Q1 2021 Northrop Grumman Corp Earnings Call

And we're optimistic about continuing to drive really strong cash flows from the operations of the business Kathy.

Kathy over to you for capital deployment, Thanks, James and so as Steve outlined our capital deployment strategy has remained consistent we invest in the business, but we have signaled and continue to see our capex as a percentage of revenue starting to come down in 2022, just based on the opportunity set that we have.

Have any robust investments that we've been doing over the last couple of years. We've also been active in portfolio shaping and are pleased with the portfolio that we have now and its alignment to the national defense strategy. So we've spend using proceeds to.

Mature, our cash balance and really get to a place where our balance sheet is where we'd like it to be and we're in a position. Therefore to now focus on dividends and share repurchase. So my comments really reflect that as we sit here today that we do expect the majority of our cash proceeds over the next couple of years.

We'll go to those two.

And methods of returning cash to shareholders.

Your next question comes from the line of David Strauss with Barclays. Your line is open.

Thanks, Good morning.

Well I want to wanted to touch on that the space margins on.

They were up a fair amount. Despite a 30 some percent growth I assume most of that being on a cost plus basis. So could you could you maybe touch on you know what.

This space margin start to come down from here based on your guidance and then I know you touched on additional working days you had in Q1, but I think you know your sales implied sales guidance for Q1 still came in.

Your sales came in well above your implied guidance. So was there any sort of pull forward in the quarter or anything that other than the working day is that kind of reverses ago or goes back the other way later in the year. Thanks.

Sure two good good topics there I'm happy to touch on first as it relates to space margin space.

Space was one of the segments that did benefit from the overhead rate reduction in Q1.

Which are of course lifted there are margin rate performance in the quarter. The the expansion of their base was also a contributor there and the.

Efficiency with which they execute their programs in the quarter and with which they manage the business were both contributors as well it was a really strong operational quarter.

For force space building on a really strong 2020 per space for the rest of the year are you know I wouldn't see any dramatic change there obviously, we have its full year margin.

Margin rate guidance around 10% consistent with the paas guidance for per space and reflective of the mix moving more towards cost type development work as you mentioned.

But obviously off to a strong start there in part due to those EAC benefits because of the operational and cost efficiency in the quarter.

You mentioned the working day in the overall revenue profile for the year. It's a I think an important topic to talk through because there are a couple of moving pieces. There. So let me give you a bit of a sense for for some of the key quarterly items. There Q1 did include one month of the now divested <unk> services business.

And as we've mentioned about a 5% benefit in each sector from the additional three working days.

In terms of other items.

I would say in general we had strength at the at the end of the quarter in terms of the timing of materials and deliveries.

Which did benefit the quarter I would call that broad based across the businesses not any one particular program or sector.

I'm thinking about the rest of the year in Q4, as we mentioned in our scripted remarks will be a tough compare it will have four fewer working days in the prior year and as we mentioned on our last call Q4 of 2020 benefited by the $444 million equipment sale and a S. So on top of the.

The divestiture impact on Q4.

Compare from a revenue perspective, we'll have those other two unique items as.

As we think about Q2 and Q3, we expect continued solid organic growth in those quarters consistent with what our what we've been able to deliver of late.

From a GAAP sales perspective, those will be offset by the.

Divestiture of course, but again really strong momentum in the business of late and that's reflected in our guidance in particular in the $200 million increase that we provided to our sales guidance with the book.

Bottom and the top end of that range.

As we.

Into Q2, Q3 and beyond we will continue to have an eye on the strength of new business performance and.

Backlog success.

The year progresses, and evaluate our outlook further as the year continues.

Your next question comes from the line of Cai von <unk> with Cowen Your line is open.

Yes, thanks, so much so.

Kathy with.

The decreasing cost of access to space.

And the increasing capability of smaller Leo satellites.

It's been kind of a proliferation of lots of these smaller satellite builders.

Rocket builders getting large amounts.

<unk> do you have any aspirations for any forward integration into launchers or commercial.

Commercial additional new commercial space ventures, because it looks like you guys have the capability to do so.

Okay I appreciate the question and the reflection on the breadth of our portfolio you're absolutely right. We already are an important partner to launch providers, including companies that we've been working with them from that are newer entrants into the space. We are working with companies.

That's our new entrance into the defense space that provide unique capabilities in areas like communication or other.

Areas of expertise that we feel can be applied to national security.

Okay really as a company remains on our expertise and national security space, That's where the predominance of the growth in our portfolio is coming from today.

And we'll look to use capabilities and products that we build for commercial and base exploration applications. Just as we do today, but you can expect from predominance of Northrop Grumman investment as well as our growth to continue to come from National Security space.

Your next question comes from the line of Kristine <unk> with Morgan Stanley. Your line is open.

Thanks, Good morning, everyone.

Kathy following up on <unk> question about.

Some of these new based companies I guess, what we're seeing with your peers that theyre starting to invest in strategic partnerships, we've seen that with Lockheed NBL and Raytheon in Hawkeye three <unk>.

How do you think about strategic partnerships to expand your national security offerings and space would you pursue that.

Do M&A or invest organically and are there areas of your portfolio, but your interest in bolstering.

So we're really pleased with the acquisition that we did of orbital ATK.

Build out our space portfolio, we sold out of our big investment and as you know they brought not only capability in national security space, but commercial is day second Florida simple things like.

Operations as well and so we're quite confident that our portfolio allows us to participate across a wide spectrum of.

Growth in investment in space. We also have partnerships, we tend not to advertise those partnerships and they.

Aren't always aligned with an investment in other companies, but they are relationships that we have from providing our capability to and through them or their capability through us to our customers.

Look at the end of the day, we see new entrants in the market.

Partners in areas like launch Com exploration and the investment that they're making is often times complementary to ours, but we combine them on a solution my solution basis, because that's the business that we're in we look for the best partner for each system that we are bidding and delivering.

And set up and our partnership model and I expect that to continue to be our partnership model.

Your next question comes from the line of Ron Epstein with Bank of America. Your line is open.

Hey, good morning, everyone.

So Kathy.

On the heels of the and Gi down select.

G B S. D. If you had some really.

Important wins recently, when we looked at in the pipeline what what are you looking at next what's the team focused on are kind of key areas or key programs that you'd like to win in the near term and maybe even in the medium term.

So Ron.

Two years ago, when I stepped into the role I talked a lot about the desire for the company to focus them on campaign areas that were closely aligned to where we believes the national defense strategy.

