Q3 2021 Northrop Grumman Corp Earnings Call

[noise] campaign, ladies and gentlemen, and welcome to Northrop Grumman third quarter of 2021 Conference call. Today's call is being recorded my name is Catherine and I'll be your operator today.

At this time all participants her name listen only mode.

At any time during the call you require assistance. Please press star zero and an operator will be happy to assist you.

Not like to turn the call over to your host Mister Tottering, Treasurer, and Vice President Investor Relations Mister Ernst. Please proceed.

Thanks, Catherine and good morning, everyone welcomed to Northrop Grumman's third quarter of 2021 conference call will refer to a powerpoint presentation that is posted on the I R. Webpage 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 of Federal Securities laws forward looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially.

Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release.

On the call today are Kathy organ, or chairman, CEO, and President and Dave <unk>, Our CFO at this time I'd like to turn the call over to Kathy Kathy. Thank you. Good morning, everyone and thank you for joining us.

We delivered another quarter of strong results in an increasingly complex environment.

And the last corner, we've seen developments in the global fight against COVID-19.

Economic changes such as a tightening labor market supply chain challenges and growing inflation.

But we've also seen evolving threats to our national security, which is further eliminated the value of Northrop Grumman products and services.

On today's call, we will provide insights into these developments and their effects on a business today.

As well as discuss our third quarter performance results and provide our updated outlook for this year and an initial look at 2022.

I'd like to take our employees and our extended Northrop Grumman team, including our suppliers for their relentless focus on delivering for our customers and our shareholders.

I am proud of how our team has demonstrated remarkable resiliency and adaptability during these dynamic time.

Our company continues to delivered strong operating performance.

As we announced earlier today, we had a segment operating margin rate of 11.9% in the third quarter and year to date, an exceptional segment operating margin rate of 12%.

In addition earnings per share in the quarter was $6.63, an increase of 13% compared to last year and our transaction adjusted free cash generation continues to be strong increasing 15% year to date.

We ended the quarter with just over $4 billion in cash providing significant flexibility in support of our capital deployment initiative.

With respect to the top line are year to date organic growth was 8%.

The best growth reflects the alignment in strength of our broad portfolio to our customers priorities and future needs.

As expected our organic growth rate slowed in the corner from the rapid pace that we saw in the first half of the year.

In addition to having to you. If you were working days in the second half of the year, which we discussed on each of our last two calls were also seen an impact on our sales from the broader economic environment due to COVID-19.

During the third quarter. This included employee leave taking at a higher level than planned a tighter labor market and certain supply chain challenges.

We continue to focus on the safety and wellbeing of our employees customers and partners as we work to mitigate the impact of these factors.

As you know the President recently issued an executive order generally requiring employees the federal contractors to be fully vaccinated by early December we have shared the details of this mandate with R. U S workforce and we are working to help them meet the requirement.

We also increased our hiring plans for the fourth quarter to help mitigate the potential impact of any increase detrition.

Based on the team's strong third quarter performance and in consideration of macroeconomic factors as we see them today, we are increasing our guidance for segment O M. In EPS for the year and narrowing our sales guidance to approximately 36 billion.

Dave will provide more details on the quarter are updated guide as well as the initial outlook for 2022.

Turning to budget updates from Washington receive strong bipartisan support for National Security broadly and Northrop Grumman program specifically.

We are pleased that an agreement was reached on the continuing resolution and that feeling that will fund the government through December 3rd.

We are hopeful the Congress will finalize the fiscal year 2022, appropriations and avoid a protracted continuing resolution.

With respect to the FY 22 defense budget overall, we see bipartisan support for increased defense spending, including adding funding above the president's budget request.

We are hopeful that this additional funding will be supported and final appropriation.

Over the past several weeks senior customers members of Congress and administration officials have made increasingly public comments about strategic competition in the national security environment, and they need to counter and deter evolving threat.

One clear and consistent message has been the need to invest in and more rapidly field advanced capabilities.

Our company's portfolio and capabilities are strongly aligned to the high national security priority areas.

Take yearly and advanced weapons strategic deterrent mission systems and space and.

And we're using digital technologies to develop and deploy capabilities faster and more efficiently than ever before across our entire portfolio.

Oh sure a few highlights to demonstrate how our performance today continue to position us for the future.

With the emergence of more sophisticated air defense system, the need for standoff capabilities and speed to target is critical for our customers.

To address this requirement Northrop Grumman developed arguing E. R. A high speed long range air to ground missiles and in the third quarter. After just 28 months and engineering manufacturing and development, we achieved a critical milestone clearing the way for production.

In September we received our first low rate initial production award for the program.

Also during the quarter, we along with our industry partner Raytheon successfully tested the hypersonic air breathing weapon concept known as Hawk.

Grumman supplies, the scramjet propulsion system for Hawk, allowing feeds a greater than Mach five.

Argument E. R. R E R and Hawk are just two weeks example of how we are providing the higher speed and longer range weapons needed to be relevant in today's threaten environment.

Another key area, where we are supporting our customers isn't the need and urgency to enhance our country's strategic deterrence capability.

Especially in light of recent disclosures of investments to other nations are making in modernising their strategic capabilities.

The triad is the foundation of the security strategy for the us and its allies.

And it's been an effective deterrent for decades, preserving peace and deterring aggression.

Is highlighted by recent customer and administration comment Modernising, the triad remains a high priority.

Northrop Grumman as the prime on she was this relates to the triad with the bomber and strategic missiles, and where a significant supplier for submarines as well.

For the bomber the B 21 program continues to advanced.

As Air Force Secretary Frank Kendall recently noted there are now five units in various stages of production and the systems are in his word making good progress to real fielded capability.

For strategic missiles, we continue to make solid progress on the AMD portion of the ground based strategic deterrent program.

We completed key milestones earlier this year and we are tracking toward our first flight as planned.

The G. B a C program has ramped significantly this year and we now expect that it will add just over $1 billion in incremental revenue two are <unk> 2021 results and another approximately 500 million of incremental revenue in 2022.

For both be 21, and GBS fee, we have applied digital transformation concept as a key enabler to reduce risk increase productivity shorten cycle time and improve the system's ability to adapt to changing threat.

In today's rapidly changing threat environment, our mission system portfolio, including in communications and artificial intelligence is making a critical contribution in the advancement of technology and capability needed to allow the legacy platform to be more capable and survivable and therefore more relevant.

Addressing the increasingly sophisticated threats.

So this and during the third quarter, our next generation electronic warfare system, which will equip domestic at 16 had his first test flight on a testbed aircraft at the northern Lightning exercise.

In conjunction with our Sabre radar demonstrated full interoperability in a simulated contested electromagnetic spectrum environment.

With the radio frequency spectrum, becoming increasingly contested is critical set of electronic warfare capabilities will allow the platform to remain survivable.

We anticipated Andy contract for next generation electronic warfare in 2022, with an overall lifetime opportunity of up to $3 billion.

And and missile defense emerging threats from hypersonic missiles are creating new challenges for customers.

We're helping to provide differentiated solutions to these challenges by applying our advanced technology and domain expertise.

Earlier this year, we were awarded a contract to deliver a prototype satellite as part of the Mdas hypersonic and ballistic tracking space Center <unk> program.

This program is designed to detect and track hypersonic vehicles, we have a very different flight profile and signature then ballistic missile it required new something capabilities in order to detect and track them.

In September we conducted a successful Hdtvs's critical design review and are progressing towards a 2023 launch.

And it's based on main Northrop Grumman is working with our customers on advanced capabilities to address a range of new and evolving threat.

Many of these programs are classified and consistent with increased demand in this area. We received 1.2 billion in restricted space Awards in the third quarter.

I've touched on several major contributions that we've made this quarter to national security all of which highlight our strong performance technology leadership and broad portfolio.

I also want to share examples of our collaboration with partners to accelerate innovation and create discriminating technologies.

As I've noted before we are actively engaged in partnering with early stage technology and non traditional defense company.

In the quarter, we clicked and investment in orbit Fab Ah space Logistics company, whose goal is to put gas stations and state.

Their vision fits well with our on orbit satellite refueling and face logistics capabilities.

We also continue to work with the digital and innovative company, we invested in at the end of last year.

Digital provides a hardware and software solution, enabling very efficient.

AI enhanced software defined radio for deep learning applications at the edge, which we believe will enhance our efforts and both autonomy and Jesse too.

These partnerships as well as other venture investments support our strategy to create solutions that speed for our customers toughest national security challenges.

Now I'll turn the call over to Dave who will provide more detail on our third quarter results are updated 2021 guidance and our 20 twenty-two outlook Dave.

Thanks, caffeine good morning, everyone.

Begin my comments with third quarter highlights unplugged three.

We continued to generate strong operating results delivering another quarter of solid organic sales growth players segment operating margin right.

Handing earnings per share and transaction adjusted free cash flow, we continued to return cash to shareholders through our buyback program and quarterly dividend returning over $800 million in the quarter.

Slide four provides a bridge between third quarter of 2023rd quarter of 2021 sales.

Excluding sales from the two services divestiture or organic growth was 3%. This week was below our first half growth due in part to the broader labor market and supply chain trolls booked up you outlined.

Mixed overview, our earnings per share results on slug bug.

Compared to the third quarter of 2020, or EPS increased 13% to $6.63.

Strong segment operational performance contributed about 14 cents, a growth and lower corporate unallocated added another 55 cents.

Included a $60 million benefit from insurance settlements related to shareholder litigation involving the former orbital ATK business prior to our acquisition.

Corporate unallocated expense also decreased due to a change in deferred state income taxes, as well as lower intangible amortization and PP&E step up depreciation.

Pension costs contributed 17 cents of growth driven by higher Nonservice income.

Are marketable securities performance represented a headwind of 17 cents.

Compared to the third quarter of 2020, which benefited from particularly strong equity markets.

