Q2 2021 Northrop Grumman Corp Earnings Call
Year to day 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 would now like to turn the call over to your host Mr. Todd Ernst Treasurer, and Vice President Investor Relations. Mr. Ernst. Please proceed.
Thanks Nicole.
Everyone and welcome to Northrop Grumman second quarter 2021 conference call, we will refer to a powerpoint presentation that is posted on our IR web page. This morning before we start matters discussed on today's call, including 2021 guidance and beyond reflect the company's judgment based on information available at the time of this call day constant.
Institute forward looking statements pursuant to safe Harbor provisions.
Federal Securities laws.
We're looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially.
Today's call will include non-GAAP financial measures that are reconciled.
Our GAAP results in our earnings release on.
On today's call are Kathy Warden, our chairman CEO, and President and Dave Keffer, Our CFO at this time I would like to turn the call over to Kathy Kathy.
Thank you Todd good morning, everyone and thank you for joining us.
Today, we are very pleased to announce another strong quarter.
I'll begin by recognizing.
Our Northrop Grumman employees for their continued focus on operational excellence.
Our results represents a successful execution of our strategy the strength of our portfolio and the commitment of our team to deliver for our customers and shareholders.
As the global threat environment continues to rapidly.
We evolve and other nations gained more complex and sophisticated capabilities, our customers need innovative and affordable solutions to be delivered with increasing speed and agility.
With the investments we've made in advanced technologies combined with our talented work force and adoption of digital.
Transformation capabilities, Northrop Grumman is well positioned to meet our customers' needs and continue to strengthen our position for the future.
This quarter, we once again delivered strong growth and operating performance.
Our sales increased by 3% to $9.2.
$2 billion.
Adjusting for the effects of our first quarter divestiture of the <unk> services business organic sales increased 10%.
While we do expect this growth rate to moderate in the second half of the year. We continue to have a robust pipeline of opportunities in 2021 and beyond.
Additionally program execution across the portfolio with exceptional which drove our segment operating margins to exceed 12%.
This follows on strong Q1 performance, resulting in a year to date segment operating margin of 12, 1%.
And we continue to expect solid perform.
<unk> for the remainder of the year.
Earnings per share increased 7% this quarter and transaction adjusted EPS has increased 16% year to day.
Transaction adjusted free cash flow was also trending favorably and has increased 26% year to date.
As a result.
We ended the quarter with just under $4 billion in cash on the balance sheet.
This provides us continued flexibility for capital deployment.
We completed the $2 billion accelerated share repurchase in Q2 and continue to expect to repurchase over $3 billion for the year.
Additionally.
We increased our dividend by 8% in May.
We are executing a balanced capital deployment strategy, which includes investing in the solutions our customers need and also returning cash to investors.
Over the next couple of years, we continue to expect to return the majority of our free cash flow to.
Shareholders through share repurchases and dividends.
In terms of budget updates from Washington, The Biden administration issued its budget request for fiscal year 2022 in May.
And it reinforces the administration's statements around investing in capabilities to maintain U S. Nash.
We already advantages.
The request aligns well with the investments we've made at Northrop Grumman as we've positioned our portfolio for the future.
And while it's still relatively early in the budget process. We're pleased to see strong support for National security from the Congress.
Including a <unk>.
<unk> $6 billion increase to the President's budget request approved last week by the Senate Armed Services Committee.
Both the House Appropriations Committee and fast have voiced strong support from many of our programs, including B 21 G. B S. D. Triton F 35 to name a few.
We look forward to working with the Congress and the administration as they make progress on the fiscal year 2022 budget.
NASA was also well supported in the budget with a 7% year over year increase in proposed funding now.
NASA priorities include returning to the Moon via the Artemis program.
1.5 year and key supplier of critical technologies, including the habitation and logistics outpost or Halo and the solid rocket booster for the space launch system also known as at the lab.
This provides meaningful opportunity for the company and it demonstrates the diverse nature of our space.
Wherewith net.
Turning to business highlights from the quarter I'll share a few examples that help to demonstrate the strength of our portfolio and our technology leadership across key markets.
In partnership with the Air Force. The B 21 program remains on track with 2 test aircraft.
Base production today, and we continue to make solid progress towards first flight.
This program Leverages, the Confluences of Northrop Grumman's long history in aircraft development and advanced flow observe ability capabilities.
The Air Force recently published an artist rendering and it'd be 20.
<unk> that provides additional insights into the program.
It's actually highlights that the B 21 is being designed with open systems architecture to reduce integration risk and enable future modernization efforts to allow for the aircraft to evolve as the threat environment changes.
As we've discussed on many of these calls Northrop Grumman is a leader in communications and networking solutions.
Providing the connective tissue from military platform sensors and systems, they weren't designed to communicate with 1 another.
Passing information and data using secured.
1 fact open system similar to how we use the internet and 5 G. In our day to day lives.
Our system has played an important role in the northern edge 2021 joint exercise, which was held in May and showcased how we enabled warfighters to easily communicate and.
Securely share actionable information regardless of platform.
As part of the exercise Northrop Grumman systems were validated on 3 separate platforms.
Our freedom pod was the part of a demonstration with the air National Guard and our freedom radios. We're a key part of 2 demonstration centered on Advair.
<unk> fifth generation communication and as a reminder, the freedom radios equipped both E F 35 and up 22.
We are also enabling joint all domain command and control through our integrated Air and missile Defense Battle command system or <unk>.
In July the U S Army.
Successfully engaged a cruise missile target in a highly contested electronic attack environment. During a developmental flight tests using Northrop Grumman I B C F.
This latest flight test integrated the widest variety of sensors to date, including a Marine Corp, Gator radar, which is our GAAP.
<unk> Expeditionary radar that entered full rate production last year as well as F 35, and other ground sensors and interceptors.
This would be a successful flight tests performed with the IV CF program and the program is on track for a competitive down select a full rate production later this year.
In addition, we are making great progress on the GBS fee program.
In the second quarter the team officially closed out the Emt baseline review with our Air Force customer.
And we completed the integrated baseline review.
The IV or is a critical step in setting Clarkson schedule baselines and.
An important milestone for the program.
And earlier this month, we were awarded a contract to continue our support of the Minuteman 3 ground subsystem until they're successful transition to the GBS day system.
So taking a step back the examples that I just provided highlight our strong.
Performance technology leadership, and broad portfolio and its tight connection to national security priorities.
From modernizing our strategic deterrence to breakthrough technologies that connect our forces.
Based on the strong results and performance of our company year to date and our later.
And isn't it look for the remainder of the year, we are increasing our 2021 revenue segment Om rate and transaction adjusted EPS guidance.
Additionally, after 2 years of book to Bill over 1.3, we expect our book to Bill for the full year to be close to 1 this year with.
People keep opportunities in the second half of the year that include Halo S. L. F. F 35, and several restricted program laying the foundation for continued growth.
Before I turn the call over to Dave I'd like to talk about ESG.
We are very proud of our ESG.
E S record and the high marks we have received in many environmental and social ranking.
We have built an organization with a robust governance structure diverse and inclusive working environment and an ongoing and evolving focus on responsible environment stewardship.
In.
We published our most recent sustainability report.
It provides transparency into the progress on actions we've taken in these areas and more.
To help ensure we adhere to these priorities every day key components of our ESG goals are reflected in non financial metrics.
That are incorporated into the leadership team annual incentive compensation.
And just last week, we announced the appointment of a chief Sustainability Officer, who will report to me and drive further enhancements to our ESG program.
I want to again, thank all of our employees for stepping.
Up to the challenges our nation of safety and for remaining focused on delivering for our customers and our shareholders.
Our second quarter results and enhanced 2021 outlook demonstrate that our strong fundamental trends continue.
Over the long term, we are well positioned.
Provider customers innovative and affordable solutions to help address national security threats.
While driving profitable growth and value creation for our shareholders.
So with that I'll turn the call over to Dave who will provide more detail on our sector results and our updated 2021 guidance.
Dave.
Thanks, Kathy and good morning, everyone. My comments begin with second quarter highlights on slide 3.
We delivered another quarter of excellent organic sales growth.
Standing segment operating margin rate income.
Layer EPS.
Our year to date transaction adjusted free cash flow increased 26%.
And we continued to return cash to shareholders through our buyback program and our quarterly dividend, which we increased by 8% in Q2.
As a result of our outstanding first half performance and enhanced outlook for the year, we're pleased to be raising our sales segment operating margin rate and EPS guidance.
<unk> 4 provides a bridge between second quarter 2020, and second quarter 2021 sales.
Normalizing for the it services divestiture, which was a $585 million headwind in the second quarter of 2021, our organic sales increased 10% compared to last year working days were.
The same in both periods.
Moving to slide 5 which compares our earnings per share between Q2.2020 in Q2.2021, our EPS increased 7% to $6.42.
Operational performance contributed 60 cents of growth and lower unallocated corporate costs.
Slide driven by state tax changes added another 22 cents or.
Marketable securities' performance was a modest earnings benefit in Q2, when compared to the even more favorable equity markets experienced in the same quarter last year. They represented a year over year headwind of <unk> 18.
Lastly, we experienced a higher.
<unk> total tax rate in the period due to a change in tax revenue recognition on certain contracts for years prior to the 2017 tax cuts and jobs Act.
Next I'll begin a review of sector results on slide 6 <unk>.
Aeronautics sales were roughly flat for the quarter and up 2% year to date.
Sales in both periods were higher in manned aircraft principally due to higher volume on restricted programs and <unk>, partially offset by lower production activity on <unk> hundred 50, and lower volume in autonomous systems.
At defense systems sales decreased by 24% in the quarter and.
<unk> fell 1% year to date and on an organic basis sales were down roughly 3% in both periods lower organic sales were driven by the completion of our lake city activities, which represented a headwind of $120 million in the quarter and $260 million year to date.
This was partially.
Partially offset by higher volume in both periods from G. M L RF as well as ramp up on the global Hawk contractor logistics support program for the Republic of Korea.