<unk> placed investment and we continue to believe that those campaigns are focused on the right areas, we see space continuing to grow faster than other parts of the market and we see ourselves being able to continue to grow our portfolio and take share there.

Can you check missiles continues to be an important area. Our work on CBS D. The down select on Mci. So now the interceptor side of that equation as well as more modernization that the missile defense agency has to do in protective system against <unk>.

We see that stretching across domains. So even in space, we see a tremendous amount of recapitalization and missile tracking and the ability to attract new missile type like hypersonic when I talked about the H B T. S. S Award that we had growth.

Jason missiles, very complementary in terms of our strategic focus and both of those areas and still more growth that we see in both of those another key area that we've been focused on is joint all domain command and control and we were doing it before it was call Genesee two with programs like <unk>.

Which really fit what the government looks for and being able to integrate sensors and shooters and provide that back from an architecture. It has elements of communications and connectivity, which is an investment area and area of technical excellence for our company. It has elements of computing.

Nope, that's needed to process large amounts of data. It has advancements in artificial intelligence and these are all areas that our company continues to invest in and have leadership positions and so those are just a few examples of the campaigns that we outlined in 2019 that we continue to execute against and see.

<unk> success. So yeah, no new strategy is continuing to execute that strategy, which is working well for us from still has legs, we believe well into the future.

Your next question comes from the line of Doug Harned with Bernstein. Your line is open.

Good morning, Thank you.

When you look at Northrop.

Northrop Grumman's position now your major player on line.

Major airborne and space platforms, but you've.

Also.

No.

Important provider of electronic systems to other platforms.

You go back historically.

There's always been this tension.

People have tried to have a platform and then ensure that their own systems get on it and then those have been typically sat down in and they've been competed separately.

So today since you're on both sides of this when you look at the way technology is evolving the way the threat is evolving.

How do you see the competitive landscape do you think it will stay the same do you think there'll be the ability for people to try and vertically integrate more between platforms and systems.

Where do you see this going.

So Doug it's an excellent question and one that we spend a lot of time thinking about strategically because our portfolio as you will note does have.

A good bit of vertical integration opportunities, but that doesn't mean that it's always the right answer.

Our systems on our platforms and so we take a very objective look when we are an integrator onto our platform.

We're the best technology come from and that May be inside of Northrop Grumman It maybe with an industry partner and.

To the earlier point in space increasingly maybe new entrants and the companies that aren't particularly focused on national security, but have capability to bring to bear I would also though point out that the.

In a strong competitor in mission systems, and being able to have the technology that is the the winning technology on a platform means that you have to invest and that you'd have to prioritize in that area and we have done that quite successfully so there are many cases, where our.

Technology is about to go on our platform and even if it is not our platform another company's desire to vertically integrate they will not too I don't believe to put their own kit on a platform. If it's not the best technology to compete at the platform level and we.

Seen that play out time, and time again, where there was a fear that our mission systems would not be selected by other competitors because they would want to integrate their own capabilities, but at the end of the day.

Incumbent upon the platform price ourselves included to make unbiased choices and look at what is the best capability to provide to our ultimate customer and meet the requirements.

And that's where our mission systems team has excelled staying at the forefront of technology. So that we do compete and we emerge as the best provider. It's why our mission systems business has a good deal of full force work I talked about the F 16 upgrades.

On the radar, but also the EW suite now that we're working with the Air Force that is because we have the best technology and we are not being selected to move to.

To deliver that capability.

Your next question comes from the line of Mike Mcgary with Wolfe Research. Your line is open.

Hey, good morning, Thank you.

David you mentioned that a lower cash expense. It can help make you a little bit more competitive in a flattening budget environment. So.

In line at that point I, just wanted to ask how do you think about the E&P discipline in a flattening or contracting budget environment relative to when the budget is expanding.

Sure.

We look across our businesses at investment opportunities both capital expenditures R&D BNP.

And.

Really make decisions specific to the market conditions.

Conditions in market opportunity set that we see in different parts of the business.

You know with with the overall budget flattening.

As expected the flattened over the coming years, we still have our space business grew nearly 30% this quarter and over 30% last quarter.

So clearly the opportunity set there is such that our significant ongoing investment in R&D and capital expenditures BNP has been the right decision for the company to have made and continues to be we have a very healthy outlook there.

Really across the business I wouldn't say we're yet.

Feeling opportunity constrained and so certainly we are careful with our investment dollars and we looked at.

Returns on our investment dollars in each of those buckets, but at this point, we continue to see a healthy opportunity set in the markets, we serve and to make.

Investments as a result, our R&D costs are.

It's continuing to be.

Around 3%.

Of revenue and that's been a healthy level for us over the last couple of years continues at at approximately that level in 2021.

Certainly put BMP in that same category again reflective of.

The positioning we have with the faster growing parts of the budget.

Maryann Man, we have time for one more question.

Okay. Thank you. Your next question comes from the line of Myles Walton with UBS.

Your line is open thanks, Chris.

Thanks for squeezing me in maybe a clarification on the.

The slide deck you'd call. It 35 cents from corporate unallocated just how much of that is more corporate unallocated run rate as opposed to one off and then Kathy as you look at talent acquisition I think he agree that work for 7000 or so in 2020.

Given the pipeline of business that you're having what is the market for growing that pipeline, where do you think that number might end up at the end of 'twenty one.

Sure on the on the lower corporate unallocated I would call. It a mix of items more unique to this year and other items that will be sustained in future years. As we mentioned the state tax costs are a bit lower this year than we had anticipated in other areas you know theres ongoing.

Careful cost management and discipline, that's that's led to that efficiency. So I'd call. It a mix on that from.

And miles on our talent.

Strategy and specifically the growth that we expect.

We hired almost 14000 people last year and as you noted yielded about 7000.

Head count and that's largely because of attrition has slowed and we expect that that will continue into this year, but perhaps with other companies beginning to grow and the labor market tightening and that could go up so we expect to net about the same headcount growth this year.

We are monitoring closely the moving parts of how many hires we need to make with the net of attrition to get there.

Okay, we'll leave it there I'll turn it over to Kathy for closing remarks.

Well, thanks, Todd and Steve heard the year's off to a great start with our New award we had robust sales growth and strong margin in the quarter and I want to recognize that the foundation of executing our strategy is the strength of this team and their outstanding performance. So let me conclude by once again thanking the Northrop Grumman.

