Q1 2022 Northrop Grumman Corp Earnings Call

Okay.

Good day, ladies and gentlemen, and welcome to Northrop Grumman's first quarter 2022 conference call.

Today's call is being recorded my name is rinse 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 then the operator will be happy to assist you.

I would now like to turn the call over to your host Mr. Todd Ernst.

<unk> and Vice President President Investor Relations Mr. Ernst. Please proceed.

Thanks, Brian and good morning, everyone and welcome to Northrop Grumman's first quarter 2022 conference call. We will refer to a powerpoint presentation that is posted on our IR website. This morning.

Before we start matters discussed on today's call, including 2022 guidance and beyond including outlooks 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 chair, CEO , and President and Dave Keffer, our CFO .

This time I would like to turn the call over to Kathy Kathy.

Thanks, Todd Good morning, everyone and thank you for joining us.

We've seen significant changes to the political.

Political landscape since our last earnings call Russians in basin, Ukraine has consequences for the stability of the region. In addition to creating a profound humanitarian crisis.

Or with the people of Ukraine, and they defend their freedom and protect their way of life.

Northrop Grumman Foundation, we are committed to help the people of Ukraine.

<unk> not seen our employee's personal donations to select charitable organization.

This situation underscores the importance of having strong defensive capabilities to deter broader aggression and contain global conflicts.

At Northrop Grumman, we've worked to ensure our country and its allies have these detouring capabilities.

Modern deterrence depends on our customers' ability to maintain advantage over competitors and multiple domains from undersea to space in cyberspace and every domain in between.

Northrop Grumman continues to demonstrate our ability to bring the <unk> solution to a more complicated world.

<unk> unique capabilities in areas, such as stealth fiber space computing propulsion and communications to name a few.

I will talk more specifically about our capabilities and our strategy in a few moments.

First let's address the budget trends, we see in light of the threat environment.

In the U S. There is bipartisan support for increasing defense budgets.

Congress finalize the fiscal year 2022 defense appropriations in March and the administration have since issued the fiscal year 2023 defense budget request.

Both of these base budget showed solid 4% to 5% topline growth with additional potential in supplemental funding.

Based on initial indications from Congress the final fiscal year 2023 appropriations could be even higher than the initial request as Congress looks to address the evolving threat landscape, but also to offset inflationary pressures.

Currently the fiscal year 2023 budget request includes a 4% increase in the investment accounts.

The main driver behind this increase is a 9% increase in R&D to fund development of critical capabilities, particularly in space and deterrence.

States continues to be one of the fastest growing defense budget areas with a 30% plus year over year increase.

The request also fully funds modernization of the strategic deterrent.

Including initial production funding for 'twenty, one as well as significant year over year increase in development funding for Gvhd.

And NASA budgets are also growing in support of a new era of space exploration.

Slide 23 budget request includes an 8% increase over FY 'twenty, two including funding ongoing programs, such as <unk> and new initiatives for Moon to Mark's efforts.

And globally. There is an ongoing paradigm shift regarding national security and several alloys have pledged to increase defense spending as a result.

We stand ready to support them in achieving their national security objectives as well.

With a budget environment as context, I will take a few minutes to step back and frame our business strategy.

Our fundamental goal is to be the leading technology company, enabling the U S and its allies to protect freedom deter conflict and sustain our planet.

Our business strategy, which we've been executing for several years is focused on four core areas.

First is maintaining technology leadership, and delivering innovative and affordable solutions with speed.

It sustainably and profitably growing our business and our customers' highest priority missions, while maintaining contracting discipline.

Third is keeping a laser focus on performance and driving cost efficiencies.

And finally, we are focused on deploying our capital in value, creating ways for our customers and investors.

This strategy has created strong alignment with our customer priorities and strengthened our portfolio position as.

As we sit here today, we expect this will enable us to accelerate our revenue growth rate in 2023 from the low single digits in our 2022 guidance by.

By 2024, we also expect that by growing our business and delivering strong operational performance, we will be able to drive our segment operating margin rate to approximately 12%.

And we continue to expect to grow our transaction adjusted free cash flow at a double digit CAGR through this period.