Lastly, we experienced a slightly higher federal tax rates in the period due to lower benefits from foreign derived intangible income.

Turning to soak the results from floods six we saw some broad based COVID-19 related impact the most significant of which were in our aeronautics sector or.

Aeronautics sales declaimed, 6% for the quarter.

Year to date sales are down 1%.

Cause we've described in recent quarters several programs in our portfolio or plateauing or entering a phase of life cycle, where you would not expect to see growth.

This quarter, we experienced slightly lower volume across the portfolio, including restricted efforts F 35, B, two demos and global health programs.

We expect this overall trend to continue at a us in 2022, which will discuss in more detail momentarily.

Defense systems sales decreased by 24% in the quarter and 22% year to date on an organic basis sales were down roughly 2% in the quarter and year to date periods driven by the completion of our activities on the Lake City small caliber ammunition contract last year.

<unk> city, representing the sales headwind roughly $75 million in the quarter and $335 million a year to date. This was partially offset by higher volume on several mission readiness programs.

Mission system sales were down 5% in the quarter up 4% year to date.

Organically, Emma sales increased 1% in Q3 and.

And year to date, they are up a robust 9%.

We've noted previously the timing of material volume at M. S has been weighted more towards the first half of 2021 and the second.

Organic sales growth in the third quarter and year to date periods was broad based across programs such as Gator J crew and various restricted efforts.

Finally based systems continues to deliver outstanding sales growth, increasing 22% in the third quarter and 28% year to date.

Sales in both business areas, where higher in the quarter and year to date periods.

Reflecting continued ramp up on GBS, DNN Gi as well as higher volume unrestricted programs and the art of us.

Turning to segment operating income and margin right on slide seven we delivered another quarter of excellent performance with segment operating margin rate of 11.9%.

Aeronautics third quarter operating income decreased 10% due to lower sales volume and a $42 million unfavorable EAC adjustment on the 35 program.

The adjustment was driven by Labour related production inefficiencies, reflecting COVID-19 related impacts on the program.

The operating margin rate decreased to 9.7% in Q3 as a result of this adjustment with year to date operating margin slightly ahead of last year the 10.1%.

Defense systems operating income decreased by 19% in the quarter and 16% year to date largely due to the impact of the two services divestiture.

Operating margin rate increased to 12.4% in the quarter and 12% year to date, largely driven by improved performance in contract mix and Battle management and missile systems, partially offset by lower net favorable EAC adjustments.

Admission system operating income was relatively flattened the quarter and up 10% year to date.

Third quarter operating margin rate improved to 15.3%.

And year to date was 15.5%, reflecting strong program performance and changes in business mix as a result of the two services divestiture.

Space systems operating income rose, 29% in the quarter and 36% year to date driven by higher sales volume.

Operating margin rate was also higher at 10.7% in the quarter and 10.9% year to date, driven by higher net favorable EAC adjustments.

Moving to sector guidance on slide eight.

Note that this outlook assumes a relatively consistent level of impact in queue for with what we've been experiencing so far this year from the effects of COVID-19 on the workforce and supply chain.

And it does not include any potential financial impacts on the company related to the vaccine mandate.

We have updated our 2021 sales estimates for each segment based on our year to date results in current expectations for Q4.

For operating margin right, we're increasing our guidance of defense in space and the margin rates with us and M's remain unchanged.

Before we get to our consolidated guidance I'd also like to take a moment to discuss some of the factors to consider and comparing our fourth quarter revenue to last year on slide nine in.

In queue for a 2022 services business contributed almost $600 million of sales and the equipment sale generated over $400 million.

Q4 of 2021 also has four fewer working days than the same period in 2020, representing a headwind of about 6% adjusting for these three items are 242021 sales would grow a 3% to 4% based on our latest full year guidance.

Moving to slide 10.

Based on what we now see we expect sales of approximately $36 billion.

We're raising our 2021 outlook for segment in total operating margin and for EPS.

Our segment operating margin right guidance 10 basis points higher at 11.7% to 11.9%, reflecting our continued strong performance.

<unk> pension adjustments has increased $60 million for the full year as a result of the annual demographic update we performed in Q3.

Other corporate unallocated costs or $70 million below our previous guidance now at approximately $120 million for the year.

As I mentioned, our corporate unallocated costs benefited from a $60 million insurance settlement in Q3 as well as additional benefits from state taxes. These.

These updates translate into an increase of 50 basis points in our operating margin right to a range of 16% to 16.2% and are updated guidance.

Remember that the game from the two services divestiture in Q1 contributed approximately five percentage points of overall operating margin benefit for the full year.

We continue to project of 2021 effective federal tax rate and the highest 17% range, excluding the effects of the divestiture, which is consistent with our prior guidance.

Lastly, we're raising our EPS guidance, which will cover on slide 11.

Segment performance is contributing about 15 cents of the increase with the benefits to corporate unallocated and pension contributing the remainder into.

In total this represents an 80 cent improvement in our transaction adjusted EPS guidance.

With this latest increase of 2021 EPS guidance is up by about $2 since our initial guidance in the beginning of the year.

Before we moved to 2022 I wanted to give you an update on our cash performance.

Year to date, we've generated over $2.1 billion, a transaction adjusted pre cash flow up 15% compared to 2020, and we ended the quarter with over $4 billion in cash on the balance sheet.

Keep in mind that we have of roughly $200 million payroll tax payment in queue for from the cares Act legislation.

With the second similar payment in 2022 <unk>.

Additionally, we expect to pay the balance of our transaction related texts from the services divestiture in the fourth quarter.

Healthy cash position that has enabled us to repurchase over $2.7 billion of stock. So far this year on track with our full year target of $3 billion or more.

As we look ahead to 2022 on slide 12, our outlook is based on the same set of assumptions that we described for 2021 guidance regarding the COVID-19 environment and vaccine mandate.

It also assumes that the continuing resolution does not extend beyond 2021, and like our 2021 guidance, but assumed that we do not experience a breach of the debt ceiling.

We expect space to be our fastest growing segment again in 2022, driven by Gbs's NGA and several restricted efforts as they continue to ramp.

Emission systems in defense systems should also produce organic growth.

Regarding aeronautics systems. After several years of strong growth. Our latest 2021 sales guidance calls for a mid single digit decline and we see that trend continuing in 2022.

We've talked in recent quarters about the headwinds in our Hale portfolio. We're also projecting lower sales on J stars <unk>.

<unk>.

As well as a restricted portfolio.

Looking further to the future with some exciting decade for defense aerospace rapidly evolving threats.

Spring, a new wave of autonomous vehicle and six generations by their development so the opportunities.

Remains solid and we will continue to invest in the cutting edge technologies that allow our customers to stay ahead of the threat environment.

Altogether. We currently expect to 22 2022 sales at the company level to reflect continued organic growth.

Looking at segment margin, we expect a strong results we have demonstrated in 2021 to continue in 2022.

With excellent program performance offsetting a portion of the 20% to 30 basis points benefit we generated from pension related overhead rate changes in Q1 of 2021.

While we project higher sales and strong segment operating margin, we expect transaction adjusted earnings per share to be down next year as a result of several non operational headwinds.

Lower caste pension recoveries and higher corporate unallocated expenses are currently projected to create an EPS headwind next year of more than $2.

For fast pension or outlook for 2022 will depend on our updated actuarial assumptions, including discount rates implant asset returns, which we will determine at the end of the year.

Earnings per share driven from sales growth strong operating margin performance and lower share count will help to offset these non operational items.

Next I would like to spend a moment discussing cash we expect relatively stable cash flow at the program level in 2022, but there are a few temporal items that should be factored into the year over year comparison of overall free cash flow.

First is lower Kaz pension recoveries.

As you can see on slide 13, Marquez recoveries are currently expected to be lower by $350 million next year the.

The second is cash cash Texas.

Excluding the impact of the it services transaction, we expect cash taxes to be modestly higher next year. In addition, as we've noted in the past current tax law would require companies to amortize R&D costs over five years, starting in 2022, which would increase our cash taxes by around $1 billion next year and smaller.

Amounts in subsequent years.

There continues to be uncertainty and the tax environment with potential new legislation that could change the R&D amortization provision and other provisions we will provide updates on each of these items on our January call.

Taking all of these cash flow factors into consideration.

We would expect to decline in 2022 transaction adjusted free cash flow followed by a double digit growth CAGR through 2024, driven by strong operational performance.

Regarding capital deployment investing in the business through disciplined R&D and capital spending continues to be our priority. We expect capex to be roughly flat next year in absolute dollar terms.

We believe these investments allow us to stay at the forefront of technology as we invest in our business.

And as we've said we.

We continue to expect to return the majority of our 2022 free cash flow to shareholders through dividends and share repurchases with that I'll turn the call back over to you Kathy. Thanks.

Thanks, Dave in summary, we have delivered excellent year to date results in operating performance and we are pleased to be increasing our full year EPS guidance for the third consecutive quarter. We are actively engaged with our supply chain and our employees as we work to mitigate broader COVID-19 related rent and continue to keep our programs on track.

As shown by the many milestones in the quarter, we have highly relevant capabilities and programs that alight, well to national security requirements and our customer funding priority.

So as we look forward 2022 is expected to deliver another year of organic sales growth and excellent performance paving the way for longer term margin expansion and free cash flow growth.

We remain focused on protecting the safety and wellbeing of our employees delivering the capabilities, our customer need to protect national security and sustain our planet and delivering value to our shareholders.

So with that Catherine.

If you would please open the phone lines for questions.

Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your touch 10 telephone again press star one to ask a question.

If your question has been answered or if you wish to exit the question queue press the pound key to exit thank you and to be respectful of time. Please limit yourself to one question and one follow up question.

Please press star zero at any time for operator assistance.

And your first question comes from Robert's tired with medical research.

Good morning.

Good morning, Rob.