Mission systems sales were up 6% in the second quarter and 8% year to date.
On an organic basis M S delivered another double.
Double digit sales increase in the quarter of almost 12% and organic sales were higher in all 4 of its business units in both periods.
Turning to space systems sales continued to grow at a robust rate rising 34% in the second quarter and 32% year to date.
In both of its business areas were higher in the quarter and year to date periods.
<unk> continued ramp up on GBS D and N G I as well as higher volume on restricted programs Artemis and next generation <unk>.
Moving to segment operating income and margin rate on slide 7.
We had an outstanding operational quarter with segment margin rate at 12, 2%.
Aeronautics Q2 operating income decreased 3% due to a benefit of $21 million recognized in the second quarter of 2020 from the resolution of the government accounting matter.
Operating margin rate.
Was consistent at 10, 3% in Q2 and the year to date period.
At Defense systems operating income decreased by 18% in the quarter and 15% year to date, primarily due to the impact of the it services divestiture.
Operating margin rate increased to 12.
Per cent in the quarter and 11, 8% year to date.
The increase in operating margin rate was largely driven by improved business performance and business mix and Battle management and missile systems programs.
Operating income in mission systems rose, 18% in the quarter and 15%.
48, due to higher sales volume and improved performance operating margin rate increased to 15, 8% in the quarter and benefited from the favorable resolution of certain cost accounting matters as well as changes in business mix as a result of the it services divestiture.
Year to date operating margin.
Non rate increased to 15, 5%.
Space systems operating income rose, 44% in the quarter and 40% year to date and operating margin rate was 11% in both periods.
Their operating income is primarily a result of the higher sales volume along with the timing.
Year to disc retirements contributing to higher net favorable earnings adjustments in both periods.
Now turning to sector guidance on slide 8 you'll note that we are now providing quantified ranges for sales and AUM rates instead of the broader description such as low to mid or mid to high given the improved visibility that we have.
<unk> the rest of the midpoint of this fiscal year.
We are increasing the sales outlooks of our defense mission systems and space sectors, given the strong volume that each produced in the first half and solid outlooks for second half performance.
We're slightly reducing sales guidance for aeronautics.
Reflecting the continued.
As we Boeing of several of our production programs after years of outsized growth.
For operating margin rate, we're increasing our guidance at defense MFS and space and the margin rated assets remains unchanged.
Moving to consolidated guidance on slide 9 we are raising our 2020.
<unk> look for several key metrics for sales, we're increasing the midpoint of our guide by $500 million to a range of $35.8 billion to $36.2 billion.
This translates to full year organic growth of over 4% and over 5%, excluding the 2020 equipment.
1 <unk> at a S.
As you review our sales trends keep in mind that the first half benefited from 1 month of the it services business and had 7 more working days in the second half will have.
We expect the company to have higher organic sales per working day in the second half of the year than the first.
We're also increasing both our segment operating margin rate and our overall operating margin rate ranges by 10 basis points to 12, 211, 6 to 11, 8% and $15.5 to 15, 7% respectively.
Keep in mind that the gain from the it services divestiture.
<unk> contributed approximately 5 points of our overall operating margin benefit.
We're proud of our profit performance in the first half.
To expect strong results in the second half of the year.
First half net favorable EAC adjustments were particularly strong.
With lower rates driving Q1.
Outperformance and program risk retirements contributing to Q2 strength.
For unallocated corporate expense, our updated guidance reflects a $30 million reduction associated with state tax changes.
And we now foresee in effective federal tax rate in the high 17% range, excluding the effects of the.
The divestiture, which was an increase from our prior guidance.
We projected federal tax rate of approximately 22, 5% on a GAAP basis.
Finally, we're raising our EPS guidance, which I'll highlight on slide 11, the increase in guidance is driven by 40 some segment operations.
Improvement.
Lower unallocated corporate costs, almost fully offset the headwind from the higher federal tax rate, leading to an increase in our transaction adjusted EPS guidance of 35 at the midpoint.
Next I'd like to take a moment to talk about cash.
Since our call in January we've raised the midpoint.
<unk> of our sales guide by $700 million.
With those additional sales come additional working capital needs to fuel the growth, but in light of our outstanding first half cash flow performance. We project that we can absorb that additional working capital and our existing transaction adjusted free cash flow guidance.
<unk>, 3% to $3.3 billion.
<unk>.
We believe this range reflects continued strength in cash conversion balanced with prudent investments in key growth segments of our market.
I also wanted to provide more information on the projected impact on our 2022 cash pension recoveries from the American Rescue Plan Act, which was passed this spring.
Well at while asset returns and actuarial assumptions will continue to influence the final number our current estimate is approximately $185 million of Cas recoveries in 2022.
Down $55 million from our January guide and down about $300 million from our expected.
21 level.
We continue to expect minimal required pension contributions over the next several years.
Regarding cash deployment as Kathy mentioned, we completed our $2 billion.
Accelerated share repurchase in the second quarter retiring over 6 million shares at an average price of around 312.
$27 per share and.
And we continue to target over $3 billion of total buybacks in 2021.
At the end of the second quarter, we had approximately $3.7 billion from remaining share repurchase authorization.
In conclusion, we're very pleased to have delivered on.
<unk> per quarter of rapid growth outstanding program performance strong cash flow and accretive cash deployment would that Todd I think we're ready to open up the call for Q&A.
Hey, Nicole we remind everyone how did it get into the queue.
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1 moment, while we compile the roster.
Okay.
The first question will come from the.
Another Doug Harned with Bernstein.
Good morning.
Good morning, Doug.
Spaces is now such a big area for you.
I wondered if you could give us a sense of how you look at this.
The broader environment because.
And we're seeing many new entrants in space commercial players some.
So I'm doing small sats launch vehicles or other things.
So when you look at.
At this evolution.
You know for Northrop Grumman.
Where do you where do these players.
Present competition for you.
The line of where can they present partnership opportunities how do you see this world evolving.
Thanks for the question.
Because if we look at our portfolio.
I've said before is quite broad in terms of the technologies that we offer the integration capabilities.
Provide.
You.
Each segment of the market, we follow a strategy of partnering.
And leaning and combining partner capabilities into our own team and National Security Space. For example, we are operating as both a strategic partner to me.
Any other primes.
<unk> also been able to lead efforts on our own that integrate our technologies and others in the case of simple space in particular NAFTA with today's exploration the same is true.
Halo program is an example of where we are leading we were awarded that.
But we.
We do have partners on that program that are bringing differentiating technologies, while at the same time on human Lander, we chose to partner in that case with Blue origin.
In each case, we look at the capabilities that our team has to bring the overall mission requirements and.
For us to lead or follow in order to do that we need to have strong partnerships.
With the more traditional space companies in our industry as well as some of the new entrants like Spacex and blue that are of a larger scale and I also don't want any of us to forget that.
And while the number of smaller companies that also have been very good partners for us in this area and we will continue to be in the future and there are dozens of them we tend not to.
Go forward with singular and.
Our.
Focused partnerships.
There are then 1 particular company, but instead have a wide variety of cash.
Our partners that we work with in this area and that's what we plan to continue to do it at all.
Well you know when you look at it this 1 areas small sats for example, where I.
A lot of aspects of that people may look at it it could be coming more commoditized and there are a number of small players that raytheon made the decision to acquire them.
Blue Canyon.
How do you how do you look at that part of the universe here in terms of what you see as a differentiated capability.
<unk> at Northrop Grumman that clearly.
Our position is going to be very strong for a long time and then perhaps some other areas.
You know in a small said bus could be 1 where you know you could own it or not on it how do you think of the division between those 2.
I think.
<unk>.
<unk> believes that we should own what is most important to a fully integrated offering that meets mission requirement and we particularly are focused in our case on national security space and Cleveland duration, and so we don't feel we need to own everything.
Our acquisition of orbital ATK rounded out our portfolio nicely. We now have both bus offerings as well as the ability to develop satellites on small scale rapidly as well as more exquisite payload for more sophisticated mission and we like that.
Breadth of.
Our folio as it exists today and that's not to say, we have everything we need which we're partnering comes in but we don't feel we need to take an equity stake or acquire companies to get access to those capabilities.
Okay very good thank you.
Okay.
The next question will come from the line of Ron Epstein.
Our bank of America.
Hey.
Good morning.
Kathy I was just wondering if maybe 2 things.
Could you remind us what's on the horizon in terms of competitions latter half of this year into next year, and then and then certain the second point in terms.
With a total deployment itself is there any areas that you're looking or how are you thinking about that.
From so I'll start with the competition that we see in the latter half of this year most of our second half award or actually noncompetitive, we're looking at.
35.
So lots of awards in the latter half of the year. There are several restricted programs, which are competitive that we are looking to book in the second half and we also have I B C us, which I mentioned earlier on the call, which will be selected for full rate production in the second half of this year as we.
A calendar term there are aircrafts development programs in the pipeline, but those are a bit further out and so those are areas to the second part of your question that we are investing to position for that are not necessarily evident in our short range plan.
The.
Look there is that we're investing in when I became CEO in 2019, we defined mission campaigns and I've talked about several of them in the past. They include areas like National security space strategic missiles, where we've made significant progress in the last couple of years executing those campaign strategies.
Other new awards and moving our position in those market segments materially we continue without okay, and so looking forward major areas.
<unk> future manned aircraft and unmanned aircraft. We also see continued growth.
And our advanced weapons portfolio, and our advanced networking and communications portfolio just to name a few.
Okay.
Great. Thank you. Thank you very much.
Okay.
The next question will come from the line of Sheila <unk>.
<unk> with Jefferies.
Good morning, Kathy David had so going back to space Kathy a hot topic right now 37% growth in the quarter very good how do we kind of think about this business over the medium term does it continue at double digits outside of GBS day growth.
Maybe if you could talk about that given the deceleration you have been.
For the second half with high single digit and just the margin contraction is that related to some of the new programs that are.