Team for their innovation and hard work. So that concludes our call. We look forward to talking to you again next quarter and thanks for joining.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

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Yeah.

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Good day, ladies and gentlemen, and welcome to Northrop Grumman first quarter 2021 Conference call. Today's call is being recorded my name is Marianna and I will 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. Ernst. Please proceed.

Good morning, and welcome to Northrop Grumman first quarter 2021 conference call. This morning, we will refer to a powerpoint presentation that is posted on our IR web page and before we start I'd just like to remind you that matters discussed on today's call, including guidance and our outlook for 2021 and beyond reflect the company's judgment based on information.

Available at the time of this call may constitute forward looking statements pursuant pursuant to safe Harbor provisions of Federal Securities laws forward 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.

Matters discussed on today's call will include non-GAAP financial measures, which are defined and reconciled in our earnings release and supplemental Powerpoint presentation 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 congratulate the Northrop Grumman team for a very strong start to 2021.

One year after the onset of the pandemic, we have adjusted to a new way of working and we continue to support our employees our customers our suppliers and our communities, which has enabled us to deliver outstanding results to our shareholders.

Our results demonstrate the strength of our team our portfolio our strategy and our operating performance.

Our solid bookings and competitive wins robust organic sales growth and excellent operational performance resulted in strong margin rates earnings and cash in the quarter.

We also closed the divestiture of our it services business and successfully transition those employees and programs to paradigm.

Elaborating on financial highlights, we booked new awards of $8 9 billion grew sales, 6% and increased segment operating income 13%.

GAAP EPS of $13 43.

Reflect the it services gain and transaction adjusted EPS increased 28% in the quarter.

First quarter operating cash improved by more than $900 million year over year.

Using cash from our balance sheet and divestiture proceeds we executed a $2 billion accelerated share repurchase agreement that retired an initial five 9 million shares.

We also retired $2 2 billion in debt, including early redemptions of one 5 billion.

Even with share repurchases dividends and deleveraging all of which totaled more than $4 $4 billion. We exceeded the first we ended the first quarter with $3 5 billion of cash on the balance sheet.

As I outlined in January this year's capital deployment plans continue to include robust investment to drive innovation and affordability and at least $1 billion of additional share repurchases.

Based on what we see now over the next couple of years, we expect to return the majority of our free cash flow to our shareholders through share repurchases and dividends.

With the strength of our first quarter results a solid outlook for the remainder of the year and confidence in our portfolio, we are raising our sales and EPS guidance.

We now expect sales will increase to between $35 three and $35 7 billion.

A 200 million increase to the prior range and.

And we are racing transaction adjusted EPS guidance by <unk> 85.

To a range of $24 to $24 57.

As we look forward, we believe our capabilities will remain well aligned with U S U S National security priority.

In early policy guidance, such as this interim national security strategy.

The administration has signaled that it views competition with China as the most pressing long term security challenge and we will invest in the capabilities needed to maintain U S National security advantages.

In its recent budget framework for fiscal year 2022 Day administration described several priority efforts that are closely aligned with our portfolio and technology leadership.

These include space modernizing the nuclear deterrent advanced weapons, and long range fires capabilities and R&D for breakthrough technology, such as artificial intelligence advanced computing and cyber.

Turning to operational highlights from the quarter, our space business doubled its backlog in 2020 and achieved 30% revenue growth in each of the last two quarters.

This performance confirms our competitive capabilities and our ability to capture market share as our nation ramped up investment in space.

Three competitive award from the first quarter are good examples.

The hypersonic and ballistic tracking space sensor the protected tactical Satcom rapid prototype program and the next generation interceptor.

On HB TSS, we received $155 million award to build a prototype sensors satellite capability capable of tracking hypersonic weapons from space.

For protected tactical Satcom, we were down selected for a follow on award to proceed with our ongoing prototype development with a flight demonstration of our Pts payload expected in 2024.

We also were awarded a $2 $6 billion contract for the next phase of the missile Defense Agency's next generation interceptor known as MTI with a period of performance through 2026.

This contract is for the rapid development and flight test of an interceptor designed to defend against the most complex long range threats.

Opportunities for Northrop Grumman and space also extend to civil and commercial space.

<unk> fiscal year 2022, discretionary request is $24 7 billion a.

A six 3% increase over the 2021 enacted level.

Importantly, the request supports human exploration of the Moon Mars and beyond.

Support for the NASA budget enables our effort on the space launch system and Halo to have attached to habitation and logistics outpost program.

And in commercial space.

One continues to provide a life extension services to an Intelsat satellite and it received via satellite satellite technology of the year Award.

The award recognizes the technology breakthrough and reshape the way that the satellite industry works now and for years to come.

I'm also pleased to report that earlier this month.

To successfully talked with another Intelsat satellite.

<unk> will provide five years of service before undocking and moving on to provide services for a new mission.

Northrop Grumman is a pioneer in this field and remains the only provider a flight proven life extension services for satellite.

As the U S continued modernizing its strategic deterrent capability.

We are proud to be the prime contractor for two legs of the Tri Ed The B 21 bomber and the ground based strategic deterrent for GBS, Steve as.

As well as a key supplier on the third leg.

These modernization program, which were initiated in the Obama administration are expected to begin fielding at the end of this decade.

Both GBS and B 21 are benefiting from our use of innovative digital tools to reduce technical risk and cost.

As the Air Force has noted the 21 development has been unique in that the test aircraft are more mature than other systems have been at this point allows.

Allowing us to validate our production processes much sooner in the program lifecycle.

And our GBS fee program successfully completed two major milestone reviews and remains on track to field and initial operating capability by 2029.

We are working closely with the air force partner and industry teammates to use digital engineering and agile software development to reduce risks and important development timeline as we modernize this critical system.

The GBS day program has earned the E series designation from the U S Air Force affirming the program's cutting edge approach to digital transformation.

All four of our sectors are aligned to the high priority investment areas needed to maintain military superiority.

In addition to developing new platforms and weapons systems, we are enabling the modernization of existing platforms to ensure our war fighters have the best technology that theyre platforms can be moderately upgraded to counter evolving threats.

In the first quarter, we received orders totaling approximately $500 million for additional saber radar systems for the F 16.

With these additional orders we're now under contract to produce approximately 900 systems in the support of F 16 upgrades and new shaft procurements for eight Fms countries as well as upgrades to our U S Air Force Guard and reserves of 16 fleets.