Kathy Oh, Dave I'm, just on the 2022 expectations for Ash.

Climbed that you're expecting I wondering if you could give a little bit more detail of the puts and takes some countries you can't talk that much about classified but if you could give some sort of scandal. The moving parts would be very helpful. Thank you.

Sure Robert Dave I can touch on that a bit further.

As we mentioned.

We're projecting a mid single digit growth decline this year.

And that's about the same trend that we anticipate next year in light of where we are in the lifecycle of a lot of our key programs.

At this point.

There is no single factor or even two or three factors that contribute the lion's share of but.

Decline, but rather a fairly consistent trend in the trajectory across a lot of our key programs in the sector. You mentioned, we can't say much about are restricted portfolio certainly agreed on that front.

We have mentioned that the global Hawk portfolio is projected to decline next year is blocked twenties and thirties.

Continuing their retirement process.

<unk> is projecting a decline for our portion of that program. J stars is another I would highlight there and so across the board. These are are fairly consistent drivers up 35, we've talked about some of the COVID-19 impacts there in Q3.

It's kind of pattern going forward in the portion of the program is relatively flat too modestly declining.

As we look at the 22 outlook. So hopefully that gives you a sense.

Of some of the key drivers as I mentioned, it's not any one specific program.

Just a quick follow up data sorry, just quickly rubbed the only thing I would add is.

Sector has said and we expect may continue to be the most impacted by the COVID-19 related challenges that we spoke about.

Yeah, just to follow up do you think 2022 is like to be the trough for these issues. Some of these other.

Less mature program is not to grow with twenty-three beyond.

Obviously, we will provide more insight on 2023 as we get to a similar point in 2022.

And throughout the year, we'll talk more about specific programs within that portfolio I think for some the trends will continue for others, they won't and we will defer to.

A later date to give you more specifics as we looked at the twenty-three outlook and beyond.

Okay. Thank you very much.

Your next question comes from the line of miles Walton with U P. S.

Thanks, Good morning.

I was hoping you could touched it on the on the cast commentary for 22 and just so we can all get to the same base level, you're thinking about Dave.

Is that an <unk> when you when you talk about the cash taxes being a headwind is that assuming the amortization rural sticks around and you have that billion dollar headwind are you thinking cash taxes or headwind.

Regardless and then have some more questions relates to the double digit growth through 2024.

Sure so the.

The kind of high level view, we gave you on 22 through 24.

Assume that the.

Amortization of.

Those R&D cost does not go into effect.

The trend line would be similar would be lowest in 22 with an increase in 23 and 24, but let's talk about it assuming that the guidance does not go into effect.

What I think you can expect from US in 22 is to continue to drive.

Similar volume of working capital improvements to what we've done this year, we certainly have a good track record over the last couple of years of working capital.

Efficiency across our business.

And that will help to provide that steady level of program driven cash that we talked about on the call.

We also talked about pretty steady Capex next year slightly lower as a percentage of sales with the sales growth, but fair.

Fairly consistent volume on a dollar basis.

So that means the kind of non operating items.

What we expect to provide the year over year reduction $350 million less caz pension recover is what we project today.

I think of that more as a purification of our free cash flow stream that day was going to come.

For awhile and so we're reaching that point now where we've reached a sustainably lower level of of caz reimbursement on.

On the cast tech side, we projected those would be modestly higher.

Without the R&D amortization provision or other changes in the rate or other key provisions legislatively of course legislation could.

Then change that further if we don't have a.

Removal of deferral of the R&D tax item for example, so more to come on all of those fronts on the January home, but hopefully that gives you a sense for us today as we think about 23 and 24.

We do expect continued decline in capital expenditures as a percentage of sales. We will also benefit from not having the payroll tax deferral and 23 and 24 is we have an 21 and 22 and at the program level. We expect continued working capital efficiencies on some of our key programs and 23 and 24, which is what.

Gives us the confidence in that increase in those years.

Okay, and just one quick clarification, the prior caz outlook head.

Lightly modest growth in and cast recoveries in 23 that that's the trend lines to a halt.

At this point, yes, I think you'll see much less significant changes in 23 and 24 again based on what we see today and based on the actuarial envy.

Environment today.

So from 21% to 22 as.

As well as 20 to 21, we've had significant reductions in <unk> recovery, we no longer expect significant movement really in either direction and those out years.

Thank you.

Your next question comes from the line of Cornel West Bernstein.

Good morning, Thank you.

Oh I wanted to go back to Aeronautics and when you describe the the lower.

Aeronautics revenues 2022, you referred to opportunities longterm to reverse that those are things like the <unk> fighter a.

New autonomous system, but I think of those as being fairly long term and fairly uncertain. If you look at that revenue trajectory to be 21, we should certainly see a strong growth come about from that.

Do you see that is sufficient to reverse this trend in.

When might that grow to appointment that we would see that.

Sure Doug obviously, that's one that we can't get into much detail on.

And so.

I guess refer you to the overall trends that programs tend to see is there in these.

Phases of the lifecycle that we've described on be 21, and maybe more importantly that our customer have described on that program.

Certainly it has been a contributor to our growth.

In the restrict today as portfolio over the last several years.

Described but the go forward trajectory and the pace and timing of that growth.

We can't say much more about so we've given you a sense for the 22 outlook, there and where the program stands in its lifecycle and and that's about what we are able to say at this office space.

Okay, well, if I, if I switch to F 35, and perhaps go outside of Aeronautics I think of the kinds of things that you're doing on F. 35 is right at the heart of Tech refreshed three systems upgrades Uhm now that that has with it.

I say some good news as it should be a lot of I would expect growth there, but they have also been quite a few challenges that have been highlighted around tech refreshed. Three can you talk about both the growth opportunity that you have on F 35, there as well as how you're dealing.

Dealing with some of the challenges that have come up.

Sure diagnosis, Cathy I'll take that so as you noted that there is opportunity, particularly in our mission system sector. As we look at the tech refresh on the F 35, and the mission systems that we provide to the aircraft there has been some delays.

And then noted this year they have had some minimal impact just on the timing of our work and the funding to support our work.

But we have not experienced performance issues as a result of those delays. It's just shifted some sales out of this year Internet and in terms of our overall outlook for our mission system before we do see that and we've been consistent in payments.

Side opportunity, while the production volume is flat and price pressure is.

Overall production sales volume down lightly across the board. The other area you didn't ask about the statement continues to be an opportunity as well and we see that in all three sectors that predominantly led through our defense systems business for the aircraft.

Airframe and our mission system business with Sustainment contracts innovation system.

Okay very good thank you.

Your next question comes from online.

<unk> with the Japanese.

Oh good morning, guys. Thank you for the time have been able to follow up on an earlier question just thinking about the 20th 22 about the new framework inherited Aeronautics goes down the tubes for growing $509, which is less than what we thought were any other.

Nature headlines and if we were all it up is it that I think about 3% to 4% revenue across the 20th.

And maybe as a follow up to that you gave.

Some color maybe if you could just talk about how you think about the rest of that portfolio outside T B Apple.

Yeah. Thanks for the question Sheila.

The space Grove.

This year and the trend that we expect to continue into next year GBS fee has contributed roughly 50% a little bit over 50% to the sales growth in space in 2021, and we expect that trend to continue into 2022 to your point about $500 million of growth next.

Calendar year being less than you might have anticipated you might be looking at.

Which showed an incremental billions in each of the two years, but I'll remind you that a quarter of now 22 government year is in 2021, and we've seen a more significant ramp over the course of the 12 months in 2021, and we anticipate in our calendar year 2022, So it's not.

The change in profile, it's nothing different it's just how that all.

Into our calendar year.

With regard to your broader question on how that translates to our outlook for the company overall.

I think it is safe.

Based on what we know today to suggest that low single digit growth in 2022 is.

Reasonable expectation.

It can wait in the year, we've seen some COVID-19 impacts that we've reference we saw them in three Q, we're anticipating those to stay in the same level in queue for but it is difficult project that impact maybe in early 2022.

But what I will say is we've seen as more as speed bumps than we do the ramblers.

Our fundamentals are intact, we have strong backlog at strong pipeline and great portfolio alignment to budget priority. So we still see the path to growth that we've been talking about we just have some of these COVID-19 as I call them speed bumps that we're working our way through hopefully that help.

Sure. Thank you so much.

Your next question comes from the line of Ron at scene with Bank of America.

Hi, good morning, maybe.

Maybe just following up on that whole series of questions. Kathy cause I think this is a question that's on a on a lot of People's minds.

And obviously I'm not asking for guidance I clearly.

Out of the game, but how do we think about a medium term growth right. So when the speed bumps are behind US and then we're kind of in production on the 21 G. B S. These kind of humming along whatever else is coming along so if we step out over the next couple of years, how do we think about.

Medium term growth.

Well as I said, we'd see a path to continuing to grow the business and its base.

Based not only on the strength of the backlog we have with programs.

Francine like be 21 in Gbs's, but.

But it's also a pipeline that include continued New award and I highlighted a few of those today of programs that are moving into phase, where they will see production awards in the next couple of years.

So we still see a path to growth over the medium term and it's just a matter of how quickly that growth come in the next several quarters as a result of.

Man slowdowns that we've seen and I should say, Ron and I appreciate the opportunity to address that we've seen fairly minimal supply chain impact because we have a relatively high labor content on our job versus external supplier content, we've talked a bit about the lead taking that we saw.

In higher than the third quarter, but that too is fine because if people take leave of course, they're burning down their leaf balances and when I look out for a longer term period trends like labor market.

It.

Issues that may direct labor rates up or inflation, we have in the industry. One of the highest levels of cost plus work. So in a casket passed on and shared with our customer now I do want to emphasize that we in no way want to pass those costs on to our customers that we are working and minimize the impact for their.

<unk> benefit, but our shareholders, they're not curie.

