rates.
While this makes our rates more competitive to enable future growth.
Net pension cost reduction, including both Fas and Cas is a headwind of approximately <unk> 45.
To 2021, EPS compared with 2020.
The other key factor affecting comparisons between our 2020 results in 2021 outlook is the divestiture of our it services business.
Services business generated approximately $2 $3 billion of revenue in 2020, where the segment Om rate of 10, 5%, which is below company average.
Expected net after tax proceeds from the transaction are approximately $2 5 billion.
We expect to book a substantial gain on the sale, but neither that game, nor the costs directly associated with the transaction and our related debt retirement are included in our guidance.
Now looking ahead to 2021 sector guidance as outlined on slide 13, our revenue and segment O&M guidance or slightly above the outlook we provided in October.
Testing for the it services divestiture.
At Aeronautics systems, we expect sales in the mid to high $11 billion range with a low 10% margin rate.
Excluding the equipment sales from the 2020 results as revenue would be flat to up slightly year over year.
From manned aircraft restricted activities are expected to be lower primarily due to the equipment sale and programs like FAA team B, two and commercial Aero structures are also expected to decline.
Both demand programs, including <unk> F 35, and <unk> is expected to partially offset these declines.
And as well as lower volume in autonomous systems.
For defense systems, we expect sales to be in the mid to high $5 billion range, reflecting the impact of the <unk> services divestiture.
The effect of the Lake City program and.
Is expected to be partially offset by growth elsewhere in the portfolio.
We expect the operating margin rate to remain strong in the low 11% range Miss.
Mission systems sales will be reduced and operating margin rate will be increased by VIP services divestiture.
As a result, we expect <unk> sales of approximately $10 billion.
With a margin rate of approximately 15%.
Adjusting for the approximately $525 million of sales going to Veritas.
2021 guidance reflects mid single digit organic growth.
At space systems sales will be reduced and margin rate will be increased on the ICU services divestiture.
As a result, we expect low double digit sales growth to the high $9 billion range with margin rate of approximately 10%.
This represents continued strong margin rate performance given the expected change in mix space systems sales and margin rate guidance contemplates more early phase development work, including GBS D. In several restricted programs, which is accretive to sales and margin dollars, but slightly dilutive to the margin rate of the portfolio.
Turning to slide 14, including the it services divestiture. Our total revenue guidance is $35 1 billion to $35 5 billion after.
After intersegment eliminations of about $2 billion.
We expect our full year segment operating margin rate of 11, 5% to 11, 7%.
Adjusting for the it services divestiture and the us equipment sale, our organic growth rate would be nearly 4% at the midpoint of this guidance.
I would also note that we expect the first quarter to be slightly less than 25% of full year revenue.
We expect 2021 total operating margin rate will range between 10, one and 10, 3%, reflecting $465 million for the operating portion of net <unk> pension benefit.
Unallocated corporate expense of approximately $550 million, which includes $260 million noncash.
Noncash intangible asset amortization and PP&E step up depreciation.
$290 million of other corporate unallocated items.
Our guidance assumes $560 million of interest expense de Minimis interest income and an effective tax rate of approximately 17%.
I'll remind you that our 2020 reported effective tax rate reflected the mark to market expense on an apples to apples basis with our 2021 on guidance for 2020 tax rate was about 15, 8%.
Our guidance also assumes the Ltd business impacts of COVID-19 are similar to the second half of 2020.
Based on all of that we expect adjusted earnings per share to range between $23 15, and $23 65, excluding the gain on the it services sale and onetime transaction costs.
As shown on slide 16. This range reflects stronger segment performance from 2020.
<unk> by the year, one dilution of the IP services divestiture, the lower pension benefit and the higher tax rate.
Given that we intend to use the majority of the proceeds from the ICU services divestiture to buyback stock or 2021, EPS outlook anticipates and a reduction a reduction in shares outstanding to approximately 162 million shares.
For 2021, we expect operating cash flow will range between $4 2 billion and $4 5 billion.
With adjusted free cash flow of $3 to $3 3 billion.
Our estimate of adjusted free cash flow includes the remaining $239 million of proceeds from the equipment sales.
As we've discussed on past calls the payroll tax deferral, resulting from the cares Act is set to begin to unwind. This year. The after tax benefit was over $300 million in 2020 and should thus be an outflow of over $150 million in 2021.
It services business generated approximately $250 million of free cash flow per year.
And the lower cash reimbursement that I described a moment ago should create a year over year cash flow headwind of over $300 million.
We intend to offset a portion of these headwinds through continued outstanding working capital performance.
As is our typical pattern, we expect our cash flows will be weighted more towards the second half of the year.
As Kathy mentioned earlier, we are in an excellent position to deploy cash productively in 2021 and beyond with about $5 billion in cash at the end of 2020, plus the it services divestiture proceeds of approximately $2 $5 billion. After after the divestiture closes.