Also on the F 16 to the U S. Air Force, we were down selected as the sole offer for the Emt and production of a modern electronic warfare suite to provide next generation self protection and ensure an upgrade path for advanced capabilities against highly agile future threats.

And during the quarter the U S Army approved our <unk> system for full rate production. Following a successful six month initial operational test and evaluation on its helicopters.

We also continue to demonstrate how we can connect platforms and sensors to enable joint all domain command and control or <unk>.

Our fifth generation connectivity solutions will be featured on multiple platforms in the upcoming northern edge 21 exercise in may.

We expect to participate in several other exercises over the next 12 months, including the Army's project convergence, where IV CFS is expected to be featured.

And we're responding to the abms digital infrastructure investment priority, requiring secure processing connectivity and data management.

And finally, we are maturing our advanced weaponry and long range fires capabilities.

We conducted a successful life fire demonstration of our integrated counter UAS solutions this quarter.

Demonstration showcased our next generation proximity ammunition and its capability to defeat class one two and three unmanned aerial systems.

In addition, <unk> had two successful static motor test of a rocket motor marketing nine consecutive successful test and preparation for the upcoming flight test.

All of these successes reflect the quality of our team and the benefits of our recent investment in new technology to support National security for the U S and our allies.

We are focused on competing and winning the program that enable continued growth and affordably delivering the capability our customers need.

This quarter was another demonstration of our commitment to maintain strong returns and cash flows while growing the business.

I will turn the call over to Dave now for a more detailed discussion of our financial guidance results and trends safe.

Thanks, Kathy and good morning, everyone I'd also like to thank our team for another quarter of outstanding performance.

My comments begin with Q1 sales growth on slide four which provides a bridge between our first quarter of 2020 and first quarter of 2021, we reported Q1 sales growth of approximately 6% and as you can see the ICU services divestiture was an approximately $400 million headwind to first quarter sales.

In addition, due to the timing of our accounting calendar Convention, we had three more working days in the first quarter of 2021 than in the first quarter of 2020.

We view this tailwind is purely timing as it normalizes in Q4, when we will have four fewer days than in the fourth quarter of 2020.

The three additional days in Q1, 2021, resulting in approximately 5% benefit to sales across all of our segments for your modeling purposes.

So at the consolidated level, the divestiture and extra working days were largely offsetting for Q1 adjusting for these two items revenue growth was six 4%.

As I review the sector results ill refer to organic sales growth adjusting only for the it services divestiture.

Slide five provides a bridge of our earnings per share between first quarter 2020, and first quarter 2021.

GAAP earnings per share increased to $13 43 per.

Primarily due to the gain on sale.

When we adjust for the divestiture related items transaction adjusted earnings per share are up 28% to $6 57.

The increase reflects strong segment performance, which drove 75, so the year over year improvement.

Recovery in the equity markets generated favorable earnings on our marketable securities, especially compared to the volatility we experienced in the equity markets last March.

Corporate unallocated expense contributed 27.

Primarily due to lower state tax and lower amortization expense in the period.

Referring to sector results on slide six.

Aeronautics systems sales were up 5% per the quarter, reflecting higher manned aircraft sales due to stronger volume on restricted programs and <unk>, partially offset by lower sales in autonomous systems as certain global Hawk production programs near completion.

Net defense systems first quarter sales decreased 17% or 2% on an organic basis.

Lower organic sales reflects the closeout of our Lake city activities, which represented a headwind of roughly $140 million this quarter.

Higher volume on GMO Rs in Oregon helped to offset that impact.

Turning to mission systems, we saw a third consecutive quarter of double digit sales growth.

With revenues up 10% or 15% on an organic basis.

Organic sales were higher in all four EMS business areas as its debt.

<unk> portfolio continues its strong momentum from last year.

And airborne multi function sensors, we had higher volume for the sabre and Mesa radar programs and higher restricted sales.

Maritime land systems, and sensors increased primarily due to ramp up on the Gator program as well as higher volume on marine systems.

Navigation targeting and survivability sales increased principally due to higher volume on targeting programs, including lightning.

Networked information solutions sales were driven by higher volume on electronic warfare programs, including J crew and restricted programs.

Space systems continues to be our fastest growing segment with sales up 29% in the quarter were 32% on an organic basis.

Sales were higher in both business areas with continued ramp up on the GBS D program.

Driving revenue growth and launching strategic missiles.

Space programs were driven by higher volume on restricted programs NASA.

As part of its programs and the Nextgen <unk> program.

Turning to operating income on slide seven Sigma.

Segment operating income includes the Q1 benefit of approximately $100 million from lower overhead rates, a reflection of our disciplined approach to cost and affordability.

This quarter's benefit includes the reduction in projected cash pension costs that we mentioned on last quarter's call.

Lower cash costs do present, a modest revenue and cash flow headwind going forward to improve our competitiveness by making our solutions more affordable and that will be a key competitive differentiator and a flattening budget environment.

<unk> operating income increased 17% and margin rate increased to 10, 3% due to higher net favorable EAC adjustments driven by reduced overhead rates.

Defense systems operating income decreased 11%, primarily due to the it services divestiture and operating margin rate increased 80 basis points to 11, 3%.

The increase in operating margin rate was largely driven by improved performance in battle management and missile systems programs.

Operating income at mission systems Rose, 12% and operating margin rate increased to 15, 3%.

Higher operating income reflects higher sales as well as the benefit recognized from reduced overhead rates, partially offset by lower net favorable EAC adjustments at networked information solutions.

Space systems operating income increased 37%.

Primarily due to higher sales volume operating margin rate rose to 10, 9% due to higher net favorable EAC adjustments driven by the reduction in overhead rates.

At the total company level segment operating income increased 13% in Q1 and operating margin rate increased to 12%.

Higher operating income was driven principally by favorable overhead rates as well as operational performance at the sectors, which more than offset the lower business base due to the it services divestiture.

Turning to sector guidance on slide eight as a result of the continued robust growth in our space business and the recent win of the NCI program. We are increasing space sales guidance to approximately $10 billion sales guidance remains unchanged for a S D.

And MFS.

Those operating margin rate guidance at all four sectors.

Moving to consolidated guidance Slide nine provides a bridge to our updated guidance, reflecting the improvement in operations as well as the effects of the divestiture on our overall outlook.

We are raising our 2021 sales and transaction adjusted EPS guidance to reflect the strength of first quarter results.

We now expect 2021 sales will range between $35 3 billion and $35 7 billion.