Sure. So I feel really good about the portfolio that we have in our ability to to whether any of these short term impact what we expect to be short term impact and still be on a path to growth.

Great. Thank you.

Your next question comes from the line of Christine Lee Walk with Morgan Stanley.

Hey, I'm good morning, guys.

Good morning.

Mm Kathy just following up on that supply chain challenge can you provide more specifics in terms of what you're seeing why they're more prevalent an arris, an aeronautics versus the other segments and also right on labor if the vaccine mandate does come into effect December 8th how are you thinking about the potential impact.

So we are implementing.

Scene requirements across R U S workforce.

Good sense that a vast majority of our employees are vaccinated are in the process of being vaccinated and with other employees. We are working through their options to meet that requirement by December 8th.

It's really too early to predict predict what those impacts might be until we have a better sense of not just the pure quantum of employees to may not meet that requirement, but where they work and what they do in our company and therefore, how we would mitigate those impacts but as I mentioned, we are proactively increasing our higher.

Right now in anticipation that we may have somewhat.

Workers and we are ensuring that we have training and skill building programs in place so as to bring those new employees into the workplace they can get.

Productive and efficient as quickly as possible so actively working to mitigate impacts they're just too difficult to really quantify for you at this time.

Great and the specifics on the supply chain challenges with Aeronautics.

Been relatively minimal.

We have seen our own increases and leave taken we've seen the same thing in our suppliers and that was primarily driven by two things in the third quarter. We estimate one with the Delta there and we saw increased case accounts and therefore people out of the workforce, while they either recovered from.

<unk> or where.

Staying out based on close contact and we understand their supplier saw similar phenomenon and then the other was that people had not been taking leave at the same rate but at things.

Things started to open up people actually took some well needed and deserved vacation. So those are the two primary drivers that we saw and our suppliers saw the same which slowed down deliveries of it but as I noted, we see those to be temporal.

In that link taking is somewhat limited.

Point in time.

Thank you.

Your next question comes from the line Avenova Popinac with Goldman Sachs.

And now what your line is open.

Hi can you hear me.

Yes, good morning.

Hi, good morning, everybody.

Dave in the cash flow projection that you.

Talked about on a multiyear.

No, where we lost Ya.

No.

Are you there.

Can we go to the next question will go right back to Noah.

Sure how can we have David <unk> I don't know what your line is that pain you there.

Hi, Sarah.

Yeah I was just wondering Davis, you could speak to what you're assuming directionally for margins.

And that projection.

On a total company basis. Thank you.

Sure. So we're really pleased to have been able to increase our 2021.

Segment operating margin right guidance for the second time now too.

Another thing another 10 basis point increase this year as we noted in 2022.

We won't have the 20% to 30 basis points benefit that we have this year from the pinch.

Pension driven overhead rate benefits that we experienced in <unk> in the first quarter of the year.

And we anticipate being able to offset a portion of that reduction.

We look to 2022.

I don't think it's it requires a specific assumption for 23, and 24 margin right to get to the general trend that we're providing for for those years will be more specific about margin rate outlook as we got closer to those years, but I think.

A relatively stable margin rate would get you to the.

The trends that we've talked about 23 and four with a healthy.

Double digit CAGR as it relates to free cash flow from the 22 base up to that 24 level again, no payroll tax deferral bit of efficiency on the the capital expenditure side in some program driven opportunities or what really drive that.

Okay. Thank you.

Our next question comes from the line of David Strauss with Barclays.

Thanks for taking my question Maureen.

So just just gave them to follow up on that some clerisy your guiding segment margin overall lower versus I guess whatever that.

Call. It a <unk> mid point for 2021, your gyn at lower than 22 and then.

In terms of free cash flow on an absolute basis is is 23 and 24 free cash flow higher than 2021 transaction adjusted free cash flow just an absolute basis.

Sure Let me address both of those David on the <unk>.

Segment O&M right.

You are right to think about.

The two factors we've described in 22 compared with our increased guidance for 2021 will look to offset a portion of the 20 to 30 basis point reduction that we would see from the absence of those.

Right benefits in 22 will look to offset a portion of that 20 to 30 basis points through continued strong operating performance, but not all of the 20 to 30 basis points on the right side.

Look in terms of the 23 and 24 free cash flow.

We've got a lot of moving pieces yet to be determined on the tech side as we mentioned.

Things can continue to move as they often do on the pension side.

Based on what we know today I think.

To say today as we anticipate that that.

Healthy growth outlook, and 23 and 24 as we get to January and provide more specifics on the 22 level of free cash flow and no more than than we could note today in terms of tax legislation and such will provide a bit further detail on the 23 and 24 growth rate in comparison to where we are today also.

Alright, thank you.

Our next question comes from the line of George Shapiro with Superior research.

Ah, Yes, Dave I wanted to.

Clarification, when you say.

Decline of the rates similar to 21 is that or because organically, it's more like down 2% with the equipment sale taken out of it or are you talking to 5% that you just see.

Right, we're comparing to the actual mid single digit decline in 2021, when we say, we're having a expecting a similar trajectory in 2022. It's a good question. Thanks for the clarification Jordan.

Okay and then.

What changed if anything or what change to the cast pension dropped so much next year I know you talked about it coming down, but I hadn't expected it to come down the magnitude that it is.

Sure the $350 million number is pretty consistent with what we've been projecting in recent months in the.

July and April earnings calls there was legislation rigged.

Regarding pension earlier this year.

That affected some of the actuarial assumptions used for <unk> purposes, and reduce that number and then the other factor is in 2021, because number came up by about $60 million as we noted on the call today. So the compare from 2021 to 2022 got $60 million tougher, but the 22 level.

Has been pretty stable for us since that new legislation came out in the spring.

Okay. Thanks very much.

You bet.

Your next question comes from the line of Kai von Remember Cohen.

Yes. Thank you so much for taking the call so.

By the Middle of 22 will know about the R&D tax credit.

And as you look at 23, 24, you're saying a we don't have the payroll tax repayment, we have lower capex, we have better ops and we have less downside in terms of cat. So you're basically saying, we're gonna have considerably better cash flow and you also have.

Have a strong balance sheet could low net debt to EBITDA ratio.

Your your major pier basically in a somewhat similar situation, although they have kaz going against them has taken a more aggressive stance toward.

Their strategic.

Use of share repurchase and dividend hikes to return value to shareholders.

Your situation books actually similar if not better is that something you would consider.

Hi, it's not just something we would consider we have been articulating throughout the year that we do see a majority of our free cash flow being returned to shareholders over this period and is in part why we increase the dividend again this year and we have committed.

To at least $3 billion a share repurchase in 2021, you could expect to see those trends for cash returning to shareholders.

Couple of years as well.

But actually Lockheed is implying that there that will go up.

Consider all of their numbers, so, they're basically saying, they're looking at <unk>, because EBITDAX going up the basically.

Increasing the net debt somewhat because of the strength of their of their balance sheet is that something you would consider or is it basically just the cash flow.

That's available.

Sure I think you noted appropriately at the beginning that we'll know more in the next few quarters than we do today about.

<unk> legislation and other fat.

Factors will know more about the COVID-19 environment, the budget environment and so all of these are factors that we think about as we look at our capital allocation plans I think kathy's point is the important one around the priority for us over the next couple of years will remain.

First and foremost after making critical investments in our businesses. We've said we will continue to do the next priority is around returning cash to shareholders over these next couple of years, whether we choose to.

Change of net debt balance over the next few years or not will in some ways be effected by those broader factors and will update you and others as as we know more and get into 2022 on that front. This year, we achieved or.

Rating target and.

And feel like we're in a good stable position there.

So again, we will know more and update you all as we do.

And we have one more question. Thanks, so much.

Alright, and your last question will come from that's Tyson went to J P. Morgan.

Okay, alright, thanks, very much. Thanks for forget me off I think I got one more here. So I guess as far as backlog when would you expect backlog to kind of stabilize and given the decline is senior to date in the defense systems backlog, what gives me confidence on both.

Hello there.

So we see our book to building close to one again. This year has been significant awards that we anticipate in the fourth quarter and our backlog has grown over 90% since the end of 2017 to to your point.

They are.

We don't expect that kind of accelerated growth in our backlog at currently.

Two times sales so it's quite strong and we feel supports the continued growth of the business for for several years to come.

Great.

Oh, and then on defense.

Sure what is the specific question on defense death, or just at the defense defense backlogs been been down that's fairly significantly every day and calling.

Calling for for growth next year I know there are some kind of grouchy programs in that segment, that's kind of what gives you confidence in the defense.

Systems business growing next year.

Yes, so not business also has some key award in the fourth quarter of this year that would position for its growth next year. We also in defense C at their shortest cycle business.

You tend to run more of a one to one backlog to sales ratio and the only other thing I would 0.2. There is we have been trailing off Lake city and that of course has impacted near New award.

A tough year for your compare but as we look forward.

That will stabilize.

Looking at the backlog to sales ratio in that business anything you know.

The year over year backlog comparisons in <unk> in particular would be affected by the divestiture of the it services business to a lesser degree in M. S in space, but certainly.

Thinking of more of an organic change and that the us backlog is important in this particular year.

Okay, Okay great.

Thank you very much.

Alright, we'll lose their Kathy.

Yes, well once again I want to thank the Northrop Grumman team for delivering another solid quarter. We are actively working to mitigate the covenant related risks that we talked about today and finish this year strong with robust sales growth and other strong EPS performance and solid free cash flow and our initial 2022 outlook as we've said.

Is expected to continue to deliver growth and strong operating performance again next year and we look forward to providing you some details around that guidance in our January call. So we wish you all well and thanks again for joining our call today.

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

[music].

[music].

[music].

Good day, ladies and gentlemen, and welcome to Northrop Grumman's third quarter 2021 Conference call. Today's call is being recorded my name is Catherine and I'll be your operator today.