From a capital deployment perspective investing in our business to support this growth outlook remains our top priority after making such investments we are targeting a return of at least 100% of our free cash flow to investors in 2022.

Underlying these performance goals and expectations is our position in several priority growth areas for our customers.

Our role in supporting deterrence across all domains is in direct alignment to the needs of today's changing global National security environment.

For nearly seven decade, the U S has successfully mitigated the risk of broader global conflict through strategic deterrence.

Northrop Grumman is the prime contractor onto this recurrent deterrence modernization program.

So the B 21 program the Air Force confirmed that the first aircraft have entered the ground tough days paving the way for first flight and there are five additional test aircraft in various stages of assembly.

This progress is partly enabled by our digital design capabilities and advanced manufacturing technologies.

Which reduce risk ahead of the aircraft's first flight.

And looking forward, we expect sales on the B 21 program to grow as the AMD phase continues and we progress into low rate initial production.

This assumption underpins our expectations for aeronautics revenue to be flat next year and return to growth in 2024.

For GBS fee, we remain on schedule and the program is expected to continue to ramp over the next couple of years as we execute on the $13 billion E&P contract with nearly $1 9 billion in expected revenue in 2022.

We still expect the program to enter production in the 2026 timeframe with initial operating capability plan for 2029.

<unk> production is expected to be a material growth driver in the middle of the decade as it's reflected in the President's budget.

In addition, our space business continues to experience rapid growth as our customers re architect their space based capabilities.

This growth is in response to other series developing more sophisticated weapons.

The need for more capable missile defense warning system as well as the migration of some airborne missions to the space domain.

In the first quarter, we have received several new awards that showcase the breadth of our space portfolio and our ability to compete and win in various domains, including ground systems and proliferated Leo constellations.

These awards build on our significant backlog and positions our space business for expected double digit growth once again this year.

Notable wins this quarter included nearly 700 million dollar award for 42 satellites in low Earth orbit that provide high speed low latency communications for the space development agencies transport layer.

And we want a $340 million contract for deep space advanced radar capability or dark that dramatically improve situational awareness, particularly in geosynchronous orbit.

And in Q2, we anticipate an approximately 2 billion dollar award from U L. A to provide gem 63 motors for launch services, including in support of Amazon's project Kiper.

Another area, where we see meaningful future growth opportunities within mission system, particularly our networked information solutions business, which at its core is a communications and processing that's now.

And this area, we have proven technology leadership, and connecting and linking military systems with a broad portfolio of products.

Networking systems, and radios and cyber computing and AI capabilities.

We're seeing a rapid evolution in this area with ambitious goals from our customers to field open distributed secure networks that are more survivable.

Initiatives like <unk> or providing demands for our existing platform agnostic solution as well as providing opportunities for new technologies, we are developing.

And we are creating partnerships like the <unk> partnership with AT&T that we announced this month to strengthen our competitive position.

We believe that the communications business will be the fastest growing area of MFS over the next couple of years.

Given all that I've just outlined you can see that our portfolio is aligned to the evolving national security environment and priority areas for our customers.

We continue to demonstrate our ability to deliver compelling solutions in this environment.

Ultimately executing on our strategy depends on having the right culture and people.

It is one of the reasons, we focus on remaining an industry leader in ESG.

I encourage you to look at our annual sustainability report, which we published in March It provides insight to our progressive governance structure, our culture, our commitment to ethics diversity equity and inclusion and environmental sustainability.

As we shared in this year's report we are committing to net zero emissions in our operations by 2035.

We also published our first T. C. F. T report, which provides additional transparency around our approach to managing the climate related risks and opportunities across our business.

So with that I'll turn the call over to Dave to provide more detail on our results and guidance and then we'll move on to Q&A.

Kathy and good morning, everyone. Our first quarter was a strong start to the year, we generated more bookings than we'd been expecting including competitive wins on several new programs.

Our robust backlog of $76 billion continues to be over two times, our annual sales and provides the foundation for future growth.

First quarter sales totaled $8 $8 billion down 2% organically.

Up sequentially from the fourth quarter of 2021.

Q1 sales represented about 24% of our full year guidance in line with our prior projections.

We experienced some temporary COVID-19 related productivity and volume impacts to start the year, which receded as the quarter progressed.