But you're starting in the N space.
Okay.
Yes, sure why don't I start and then I'm going to ask Dave to walk through the specific structural items. There is no doubt that our space business.
Is performing exceptionally there are some structural items to consider when you look at the first half compared to the second half. We walked you through a few of those working days the timing of our pension cost reductions, but from a flow through our program. He sees and the impact on margin and then timing of particular.
Programs like GBS D, which started to ramp in the second half of last year, and therefore create a tougher compare in the second half of this.
But with that said this business has exceeded our expectations and frankly since it would stood up 19 months ago, and we aren't betting against it in the second half but generally.
We don't forecast that kind of success that the business is having but we certainly strive to deliver it and that's what the team has been doing all year to that point, so yeah, I'm going to turn it over to day because he can walk you through some of the structural items that I mentioned as you model the second half compared to the first.
I want to leave you with the impression that we still have significant opportunity in the pipeline for this business I've talked about some of the second half award and great momentum that will enable this business to continue to grow.
Thanks, Kathy I think that's a great summary, the first half of the year was just an outstanding half for space and we can.
Continue to see a strong second half in store.
Mentioned the working day.
Impact on organic growth in the first quarter as we noted that that was 3 extra working days for a 5% or so benefit to growth in Q4 as 4 fewer working days for a 6% to 7%.
But I'd wind for growth, but of course sales or just timing items more broadly speaking we had the GBS T N N G I programs ramping up in the first half and that will continue going forward.
In the second quarter, we noted that we had a really strong program performance in particular.
<unk> on some commercial programs, where we had a net EAC benefits in the quarter that contributed.
So that really strong margin rate performance, we saw from space in the first half in addition to the first.
First quarter indirect rate improvements that we talked about on our April call. So in aggregate are really.
Really strong first half for the business in the second half. We expect continued strong performance. We had originally guided this business to be about a 10%.
Margin rate business for this year, we're outperforming that number this year.
We continue to see that as a reasonable expectation in that 10% margin rate range.
After this year and so.
It's a really strong business and a great part of the market and we intend to continue gaining share there.
Thank you.
Okay.
Our next question will come from the line of Scott Bachman with Jpmorgan.
Thanks, very much and good morning, everyone.
Kathy you are you.
You mentioned Halo as an award coming up for I think he probably will it seems like you'll have it in the in the third quarter and I noticed there was a firm fixed price contract.
I guess in for something in space, where we all know how much.
Risks there can be involved in space programs.
How do you think about taking on a firm fixed price contract for it.
An important space opportunity and what does it say about the way that you and your customers are looking at risk in the space area more broadly.
Thanks.
Okay Halo program is from fixed price contract, we don't see it in the development effort per se, it's building off of the.
<unk> habitat that.
We have built in the past and so a lot of commonality with prior efforts and strong experience in this area.
And.
That goes to how we think about bidding more generally.
Know that we have a track record of not meeting when we assess the risk of 2 great.
Are you able to mitigate prior to putting in a fixed price proposal and we have walked away in the past from opportunities.
As a result of finding ourselves in that situation.
We are getting more sophisticated and being able to shape these opportunities and risk reduction prior to the bid. So we can get comfortable that those risks are well understood and that we have a plan to mitigate.
Get them and that indeed is the case with Halo with that said, we have very little firm fixed price development at work in our portfolio and so as we look across the portfolio and think about that risk exposure I think part of your question is going to are.
Are we doing more out of that and the reality is that we are not doing more fixed price development work today than we have in the past and we don't see that as a broad trends in the industry.
Great. Thanks very much.
The next question.
Comes from the line of Richard Safran with Seaport Global.
Yeah.
Kathy David Todd Good morning, how are you.
Good morning.
You know.
Either Kathy or David with a number of programs advancing from development to production I thought now might be a.
Well, a good time to ask how you're managing cost and cost take out both internally and with the supply chain. So I'm, just wondering how you're incentivizing and challenging the business segments and suppliers to take out cost and drive productivity improvements I know, it's a general question, but any insight into how you think about this.
It would be helpful.
We just consider how to model Northrop Grumman.
<unk> term.
Thanks Rich it is an important question at this point in time, if we do see a transition to <unk>.
More production work, we continue to focus on cost control across the company and its 8.
<unk> now by our digital transformation effort. It is an enterprise wide effort led out of my office and we are streamlining and automating processes, both for our product development, so taking cost out of the product development cycle.
And manufacturing as well as the back office, both of which contribute to.
Margin improvement opportunity and those will evolve over the next several years as we implement different phases of that digital transformation. We're also monitoring labor costs something that you didn't ask specifically about but we have not yet seen significant pressure upward on labor costs, but we're tracking it.
Because we all know nationwide attrition and movement is upward trending and we have not seen that in our company. Our attrition is fairly similar to what it was pre COVID-19, but we do continue to monitor that and expect to be able to fully offset that with the efficiencies I referenced.
And our digital transformation and so that's part of what we're thinking about as we're setting those goals with regard to supplier pricing. We have seen some modest pressure in supplier pricing, it's mostly related to areas, where there are supply bottlenecks think semi conductors certain commodities.
But we expect those to be transitory and to be more than offset by the internal efficiencies I spoke about and indeed team, where we manage our enterprise supplier.
Work, they're doing some really good things to get ahead, both contractually and through supplier management of those.
This pressure so Dave why don't I turn it to you for any additional comments you'd like to make sure. Thanks, Kathy we have a keen focus on the supply chain. These days certainly.
We were looking at Covid driven pressures over the past year and photos were mitigated well continuing to track that of course on the inflationary side I think those pressures have been.
Modest so far and focused on a few particular commodities boots, but have not been anything.
Anything we haven't been able to mitigate it.
As Kathy mentioned contract structures to reduce that risk about half of our work is huge cost type work.
And of the remainder of the the majority is price over short durations and.
And so we get to reprice those frequently enough to mitigate that pressure on the semiconductor side we've seen.
In certain areas and pockets I would say, we've seen extended lead times, but nothing we haven't been able to mitigate broadly.
By partnering with our suppliers by sharing demand.
And signals well in advance and it being in tight.
Communication with those in the challenging pockets of that semiconductor community. We're also continuing to make use of our own.
Foundry, where where appropriate and where are in the best interest of our customers.
So taking a step back and kind of summarizing certainly to the.
It is critical to our cost management efforts into our execution efforts in general.
And more broadly speaking is cost management is a keen focus of ours every day, we don't talk about it a lot on these calls, but certainly it's something that is part and parcel.
Everything we do our it costs are real estate costs as Kathy mentioned were careful about our labor and semiconductor costs and other key elements of our supply chain as well.
So these are areas that we're keenly focused on certainly digital transformation is.
The next key initiatives that will.
Will that will have a significant beneficial impact.
But broadly speaking, it's a it's something that's high on our radar.
That was really great color. Thanks.
Okay.
Our next question comes from the line of Carl bottom line.
Good day.
Yes. Thank you excellent results again.
Base margins.
I think we've always talked about is the mix, becoming more production is it more development and obviously.
With all the wins you had in space G D C and Gi it looks.
If the mix is becoming more development, so I'm a little surprised by the very strong margin that you delivered in in space I mean, it looks like in the second half Youre looking at about 10 or a little bit under.
But maybe talk to us is that bye bye your sectors mainly.
Space Mission and Aeronautics is the net shift in the mix towards production or toward development.
And or is it is it essentially balanced going forward.
Sure I can start on that it's a good question on the space side.
You've touched on some of this.
But certainly to your point, we've been really pleased to be able to increase the margin rate guide there from 10% to start the year to 10.2 to 10, 4% and our.
Latest guidance, that's driven by the strength of our first half performance across our programs in that portfolio I mentioned it on the commercial side.
There was particular strength in Q2.
The indirect rate reductions in.
In the first quarter were also beneficial there and.
In the second half margin rates continues to look solid and longer term, we continue to think of it as about a 10% business.
There is that mixed pressure that you've described so that 10% margin is in the face of that pressure and really driven by the strength of operating performance that we continue to see in the business to include a direct and indirect.
Cost performance as well as our program execution milestones and such so it's certainly been a.
The per BOE are favorable.
Favorable story as we've seen the cost type development work begin to grow in space and 1 that we expect to continue.
S and <unk> have a bit of a different picture moving forward that is to some degree offset the cost type increase in AR.
Space M. S. In particular has had a mixed shift toward a bit more fixed price this year.
Really driven by the divestiture, which are removed a portion of its cost type portfolio.
And then as the broader long term trend would shift a bit more toward fixed price as well so.
Again this is 1 of those scenarios.
Scenarios, where it's helpful to have a broad portfolio with different types of business at different phases of their life cycles, and that's what we see unfolding in the coming years.
Great answer thank so much.
The next question will come from the line of Crystal day lock with more.
Okay.
Hi, good morning, everyone.
Good morning.
Kathy circling back on the Artemis Lunar Lander program.
Blue origin has proposed to NASA to wave $2 billion of fees, how does it affect your partnership with Blue origin, and what's your appetite.
Appetite to support a loss leader approach in space.
Thanks, Christine So this gets back to the question Doug was asking as well when we think about partnerships and clearly when we lead and FERC, we will choose to make sizable investments to protect that.
Program and increase our probability of win over.
Its life because of the advantage that you get when you are the leader of the prime on the effort and that's exactly what origin is doing and it's important to also note that the business case for glu extends well beyond the announced.
Brown as they think about their aspirations for commercial space travel in the case of Northrop Grumman, we'd have to do that similar business case assessment and we'd come to different answers in terms of what our contribution should be to the overall program financial and.
That's expected in any good partnership that you lay out the clear expectations of each party, but also the benefits to be gained by each party and aligning those expectations for financial investment.
Thanks, Kathy and maybe switching gears to your you know your nuclear business.
The program, we saw the nuclear enterprise get solid support into fiscal year 'twenty to budget, but now the new administration is undertaking its own nuclear posture review and it sounds like it's going to be integrated with our new national defense strategy as well.