$200 million increase to prior guidance keep in mind that our fourth quarter year over year revenue comparison will include headwinds of fewer working days and the $444 million equipment sales.

In addition to the divestiture.

Our updated guidance on corporate unallocated expenses is driven by the net gain on the it services transaction and also reflects favorable deferred state tax benefits and other lower unallocated costs.

Our operating margin guidance includes both the lower corporate unallocated expense and the benefit from the divestiture.

Moving to taxes, you can see the estimated tax rate reflects the impact from the divestiture and our underlying effective tax rate is unchanged.

Our year end weighted average diluted shares count guidance.

Has been reduced to reflect the ASR.

Turning to EPS Slide 10 provides a bridge between our January guidance and today's transaction adjusted guidance.

We are increasing our transaction adjusted EPS to a range of $24 to $24 50 from our prior guidance range of $23 15 to $23 65 or.

Our higher guidance reflects strong segment performance as well as lower corporate unallocated expenses.

<unk> pension trends and lower weighted average shares outstanding.

Lastly, I wanted to take a moment to talk about cash we continue to pursue a balanced capital deployment strategy that includes investing in the business returning cash to shareholders through dividends and share repurchases and managing the balance sheet.

In the first quarter, we de Levered, our balance sheet obtained improved ratings from true two credit rating agencies and executed the ASR program to further reduce our share count.

The recently passed American Rescue Plan Act is.

As expected to begin affecting our cash pension recoveries in 2022.

Asset returns and other actuarial assumptions will continue to influence these numbers, but all else being equal the legislation would further reduce our tests recoveries.

Also note that we had already lowered our projected cash pension costs to a relatively low level in our January outlook, primarily due to outstanding asset performance in 2020.

I would reiterate that we expect minimal cash pension contributions over the next several years.

As Kathy mentioned first quarter operating cash flow increased more than $900 million from Q1 2020. This.

This improvement largely reflects timing of collections and disbursements and we have not changed our transaction adjusted free cash flow or capital expenditure guidance for the year.

It's worth mentioning that while the divestiture of the it services business closed in Q1 federal and state cash taxes of approximately $800 million will be paid over the remainder of the year.

In closing we are very pleased with our first quarter results as we continued to deliver for our customers employees and shareholders our portfolio shaping and continued investment in the business put us in a strong position to sustain our momentum and value creation and robust cash generation.

And I think we're ready for Q&A.

Marianna please.

And from the analyst how to enter the queue and ask questions. Thank you.

Thank you, 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. Please limit yourselves to one question. If you have any follow ups you may reenter the queue. If your question has been answered or if you wish to exit the questions.

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Your first question comes from the line of Robert Stallard with vertical research. Your line is open.

Thanks, so much good morning.

Good morning, Rob.

Kathy on space.

Have a very strong quarter here and tracking very nicely for another strong year, but.

How do you see this going forward, you're obviously going to be up against a tough comparison in 2022 for example, but you have got this new and GI win. So I was wondering if you could give us some idea of what day sort of sustainable topline growth rate could be for this division.

Well without getting into specific outlook for 2022, let me talk about some of the major drivers that we see you noted that GBS, Steve we will have a tougher compare 'twenty two to 'twenty, one because we'll have a full year of gvhd.

This year, however, I would point to the fact that GBS, Steve expense expected to continue to ramp.

2022, the budget shows another approximately $1 billion increase going from 21% to 2022.

Not all of that is the Northrop Grumman program. That's the entire budget, but you can see that there is still escalation in growth anticipated for the program going into next year, but more importantly, as you highlighted there are other activities that we have underway that how the growth profile from 'twenty, one to 'twenty, two and <unk> one.

Are those the other two awards that I mentioned today are two others and so we do see the opportunity first day to continue to grow.

It is true that when we look at this business it grew 18%.

Last year, we are projecting high teen growth again this year. So those are very robust growth rates.

But we do see the potential for space to continue to be a growth driver for our business and indeed, our fastest growing segment.

Your next question comes from the line of Robert Spingarn with Credit Suisse. Your line is open.

Hi, good morning, everybody.

Just sticking sticking with space Kathy you touched on this book a little earlier in your prepared remarks, but you've had some really nice success recently with space logistics and your satellite mission extension vehicle wondering if you could elaborate a little bit on the opportunity longer term and update us on how discussions.

With customers are trending now that the technology is proven and just wondering if satellite MRO can ultimately be comparable to something like aviation MRO is a very strong recurring business. Thank you.

Thanks for the question Rob.

We certainly see this business is transforming the way companies think about satellite life extension and we see that with Intelsat and of course, we started in the commercial space.

We had an intelsat a willing partner to pioneer with us and that's really what this does.

As I noted, we're still the only company, providing this kind of mission life extension capability.

And Intelsat has been a fabulous partner in being able to demonstrate those capabilities onto other satellites in India to adopt with the satellite that is currently providing mission services any day.

One I'll remind you was taking a satellite debt without a service and bringing it back to service so.

As we continue to demonstrate that we can even talk with a moving satellite providing services and not disruptive services line do you expect that other customers will see the value and that that business will continue to grow.

We also see the opportunity as we work with our defense customers to bring those capabilities to military and special.

Systems that our national security relies upon now that we have demonstrated the capability with commercial clients.

And your next question comes from the line of Seth Sigman with J P. Morgan Your line is open.

Okay, Thanks, very much and good morning.

I wanted to ask about so aeronautics you called out the headwind in autonomous and that's something that you've discussed before.

Does that headwind go away by the end of this year or does it persist.

2022 on global Hawk, and I guess are there any other sort of legacy type of platforms, we should be thinking about that.

Coming to the budget crosshairs going forward.

Sure Seth it's Dave I'll get started on that one for you so.

As he noted the manned portfolio in Aaas outgrew the unmanned in Q1 overall.

Sector delivered a strong 5% organic growth rate year over year in those project organic growth for the full year. When you exclude the unique equipment sales from last year in terms of the headwinds you mentioned around global Hawk.

Certainly there are puts and takes on the global Hawk program and on the hail portfolio altogether, and we'll know more when we see the updated budget numbers in the coming weeks.

But I think in aggregate.

<unk> been a strong start to 2021 for the ASP.

<unk> portfolio there are.

Pockets of new opportunity in.

The unmanned business has been in the news in recent months certainly we have.

Healthy long term opportunity set.

<unk> and.

And we will see about the trajectory of the current <unk> portfolio I think in general that's a flatter portfolio than.

And some of our other.