At this time all participants are in a listen only mode.

If at any time during the call you require assistance. Please press star zero and an operator will be happy to assist you.

I 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, Kathryn and good morning, everyone welcome to Northern <unk> third quarter 2021 conference call, we will refer to a powerpoint presentation that is posted on the IR webpage.

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 of Federal Securities laws.

Forward looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially.

Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release.

On the call today are Kathy Warden, our chairman CEO, and President and Dave Keffer, Our CFO at this time I'd like to turn the call over to Kathy Kathy. Thank you Todd Good morning, everyone and thank you for joining US we delivered another quarter of strong results in an increasingly complex environment.

In the last quarter, we've seen developments in the global fight against Covid, 19, and macroeconomic changes such as a tightening labor market supply chain challenges and growing inflation, but we've also seen evolving threats to our national security, which is further eliminated the value of Northrop Grumman products and services.

On today's call, we will provide insights into these developments and their effects on our business to date.

As well as discuss our third quarter performance results and provide our updated outlook for this year and an initial look at 2022.

I'd like to thank our employees and our extended Northrop Grumman team, including our suppliers for their relentless focus on delivering for our customers and our shareholders.

I am proud of how our team has demonstrated her remarkable resiliency and adaptability during these dynamic times.

Our company continues to deliver strong operating performance.

As we announced earlier today, we had a segment operating margin rate of 11, 9% in the third quarter and year to date and exceptional segment operating margin rate of 12%.

In addition earnings per share in the quarter were $6 63, an increase of 13% compared to last year and our transaction adjusted free cash generation continues to be strong increasing 15% year to date.

We ended the quarter with just over $4 billion in cash providing significant flexibility in support of our capital deployment initiatives.

With respect to the top line our year to date organic growth was 8%. This robust growth reflects the alignment and strength of our broad portfolio to our customers' priorities and future needs.

As expected our organic growth rate slowed in the quarter from the rapid pace that we saw in the first half of the year.

In addition to having two fewer working days in the second half of the year, which we discussed on each of our last two calls we are also seeing an impact on our sales from the broader economic environment due to COVID-19.

During the third quarter. This included employee leave taking at a higher level than planned a tighter labor market and certain supply chain challenges.

We continue to focus on the safety and wellbeing of our employees customers and partners as we work to mitigate the impact of these factors.

As you know the President recently issued an executive order generally requiring employees the federal contractors to be fully vaccinated by early December we have shared the details of this mandate with our U S workforce and we are working to help them meet the requirement.

We also increased our hiring plans for the fourth quarter to help mitigate the potential impact of any increased attrition.

Based on the team's strong third quarter performance and in consideration of macroeconomic factors as we see them today, we are increasing our guidance for segment Om in EPS for the year and narrowing our sales guidance to approximately 36 billion.

Dave will provide more details on the quarter, our updated guide as well as our initial outlook for 2022.

Turning to bunch of updates from Washington received strong bipartisan support for National Security broadly and Northrop Grumman program specifically.

We are pleased that an agreement was reached on the continuing resolution and that feeling that will fund the government through December 3rd we are hopeful that Congress will finalize the fiscal year 2022 appropriations and avoid a protracted continuing resolution.

With respect to the FY 'twenty two defense budget overall, we see bipartisan support for increased defense spending, including adding funding above the president's budget request.

We are hopeful that this additional funding will be supported and final appropriations.

Over the past several weeks senior customers members of Congress and administration officials have made increasingly public comments about strategic competition in the national security environment, and the need to counter and deter evolving threats one.

One clear and consistent message has been the need to invest in and more rapidly field advanced capabilities.

Our company's portfolio and capabilities are strongly aligned to the national security priority areas, particularly in advanced weapons strategic deterrence mission systems and space.

And we are using digital technologies to develop and deploy capabilities faster and more efficiently than ever before across our entire portfolio.

I'll share a few highlights to demonstrate how our performance today continues to position us for the future.

With the emergence of more sophisticated air defense systems, the need for standoff capabilities and speed to target is critical for our customers.

To address this requirement Northrop Grumman developed R&M EUR, a high speed long range air to ground missile and in the third quarter. After just 28 months in engineering manufacturing and development, we achieved a critical milestone clearing the wafer production in.

In September we received our first low rate initial production award for the program.

Also during the quarter, we along with our industry partner Raytheon successfully tested the hypersonic air breathing weapon concept known as hock nor.

Northrop Grumman supplies, the scramjet propulsion system for hawk, allowing speeds of greater than Mach five.

Argument.

<unk> ER and Hawk are just two example of how we're providing the higher speed and longer range weapons needed to be relevant in today's threat environment.

Another key area, where we are supporting our customers isn't the need and urgency to enhance our country's strategic deterrence capability, especially in light of recent disclosures of investments other nations are making in modernizing their strategic capabilities.

The <unk> is the foundation of the security strategy for the U S and its allies and it's been an effective deterrent for decades, preserving peace and Detouring aggression.

As highlighted by recent customer and administration comments modernizing the triad remains a high priority.

Northrop Grumman is the prime on two of the three legs of the Tri Ed with the bomber and strategic missiles, and we're a significant supplier for submarines as well.

For the bomber the B 21 program continues to advance.

And therefore secretary Frank Kendall recently noted there are now five units in various stages of production and the systems are in his words, making good progress to real fielded capability.

For strategic missiles, we continue to make solid progress on the AMD portion of the ground based strategic deterrent program.

We completed key milestones earlier this year and we are tracking toward our first flight as planned.

The GBS C program has ramped significantly this year and we now expect that it will add just over $1 billion in incremental revenue to our 2021 results and another approximately $500 million of incremental revenue in 2022.

For both the 'twenty, one and GBS fee, we have applied digital transformation concept as a key enabler to reduce risk increase productivity shorten cycle time and improve the system's ability to adapt to changing threats.

In today's rapidly changing threat environment, our mission systems portfolio, including in communications and artificial intelligence is making a critical contribution in the advancement of technology and capability needed to allow the legacy platforms to be more capable survivable and therefore more relevant.

Toward addressing the increasingly sophisticated threats.

To this end during the third quarter, our next generation electronic warfare system, which will equip domestic F. 16 had its first test flight on a testbed aircraft at the northern Lightning exercise.

This system in conjunction with our Saber radar demonstrated full interoperability in a simulated contested electromagnetic spectrum environment.

With our radio frequency spectrum, becoming increasingly contested that's critical set of electronic warfare capabilities will allow us the platform to remain survivable.

We anticipate an AMD contract for next generation electronic warfare in 2022, with an overall lifetime opportunity of up to $3 billion.

And in missile defense emerging threats from hypersonic missiles, or creating new challenges for customers.

We're helping to provide differentiated solutions to these challenges by applying our advanced technology and domain expertise.

Earlier this year, we were awarded a contract to deliver a prototype satellite as part of the MTA as hypersonic and ballistic tracking space sensor <unk> program.

This program is designed to detect and track hypersonic vehicles, which have a very different flight profiling signature then ballistic missile it required new sensing capabilities in order to detect and track them.

In September we conducted a successful HB TSS critical design review and are progressing towards a 2023 launch.

And it's based on manned Northrop Grumman is working with our customers on advanced capabilities to address a range of new and evolving threats.

Many of these programs are classified and consistent with increased demand in this area. We received $1 2 billion in restricted space Awards in the third quarter.

I've touched on several major contributions that we've made this quarter to national security all of which highlight our strong performance technology leadership and broad portfolio.

I also want to share examples of our collaboration with partners to accelerate innovation and create discriminating technologies.

As I've noted before we are actively engaged in partnering with early stage technology and non traditional defense companies.

In the quarter, we closed an investment in orbit fab space Logistics company, whose goal is to put gas stations in space.

Their vision fits well with our on orbit satellite refueling and space logistics capabilities.

We also continue to work with deep wave digital and innovative company, we invested in at the end of last year.

<unk> digital provides a hardware and software solution, enabling very efficient AI enhanced software defined radios for deep learning applications at the edge, which we believe will enhance our efforts in both autonomy and Jesse too.

These partnerships as well as other venture investments support our strategy to create solutions at speed for our customers toughest national security challenges.

Now I'll turn the call over to Dave who will provide more detail on our third quarter results, our updated 2021 guidance and our 2022 outlook Dave.

Thanks, Kathy and good morning, everyone I'll begin my comments with third quarter highlights on slide three.

We continued to generate strong operating results delivering another quarter of solid organic sales growth higher segment operating margin rate and outstanding earnings per share and transaction adjusted free cash flow. We continued to return cash to shareholders through our buyback program and quarterly dividend returning over $800 million in the quarter.

Slide four provides a bridge between third quarter 2020, and third quarter 2021 sales.

Excluding sales from the it services divestiture, our organic growth was 3%. This rate was below our first half growth due in part to the broader labor market and supply chain trends the Kathy outlined.

Next I'll review our earnings per share results on slide five.

Compared to the third quarter of 2020, our EPS increased 13% to $6 63.

Strong segment operational performance contributed about 14 sense of growth and lower corporate unallocated added another 55.

This included a $60 million benefit from insurance settlements related to shareholder litigation involving the former orbital ATK business prior to our acquisition.

Corporate unallocated expense also decreased due to a change in deferred state income taxes, as well as lower intangible asset amortization and PP&E step up depreciation.

Pension costs contributed 17 cents of growth driven by higher non service income.

Our marketable securities performance represented a headwind of <unk> 17.

<unk> to the third quarter of 2020, which benefited from particularly strong equity markets.

Lastly, we experienced a slightly higher federal tax rate in the period due to lower benefits from foreign derived intangible income.

Turning to sector results on slide six we saw some broad based COVID-19 related impacts the most significant of which were in our aeronautics sector.

Aeronautics sales declined 6% for the quarter year to date sales are down 1%.