Continued tightness in the broader labor market represents a challenge that we're working hard to mitigate as we ramp up of large contracts and address strong market demand for our capabilities.

We continue to make progress on this front and are pleased with the trajectory that world.

Our execution remained solid in the quarter.

We delivered a segment operating margin rate of 11, 8% in line with the midpoint of our full year guidance.

And we made progress on several elements of our long term cost efficiency strategy.

At the program level.

<unk> results varied across sectors as these come in any given quarter.

One of the positive EAC changes in Q1 was a $67 million favorable adjustment on the B 21 program related to performance incentives in.

In addition to what Kathy noted, but wanted to take this opportunity to provide a bit more color on this franchise program.

B 21 is currently in its cost type AMD phase.

With a variety of incentive fees for which we accrue based on anticipated achievement.

<unk> for certain ENB incentives improved in Q1.

Leading to the favorable EAC adjustments.

We are in a critical integration and test a portion will be <unk>. This year and we continue to focus on production efficiencies.

The low rate initial production or <unk> phase will begin over the next year and running parallel with ENB for a period of time.

They will rip for B 21 is fixed price and.

And we expect to recognize revenue for the El roadblocks separately from M D.

The units were priced it was part of our original bid for the program.

The full rate production phase or FRP cause yet to be negotiated and includes the majority of the aircraft volume in the program of record.

Based on our current projections, which run roughly through the end of this decade, we continue to expect production to be priced and profitably executed within the programs average procurement unit cost target.

Now turning back to our Q1 results.

Diluted earnings per share in the quarter were $6.10, reflecting our strong segment performance.

In mind, we had a headwind of roughly <unk> 46 cents, resulting from lower cash pension costs and our overhead rates that we booked in the first quarter of last year.

In aggregate our transaction adjusted earnings per share were down 7% compared to Q1 2021, primarily due to non operational factors such as lower net <unk> pension and the performance of marketable securities.

It's worth noting that the after tax net <unk> pension adjustment in Q1 was nearly $250 million, representing $1 58 of earnings per share.

This was $40 million lower than Q1, a year ago, and the 19th cent EPS headwind.

We expect similar impacts in each of the remaining quarters in 2022.

But total net <unk> pension adjustment, primarily reflects the actuarial gains and losses in our pension plans and it's not something we consider when assessing the company's operating performance.

Moving into 2022 guidance, we have minimal changes, we're increasing the sales guidance for our space business due to continued strong momentum in recent capture of New awards as Kathy outlined.

We now estimate sales in the mid to high $11 billion range, which would result in another year of double digit sales growth.

At defense systems.

Adjusting our estimate to the mid to high $5 billion range to reflect a lower first quarter, particularly on some of our international training programs.

These two adjustments offset each other and our full year company level sales guidance is unchanged.

With respect to our quarterly sales profile, we expect Q2 sales to be between 24, and 25% of our full year guidance midpoint.

Our expectation near the middle of that range.

From there, we expect accelerating year over year growth in the second half of the year.

Next I wanted to take a moment to talk about cash first.

First quarter transaction adjusted free cash flow was consistent with our expectations.

Aligned with our historical seasonal trends.

Decrease compared to the first quarter of 2021 reflects timing of collections and disbursements and our full year guidance is unchanged.

After the quarter ended we made our first cash tax payment of the year, which included the projected effects of current R&D tax law are.

Estimated tax payment is due June 15th we continue to project the cash taxes would be about $1 billion higher for the full year. So the current law remain in effect.

But we remain optimistic that we will see a deferred or eliminated given the broad bipartisan support for doing so.

Our base case assumption for cash flow and P&L continues to be that section 174, R&D tax law will be changed if and when that happens we would expect to file for any appropriate refunds of taxes paid.

Also recognize the spike in corporate unallocated cost in that quarter associated with the reversal of the deferred state tax asset that had been building year to date.

I'd note that we've already incorporated these items in our full year EPS guidance.

We remain committed to providing excellent shareholder returns with at least $1 5 billion in share repurchases targeted for this year on top of a healthy competitive dividend.