Higher growth.

Product sets on the on demand side that we've talked about in the past. So again, we'll provide more guidance on 'twenty two and beyond as we get further into this year, but that at least gives you a thumbnail sketch of what we're seeing in E. S.

Your next question comes from the line of Carter Copeland with Melius Research. Your line is open.

Hey, good morning, everybody.

Good morning.

Kathy I wonder if I could just ask briefly about the F 35, I think once the bigger beyond lot 14, and get to 15 16 17, the number of aircrafts in those lots as plan a stepped down a little bit I know you guys have a bit of a lead in terms of.

The revenue recognition on your own cost in your own work on that program versus what we may see from.

The prime contractor and I just wonder if maybe you can give us some some perspective on.

The timing of that and what it means for F 35 business and those revenues, how we should be thinking about that going forward. Thanks.

So Carter as we look at F 35, and three pieces I think youre, primarily asking about production volume and in particular at Aeronautics.

See that volume relatively flat for the next few years based on the demand signal that we've gotten from Lockheed and what they've asked us to quote now price continues to come down as we do our part to contribute to the affordability of the aircrafts. So that's a little bit of an offset to a flat volume at the same time, though when you look at the other pieces of the program.

Modernization and Sustainment those are growing over that period of time and so all in all we see our F 35.

Franchise within Northrop Grumman in relatively flat over the next several years.

Your next question comes from the line of Sheila <unk> with Jefferies. Your line is open.

Hey, everyone maybe.

How do you guys think about productivity and margin opportunities post divestiture Gary.

Great margins in the first quarter, 12% ahead of your guidance when we think about.

The remainder of the year, whether it's mix or R&D, what sort of headwinds come up.

I guess, how do you think about profitability now that you have streamlined the portfolio.

Sure. Thanks, Sheila So as you mentioned, we're off to a really strong start in Q1 on the margin front.

Both in terms of rate and dollar volume at a 12% rate for the first quarter that is.

Net of our full year guide of 11, 5% to 11, 7% segment Om rate.

I'd note that from a timing perspective, Q1 did benefit from the lower overhead rates as we talked about a portion of which was driven by the lower cash pension costs and the rest of it which was really strong.

Strong cost management across the business overcoming the of the lower base from the divestiture and such so we're really pleased with the level of disciplined cost management that we've already demonstrated in 2021 as we look to the rest of the year. We continue to project that 11, five to 11 seven segment Om rate.

Which is.

10 to 30 basis points better than last years performance, which was already at a strong level of 11, 4%.

Going forward I think you're right to think of mix as one of the drivers.

But obviously, we will continue to strive operationally for.

Both efficiency and the way, we execute our programs and deliver product as well as the way we manage the business our digital.

Transformation efforts are a good example of that efficiency initiative.

Again havent been settled on some of our key.

And newer programs.

Certainly that's also important parcel of the way, we're looking to manage the overall business with as much.

Efficiency and consistency as we can to.

So really deliver that.

Affordability and cost efficiency that drives continued strong margins over time.

Your next question comes from the line of George Shapiro with Shapiro Research. Your line is open.

If you could.

It looks like the EAC or the cash benefit of about 100 million that is consistent with the drop in cash you projected in Q4, So I assume there's been no change from the ARPA.

From ARPA as a result of that and then also what's your current pre funding level for cash.

And how does that play out over time.

The current pre funding level is just under $2 billion.

The first of the year this year.

The ARPA adjustments to Kaz.

Or are more limited in their impacts to the business in 2021 then the.

The benefits we've talked about in terms of Q1, Acs, which were primarily driven by the asset performance and other actuarial.

Changes as of.

Our last earnings call when we provided the broader outlook.

I think what I'd point you choose.

We've already reduced those cash pension projections substantially in the January call them to levels of $240 million next year of $340 million in 2023.

So there is limited ongoing reduction possible from the ARPA.

ARPA changes and obviously, there will be other effects or other influences on that number very much to include ongoing asset returns.

From pension.

A modest headwind to free cash flow and even more modest to revenue going forward.

In Q1.

It was one of the items contributed contributing to the strong margin rate, but obviously, we continue to project a healthy margin rate for the full year and thus for the remaining quarters driven by the strong program performance and the continued strong cost management, we've talked about.

Your next question comes from the line of Jon Raviv with Citigroup. Your line is open.

Thanks, and good morning cash.

You mentioned in your prepared remarks that your debt youre seeing that the majority or the most of your free cash flow going to shareholders over the next few years is what's behind it with a perspective on the on talking about that kind of dynamic in terms of how you see the market developing here on what your other capital deployment opportunities are and then within that context any preliminary thoughts on how you're thinking about debt free.

Cash flow opportunity over multiple years versus this year's free cash flow guide any particular big moving pieces, we should be aware of like payroll tax or the R&D dynamic. Thank you.

So why don't we have Dave start with the second part of your question, which we'll give you more of a sense of the capital we have to deploy and then I'll talk to the deployment strategy sure.

Sure. Thanks, Kathy so as we've talked about on our last call our guidance for free cash flow per this year of $3 to $3 3 billion.

Requires working capital management improvements from.

2020, and we're really pleased with the start we've gotten off to in 2021, having already delivered on some of those working capital enhancements and you can see the real strong year over year compare of our.

Q1, 'twenty, one free cash flow to Q1 2020.

So that gives us.

Good good feeling for for free cash flow as we.

And through the final three quarters of the year over the next few years, obviously, we'll provide more insights in the coming quarters.

But I think you've touched on a few of the right points certainly first and foremost for US is what's in our control and that has continued really strong working capital management in the business.

Efficiency in our billing and collections process efficiency and the way we.

Manage our supply base on the payables side, while continuing to maintain a healthy supply base as we have through the accelerated payments, we made net over the last year plus.

So those are all critical factors for us on the operational side.

We do expect capital expenditures to continue to come down in 'twenty, two and beyond as a percentage of revenue as we are.

<unk> signaled in the past.

And then you get into some of the cash pension dynamics I mentioned shortly ago, which should have should be a modest headwind.

All else is equal obviously remains to be seen what.

Influence asset returns and overall market conditions have them on cash.

Pension going forward and so we'll update you there as we see the year progress.

And then on the tax side.

New legislation possible certainly too.

Remove the existing R&D amortization rule scheduled to go in place in 'twenty, two that would be favorable.