With your exposure with the 2 legs of the nuclear triad with B 21 of GBS Steve.
What are you watching for when you get a document like that and do you anticipate to see any major changes.
Well first I'm very pleased that the administration is looking at the National Defense strategy and the nuclear posture review in an integrated way because it is the threat environment that should define the overall defense strategy.
And the role of the strategic deterrent and the nuclear programs as part of our strategy. So it's an indication to me that that's exactly how the administration is thinking about it they've been clear that their assessment of the threat, particularly with Russia being the pacing threat with regard to nuclear.
China being a emerging but very rapidly growing threat.
Recent intelligence just further supports that.
That with that basis, they will look at what each administration before them has done a overall nuclear posture review and.
And ensure that the programs from the modernization plans indeed measure up against that threat. We are very confident that once again the threat assessments. The affordability of these programs and the requirements being met by these programs will line up well to vote.
N D us from the M. P R and that should play out over the next 6 months or so.
Great. Thank you very much.
The next question will come from the line of Robert Spingarn with Credit Suisse.
Hey, good morning.
Good morning.
Hi, Dave I've got 1.
1 for you on just cash flow cadence and.
Just a smoother cash flow we saw this year I think last quarter, you talked about some of the working capital improvements that drove a smaller outflow. There. So now with the first half on the books, how does the second half shake out.
Q3 to Q4 in terms.
Cash flow is it going to be flat or do we have a bigger Q4 that.
We typically see and.
If it is flat or is that something you can hold onto long term.
Sure. Thanks for the question Rob.
We don't give quarterly guidance, but we do talk about the general trends and.
I think.
A free expect there.
Second half trends this year to be similar to prior years.
We had a smoother first has been the unusual as you mentioned, we're pleased with that and that's something we'll strive for going forward as we look at the second half.
Overall as I mentioned, we're driving for.
The $3 to $3.3 billion of free cash flow target that we've had since we started the year as we mentioned at the beginning of the year and as you alluded to that required some working capital enhancements given the growth that we're seeing in order to offset the lower pension reimbursements.
The outflow associated with payroll tax deferral this year.
A couple of hundred million dollars of divestiture related free cash flow that we had been generating each year prior and so in aggregate it required substantial working capital improvements. We've now delivered on those in the first half of the year and we're really.
Pleased with the progress through the first half.
No.
Without giving a quarterly outlook for the second half we expect continued strength in the in the third and fourth quarters.
It leads to a strong 3 to $3.3 billion as we mentioned in our guidance for the year. I'd also note I think of that as a pure free cash flow number than we've had in prior.
Prior years, given the cash pension dynamics, which as we noted on the call will continue into next year, so that purification of the cash flow the strength in working capital I think are good news stories as it relates to free cash.
Thanks, Dave.
You bet.
The next question comes from the line of Robert Stallard.
With vertical research.
Thanks, so much good morning.
Morning.
Dave is probably 1 for you can you elaborate on what the programs are.
In aerospace.
Going to be plateauing, I would say going forward from here.
Sure I'll be happy to start on that 1 Rob.
<unk>.
We would've noted if there were 1 or 2 programs driving that it's really broader based than that we've been talking about the trends in the life cycles of various programs.
The unrestricted side over the last couple of years.
Our comments today will be consistent with that.
35 program.
Noted in the past that we deliver.
To deliver ahead of the primes, a timeline and so in this case, we would expect to plateau ahead of a prime on that.
And so thats among the programs we'd note here on the unmanned side and the hill portfolio, we've talked about the budget dynamics.
We needed there and so there's still some ongoing budget decision, making to occur for both global Hawk and Triton, but certainly I would include those in the in the Plateauing list and include F 18, as well and so.
Broadly speaking, it's not any 1 program, but a series of them on the commercial.
So side of our Aerostructures business, there's been pressure really over the last few years since the Covid dynamics occurred until there's long term growth opportunity. There is the commercial market recovers, but in the near term that that smaller portion of our portfolio has faced some pressure as well.
Okay, that's very helpful.
And Kathy maybe you want to see you mentioned chancey to in your commentary seems to be the buzzword in the Dod's days I was wondering how you think this program is going to evolve we're going to see 1 sort of mega program or lots of smaller ex.
Contributing to this theme and what could be the opportunities from Northrop Grumman.
So I absolutely.
Please see this being a collection of smaller efforts rather than 1 large program.
<unk> supports the ability for the government to make this architecture, a reality digesting it by upgrading platforms and sensors with the ability to communicate with 1 another share data.
Can be part of an architecture is a much better solution in my view that I'm trying to go with a single party or a single platform to be that.
Network of choice because the mission requirements vary so greatly when you think about a contested space and the kind.
Texture that you need is very different than when you're operating in an uncontested environment like we have been for the last 20 years from the middle East. So there will be many architectures to be able to support different theaters and mission requirements and John C..2 and therefore, an opportunity for all of the industry to participate.
Dissipate, where Northrop Grumman is particularly strong isn't our advance networking as those capabilities are the core of helping platforms and systems that were not designed to share data to be able to do so in the future and I would also note that's a much more affordable answer to getting April.
Archive form modern items to be part of the job situ architecture and completely redesigning or replacing the platform itself.
That makes sense. Thank you very much.
Yeah.
The next question will come from the line of Myles Walton with UBS.
Thanks, Good morning.
Dave That's a task for a second.
The working capital headwinds you absorbed can you maybe just size that and also.
There are a couple of years of elevated growth and likely some moderation in the growth next year should we expect the working capital to start to flow out in 'twenty, 2 and 'twenty 3 into more measurable sense.
Yeah. Thanks for the question miles.
It's tough to size exactly the nature of the pressure from the increased growth. This year as we mentioned we've increased our guidance now by $700 million in sales since the beginning of the year and so you can apply a reasonable.
Our days of working capital metric there.
And maybe.
Maybe 100 million or so pressure on net debt metric that we're able to overcome in part due to the strong first half performance and the strength and outlook that that gives us as a result as.
As we look at 'twenty, 2 and beyond.
We're certainly not finished.
Our efforts to.
Drive working capital efficiency and effectiveness.
Like we talked about earlier with cost management.
Something we wake up every day and focus on that.
That focus will continue so I'll look for continued opportunities in 'twenty, 2 and 'twenty 3.
Oddly as we think about free cash in 'twenty, 2 and beyond.
We had the pension dynamic I mentioned earlier that we'll need to.
Overcome and then on the tax side, everyone is awaiting a.
News on legislated.
Environment, there as it relates to the R&D amortization issues.
And such so we're focused as you would imagine on the things we can control which are.
Around working capital efficiency being prudent with our capital expenditures focusing those on our key growth areas of the market in.
And at this point, we feel confident that we're doing a good job in both of those areas.
Alright, thank you.
More broad next question comes from the line of David Strauss with Barclays.
Thanks, Good morning, everyone.
Hi, David.
Back on <unk>.
Kathy so it looks like with your revised revenue guidance Youre talking about $2 billion revenue increase year over year.
Adjusting for the divested revenues as well.
I think previously you had said you'd be SBU was $800.900 million does that still hold within that or has that improved and then.
If you could just break out the big chunks that are driving that extra $1 billion or so revenue growth.
Yeah.
Yeah.
Yes, so GBS T is still close to $1 billion of incremental revenue. This year as we anticipated and about 60% of the growth is non GSE and the midpoint of our guide.
If we project out for the remainder of the year.
This year with healthy growth across the entirety of the portfolio not just <unk>.
And I will note and have spoken about this before GBS, Steve will continue to grow into next year and 2023. So it has a long ramp if you will.
But it's just.
We're starting to hear you repeat at $2 billion of growth in that segment.
Is just from what the team is executing and winning work at a rate that I haven't seen in my time in industry, So kudos to them.
And Kathy that that non.
G B S D.
A portion of the 6 I think you said, 60% does that does that bucket grow next year as well.
We expect it to go again.
We will provide more color on our 'twenty 2 guidance.
<unk> sales to continue to be our fastest growing segment.
Segment, It will modulate from this year certainly there just started the same number of opportunities going into 2022 that there are in 2021, we still have confidence in this team's ability to win.
But we do see that modulating a bit but still plenty of growth drivers for 2022.
Terrific.
I'm not sure the caller.
Thank you.
We have time for 1 more question.
Our final question will come from the line of Mike Maggiore Research.
Hey, good morning, Thank you.
Hmm.
Kathy I'd be curious to get your thoughts on the cyber domain.
Maybe just how you see that trending.
Thanks, very much the budget at a high level what are you seeing north from the landscape how big it is for you and then.
How it trends for Northrop relative to the rest of Northrop.
So fiber continues to be an important standalone market segments. When we think about the work.
Relative to doing for customer to enable secure processing secure communication often times those programs are wrapped up under those umbrella when we talk about our processing program or our communications program.
In addition, now.
The ability to.
Work really command and control or communicate is a differentiator in many of the programs that we're bidding and winning it was true on GBS, Steve secure command and control with an essential requirement and we were able to bring forward a solution to that requirement based on the strength of our cyber.
Cyber expertise that we gain largely from our direct work with the government on securing their assets, but then apply internally as we build new weapons system. So a lot of synergy with our standalone cyber portfolio, even though it in and of itself is not that large.
It does.
2 right opportunity and differentiation across the entirety of the business.
And we see it continuing to grow out with has been growing for a decade, and we expect that trend to continue and just about every weapon system now has requirement for secure.
Great.
Great Alright, we'll leave it there.
Turn it over to Kathy for some closing remarks.
Thank you Todd well again this quarter, we demonstrated our ability to execute our strategy and deliver growth operational excellence and balanced capital deployment. So our strong performance all the credit goes to the team and I want to thank them again.
That's true their hard work and continued efforts as we look forward I have great confidence in our future. Thanks for joining us today I look forward to our next call in October.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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<unk>.