As Kathy mentioned in aggregate, we expect to return at least 100% of our 2022 transaction adjusted free cash flow to shareholders via dividends and share repurchases over time, we expect the cash on our balance sheet at a typical year end to be roughly $2 billion, which would continue to provide flexibility.

<unk> and liquidity.

Our capital deployment strategy also prioritizes investing in our business.

We continue to expect capital expenditures for 2022 to be in line with 2021 levels.

And later today, we will file an S. Four with the SEC as the final step of the Obligor exchange process that we executed last summer on certain debt instruments.

Overall, we're pleased with our first quarter results and achievements as we continue to build a strong foundation to accelerate growth and deliver on our long term value creation strategy and with that we'll open your call up for questions.

Thank you, Sir 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.

We ask that you limit yourself to one question and one follow up.

If you have further questions. Please re enter the queue.

Thank you.

Our first question is from the line of Doug Harned.

With Bernstein. Please go ahead.

Good morning, Thank you.

Kathy you talked about Aeronautics and how you're looking at the topline 2022 to 24.

But.

This has been complicated you've got several mature programs that are set to decline this year even F 35.

Trajectory looks complicated <unk> appears to be ending in 2024, and then beneath that you've got.

High growth on the B 21 ahead, you've got a budget boost for Triton.

Can you help us understand the puts and takes here.

You too those revenue expectations for the next few years.

Sure, Doug and you did a nice job of outlining the key moving parts in the Aero portfolio let.

Let me start with the mature programs are the ones we've been talking about for several years Global Hawks joint stars.

Or in the Air Force plan for retirement.

That is happening in the near term then we have things like what you know.

It will reach its program of record quantities over the next several years, we don't see this as an issue in 'twenty three 'twenty four but as we look to 'twenty five and beyond and that program will be reliance on international sales and I will say that we are building a quite a bit of international interest for <unk>.

<unk> and prosecuting on a pipeline there, but the navy program of record.

The full quantity and then F 35, we look at that it's fairly stable over the next couple of years.

What we've been saying and I know there was a question about the quantity and the budget request and how that impacts the Northrop Grumman quantities. It really doesn't have a material impact because we already were planning to build toward our capacity and working with Lockheed Martin. It appears that that plan is still intact and.

And then as you know there are some opportunities that layer additional sale.

The plan over the next several years the 'twenty one being the most notable for the first time the President's budget shows the production.

Starting in 2023, and you can see that that grows significantly in that same timeframe. So lots of puts and takes but as we look forward to 2023, we see those netting out to about flat with where we expect to finish 2022, and then largely based on B 21.

On growth and not having any major headwinds in 2024 from the other programs I just outlined we see growth in 2024.

Well and.

Just as a follow up within that.

The new budget.

A big boost for Triton.

If I look at.

Unmanned systems.

This has been an area, where I mean at least a while back.

The company had talked a lot about differentiation because of the operating architectures that had been developed at Northrop Grumman.

We saw we've seen global Hawk come down hail systems.

I think the <unk>.

And this is good but how do you think of growth potential in unmanned systems overall from this point.

Okay.

The Air Force and the Navy looking at unmanned systems is a key part of their architecture that these won't be either the highest quantity or the highest priced assets in their fleet. So when you think about the overall materiality of unmanned systems and in aeronautics portfolio, whether it be ours.

For others, it's not going to be one of the bigger drivers.

For growth over the next decade, but it will be important and the capabilities that we have and that we have.

Through our work on our Hale platforms as well as some smaller platform I think is highly relevant to our positioning for this market in the future.

Okay, great. Thank you.

Thank you.

The next question is from the line of Robert Stallard with vertical research. Your line is open.

Thanks, so much good morning.

Good morning, Rob.

Kathy Thanks for the additional detail on the B 21 that.

But I was wondering if he could begin any further on this you mentioned that.

The L. Rip portion is fixed price.

We signed a few years ago I was wondering how this now stands with regards to the inflation and the whole world is dealing with and how youre going to manage that.

Yeah. Thanks for the question because this is an important thing for us to touch on and Thats, why we provided a bit more clarity.

What production looks like on the B 21 program.

We are approaching that phase we did at a quantity that quantity is not something I can share, but it's a small portion of the overall program of record as part of the initial bid and that is what constitutes a rep and that was said is right.