We've described in recent quarters several programs in our portfolio are plateauing or entering a phase of lifecycle, where you would not expect to see growth.

This quarter, we experienced slightly lower volume across the portfolio, including restricted efforts F.

35, <unk> Dms and global Hawk programs.

We expect this overall trend to continue in 2022, which we'll discuss in more detail momentarily.

Defense systems sales decreased by 24% in the quarter and 22% year to date on an organic basis sales were down roughly 2% in the quarter and year to date periods driven by the completion of our activities on the Lake City small caliber ammunition contract last year.

Lake City represented a sales headwind of roughly $75 million in the quarter and $335 million year to date. This was partially offset by higher volume on several mission readiness programs.

Mission systems sales were down 5% in the quarter and up 4% year to date.

Organically sales increased 1% in Q3.

And year to date, they're up a robust 9%.

As we've noted previously the timing of material volume at MFS has been weighted more towards the first half of 2021 and the second.

Organic sales growth in the third quarter and year to date periods was broad based across programs such as Gator J crew and various restricted efforts.

And finally based systems continues to deliver outstanding sales growth, increasing 22% in the third quarter and 28% year to date.

Sales in both business areas were higher in the quarter and year to date periods.

Reflecting continued ramp up on GBS D in Gi.

Well as higher volume on restricted programs and Artemis.

Turning to segment operating income and margin rate on slide seven we delivered another quarter of excellent performance with segment operating margin rate of 11, 9%.

Aeronautics third quarter operating income decreased 10% due to lower sales volume and a $42 million unfavorable EAC adjustments on the F 35 program.

The adjustment was driven by labor related production inefficiencies, reflecting COVID-19 related impacts on the program.

The operating margin rate decreased to nine 7% in Q3 as a result of this adjustment with year to date operating margin slightly ahead of last year, a 10, 1%.

Defense systems operating income decreased by 19% in the quarter and 16% year to date, largely due to the impact of the it services divestiture.

Operating margin rate increased to 12, 4% in the quarter and 12% year to date, largely driven by improved performance in contract mix and Battle management and missile systems, partially offset by lower net favorable EAC adjustments.

At mission systems.

Third quarter operating margin rate improved to 15, 3% and year to date was 15, 5%, reflecting strong program performance and changes in business mix as a result of the <unk> services divestiture.

Space systems operating income rose, 29% in the quarter and 36% year to date driven by higher sales volume.

Operating margin rate was also higher at 10, 7% in the quarter and 10, 9% year to date, driven by higher net favorable EAC adjustments.

Moving to sector guidance on slide eight.

Note that this outlook assumes a relatively consistent level of impact in Q4 with what we've been experiencing so far this year from the effects of COVID-19 on the workforce and supply chain.

And it does not include any potential financial impacts on the company related to the vaccine mandate.

We have updated our 2021 sales estimates for each segment based on our year to date results and current expectations for Q4.

Our operating margin rate, we are increasing our guidance of defence and space and the margin rates at <unk> and EMS remain unchanged.

Before we get to our consolidated guidance I'd also like to take a moment to discuss some of the factors to consider in comparing our fourth quarter revenue to last year on slide nine in.

In Q4 of 2020, the it services business contributed almost $600 million of sales in the equipment sale generated over $400 million.

Q4 of 2021 also has four fewer working days in the same period in 2020, representing a headwind of about 6% adjusting for these three items. Our Q4 2021 sales would grow at 3% to 4% based on our latest full year guidance.

Moving to slide 10.

Based on what we now see we expect sales of approximately $36 billion.

We are raising our 2021 outlook for segment and total operating margin and for EPS or.

Our segment operating margin rate guidance is 10 basis points higher at 11, 7% to 11, 9%, reflecting our continued strong performance.

Our net <unk> pension adjustment is increased $60 million for the full year as a result of the annual demographic update we performed in Q3.

Other corporate unallocated costs are $70 million below our previous guidance now at approximately $120 million for the year.

As I mentioned, our corporate unallocated costs benefited from a $60 million insurance settlement in Q3, as well as additional benefits from state taxes.

These updates translate into an increase of 50 basis points and our operating margin rate to a range of 16% to 16, 2% and our updated guidance.

Remember that the game from the ITC services divestiture in Q1 contributed approximately five percentage points of overall operating margin benefit for the full year.

We continue to project, a 2021 effective federal tax rate in the high 17% range, excluding the effects of the divestiture, which is consistent with our prior guidance.

Lastly, we're raising our EPS guidance, which I'll cover on slide 11.

Segment performance is contributing about 15 of the increase with the benefits to corporate unallocated and pension contributing the remainder in.

In total this represents an 80% improvement in our transaction adjusted EPS guidance.

This latest increase our 2021 EPS guidance is up by about $2 since our initial guidance in the beginning of the year.

Before we move to 2022.

To give you an update on our cash performance.

Year to date, we've generated over $2 $1 billion of transaction adjusted free cash flow up 15% compared to 2020.

We ended the quarter with over $4 billion in cash on the balance sheet.

Keep in mind that we have a roughly $200 million payroll tax payment in Q4 from the cares Act legislation.

With the second similar payment in 2022. Additionally.

We expect to pay the balance of our transaction related tax from the ICU services divestiture in the fourth quarter.

Our healthy cash position has enabled us to repurchase over $2 7 billion of stock. So far this year on track with our full year target of $3 billion or more.

As we look ahead to 2022 on slide 12.

Outlook is based on the same set of assumptions that we described for 2021 guidance regarding the COVID-19 environment and vaccine mandate.

It also assumes that the continuing resolution does not extend beyond 2021, and like our 2021 guidance. It assumes that we do not experience a breach of the debt ceiling.

We expect space to be our fastest growing segment again in 2022, driven by GBS D in Gi and several restricted efforts as they continue to ramp.

Emission systems and defense systems should also produce organic growth regarding.

Regarding aeronautics systems. After several years of strong growth. Our latest 2021 sales guidance calls for a mid single digit decline and we see that trend continuing in 2022.

We've talked in recent quarters about the headwinds in our Hale portfolio.

We're also projecting lower sales on <unk> F 18 as.

Well as our restricted portfolio.

Looking further to the future with some <unk>.

Citing decade for defense aerospace rapidly evolving threats.

Our spring a new wave of autonomous vehicle and sixth generation fighter development. So the opportunity set in AF remained solid and we will continue to invest in the cutting edge technologies that allow our customers to stay ahead of the threat environment.

Altogether, we currently expect <unk> 'twenty to 2022 sales at the company level to reflect continued organic growth.

Looking at segment margin, we expect the strong results we have demonstrated in 2021 to continue in 2022.

With excellent program performance offsetting a portion of the 20 to 30 basis point benefit we generated from pension related overhead rate changes in Q1 of 2021.

While we project higher sales and strong segment operating margin, we expect transaction adjusted earnings per share to be down next year as a result of several nonoperational headwinds.

Lower cash pension recoveries and higher corporate unallocated expenses are currently projected to create an EPS headwind next year of more than $2.

For <unk> pension or outlook for 2022 will depend on our updated actuarial assumptions, including discount rates and plan asset returns, which we will determine at the end of the year.

Earnings per share driven from sales growth strong operating margin performance and lower share count will help to offset these non operational items.

Next I'd like to spend a moment discussing cash.

We expect relatively stable cash flow at the program level in 2022, but there are a few temporal items that should be factored into the year over year comparison of overall free cash flow.

First is lower Cas pension recoveries as.

As you can see on slide 13, our Cas recoveries are currently expected to be lower by $350 million next year.

Second is cash tax cash taxes excluding.

Excluding the impact of the ICT services transaction, we expect cash taxes to be modestly higher next year. In addition, as we've noted in the past current tax law would require companies to amortize R&D costs over five years, starting in 2022, which would increase our cash taxes by around $1 billion next year and small.

Other amounts in subsequent years.

There continues to be uncertainty in the tax environment with potential new legislation that could change the R&D amortization provision and other provisions.

We will provide updates on each of these items on our January call.

Taking all of these cash flow factors into consideration.

We would expect to decline in 2022 transaction adjusted free cash flow followed by a double digit growth CAGR through 2024, driven by strong operational performance.

Regarding capital deployment investing in the business through disciplined R&D and capital spending continues to be our priority. We expect capex to be roughly flat next year in absolute dollar terms.

We believe these investments allow us to stay at the forefront of technology as we invest in our business.

And as we've said we continue to expect to return the majority of our 2022 free cash flow to shareholders through dividends and share repurchases with that ill turn the call back over to you Kathy.

Thanks, Dave in summary, we have delivered excellent year to date results and operating performance and we are pleased to be increasing our full year EPS guidance for the third consecutive quarter. We are actively engaged with our supply chain and our employees as we work to mitigate broader COVID-19 related risks and continue to keep our programs on track.

As shown by the many milestones in the quarter, we have highly relevant capabilities and programs that align well to national security requirements and our customer funding priorities.

So as we look forward 2022 is expected to deliver another year of organic sales growth and excellent performance paving the way for longer term margin expansion and free cash flow growth.

We remain focused on protecting the safety and wellbeing of our employees delivering the capabilities, our customers need to protect national security and sustain our planet and delivering value to our shareholders.

So with that Kathryn.

If you would please open the phone line for questions.

Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your Touchtone telephone again press star one to ask a question.

If your question has been answered or if you wish to exit the question queue press the pound key to exit. Thank you Anthony respectful of time, please limit yourself to one question and one follow up question.

Press Star zero at any time for operator assistance.

And your first question comes from Robert Stallard with vertical research.

Good morning.

Good morning, Rob.

Kathy or Dave just on the 2022 expectations for Aes.

Decline that you're expecting there I'm wondering if you could give a little bit more detail of the puts and takes some countries you can't talk that much about classified but if you could give some sort of scan of the moving parts would be very helpful. Thank you.