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Yeah.
[music].
Good day, ladies and gentlemen, and welcome to Northrop Grumman, Inc. Second quarter 2021 Conference call. Today's call is being recorded my name is Nicole and I'll be your operator today at this time all participants.
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 would now like to turn the call over to your host Mr. Todd Ernst Treasurer, and Vice President Investor Relations. Mr. Ernst. Please proceed.
Thanks, Nicole and good morning, everyone and welcome to Northrop Grumman second quarter.
For 2021 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 2021 guidance and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward looking statements pursuant to safe Harbor provisions.
Divisions.
Federal Securities laws.
We're 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.
This call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release.
Please call 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.
You Todd good morning, everyone and thank you for joining us.
Today, we are very pleased to announce another strong quarter.
I'll begin by recognizing our Northrop Grumman employees for their continued folk.
On to non operational excellence.
Our results represents a successful execution of our strategy the strength of our portfolio and the commitment of our team to deliver for our customers and shareholders.
As the global threat environment continues to rapidly evolve and other nations gained more complexity.
Focus and sophisticated capabilities, our customers need innovative and affordable solutions to be delivered with increasing speed and agility with.
With the investments we've made in advanced technologies combined with our talented work force and adoption of digital transformation capabilities Northrop Grumman.
<unk> is well positioned to meet our customers' needs and continue to strengthen our position for the future.
This quarter, we once again delivered strong growth and operating performance.
Our sales increased by 3% to $9.2 billion adjusted.
Adjusting for the effects.
<unk> quarter divestiture of the <unk> services business organic sales increased 10%.
While we do expect this growth rate to moderate in the second half of the year. We continue to have a robust pipeline of opportunities in 2021 and beyond.
Additionally program.
Our execution across the portfolio with exceptional which drove our segment operating margins to exceed 12%.
This follows on strong Q1 performance, resulting in a year to date segment operating margin of 12, 1%.
And we continue to expect solid performance for the remainder of the year.
Earnings per share increased 7% this quarter and transaction adjusted EPS has increased 16% year to day.
Transaction adjusted free cash flow was also trending favorably and has increased 26% year to date.
As a result, we ended the quarter with just under $4 billion.
And cash on the balance sheet.
This provides us continued flexibility for capital deployment.
We completed the $2 billion accelerated share repurchase in Q2 and continue to expect to repurchase over $3 billion for the year.
Additionally, we increased our dividend by 8% in May.
We are executing a balanced capital deployment strategy, which includes investing in the solutions our customers need and also returning cash to investors.
Over the next couple of years, we continue to expect to return the majority of our free cash flow to shareholders through share repurchases and dividend.
In terms of budget updates from Washington, The Biden administration issued its budget request for fiscal year 2022 in May.
And it reinforces the administration's statements around investing in capabilities to maintain U S National security advantages.
The request aligns.
Well with the investments we've made at Northrop Grumman as we've positioned our portfolio for the future.
And while it's still relatively early in the budget process. We're pleased to see strong support for National security from the Congress.
Including a $25 billion increase to the President's budget request approved.
Week by the Senate Armed Services Committee.
Both the House Appropriations Committee and fast have voiced strong support for many of our programs, including B 21 GB Ft. Triton F 35 to name a few.
We look forward to working with the Congress and the administration.
Cruise line progress on the fiscal year 2022 budget.
NASA was also well supported in the budget with a 7% year over year increase in proposed funding.
NASA priorities include returning to the Moon via the Artemis program, where we are a key supplier of critical technologies, including.
The habitation and logistics outposts or Halo and the solid rocket booster for the space launch system also known as <unk>.
This provides meaningful opportunity for the company and it demonstrates the diverse nature of our space business.
Turning to business highlights.
In the quarter I'll share a few examples that help to demonstrate the strength of our portfolio and our technology leadership across key markets.
In partnership with the Air Force. The B 21 program remains on track with 2 test aircraft in production today, and we continue to make solid.
Progress towards first flight.
This program Leverages, the confluence of Northrop Grumman long history in aircraft development and advanced flow observe ability capabilities.
The Air Force recently published an artist rendering and a B 21 fact sheet that provides additional insights into the program.
The fact sheet highlights that the B 21 is being designed with open systems architecture to reduce integration risk and enable future modernization efforts to allow for the aircraft to evolve as the threat environment changes.
As we've discussed on many of these calls Northrop.
Northrop Grumman is a leader in communications and networking solutions providing.
Providing the connective tissue for military platform sensors and systems that weren't designed to communicate with 1 another.
Passing information and data using secure open system similar to how we use.
Internet and 5 G in our day to day lives.
Our system has played an important role in the northern edge 2021 'twenty exercise, which was held in May and showcased how we enabled war fighters to easily communicate and securely share actionable information regardless of the platform.
Use as part of the exercise Northrop Grumman systems were validated on 3 separate platforms.
Our freedom pod was the part of a demonstration with the air National Guard and our freedom radios. We're a key part of 2 demonstration centered on advanced fifth generation Communications and as a reminder, the freedom radios.
For them, both he up 35 end of 'twenty 2.
We are also enabling joint all domain command and control through our integrated Air and missile Defense Battle command system or I D. C L.
In July the U S Army successfully engaged a cruise missile target in a highly contested election.
Electronic attack environment during a developmental flight test using Northrop Grumman Ibs C F.
This latest flight test integrated the widest variety of sensors to date, including a Marine Corp, Gator radar, which is our Gan based expeditionary radar that enter full rate production last year.
Equipped as well as F 35, and other ground sensors and interceptors.
This would be a successful flight tests performed with the <unk> program and the program is on track for a competitive down select a full rate production later this year.
In addition, we are making great progress on the GBS.
The fee program.
In the second quarter the team officially closed out the Emt baseline review with our Air Force customer.
And we completed the integrated baseline review.
The IV or is a critical step in setting croxton schedule baselines and is an important milestone for the program.
Earlier. This month, we were awarded a contract to continue our support of the Minuteman 3 ground sub system until Theyre successful transition to the <unk> system.
So taking a step back the examples that I just provided highlight our strong performance technology leadership and broad portfolio.
And its tight connection to national security priorities from.
From modernizing our strategic deterrent to breakthrough technologies that connect our forces.
Based on the strong results and performance of our company year to date and our latest outlook for the remainder of the year we are increasing.
Leo in 'twenty, 1 revenue segment Om rate and transaction adjusted EPS guidance.
Additionally, after 2 years of book to Bill over 1.3, we expect our book to Bill for the full year to be close to 1 this year with key booking opportunities in the second half of the year that include.
<unk> S. L. F F 35, and several restricted program laying the foundation for continued growth.
Before I turn the call over to Dave I'd like to talk about ESG.
We are very proud of our ESG record and the high marks we have received in many environments.
Our mental and social ranking.
We have built an organization with a robust governance structure diverse and inclusive working environment and an ongoing and evolving focus on responsible environmental stewardship.
In May we published our most recent sustainability report.
It provides transparency into the progress on actions we've taken in these areas and more.
To help ensure we adhere to these priorities every day key components of our ESG goals are reflected in non financial metrics that are incorporated into the leadership team annual incentive compensation.
And just last week, we announced the appointment of a chief Sustainability Officer, who will report to me and drive further enhancements to our ESG program.
I want to again, thank all of our employees for stepping up to the challenges our nation is facing and for remaining focused on.
For our customers and our shareholders.
Our second quarter results and enhanced 2021 outlook demonstrate that our strong fundamental trends continue.
Over the long term, we are well positioned to provide our customers innovative and affordable solutions to help address national.
Security threats, while driving profitable growth and value creation for our shareholders.
So with that I'll turn the call over to Dave who will provide more detail on our sector results and our updated 2021 guidance Steve.
Thanks, Kathy and good morning, everyone My comments.
Second quarter highlights on slide 3.
We delivered another quarter of excellent organic sales growth.
Standing segment operating margin rate income.
Higher EPS or.
Our year to date transaction adjusted free cash flow increased 26% and we continued to return cash to shareholders through our buyback.
Program, and our quarterly dividend, which we increased by 8% in Q2.
As a result of our outstanding first half performance.
Enhanced outlook for the year, we're pleased to be raising our sales and segment operating margin rate and EPS guidance.
Slide 4 provides a bridge between second quarter 2020.
Second quarter 2021 sales.
Normalizing for the OTT services divestiture, which was a $585 million headwind in the second quarter of 2021 organic sales increased 10% compared to last year working days were the same in both periods.
Moving to slide 5.
Which compares our earnings per share between Q2.2020 in Q2.2021, our EPS increased 7% to $6.42 operational performance contributed 60 cents of growth and lower unallocated corporate costs driven by state tax changes added another 22.
Our marketable securities' performance was a modest earnings benefit in Q2.
But compared to the even more favorable equity markets experienced in the same quarter last year. It represented a year over year headwind of <unk> 18.
Lastly, we experienced a higher federal tax rate in the period due to a change in tax revenue recognition.
From certain contracts for years prior to the 2017 tax cuts and jobs Act.
Next I'll begin a review of sector results on slide 6.
<unk> sales were roughly flat for the quarter and up 2% year to date.
Sales in both periods were higher in manned aircraft principally due to.
<unk> volume on restricted programs and <unk>.
Partially offset by lower production activity on <unk> hundred 50, and lower volume in autonomous systems.
At defense systems sales decreased by 24% in the quarter and 21% year to date and on an organic basis sales.
Higher volume roughly 3% in both periods lower organic sales were driven by the completion of our Lake city activities, which represented a headwind of $120 million in the quarter and $260 million year to date.
This was partially offset by higher volume in both periods from GM L O S.
Sales, where does well is ramp up on the global Hawk contractor logistics support program for the Republic of Korea.
Mission systems sales were up 6% in the second quarter and 8% year to date.
On an organic basis <unk> delivered another double digit sales increase in the quarter of almost 12%.
And organic sales were higher in all 4 of its business units in both periods.