We intend to deploy more than $3 billion to share repurchases and over $2 billion to debt retirement in 2021 subject to market conditions on timing considerations.
Our current guidance presumes, the retirement of the $700 million of debt that matures in March and the early retirement of the $1 5 billion of debt scheduled to mature in 2022.
Our 2020 in 2021 debt retirements combined with the $750 million pension pre funding totaled $4 billion towards the strengthening of our balance sheet and support our target of returning to a solid investment grade rating of Triple B plus.
2021, our discretionary cash can be prioritized toward shareholder returns or M&A, while also maintaining a very strong balance sheet and.
In summary, we expect to continue strong value creation through a combination of growth performance and robust cash generation as well as thoughtful capital allocation.
I think we're ready for Q&A Todd.
Ladies and gentlemen.
I'm, sorry, ladies and gentlemen, if you wish to ask a question. Please press star followed by the number one on your Touchtone telephone again press Star one to ask a question. If your question has been answered or you wish to exit the questions queue press the pound key to exit the queue.
<unk> zero at anytime for operator assistance.
Your first question is from Seth <unk> of JP Morgan.
Oh, hi, thanks very much.
Good morning.
I Wonder just out with the divestiture.
Is the long term plan to sort of maintain defense and mission is kind of two separate segments and.
How would you kind of think about the long term gross prospects and defense given that Scott.
I see <unk> and <unk>.
In that segment.
Thanks, Seth so when we look at the portfolio of defense systems as you point out it is consisting of our command and control as well as our offensive and missile systems capabilities and so we view that area is one that will continue to grow it's very.
Well aligns with our customers' highest priority areas, both domestically and internationally and we have made the portfolio decision we have to divest our it services business. So that we can focus more fully on those businesses in our defense portfolio.
On the other hand mission systems, which contains a significant quantity of open architecture networking capabilities.
<unk> are really keeping pace with the advancing threat environment.
Be able to help our customers compete in the electro magnetic spectrum. Those capabilities are also areas that we see well aligned and core to grow. So we want to keep that team focused on investing and staying at the forefront of technology to different areas of focus, but certainly some <unk>.
<unk> in those two teams work well together, but I don't see need for dish.
Different alignment to make that kind of working relationship productive.
Your next question is from Carter Copeland of Melius research.
Hey, Thanks, and good morning.
Dave Dave I wondered if you could just.
Just expand a little bit on this as equipment sale.
Should we think about the accounting treatment of that is that something that you sort of booked and shipped in a quarter or is it cost on cost or do you recognize the revenue when you make the sale I'm just trying to think about the cost of whatever that was on how we should we should think about that just any clarity on that would be helpful.
Sure. Thanks Carter.
As we mentioned relates to a restricted program. So there is a limited amount we can say about that.
What I would be able to say is.
This is.
Equipment that as we mentioned.
Looked in the past is.
Capital expenditure, we've now sold that equipment to a customer.
And as appropriate booked both revenue and the portion of the cash that we've received in the quarter and our 2020 results little over half of the cash is to be paid in 2021 and will be.
Booked and as part of our cash flow in the 2021 outlook.
From an accounting perspective, it's a somewhat unique item but.
But.
A customer transaction.
With revenue accordingly.
As we mentioned minimal profit associated with it which is why you see the.
The margin impact on us in the outside.
Outstanding growth that it delivered in the quarter.
Your next question is from Sheila <unk> of Jefferies.
Good morning, everyone. Thank you from the time.
Maybe Kathy for you just bigger picture Northrop is one of the only price where consensus doesn't have any major margin improvement baked in how do you. How do you think about your profit profile of your business given at least 20% is in development are low rate production.
Can you give us a little bit more color do you see profit rates improving over the next few years.
Thanks Sheila.
Clearly this year has guided margin rate expansion and there are a number of factors contributing to that first and foremost is the strong performance in the operating businesses that we delivered both in 2020 and that we anticipate in 2021 that will continue to be a focus for the company. We also.
<unk> has been increasingly orienting our business to agility and streamlining and COVID-19 helped to accelerate some of those initiatives in 2020 again, resulting in good rate management and cost reduction and those operating efficiencies, we expect to continue as well.
We move forward as well and then finally as you note we do have mix headwinds as we bring in more early phase development work of course, those are generating increasing margin dollars, but create pressure on margin rate and we've challenged the team to look at offsets.
To that mix pressure through just strong performance operating efficiencies and future changes that we might make in the operating structure that enable us to continue to find new ways of reducing costs. So those are the areas that we are.
Your line too and as you can see in our guidance. We were in 2021 able to across the portfolio really offset many of those margin headwinds that we fight we see.