Sure Rob, it's Dave I can touch on that a bit further as.

As we mentioned.

We're projecting a mid single digit growth decline this year in Aaas and that's about the same trend that we anticipate next year in light of where we are in the lifecycle of a lot of our key programs.

At this point.

There's no single factor or even two or three factors that contribute to the lion's share of that.

Decline, but rather a fairly consistent trend and the trajectory across a lot of our key programs in the sector. You mentioned, we can't say much about our restricted portfolio certainly agreed on that front.

Have mentioned that the global Hawk portfolio is projected to decline next year as blocks <unk> and <unk> continue in their retirement process.

F 18 is projecting a decline for our portion of that program.

<unk> is another I would highlight there so across the board. These are are fairly consistent drivers F. 35, we've talked about some of the COVID-19 impacts there in Q3.

It's.

Kind of pattern going forward in the US portion of the program is relatively flat to modestly declining.

As we look at the 22 outlook. So hopefully that gives you a sense.

Some of the key drivers as I mentioned, it's not any one specific program.

And just a quick follow up Dave sorry, just quickly Rob the only thing I would add is that our sector has been and we expect may continue to be the most impacted by the COVID-19 related challenges that we spoke about.

Yes.

Just a follow up do you think.

2022 is like to be the trough for these issues some of these other.

Mature programs start to grow at 23 and beyond.

Obviously, we will provide more insight on 2023 as we get to a similar point in 2022.

And throughout the year, we'll talk more about specific programs within that portfolio I think for some of the trends will continue for others, they won't and we'll defer to.

You know a later date to give you more specifics as we looked at the 'twenty three outlook and beyond.

Thank you very much.

Yes.

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

Thanks, Good morning.

I was hoping you could touch a bit on the cash commentary for 'twenty, two and just so we can all get to the same base level, you're thinking about Dave is that <unk>.

When you when you talk about the cash taxes being a headwind is that assuming the amortization rule sticks around and you have that $1 billion headwind are you thinking cash taxes are a headwind.

Regardless and then a similar question as it relates to the double digit growth through 2024.

Sure so the.

The kind of high level view, we gave you on 'twenty two through 'twenty four.

Assumes that the.

Amortization of those R&D costs does not go into effect.

Though the trend line would be similar it would be lowest in 'twenty two with an increase in 'twenty three 'twenty four but let's talk about it assuming that the guidance does not go into effect.

What I think you can expect from us in 'twenty two is to continue to drive.

A similar volume of working capital improvements to what we've done this year, which certainly had a good track record over the last couple of years of working capital.

Efficiency across our business.

And that will help to provide that steady level of program driven cash that we've talked about on the call.

We also talked about pretty steady Capex next year slightly lower as a percentage of sales with the sales growth but.

Fairly consistent volume on a dollar basis.

And so that means the kind of non operating items.

What we expect to provide the year over year reduction $350 million less Cas pension recovery as what we project today.

I think of that more as a purification of our free cash flow stream that day was going to come.

For a while and so we're reaching that point now where we've reached a sustainably lower level of <unk>.

<unk> reimbursement.

On the cash tax side, we project that those would be modestly higher.

Without the R&D amortization provision or other changes in the rate or other key provisions legislatively of course legislation could.

Could then change that further if we don't have a.

The removal or deferral of the R&D tax item for example, so more to come on all of those fronts on the January call, but hopefully that gives you a sense for it today as we think about 'twenty three and 'twenty four.

We do expect continued decline in capital expenditures as a percentage of sales.

We'll also benefit from not having the payroll tax deferral in 'twenty, three and 'twenty four as we have in 'twenty, one and 'twenty two and at the program level. We expect to continued working capital efficiencies on some of our key programs and 23% and 24, which is what gives us the confidence in that increase in those years.

Okay, and just one quick clarification the prior cash outlook had slightly modest growth in Cas recoveries in 'twenty three that that's that trend line still holds.

At this point, yes, I think you'll see much less significant changes in 'twenty, three and 'twenty four again based on what we see today and based on the actuarial environment.

Environment today.

So from 'twenty, one to 'twenty two as.

As well as 'twenty to 'twenty, one we've had significant reductions in cost recovery, we no longer expect significant movement really in either direction in those out years. Okay. Thank you.

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

Hi, good morning, Thank you.

I wanted to go back to Aeronautics.

And when you describe the lower.

Aeronautics revenues in 2022, you referred to opportunities long term to reverse that those are things like the sixth Gen fighter New autonomous systems, but I think of those as being fair.

A fairly long term in fairly uncertain. If you look at that revenue trajectory.

'twenty, one we should certainly see strong growth come about from that.

Do you see that is sufficient.

To reverse this trend in <unk>.

When might that grow to a point that we would see that.

Sure Doug obviously, that's one that we can't get into much detail on it.

So.

I guess refer you to the overall trends that programs tend to see is there in these.

Phases of the lifecycle that we've described on B 21, and maybe more importantly that our customer has described.

That program.

Certainly it has been a contributor to our growth.

Restrict today as portfolio over the last several years as we've <unk>.

Described but the go forward trajectory and the pace and timing of that growth is something we can't say much more about so we've given you a sense for the 22 outlook there.

And where the program stands in its lifecycle and Thats about what we're able to say at this space.

Okay.

Well, if I, if I switch to F 35.

Perhaps go outside of Aeronautics.

I think of the kinds of things that Youre doing on the F. 35 is right at the heart of Tech refresh three.

Our systems upgrades.

Now that that has with it I'd say some good news as it should be a lot of I would expect growth there, but they've also been quite a few challenges that have been highlighted around tech refresh three can you talk about both the growth opportunity that you have on F 35, there as well as how your.

Dealing with some of the challenges that have come up.

Sure Doug This is Kathy I'll take that so as you noted there is opportunity, particularly in our mission systems sector. As we look at the tech refresh on the F 35, and the mission systems that we provide to the aircraft there has been some delay as it has.

Ben noted this year they have had some minimal impact just on the timing of our work and the funding to support our work.

But we have not experienced performance issues as a result of those delays its just shifted some sales out of this year into next and in terms of our overall outlook for our mission systems work, we do see that and we've been consistent in saying that.

<unk>.

Side opportunity, while the production volume is flat and price pressure is.

Overall production sales volume down slightly across the board. The other area you didn't ask about that Sustainment continues to be an opportunity as well and we see that in all three sectors that predominantly led through our defense systems business for the aircraft.

The airframe and our mission systems business with Sustainment contracts and da Vinci system.

Okay very good thank you.

Your next question comes from the line of.

<unk> with Jefferies.

Good morning, guys. Thank you for your time.

Maybe to follow up on an earlier question just thinking about the 2022 revenue framework you noted aeronautics went down to GBS.

Growing $500 million, which is less than what we thought what are any other major headwinds and if we roll. It up is it fair to think about 3% to 4% revenue growth for 2020.

And maybe as a follow up to that you gave.

Some color maybe if you could just talk about how you think about the rest of that portfolio outside <unk>.

Yes, thanks for the question Sheila so to unpack the space growth. This.

This year and the trend that we expect to continue into next year.

<unk> has contributed roughly 50% a little bit over 50% to the sales growth in space in 2021, and we expect that trend to continue into 2022 to your point about $500 million of growth next calendar year being less than you might've anticipated you might be looking at a bunch of it.

Data, which showed an incremental billions in each of the two years, but I'll remind you that a quarter of about 22 government year is in 2021. So we've seen a more significant ramp over the course of the 12 months in 2021, and we anticipate in our calendar year 2022.

It's not a change in profile, it's nothing different it's just how that falls into our calendar year.

With regard to your broader question on how <unk> and <unk>.

<unk> to our outlook for the company overall.

I think it is safe at this point based on what we know today to suggest that low single digit growth in 2022 is a reasonable expectation.

At this point in the year, we see some COVID-19 impacts that we've referenced we saw them in three Q, we're anticipating those to stay at that same level in Q4, but it is difficult to project what that impact may be in early 2022.

But what I will say as we see those more as speed bumps than we do the railroads.

Our fundamentals are intact, we have a strong backlog.

Strong pipeline and great portfolio alignment to a bunch of priorities. So we still see the path to growth that we've been talking about we just have some of these COVID-19 as I call them speed bumps that we're working our way through hopefully that helps.

Sure. Thank you so much.

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

Hey, good morning.

Maybe just following up on that series of questions Kathy.

Because I think this is a question that's a lot of People's mind.

And obviously I'm not asking you for guidance clearly.

Out of the game, but.

How do we think about kind of medium term growth right. So when the speed bumps are behind us.

Got it.

Production on B 21, GBS these kind of humming along whatever else is coming along so if we step out over the next couple of years, how do we think about medium term growth.

Well as I said, we see a path to continuing to grow this business and its based not only on the strength of the backlog. We have with programs you were referencing like B 21 in GBS fee, but it's also a pipeline that includes continued new award and I highlighted a few.

Those today of programs that are moving into a phase where they will see production awards in the next couple of years.

So we still see a path to growth over the medium term.

And it's just a matter of how quickly that growth comes in the next several quarters as a result of some.

It was bad slowdowns that we've seen and I should say, Ron and I appreciate the opportunity to address it we've seen fairly minimal supply chain impact because we have a relatively high MZ labor content on our jobs versus external supplier content.

<unk> talked a bit about the leave taking that we saw being higher in the third quarter, but that too is finite because as people take leave of course, they're burning down their leaf balances and when I look over a longer term period trends like labor market.

Got it.

Issues that may drive labor rates up or inflation, we have in the industry. One of the highest levels of cost plus work. So those costs get passed on and shared with our customer I do want to emphasize that we in no way wanted to pass those costs onto our customers. So we are working to minimize those impacts.

For their benefit, but our shareholders are not cured.

Sure. So I feel really good about the portfolio that we have in our ability to to whether any of these short term impacts or what we expect to be short term impact and still be on a path to growth.