For us. There's obviously also a discussion of the long term corporate tax rate that could influence our cash taxes going forward. So again, our first priority is what we can control and we're optimistic about continuing to drive really strong cash flows from the operations of the business Kathy.

Kathy over to you for capital deployment, Thanks, Steve and so as Steve outlined our capital deployment strategy.

<unk> remains consistent we invest in the business, but we have signaled and continue to see our capex as a percentage of revenue starting to come down in 2022, just based on the opportunity set that we have any robust investments that we've been doing over the last couple of years. We've also been active in portfolio shaping.

And are pleased with the portfolio that we have now and its alignment to the national defense strategy. So we've sent using proceeds to.

Mature, our cash balance and really get to a place where our balance sheet is.

We'd like it to be and we are in a position therefore to now focus on dividends and share repurchases. So my comments really reflect that as we sit here today that we do expect the majority of our cash proceeds over the next couple of years will go to those two.

And methods of returning cash to shareholders.

Your next question comes from the line of David Strauss with Barclays. Your line is open.

Thanks, Good morning.

Good morning want to wanted to touch on the space margin.

They were up a fair amount despite.

30, some percent growth I assume most of that being non op cost plus basis. So could you could you maybe David touch on why this space margin start to come down from here based on your guidance and then.

I know you touched on additional working days you had in Q1, but I think.

Your sales implied sales guidance for Q1 still came in.

Sales came in well above your implied guidance. So was there any sort of pull forward in the quarter or anything that other than the working day is that kind of reverses or goes back the other way later in the year.

Sure two good good topics there I'm happy to touch on first as it relates to space margins.

Space was one of the segments that did benefit from the overhead rate reduction in Q1.

Which of course lifted their margin rate performance in the quarter.

The expansion of their base was also a contributor there and the.

Efficiency with which they executed their programs in the quarter and with which they manage the business were both contributors as well it was a really strong operational quarter.

For force space building on a really strong 2020 per space for the rest of the year.

Signaling any dramatic change there obviously, we have its full year.

<unk> rate guidance around 10% consistent with our.

Paas guidance for per space and reflective of the mix.

Moving more toward cost type development work as you mentioned.

But obviously off to a strong start there in part due to those EAC benefits because of the operational and cost efficiency in the quarter.

You mentioned, the working days and the overall revenue profile for the year I think an important topic to talk through because there are a couple of moving pieces. There. So let me give you a bit of a sense for.

For some of the key quarterly items. There Q1 did include one month of the now divested <unk> services business.

And as we've mentioned about a 5% benefit in each sector from the additional three working days.

In terms of other items.

I would say in general we had strength at the at the end of the quarter in terms of the timing of materials and deliveries.

Which did benefit the quarter I would call that broad based across the businesses not any one particular program or sector.

Thinking about the rest of the year in Q4, as we mentioned in our scripted remarks, we will be a tough compare it will have four fewer working days in the prior year.

And as we mentioned on our last call Q4 of 2020 benefited by the $444 million equipment sale and so.

So on top of the.

The divestiture impact on Q4.

Compare from a revenue perspective, we'll have those other two unique items.

As we think about Q2 and Q3, we expect continued solid organic growth in those quarters consistent with what.

We've been able to deliver of late from.

Our GAAP sales perspective, those will be offset by the divested.

Divestiture of course, but again really strong momentum in the business of late and that's reflected in our guidance and in particular in the $200 million increase that we provided to our sales guidance with the bottom and the top ends of that range.

As we.

And through Q2, Q3, and beyond we will continue to have an eye on the strength of new business performance.

Backlog success.

The year progresses, and evaluate our outlook further as the year continues.

Your next question comes from the line of Cai von <unk> with Cowen Your line is open.

Yes, thanks, so much so.

Kathy.

The decreasing cost of access to space.

And the increasing capability of smaller Leo satellites, theres been kind of a proliferation of lots of these smaller satellite builders.

Rocket builders getting large amounts.

Box do you have any aspirations for any forward integration and the launchers.

Or commercial additional new commercial space ventures.

Looks like you guys have the capability to do so.

Okay I appreciate the question and the reflection on the breadth of our portfolio and you're absolutely right. We already are an important partner to launch providers, including companies that we've been working with on some that are newer entrants into the space. We are working with companies.

That's our new entrants into the defense space that provide unique capabilities in areas like communication or other.

Areas of expertise that we feel can be applied to national security.

Okay, It's really as a company remains on our expertise and national security space, That's where the predominance of the growth in our portfolio is coming from today.

And we will look to use capabilities and products that we build for commercial and base exploration applications from since we do today, but you can expect the predominance of Northrop Grumman investments as well as our growth to continue to come from National Security space.

Your next question comes from the line of Kristine <unk> with Morgan Stanley. Your line is open.

Thanks, Good morning, everyone.

Kathy following up on <unk> question about.

Some of these new based companies I guess, what we're seeing with your peers that theyre starting to invest in strategic partnerships, we've seen that with Lockheed and.

And Raytheon in Hawkeye three <unk> Steve.

How do you think about strategic partnerships to expand your national security offerings and space would you pursue that.

Day, or invest organically and are there areas of your portfolio I'll take your interest in and bolstering.

So we're really pleased with the acquisition that we did of orbital ATK.

Build out our space portfolio, we sold out of our big investment and as you know they brought not only capability in national security space, but commercial in the second quarter civil space exploration as well and so we're quite confident that our portfolio allows us to participate across that.

<unk> spectrum of growth.

Growth in investment in space. We also have partnerships, we tend not to advertise those partnerships and they.

Aren't always aligned with an investment in other companies, but they are relationships that we have in providing our capability to and through them or their capability through us to our customers.

Look at the end of the day.

We see new entrants in the market as partners in areas like launch Com exploration and the investments that they're making is oftentimes complementary to ours, but we combine them on a solution by solution basis, because that's the business that we're in we look for the best partner for each system.

We are bidding and delivery and setup and our partnership model and I expect that to continue to be our partnership model.

Your next question comes from the line of Ron Epstein with Bank of America. Your line is open.

Hey, good morning, everyone.

So Kathy.

Okay.

And Gi down select UBS.

Have you had some really.

Important wins recently, when we looked at in the pipeline what what are you looking at next what's the team focused on are kind of key areas or key programs that you'd like to win in the near term it may be EBIT in the medium term.

So Brian good to hear.

When I stepped into the role I talked a lot about the desire for the company to focus on campaign areas that were closely aligned to where we believe the national defense strategy.