And as we put that bid together of course, we at the time laid in some expectations around gross inflation.

To adjust to this time period, and we will continue to look at whether those assumptions.

I'll remind you we're not really going to be into the production phase for a couple of years in any significant way and so we still have a good bit of time, and we expect inflation is going to modulate.

Based on.

Please make a material impact to the program and part of what Dave shared how we think about the accounting on the program is so that you know we are already looking at those our flocks.

<unk> are obligated under our initial proposal for those quantities and still expect to be able to produce those within the government target price, which is published and is updated and adjusted for inflation on a regular basis. The last time the airports did that within 2019, a little over 600 million.

A pause.

And we continue to look at our own bid.

It makes sure that we see a path to executing those quantities profitably.

Reiterated that again today.

That's very helpful. Thank you.

Yeah.

Thank you. Our next question is from the line of Sheila <unk>.

With Jefferies. Please go ahead.

Good morning, Kathy do Pat Thank you.

Since we're on the topic of profitability Kathy you laid out some margin expansion targets through 2024, I think you mentioned, 12%.

Given the growth drivers you have how are you also thinking about just mix again, you touched on inflation that doesn't seem a big deal and productivity overall.

Yeah.

So mix is becoming less of a factor for us in the next few years, we have talked about our mix being roughly 50% cost type and 50% fixed.

That's exactly where we are as we sit here in the first quarter and we don't see that very much over the next couple of years, maybe a percentage point.

Higher on cost plus or two as we look at the next couple of years, when we see that inflection point to more fixed price is there's both be 'twenty, one and GBS do you start to move into their production phases, and so you can think of that notionally around the 25 26 timeframe the middle part of it.

The decade, and even that we don't see a very large swings in our mix because we still have development work that we'll be bidding and continuing to execute in the pipeline. So mix is less of a factor as we look forward at the company level.

Note that when you get into the segment level for instance in space.

Drivers are more pronounced.

A bit more of a mix shifts there.

You asked about how we think about in terms of profitability, so mix no longer being a big driver when we think about profitability and cost efficiency and performance and the two big drivers that we are focused on what I talked about that in our strategy in terms of cost efficiencies. We've put in place a dedicated team at the company level and we're working on.

All elements of cost to ensure that we're operating as efficiently as possible.

Great. Thank you.

Thank you. The next one we have the line of Peter Arment with Baird.

Please go ahead.

Yes, good morning Kathy.

Maybe I could just.

Follow up on kind of the kathy's comments on the outlook kind of through 2024, you mentioned double digit growth.

Free cash flow, how do we think about it from kind of the puts and takes on a just an overall conversion rate.

100%, apparently and just.

What's the right way to think about as we look out.

Yes.

Sure. Thanks for the question Peter.

No no significant changes to our free cash flow outlook from when we described in some detail a quarter ago.

Our three year outlook that we intend to modify on a quarterly basis unless they're material changes.

So the same drivers exist today, we do see an opportunity over the next few years for us to continue investing appropriately in the business, but to have capex come down slightly especially in 2024.

In comparison to 22% and 23, so that's one of the drivers of free cash flow acceleration. We also have the end of the.

Payroll tax deferral issue that benefited us in 'twenty and as an outflow in.

In the next in the following two years and so that will benefit 23, and 24 on the working capital side.

As we've noted 2019 'twenty, we're very strong years of working capital efficiency at this point, we'd put our working capital metrics up against any in the industry were very proud of the efficiency of our balance sheet in the next year that we see opportunities for continued.

Enhancement there is largely 2024 due to the timing of.

Some payment expectations in that year incentive milestones and such.

So again no changes to the outlook there those are some of the key moving pieces relatively stable on the working capital front in 'twenty, two and 23 before seeing those opportunities in 'twenty four and as we've noted.

Do see expansion in the core business, both the topline and the Bottomline supporting that outlook over the next few years as well.

That's great color. Thanks, so much.

Thank you. Our next question is from the line of Ron Epstein with Bank of America.

Your line is now open.

Good morning.

Kathy what have you seen.

International markets since.

The events in the Ukraine started to play out.

<unk> from several NATO members that theyre going to up their defense spending to 2%.