Turning to space systems sales continue to grow at a robust rate rising 34% in the second quarter and 32% year to date same.
Sales in both of its business areas were higher in the quarter and year to date.
Reflecting continued ramp up on GBS D and <unk> as well.
Well as higher volume on restricted programs Artemis and next generation <unk>.
Moving to segment operating income and margin rate on slide 7 we had an outstanding operational quarter with segment margin rate.
Period of 12, 2%.
Aeronautics Q2 operating income decreased 3% due to a benefit of $21 million recognized in the second quarter of 2020 from the resolution of a government accounting matter opt.
Operating margin rate was consistent at 10, 3% in Q2 and the year to date.
That's great.
At Defense systems operating income decreased by 18% in the quarter and 15% year to date, primarily due to the impact of the IQ services divestiture.
Operating margin rate increased to 12, 4% in the quarter and 11, 8% year to date.
Date period increase in operating margin rate was largely driven by improved business performance and business mix and Battle management and missile systems programs.
Operating income in mission systems rose, 18% in the quarter and 15% year to date due to higher sales volume and improved performance.
Operating margin rate increased to 15, 8% in the quarter and benefited from the favorable resolution of certain cost accounting matters as well as changes in business mix as a result of the ICT services divestiture.
Year to date operating margin rate increased to 15, 5%.
Space systems operating income rose, 44% in the quarter and 40% year to date.
And operating margin rate was 11% in both periods.
Higher operating income is primarily a result of the higher sales volume along with the timing of risk retirements contributing to higher net favorable earnings adjustments.
In both periods.
Now turning to sector guidance on slide 8 you'll note that we are now providing quantified ranges for sales and OEM rates instead of the broader descriptions such as low to mid or mid to high given the improved visibility that we have as we pass the midpoint of this fiscal year.
We are increasing.
<unk> the sales outlooks of our defense mission systems and space sectors, given the strong volume that each produced in the first half and solid outlook for second half performance were slightly reducing sales guidance for aeronautics, reflecting the continued plateauing of several of our production programs after years of outsized.
True.
For operating margin rate, we're increasing our guidance of defense MFS and space and the margin rated assets remains unchanged.
Moving to consolidated guidance on slide 9 we are raising our 2021 outlook for several key metrics per sales were.
Increasing the midpoint of our guide by $500 million.
Through a range of $35.8 billion to $36.2 billion.
This translates to full year organic growth of over 4% and over 5%, excluding the 2020 equipment sales at Aes.
As you review our sales trends.
And keep in mind that the first half benefited from 1 month of the it services business and had 7 more working days in the second half we will have with.
We expect the company to have higher organic sales per working day in the second half of the year than the first.
We're also increasing both our segment operating margin.
And our overall operating margin ranges by 10 basis points to 12, 211, 6 to 11, 8% and 15, 5% to 15, 7% respectively.
Keep in mind that the gain from the ICU services divestiture contributed approximately 5 points of our overall.
<unk> operating margin benefit.
We're proud of our profit performance in the first half and continue to expect strong results in the second half of the year.
First half net favorable EAC adjustments were particularly strong.
With lower rates, driving Q1 outperformance and program risk retirements.
<unk> contributing to Q2 strength.
For unallocated corporate expense, our updated guidance reflects a $30 million reduction associated with state tax changes.
And we now foresee in effective federal tax rate in the high 17% range, excluding the effects of the divestiture, which is an increase from our prior.
Yeah.
We projected federal tax rate of approximately 22, 5% on a GAAP basis.
Finally, we're raising our EPS guidance, which I'll highlight on slide 11, the increase in guidance is driven by 40 some segment operational improvement.
Lower unallocated.
Corporate costs, almost fully offset the headwind from the higher federal tax rate, leading to an increase in our transaction adjusted EPS guidance of 35 at the midpoint.
Next I'd like to take a moment to talk about cash.
Since our call in January we've raised the midpoint of our sales guide by $700 million.
With those additional sales come additional working capital needs to fuel the growth, but in light of our outstanding first half cash flow performance. We project that we can absorb that additional working capital and our existing transaction adjusted free cash flow guidance of 3% to $3.3 billion.
We believe this range reflects continued.
Strength in cash conversion balanced with prudent investments in key growth segments of our market.
I also wanted to provide more information on the projected impact on our 2022 cash pension recoveries from the American Rescue Plan Act, which was passed this spring.
While asset returns and actuarial.
Assumptions will continue to influence the final number our current estimate is approximately $185 million of Cas recoveries in 2022.
Down $55 million from our January guide and down about $300 million from our expected 2021 level.
We continue.
To expect minimal required pension contributions over the next several years.
Regarding cash deployment as Kathy mentioned, we completed our $2 billion.
Accelerated share repurchase in the second quarter retiring over 6 million shares at an average price of around $327 per share and.
And we continue.
Target over $3 billion of total buybacks in 2021.
At the end of the second quarter, we had approximately $3.7 billion from remaining share repurchase authorization.
In conclusion, we're very pleased to have delivered another quarter of rapid growth outstanding program.
<unk> strong cash flow and accretive cash deployment with that Todd I think we're ready to open up the call for Q&A.
Nicole we remind everyone how did it get into the queue.
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1 moment, while we compile the roster.
Okay.
The first question will come from the line of Doug Harned with Bernstein.
Yeah.
Good morning.
Good morning, Doug.
Spaces is now such a big area for you.
I wondered if you could give us a sense of how you look at this.
Broader environment, because we're seeing many new entrants in space commercial.
So players so.
So I'm doing small sats launch vehicles other things.
So when you look at it.
At this evolution.
For Northrop Grumman.
Where do you where do these players.
Present competition for you where can they present partnership opportunities.
How do you see this world evolving.
Thanks for the question.
Because if we look at our portfolio.
Before it's quite broad.
Terms of the technologies that we offer the integration capabilities.
And so in each segment of the market.
We follow a strategy of both partnering and leaning and combining partner capabilities into our own team and National Security Space. For example, we are operating as both a strategic partner to many other primes, while also being able to lead effort.
On our own that integrate our technologies and others in the case of civil space in particular NAFTA with space exploration. The same is true.
Our Halo program is an example of where we are leading we were awarded that sole source, but we do have partners on that program that are bringing differentiated.
Technology, while at the same time on human Lander, we chose to partner in that case with Blue origin. So in each case, we look at the capabilities that our team has to bring to the overall mission requirements and whether it's tough for us to lead or follow.
In order to do that we need to have strong partnerships, both with the more traditional space companies in our industry as well as some of the new entrants like Spacex and blue that are of a larger scale and I also don't want any of us to forget that there are a number of smaller companies that also have.
It's been very good partners for us in this area and we will continue to be in the future and there are dozens of them. We tend not to go forward with singular and.
Focused partnerships in 1 particular company, but instead.
<unk> a wide variety of.
Our partners that we work with in this area and that's what we plan to continue to do with baseball.
When you look at this and 1 areas small Sats for example, where.
I think a lot of aspects of that people may look at it could be coming more.
How tight and there's a number of small players that Raytheon made the decision to acquire.
Blue Canyon I mean, how do you how do you look at that part of the universe here in terms of what you see as a differentiated capability at Northrop Grumman clearly.
Youre positioned.
Come on is going to be very strong for a long time and then perhaps some other areas.
You know in a small sat bus could be 1 where you know you could own it or not on it how do you think of the division between those 2.
Well as I was noting.
Believes that.
We should.
What is most important to a fully integrated offering that mission.
<unk> requirement and we particularly are focused in our case, our national security space and Cleveland duration, and so we don't feel we need to own everything.
Our acquisition of orbital ATK rounded out.
This is Leo nicely, we now have both bus offerings as well as the ability to develop satellites on small scale rapidly as well as more exquisite payload for more sophisticated mission and we like that.
The breadth of our portfolio as it exists today, that's not to say we have everything.
Pork for need, which we're partnering comes down, but we don't feel we need to take an equity stake or acquire companies to get access to those capabilities.
Okay very good thank you.
Yeah.
The next question will come from the line of Ron Epstein with Bank of America.
Hey.
Good morning.
Kathy I was just wondering if maybe 2 things.
Can you remind us what's on the horizon in terms of competitions latter half of this year into next year and then and then the.
Second point in terms of capital deployment itself is there any areas that you're looking.
Or how are you thinking about that.
From so I'll start with the competition that we see in the latter half of this year most of our second half awards are actually noncompetitive, we're looking at.
F 35, I felt less awards in the latter half of the year there are.
Restricted programs, which are competitive that we are looking to book in the second half and we also have IV see us, which I mentioned earlier on the call, which will be selected for full rate production in the second half of this year as we look longer term there are aircrafts development.
Silva grounds in the pipeline, but those are a bit further out and so those are areas to the second part of your question that we are investing to position for that are not necessarily evident in our short range plan.
The other areas that we're investing in when I became CEO.
In 2019, we defined mission campaigns and I've talked about several of them in the past. They include areas like National security space strategic missiles, where we've made significant progress in the last couple of years executing those campaign strategies booking New awards and moving our positions.
And in those market segments materially we continue with that focus and so looking forward major areas include future manned aircraft and unmanned aircraft. We also see continued growth in our advanced weapons portfolio and our advanced.
Networking and communications portfolio just to name a few.
Yeah.
Great. Thank you. Thank you very much.
Okay.
The next question will come from the line of Sheila <unk> with Jefferies.
Good morning, Kathy day.
So going back to space Kathy a hot topic right now you know 37% growth in the quarter very good how do we kind of think about this business over the medium term does it continue at double digits outside of G. B S D growth.
Maybe if you could talk about that given the deceleration you had been for the second half with high single digit then just the margin.
And Todd is that related to some of the new programs that are that.
You're starting in the N space.
Yes, sure why don't I start and then I'm going to ask Steve to walk through a few of the specific structural items, but there is no doubt that our space business is performing exceptionally there are some structural.