With placed investment and we continue to believe that those campaigns are focused on the right areas, we see space continuing to grow faster than other parts of the market and we see ourselves being able to continue to grow our portfolio and take share in their strategic missiles continues to be an import.

Area, our work on CBS D. The down select on NCI. So now the interceptor side of that equation as well as the more modernization that from missile Defense agency has to do and protective systems.

I guess I have a theory and we see that stretching across domains. So even in a space, we see a tremendous amount of recapitalization and missile tracking and the ability to detect missile type like hypersonic when I talked about the HPT S. That's award that we have the space and missiles.

It's very complementary in terms of our strategic focus and both of those areas and still more growth that we see in both of those another key area that we've been focused on is joint all domain command and control and we were doing it before it was call subsea two with programs like <unk> yeah.

Which really fit what the government looks for and being able to integrate sensors from shooters and provides that backbone architecture. It has elements of communications and connectivity, which is an investment area and area of technical excellence for our company. It has elements of computing and the enhancement that's new.

Needed to process large amounts of data it has advancements in artificial intelligence and these are all areas that our company continues to invest in.

And have leadership positions and so those are just a few examples from the campaigns that we outlined in 2019 that we continue to execute against and see good success. So yeah. No new strategy is continuing to execute that strategy, which is working well for us from still has legs and we believe well into the future.

Your next question comes from the line of Doug Harned with Bernstein. Your line is open.

Good morning, Thank you.

When you look at.

Northrop Grumman is positioned now your major player on.

Major airborne and space platforms, but you've.

Also.

Okay.

Important provider of electronic systems to other platforms.

If you go back historically.

There's always been this tension.

Where people have tried to have a platform and then <unk>.

Sure that their own systems get on it and then those have been typically sat down and they've been competed separately.

So today since you're on both sides of this when you look at the way technology is evolving the way the threat is evolving.

Do you see the competitive landscape do you think it will stay the same do you think there'll be the ability for people to try and vertically integrate more between platforms and systems.

Where do you see this going.

So Doug it's an excellent question and one that we spend a lot of time thinking about strategically because our portfolio as you'll note does have.

A good bit of vertical integration opportunity, but that doesn't mean that it's always the right answer to put our systems on our platforms and so we take a very objective look when we are an integrator onto our platform.

We're the best technology comes from and that May be inside of Northrop Grumman It maybe with an industry partner and to the earlier point in space increasingly maybe new entrants and the companies that aren't particularly focused on national security, but have capability to bring to bear I would also though point.

But being a strong competitor in mission systems, and being able to have the technology that is the winning technology on our platform.

Means that you have to invest and that you have to prioritize.

Area and we have done that quite successfully so there are many cases, where our technology is about to go on our platform and even if it is not our platform another company's desire to vertically integrate they will not too I don't believe to put their own kit on a platform.

It's not the best technology to compete at the platform level and we've seen that play out time and time again, where there was a fear that our mission systems would not be selected by other competitors because they would want to integrate their own capabilities, but at the end of the day.

Incumbent upon the platform price ourselves included to make unbiased choices and look at what is the best capability to provide to our ultimate customer and meet the requirements and that's where our mission systems team has excelled staying at the forefront of technology. So that we do compete.

We emerge as the best provider, it's why our mission systems business has a good deal of full force work I talked about the F 16 upgrades.

On the radar, but also the EW suite now that we're working with the Air Force.

That is because we have the best technology and we are now being selected to move to deliver that capability.

Your next question comes from the line of Mike Mcgary with Wolfe Research. Your line is open.

Good morning, Thank you.

David you mentioned that lower cash expense. It can help make you a little bit more competitive in a flattening budget environment.

So in line at that point I just wanted to ask how do you think about the E&P discipline in a flattening or contracting budget environment relative to when the budget is expanding.

Sure.

We look across our business investment.

Investment opportunities both capital expenditures R&D BNP.

And really make decisions specific to the market condition.

Conditions in market opportunity set that we see in different parts of the business.

With the overall budget flattening.

As expected the flattened over the coming years, we still have our space business that grew nearly 30% this quarter and over 30% last quarter.

So clearly the opportunity set there is such that.

Significant ongoing investment in R&D and capital expenditures BNP has been the right decision for the company to have made and continues to be we have a very healthy outlook there.

Really across the business I wouldn't say, we're yet feeling.

Opportunity constrained.

Certainly we are careful with our investment dollars and we look at.

Returns on our investment dollars in each of those buckets, but at this point, we continue to see a healthy opportunity set in the markets we serve.

And to make the.

Appropriate investments as a result, our R&D costs are.

<unk> to be.

Around 3%.

Revenue and that's been a healthy level for us over the last couple of years continues at at approximately that level in 2021.

Certainly put BMP in that same category again reflective of.

The positioning we have with.

The faster growing parts of the budget.

Maryann Man, we have time for one more question.

Okay. Thank you. Your next question comes from the line of Myles Walton with UBS.

Your line is open thanks, Chris.

Thanks for squeezing me in maybe a clarification on the.

The slide deck you'd call. It 35 cents from corporate unallocated just how much of that is more corporate unallocated run rate as opposed to one off and then Kathy as you look at talent acquisition I think he agree that work for 7000 or so in 2020.

Given the pipeline of business that you're having what is the market for growing that pipeline, where do you think that number might end up at the end of 'twenty one.

Sure on the on the lower corporate unallocated I would call. It a mix of items more unique to this year and other items that will be sustained in future years as we.

Mentioned the state tax costs are a bit lower this year than we had anticipated in other areas there is ongoing.

Careful cost management and discipline, that's that's led to that efficiency.

All at a mix on that from.

And miles an hour talent.

Strategy and specifically the growth that we expect.

We hired almost 14000 people last year and as you noted yielded about 7000.

Head count and that's largely because of attrition has slowed and we expect that that will continue into this year, but perhaps with other companies beginning to grow and the labor market tightening that to go up so we expect to net about the same headcount growth this year.

We are monitoring closely the moving parts of how many hires we need to make but the net of attrition to get there.

Okay, we'll leave it there I'll turn it over to Kathy for closing remarks.

Well, thanks, Todd and Steve heard the year's off to a great start with our New award we had robust sales growth and strong margin in the quarter and I want to recognize that the foundation of executing our strategy is the strength of this team and their outstanding performance. So let me conclude by once again thanking the Northrop Grumman.

Team for their innovation and hard work. So that concludes our call. We look forward to talking to you again next quarter and thanks for joining.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.