Your next question is from David Strauss of Barclays.
Thanks, Good morning.
Okay.
Steve wanted to wanted to ask about free cash flow I appreciate all the moving pieces there, but it looked looks like when I <unk>.
Net out.
The pension side divestiture side tax.
Everything you are about a net in the same place.
As you ended 2020 around $3 billion, but that included a fair amount on working capital.
Positive working capital in 2020, so are you assuming positive working capital again in 2021 or no contribution from working capital on 'twenty, one and how sustainable.
Stable is that looking beyond 'twenty one thanks.
Sure happy to talk through that I think you named the rate.
Non operating or unique drivers from 'twenty to 'twenty, one free cash flow the divestiture.
The cash pension headwind and then the reversal of the payroll tax benefit from 2020, then you're right that when you add those three together, it's greater than the reduction in our outlook from 2020 to 2021. So it does require us to make continued working capital improvements in 2021.
The good news there is we believe we're on track to do so we expect to continue to be able to generate working capital improvements really.
It really across our businesses, we have some targeted areas of performance improvement that we're driving in 2021 and this is not a point in time effort. This is a long term effort that will remain a focus of the company. So to your question about years thereafter.
We'll continue to drive.
Our efforts around working capital efficiency in 'twenty, two and beyond.
Your next question is from Jon Raviv of Citi.
Hey, Thank you so much.
A question just sort of thinking forward about organic growth of 9% in 2020, you're talking about 4% in 2021.
Some moving pieces there with the equipment sale I think.
But just this idea of sustaining growth given where your backlog has been given where your bookings have been on on whether there's an opportunity to actually accelerate as things like <unk> hundred 21, GBS B R.
On our CBS all kind of.
Start to hit their stride.
Thanks, John so on.
As we look at gross this year in 2021 and beyond.
We see the opportunity for continued growth based on not only on our backlog, but also new programs I outlined some of those in my earlier comment that we see being awarded this year.
As budgets appear to be flattening out our portfolio would have the opportunity for sustained growth through programs like GBS, which is at the early stage of its ramp as well as a number of our restricted program. It's very much will be determined on what funding priorities.
Come from the New administration, and how those might play out over time, but we can clearly see forward this year and are projecting.
Other strong year of growth in 2021 and based on the strong support for our programs in the 2021 budget are equally optimistic that we have a path to growth beyond this year.
Your next question is from Cai von <unk> of Cowen.
Okay.
Okay.
Mr Kai buying rumor your line is open.
Okay.
Well go to our next question from Cristina <unk> of Morgan Stanley.
Hi, good morning, guys.
Kathy can you provide more color on your framework of how you think about sustainability with your planned divestiture of the testing business for cluster munitions.
Where do you draw the line.
And do you anticipate more divestitures from this initiative.
So Christine when we look through the lens of sustainability at our portfolio.
We look at not only what capability, we're providing but how it's being used or how we expect the customer to use that capability going forward and the decision in this case with our small contract related to cluster munitions. It wasn't surveillance program. It was actually structured too.
Remove cluster munitions safely however, we recognized that even supporting.
Area like cluster munitions for investors is a concern because safe removal implies that at one point there was an embracing of the uses of these products and so when we look at our portfolio, we're going to continue to recognize we support.
Our government and our allies in the important work of enabling our true to do their work, but at the same time be thoughtful about potential human rights simplification and how these technology may be used in the future and provide equal.
<unk> to safeguard associated with them and answer to your question I don't expect there to be significant change in our portfolio. As a result, we already have a portfolio, where we have looked through that lens and making decisions about where we invest and what work. We undertake this was just one small contracts that came to us through the acquisition.
And we've made a decision.
Top performing in that area.
Sure.
Your next question is from Ron Epstein of Bank of America.
Yeah.
Yes.
Morning.
Kathy can you speak to the B two defensive management system and does that is that nearing completion.
Or is that program stand on the Big picture visit the B 21, starting to.
Ramp up a little bit how should we think about that.
Thank you.
Taking a step back from the defensive management system, which is completing this year.
We are looking at modernization of the B two so that it can stay in service through the successful transition and replacement of B 21, which as you know it doesn't happen it doesn't start to happen until later in the decade, and so b to modernization is a broader program will continue but the DNS program is.
One that is expected to complete this year.
Your next question is from Myles Walton of UBS.
Thanks, Good morning, Kathy I was wondering.
Competition is always changing and as new competitors entering all the time, but I'm curious with the confluence between.
Talents here now at $70 billion in an administration geared towards inserting new technology.
Commercial based companies into the landscape of competition is it evolving quickly or is the market just thinking it's evolving quickly in terms of the competitive landscape.
We certainly see new entrants coming into the space and in the case of talented they've been in this space for a number of years.
And we are in many instances working with those companies because.