Actual items to consider when you look at the first half compared to the second half. We walked you through a few of those working days the timing of our pension cost reductions that flow through our program fees and the impact on margin and then timing of particular programs like GBS D, which started to ramp.
Contract I can't half of last year, and therefore create a tougher compare in the second half of the.
But with that said this business has exceeded our expectations frankly since it was stood up 19 months ago, and we aren't betting against it in the second half, but generally we don't forecast that kind of success.
That the business is having but we certainly strive to deliver it and that's what the team has been doing all year to this point, so I'm going to turn it over to day because he can walk you through some of the structural items that I mentioned as you model the second half compared to the first but I want to leave you with the impression that we still have.
And the significant opportunity in the pipeline for this business I've talked about some of the second half award and great momentum that will enable this business to continue to grow.
It's Kevin that's a great summary, the first half of the year was just an outstanding half for space and we continue to see a strong second half in store.
You mentioned the working day.
Packed on organic growth in the first quarter as we noted that the 3 extra working days for a 5% or so benefit to growth in Q4, it's 4 fewer working days for a 6% to 7% headwind for growth but of course those are.
It's just timing items more broadly speaking we had the GBS day at NCI programs ramping up in the first half from that will continue going forward.
In the second quarter, we noted that we had a really strong program performance in particular from commercial programs, where we had.
Net EAC benefits in the quarter that contributed.
So that really strong margin rate performance, we saw from space in the first half in addition to the.
<unk> first quarter indirect rate improvements that we talked about on our April call. So in aggregate a really strong first half for the business in the second half we.
Continued strong performance, we had originally guided this business to be about a 10%.
Margin rate business for this year, we're outperforming that number this year, we continue to see that as a reasonable expectation in that 10% margin rate range. After this year and so it's a really.
We expect business and a great part of the market.
Intend to continue gaining share there.
Thank you.
Our next question will come from the line of Scott Bachman with Jpmorgan.
Thanks, very much and good morning, everyone.
Kathy.
Mentioned Halo as an award coming up for I think you probably will it seems like youll have it in the third quarter and I noticed there was a firm fixed price contract.
I guess in for something in space, where we all know how much risk.
Risk there can be involved in space program.
Grams.
How do you think about taking on a firm fixed price contract for.
An important space opportunity and what does it say about the way that you and your customers are looking at risk in the space area more broadly.
Thanks, Seth Halo program is from fixed.
Price contract, we don't see it as a development effort per se. It's building off of the habitat that we have built in the past and so a lot of commonality with prior efforts and strong experience in this area.
And that goes to how we think about bidding more.
Okay.
You know that we have a track record of not bidding when we assess the risk is too great to be able to mitigate prior to putting in a fixed price proposal and we have walked away in the past from opportunities as a result to finding ourselves in that situation.
Generally we are getting more sophisticated and being able to shape these opportunities and due risk reduction prior to the bid. So that we can get comfortable that those risks are well understood and that we have a plan to mitigate them and that indeed is the case with halo.
Payload with that said, we have very little firm fixed price development work in our portfolio.
And so as we look across the portfolio and think about that risk exposure I think part of your question is going to are we doing more of that.
And.
The analogy is that we are not doing more fixed price development work today than we have in the past and we don't see that as a broad trends in the industry.
Great. Thanks very much.
The next question will come from the line of Richard Safran with C.
The revenue.
Kathy David Todd Good morning, how are you good morning.
Yeah.
No.
Neither Kathy or David with a number of programs advancing from development to production I thought now might be a good time to ask how you're managing cost.
<unk> and cost takeout.
With internally and with the supply chain. So I'm, just wondering how you're incentivizing and challenging the business segments and suppliers to take out cost and drive productivity improvements I know, it's a general question, but any insight into how you think about this would be helpful.
Consider how.
Northrop Grumman, who I am.
Longer term.
Thanks Rich it is an important question at this point in time as we do see a transition to a more production work. We continue to focus on cost control across the company and its aided now by our digital transformation.
A modest effort. It is an enterprise wide effort led out of my office and we are streamlining and automating processes, both for our product development, so taking cost out of the product development cycle.
Manufacturing as well as the back office, both of which contribute to margin improvement opportunity and so.
And we'll evolve over the next several years as we implement different phases of that digital transformation.
We're also monitoring labor costs, something that you didn't ask specifically about but we have not yet seen significant pressure upward on labor costs, but we're tracking it because as you all know nationwide attrition.
Attrition and movement is upward trending and we have not seen that in our company. Our attrition is fairly similar to what it was pre COVID-19, but we do continue to monitor that and expect to be able to fully offset that with the efficiencies I reference in our digital transformation.
Those Florida, what were thinking about as we're setting those goals with regard to supplier pricing, we have seen some modest pressure in supplier pricing, it's mostly related to areas, where there are supply bottlenecks think semi conductors certain commodities, but we expect those.
To be transitory and to be more than offset by the internal efficiencies I spoke about and indeed team, where we manage our enterprise supplier.
<unk>.
We're doing some really good things to get ahead, both contractually and through supplier management of those pressure, David why don't I turn it to.
To you for any additional comments you'd like to make sure. Thanks, Kathy we have a keen focus on the supply chain. These days certainly.
We were looking at Covid driven pressures over the past year and filled those were mitigated well continuing to track that of course on the inflationary side I think those pressures have been modest so far and focused.
Focused on a few particular commodities boots, but have not been.
Anything we haven't been able to mitigate.
As Kathy mentioned contract structures to reduce that risk about half of our work is huge cost type work.
And of the remainder of the majority is price over short durations and.
So we get to reprice those.
<unk> frequently enough to mitigate the pressure on the semiconductor side we've seen.
In certain areas and pockets I would say, we've seen extended lead times, but nothing we haven't been able to mitigate broadly.
By partnering with our suppliers by sharing demand signals well in advance.
And being in tight.
Communication with those and in the challenging pockets of that semiconductor community. We're also continuing to make use of our own foundry, where where appropriate and where are in the best interest of our customers.
So taking a step back and kind.
Summarizing certainly the.
Right.
This is critical to our cost management efforts into our execution efforts in general.
And more broadly speaking cost management is a key focus of ours every day, we don't talk about it a lot on these calls, but certainly it's something that is part and parcel to everything we do our I T.
Costs are real estate cost as Kathy mentioned.
We're careful about our labor and semiconductor cost and other key elements of our supply chain as well.
So these are areas that we're keenly focused on certainly digital transformation is.
The next key initiative that will that will have a significant.
Beneficial impact.
But broadly speaking, it's a it's something that's high on our radar.
That was really great color. Thanks.
Okay.
The next question comes from the line of Carl bottom line with Cowen and company.
Yes. Thank you.
Excellent results again.
Steve.
<unk> margins you know I think we've always talked about you know is the mix, becoming more production is it more development and obviously with all the wins you had in space G. P. S. T N G I it looks like the mix is becoming.
More development, so I'm, a little surprised by the very strong margin that you delivered in in space I mean, it looks like in the second half Youre looking at about 10 or a little bit under.
But maybe talk to US is that you know bite by your sectors mainly.
Space mission.
In Aeronautics is the net shift in the mix towards production or towards development.
And or is it is it essentially balanced going forward.
Sure I can start on that it's a good question on the space side, we've touched on some of this but certainly to your point.
I'm really pleased to be able to increase the margin rate guide there from 10% to start the year to 10, 2 to 10, 4% and our latest.
Our latest guidance, that's driven by the strength of our first half performance across our programs in that portfolio I mentioned that on the commercial side of the portfolio. There was particular.
Strength in Q2.
The indirect rate reductions in the first quarter were also beneficial there.
In the second half margin rates continues to look solid.
Longer term, we continue to think of it as about a 10% business.
So there is that mix pressure that.
We've described and so that 10% margin is in the face of that pressure and really driven by the strength of operating performance that we continue to see in the business to include a direct and indirect cost.
Cost performance as well as our program execution milestones and stuff. So it's certainly been a oh.
<unk> story as we've seen the cost type.
Development work begin to grow in space and 1 that we expect to continue EMS and <unk> have a bit of a different picture moving forward that is to some degree offset the cost type increase in.
Space <unk> in.
Favorite has had a mixed shift toward a bit more fixed price. This year, partially driven by the divestiture, which are removed a portion of it's a cost type portfolio.
And then as the broader long term trend would shift a bit more towards a fixed price as well. So again. This is 1 of those.
Particularly in areas, where it is helpful to have a broad portfolio with different types of business at different phases of their life cycles, and that's what we see unfolding in the coming years.
Great answer thank so much.
The next question will come from the line of Kristine <unk> with Morgan Stanley.
Hi, good morning, everyone.
Good morning.
I'm Kathy circling back on the Artemis Lunar Lander program Blu.
Blue origin has proposed to NASA to wave $2 billion, it's Steve.
How does it affect your partnership with Blue origin, and what's your appetite to support a lost leader.
Got you and Steve.
Thanks, Christine So this gets back to that question.
Yes.
When we think about partnerships clearly when we lead and FERC, we will choose to make sizable investments.
To protect that program and increase.
Or a probability of win over.
It's like because it has the advantage that you get when you are the leader.
And the effort and that's exactly what blue origin is doing.
It's important to also note that the business case for Bluelinx.
I'll be on the NASA program as they think about.
Our aspirations for commercial travel.
In the case of Northrop Grumman, we'd have to do that similar business case assessment and we've come to different answers in terms of what our contribution should be too.
For all program financial and that's expected.
Erik Hirsch up that you lay out the clearer expectations of each party, but also the benefits to be gained by each party and aligning those expectations for financial investment.
Thanks, Kathy and maybe switching gears.
You know your nuclear business, Yeah, we saw the need for enterprise.
<unk> got solid support into fiscal year 'twenty to budget, but now the new administration is undertaking its own nuclear posture review and it sounds like it's going to be integrated with our new national defense strategy as well.
With your exposure with the who loves the nuclear triad with B 21 in GBS Steve.