Great. Thank you.

Okay.

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

Hey, good morning, guys.

Good morning.

Cathy just following up on that supply chain challenge can you provide more specifics in terms of what youre seeing why they are more prevalent than arris and aeronautics versus the other segments and also right on labor if the vaccine mandate does come into effect December 8th how are you thinking about the potential impact.

So we are implementing the vaccine requirements across our U S workforce.

Mandate.

It requires us to do we are certainly early in our stage of collecting data about our employee status and have a good sense that a vast majority of our employees are vaccinated are in the process of being vaccinated and with other employees, we are working through their ops.

To meet that requirement by December eight it's really too early to predict predict what those impacts might be until we have a better sense of not just the pure quantum of employees to may not meet their requirement, but where they work and what they do in our company and therefore, how we would mitigate those impacts.

But as I mentioned, we are proactively increasing our hiring now in anticipation that we may have some law.

Of workers and we are ensuring that we house training and skill building programs in place. So as we bring those new employees into the workplace they can't get a productive and efficient as quickly as possible. So actively working to mitigate impacts, but they're just too difficult to really quant.

For you at this time.

Yeah.

Great and the specifics on the supply chain challenges with Aeronautics.

For us it's been relatively minimal.

As we have seen our own increases and leave taking we've seen the same thing in our suppliers and that was primarily driven by two things in the third quarter. We estimate one was the Delta variant, we saw increased case counts and therefore people.

Out of the workforce, while they either recovered from Covid or we're staying out based on close contact and we understand their suppliers saw similar phenomenon and then the other was that people had not been taking leave at the same rate.

Things started to open up people actually took some well needed and deserved vacation. So those are the two primary drivers that we saw and our suppliers saw the team, which slowed down deliveries of it but as I noted, we see those as being temporal in.

In that we've taken is somewhat limited.

Point in time.

Thank you.

Your next question comes from the line of Noah <unk> with Goldman Sachs.

Okay.

Yes.

And now what your line is open.

Hi can you hear me.

Yes, good morning.

Hi, good morning, everybody.

Yes.

Dave.

The cash flow projection that you.

<unk> talked about on a multiyear.

Okay.

No where we lost you.

Yeah.

Uh huh.

Okay.

Hello are you there.

Can we go to the next question will go right back to Noah.

Sure Okay, we have David.

Your line is open Sir.

Hi, Sarah.

Yeah I was just wondering David if you could speak to what Youre, assuming directionally for margins.

In that projection.

On a total company basis. Thank you.

Sure. So we're really pleased to have been able to increase our 2021.

Segment operating margin rate guidance for the second time now to another.

Another 10, another 10 basis point increase this year as we noted in 2022.

Don't have the 20% to 30 basis point benefit that we have this year from the pension.

Pension driven overhead rate benefits that we experienced in our EAC is in the first quarter of the year.

And we anticipate being able to offset a portion of that reduction.

We look to 2022.

I don't think it's it requires a specific assumption for 'twenty, three and 'twenty four margin rate to get to the general trend that we're providing for those years will be more specific about margin rate outlook as we get closer to those years, but I think a.

A relatively stable margin rate would get you to the trends.

Trends that we've talked about in 'twenty, three and four with a healthy.

A double digit CAGR as it relates to free cash flow from the 22 base up to that 24 level again, no payroll tax deferral a bit of efficiency on the.

Capital expenditure side, and some program driven opportunities are what really drive that.

Okay. Thank you.

Yes.

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

Thanks for taking the question good morning.

So just Dave to follow up on that so I'm clear. So your guidance segment margin overall lower versus I guess whatever that.

Call. It 11, eight midpoint for 2021, you're guiding at lower in 'twenty, two and then.

In terms of free cash flow on an absolute basis. It is 'twenty three and 'twenty four free cash flow higher than 2021 transaction adjusted free cash flow just on an absolute basis.

Yes.

Sure Let me address both of those David on the segment Om rate.

You're right to think about.

The two factors we've described in 'twenty, two compared with our increased guidance for 2021 will look to offset a portion of the 20 to 30 basis point reduction that we would see from the.

The absence of those.

Right benefits in 'twenty, two will look to offset a portion of that 20 to 30 basis points through continued strong operating performance, but not all of the 20 to 30 basis points on the Om rate side.

In terms of the 23 and 'twenty four free cash flow.

We got a lot of moving pieces yet to be determined on the tax side as we mentioned.

Things can continue to move as they often do on the pension side.

Based on what we know today I think I think whats best to say today is we anticipate that that.

Healthy growth outlook in 'twenty three 'twenty four as we get to January and provide more specifics on the 'twenty two level of free cash flow and no more than we than we could note today in terms of tax legislation and such we'll provide a bit further detail on the 23 and 'twenty four growth rate in comparison to where we are today also.

Alright, thank you.

Our next question comes from the line of George Shapiro with Shapiro Research.

Yes, Dave I wanted to.

Clarification, when you say a decline at a rate similar to 'twenty, one is that because organically, it's more like down 2% with the.

Equipment sale taken out of it or are you talking the 5% that you just see.

Right, we're comparing to the actual mid single digit decline in 2021, when we say, we're having are expecting a similar trajectory in 2022 and it's a good question. Thanks for the clarification George.

Okay and then.

What changed if anything or what changed to the Cas pension dropped so much next year I know you had talked about it coming down, but I hadn't expected it to come down the magnitude that it is.

Sure the $350 million number is pretty consistent with what we've been projecting in recent months and the.

July and April earnings calls there was legislation regarding pension earlier this year.

That affected some of the actuarial assumptions used for cash purposes, and reduce that number and then the other factor is in 2021, because number came up by about $60 million as we noted on the call today. So the compare from 2021 to 2022.

$60 million tougher, but the 22 level has been pretty stable for us since that new legislation came out in the spring.

Yes.

Okay. Thanks very much.

You bet.

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

Yes. Thank you so much for taking the call so.

But by the middle of 'twenty, two we'll know about the R&D tax credit.

And as you look at 'twenty three 'twenty four you are saying Hey, we don't have the payroll tax repayment, we have lower capex.

<unk> ops and we have less downside in terms of cash so youre basically, saying, we're going to have considerably better cash flow and you also have a strong balance sheet good low net debt to EBITDA ratio.

Your your major peer basically in a somewhat similar situation, although they have cost going against them.

Taken a more aggressive stance toward.

There are strategic.

Of share repurchase and dividend hikes to return value to shareholders.

Your situation looks actually similar if not better.

Is that something you would consider.

It's not just something we would consider we have been articulating throughout the year that we do see a majority of our free cash flow being returned to shareholders over this period and it is in part why we increased the dividend again this year and we have <unk>.

<unk> to at least $3 billion of share repurchase in 2021, you could expect to see those trends for cash returning to shareholders in the next couple of years as well.

But actually Lockheed is implying that our net debt will go up.

Consider all of their numbers, so, they're basically saying theyre looking at net debt because EBITDA is going up.

Basically.

Increasing the net debt somewhat because of the strength of their of their balance sheet is that something you would consider or is it basically just the cash flow.

That's available.

Sure.

You noted appropriately at the beginning that we'll know more in the next few quarters than we do today about.

Tax legislation and other <unk>.

Factors, we'll know more about the COVID-19 environment, the budget environment and so all of these are factors that we think about as we look at our capital allocation plans I think cathy's point is the important one around the priority for us over the next couple of years will remain.

First and foremost after making critical investments in our business as we've said we will continue to do the.

Our next priority is around returning cash to shareholders over these next couple of years, whether we choose to.

Change our net debt balance over the next few years or not will in some ways be affected by those broader factors and we'll update you and others as we know more and get into 2022 on that front. This year, we achieved our credit rating targets.

And feel like we're in a good stable position there.

So again, we'll know more.

Update you all as we do.

Catherine.

Thanks, so much.

Alright, and your last question will come from Seth Tyson with J P. Morgan.

Oh, great. Thanks, very much thanks for forgotten.

I think I got one more here.

So.

I guess as far as backlog.

When would you expect backlog to kind of stabilize and given the decline we've seen year to date in the defense systems backlog, what gives you confidence on the growth outlook there.

So we see our book to Bill being close to one again this year at Hudson significant awards that we anticipate in the fourth quarter and our backlog has grown over 90% since the end of 2017, so to your point.

It's there.

We don't expect that kind of accelerated growth in our backlog currently sits at over two times sales. So it's quite strong and we feel supports the continued growth of the business for for several years to come.

Great.

And then on defense.

Sure what is the specific question on defense.

Defense defense backlogs been pinned down.

Significantly year to date and.

Calling for growth next year I know there are some kind of growth you programs in that segment, but kind of what gives you confidence in that defense.

Systems business growing next year.

Yes, so that business also has some key awards in the fourth quarter of this year that would position for its growth next year. We also in defence C is our shortest cycle business. So they do tend to run more of a one to one backlog to sales ratio and the only other thing I would point to there.

There is we have been trailing off Lake city and that of course has impacted new awards and a tough year over year compare but as we look forward.

That will stabilize.

And looking at the backlog to sales ratio in that business anything you don't know of course of the year over year backlog comparisons in <unk> in particular would be affected by the divestiture of the it services business to a lesser degree in M. S N space, but certainly.

Thinking of more of an organic change and that the us backlog is important in this particular year.

Okay, Okay, great. Thank.

Thank you very much.

Alright, there Kathy.

Well once again I want to thank the Northrop Grumman team for delivering another solid quarter. We are actively working to mitigate the COVID-19 related risks that we talked about today and finish this year strong with robust sales growth another strong EPS performance and solid free cash flow and our initial 2022 outlook as we've said.

It is expected to continue to deliver growth and strong operating performance again next year and we look forward to providing you some detail around that guidance in our January call.

As you all well and thanks again for joining our call today.

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