What are you watching for.
Any good to get a document like that and do you anticipate to see any major changes.
Well first I'm very pleased that the administration is looking at the National Defense strategy and the nuclear posture of you in an integrated way because it is the threat environment that should define the overall defense strategy and the role of the.
Or when you take deterrent and the nuclear program as part of our strategy. So it's an indication to me that that's exactly how the administration is thinking about it they've been clear that their assessment of the threat, particularly with Russia in the.
Pacing threat with regard to nuclear and China being.
And emerging but very rapidly growing threat.
And recent intelligence just further supports that.
That with that basis, they will look at what each administration before them has gotten overall nuclear posture review and ensure that the programs.
From the modernization plans and feed measure up against that threat.
We're very confident that once again the threat assessments the affordability of these programs and the requirements being met by these programs will line up well.
Yes from the MTR.
So it should play out over the next 6 months or so.
Great. Thank you very much.
The next question will come from the line of Robert Spingarn with Credit Suisse.
Yes.
Hey, good morning.
Good morning.
Hi, Dave I've got 1 for you on just cash flow.
Cadence and.
Yes, just to smooth their cash flow. We saw this year I think last quarter, you talked about some of the working capital improvements that drove a smaller outflow. There. So now with the first half in the books, how does the second half shake out.
Q3 to Q4 in terms of free cash flow.
Or be flat or do we have a bigger Q4.
We typically see and.
If it is flat or is that something you can hold onto long term.
Sure. Thanks for the question Rob.
Don't give quarterly guidance, but we do talk about the general trends and I.
I think you should expect our second.
Second half trends this year to be similar to prior years.
We had a smoother first has been the unusual as you mentioned, we're pleased with that and that's something we'll strive for going forward as we look at the second half.
Overall, as I mentioned, where we're driving for a 3.
3 to $3.3 billion of free cash flow target that we've had since we started the year as we mentioned at the beginning of the year and as you alluded to that required some working capital enhancements given the growth that we're seeing in order to offset the lower pension reimbursements.
The outflows.
Weighted with payroll taxes deferral this year.
A couple of hundred million dollars of divestiture related free cash flow that we had been generating each year prior and so in aggregate it required substantial working capital improvements. We've now delivered on those in the first half of the year.
And we're really pleased with the progress through the first half.
Half.
No.
Without giving a quarterly outlook for the second half we expect continued strength in the in the third and fourth quarters.
That leads to a strong $3 to $3.3 billion as we mentioned in our guidance for the year. I'd also note I think of that as a pure free cash flow number than we've had in prior years, given the cash pension dynamic.
So which as we noted on the call will continue into next year, so that purification of the cash flow the strength in working capital I think are good news stories as it relates to free cash.
Thanks, Dave.
You bet.
The next question comes from the line of Robert Stallard with vertical research.
Yeah.
Thanks, so much good morning.
Good morning.
David It's pretty 1 for you can you elaborate on what the programs are.
In aerospace that are going to be plateauing, I would say going forward from here.
Sure I'll be happy to start on that 1 Rob.
We would've noted if there were 1 or 2.
2 programs driving that it's really broader based than that we've been talking about the trends in the life cycles of various programs.
On the unrestricted side over the last couple of years.
Our comments today will be consistent with that.
F 35 program, we've noted in the past that we.
Deliver ahead of the primes timeline and so in this case, we would expect to plateau ahead of a prime on that.
And so thats among the programs we'd note here on the unmanned side you know in the <unk> portfolio, we've talked about the budget dynamics associated there and so there is still.
From ongoing.
Ongoing budget decision, making to occur for both global Hawk and Triton, but certainly I would include those in the in the Plateauing list that include F 18, as well and so.
Broadly speaking, it's not any 1 program, but a series of them on the commercial side of our Aerostructures.
Aerostructures busy.
It's been pressure really over the last few years since the Covid dynamics occurred and so there is no law.
Long term growth opportunity there is the commercial market recovers, but in the near term that that smaller portion of our portfolio has faced some pressure as well.
Okay, that's very helpful.
Maybe you want to see you mentioned.
<unk>.
2 and your commentary seems to be the buzzword in the Dod's days I was wondering how you think this program has kind of evolved we're going to see 1 sort of Mega program of lots of smaller assets contributing to this theme and what could be the opportunity to Northrop Grumman.
So I, absolutely see that being a collection.
Smaller.
While our efforts rather than 1 large program assets.
That supports the ability for the government to make this architecture, a reality digesting it by upgrading platforms and sensors with the ability to communicate with 1 another share data and be part of an architecture is.
Cash better solution in my view that I'm trying to go with a single party or a single platform to be the.
Network of choice because the mission requirements vary so greatly when you think about a contested space and the kind of architecture that you need it's very different.
And then when you're operating in an uncontested environment like we have been for the last 20 years from the Middle East.
There will be many architectures to be able to support different theaters and mission requirements and John C..2 and therefore, an opportunity for all of the industry to participate where Northrop Grumman is particularly.
From long isn't our I'd stay on networking as those capabilities are the core of healthy platforms.
And systems that were not designed to share data to be able to do so in the future and I would also note. That's a much more affordable answer to getting a platform modernized to be part of a job.
Strong architecture, and completely redesigning or replacing the platform itself.
That makes sense. Thank you very much.
Yeah.
Okay.
The next question will come from the line of Myles Walton with UBS.
Thanks, Good morning, Hey, Dave that's a cash for a second.
I have seen working capital headwinds you absorbed can you maybe just size that and also.
A couple of years of elevated growth and likely some moderation in the growth next year should we expect the working capital to start to flow out in 'twenty, 2 and 'twenty 3 in a more measurable sense.
Yeah. Thanks for the question miles.
It's tough to size exactly the nature of the pressure from the increased growth. This year as we mentioned we've increased our guidance now by $700 million in sales since the beginning of the year and so you can apply a reasonable.
Days of working capital metric there.
Yes.
It would be 100 million or so pressure on net debt metric that we're able to overcome in part due to the strong first half performance and the strength.
The strength and outlook that that gives us as a result as.
As we look at 'twenty, 2 and beyond.
We're certainly not finished and are our efforts too.
Drive working capital efficiency and effectiveness.
We talked about earlier with cost management.
We wake up every day and focus on.
That focus will continue so I'll look for continued opportunities in 'twenty, 2 and 'twenty 3.
More broadly as we think about free.
Due in 'twenty, 2 and beyond.
We have the pension dynamic I mentioned earlier that we'll need to.
Overcome and then on the tax side everyone is awaiting.
News on legislative.
Environment, there as it relates to the R&D amortization issues and such so we're focused.
Cash has been on the things, we can control which are.
Around working capital efficiency being prudent with our capital expenditures focusing those on key growth areas of the market.
And at this point, we feel confident that we're doing a good job on both of those areas.
Alright, thank you.
Our next question comes from the line of David Strauss with Barclays.
Thanks, Good morning, everyone.
Hi, David.
Back on <unk>.
Kathy so it looks like you know with your revised revenue guidance, you're talking about $2 billion revenue increase year over year.
Adjusting for the divested revenues as well.
I think previously you had said you'd be S. D was 800 and 900 million does that still hold within that or has that improved and then you know that.
If you could just break out the big chunks that are driving that extra 1 billion or so revenue growth.
Okay.
Yeah.
Yes, so GBS P is still close to $1 billion of incremental revenue. This year as we anticipated and about 60% of the growth is non Bbs.
The midpoint of our guide.
As we project out for the remainder of the year.
There's some healthy growth across the entirety of the portfolio not just <unk> and I will note and have spoken about this before GBS, Steve will continue to grow into next year and 2023. So it has a long ramp if you will.
But it's just.
Amazing to hear you repeat at $2 billion of growth in that segment.
It's just from almost the team is executing and winning work at a rate that I haven't seen in my time in industry, So kudos to them.
And Kathy that that non.
<unk> D.
Portion of the 6 I think you said, 60% does that does that bucket grow next year as well.
We expect it to.
Again, we will provide more color on our 'twenty 2 guidance, we expect sales to continue to be our fastest growing.
Segment, it'll modulate from this year certainly there just start the same number of opportunities going into 2022 that there are in 2021, we still have confidence in this team's ability to win.
But we do see that modulating a bit but still plenty of growth drivers for 2022.
Perfect.
I'm not sure what color.
Thank you.
Time for 1 more question.
The final question will come from the line of Mike <unk>.
Research.
Hey, good morning, Thank you.
Kathy I'd be curious to get your thoughts on the cyber domain.
Maybe just how you see that trending.
Relative to the budget at a high level, where you've seen Norfolk in the landscape how big it is for you and then.
How it trends for Northrop relative to the rest of Northrop.
Fiber continues to be an important standalone market segments, when we think about the work.
What I'm doing for customers to enable secure processing secure communications often times those programs are wrapped up under those umbrella. That's when we talk about our processing program or our communications program. In addition, now the.
The ability to.
<unk>.
<unk>.
<unk> control or communicate is a differentiator in many of the programs that we're bidding and winning it was true on GBS, Steve secure command and control with an essential requirement and we were able to bring forward a solution to that requirement based on the strength of our cyber.
<unk> expertise that we gain largely from our direct work with the government on securing their assets, but then apply internally as we build new weapons system. So a lot of synergy with our standalone cyber portfolio, even though it of in and of itself is not that large a it does.
Try opportunity and differentiation across the entirety of the business.
And we see it continuing to grow out with has been growing for a decade, and we expect that trend to continue and just about every weapon system now has requirement for secure.
Great.
Great Alright, I will leave it there and no guidance.
Turn it over to Kathy for some closing remarks.
Thank you Todd well again this quarter, we demonstrated our ability to execute our strategy and deliver growth operational excellence and balanced capital deployment. So our strong performance all the credit goes to the team and I want to thank them again.
With their hard work and continued efforts as we look forward I have great confidence in our future. Thanks for joining us today I look forward to our next call in October.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.