As a floor potentially right I mean, Germany kind of doubled their defense spread it over a weekend. So what have you seen on the international front end.

Customer interest there and then I have a follow on after that.

Sure Ron we've definitely seen interest pick up across Europe , and we've been engaging with customers there to understand their needs and timeline of course, we haven't seen a dramatic shift.

<unk> spending plans.

Part of what I know each of the countries are thinking their way through is what the need is and then what the request will be and what their reliance on U S product will be so we expect that to be more of a 'twenty three 'twenty four time frame to get clarity and to start to see real award.

<unk> opportunities.

In the meantime, we are providing a great deal of support to.

Ukraine, just in the sense of our assets being used either by the U S or our NATO partners to provide surveillance intelligence and monitoring the situation and as well, providing some additional capabilities into Poland.

Got it got it and then.

The follow on there.

More domestically focused.

Do you expect.

Maybe the nuclear posture review I guess isn't out yet and some changes in that and what that could mean for GBS D. At some of the other programs you are on.

And in the wake of what's gone on in Eastern Europe .

Well, even though the nuclear posture review hasn't been fully release, there has been a executive summary provided.

And the precedent.

<unk> supported all three legs of the Tri Ed in the nuclear posture review as I was spending time.

On the Hill, just this week I still see very strong bipartisan support for all three legs of the triad and to your point I think that support has even grown in the last two months as a result of Russia Foundation, a few crane and a recognition of the importance of the triad to contain that conflict.

So we see that continuing to be a tailwind to the modernization programs that are underway.

Great. Thank you very much.

Thank you. The next one we have the line of Mr. David Strauss with Barclays.

All right.

Thanks, Good morning.

Good morning.

Kathy you you talked about the upside in the fiscal 'twenty two enacted budget proposed twenty-three budget is there any way you can quantify what that might mean to your.

Revenue growth trajectory in 'twenty three 'twenty four I know it takes time to come through but I guess relative to whatever you were thinking maybe six to 12 months ago. I mean does this add 100 basis points 200 basis point any sort of quantification you can give.

Yeah, David as I mentioned in my remarks, we do expect our revenue growth to accelerate into 2023 right now we see that in line with 2023 consensus it's really early even in this year, but we expect 2022 to be in low single digit growth outlined in our guide.

And with the growth rate accelerating in the second half.

So we do expect that momentum that we see in the second half of this year to carry into 2023 and of course, the 2023 President's budget is a good indication that demand for our products is holding up extremely well.

The one thing I would note is we're really mindful of the supply side challenges.

That continue certainly we saw that was most notably at the beginning of this year and they have in our case really moderated.

<unk> looked at March and April performance, but we're keeping a close eye on everything from the tight labor market to inflation and COVID-19 related headwinds that could slow down our growth rate, even though we have a strong budget.

Such as support for our program.

So to sum all that up by saying there is reason for optimism and we have optimism, but is cautious optimism and it's a bit early in the year for me to try to put a number on our 2023 growth rate given all of those puts and takes but we'll certainly keep you updated on each quarterly call on our outlook for <unk>.

Sure.

Okay. That's helpful color and then as a follow up.

You offered a little bit more detail on B 21, the sort of thought I would ask this.

It looks like in the in the budget there was about a $2 billion.

Need to increase in fiscal 'twenty three versus the rate that.

The levels that we've seen over the last several years.

The kind of revenue growth kind of increase we're looking at would be 'twenty, one looking out over the course of the next couple of years.

Well the government is looking at layering production on top of the M. D and so what you can see in the finance is a pretty stark jumped in 'twenty three as production gets Florida is that of course keep in mind all of those dollars won't be spent in calendar year 'twenty three and then there is not as pronounced.

Step up after that but production still remains healthy as EMC starts to come down and that's the profile. We would typically see on a program like that but it does project robust funding funding for B 21 through the decade and that is what we are anticipating as well.

Alright, thanks very much.

Thank you. The next one we have the line of Seth.

Saif men.

JP Morgan your line is now open.

Okay. Thanks very much.

Hey.

Just starting off with a quick clarification earlier about the move to the 12%.

Segment margin when you talked about the mix change in space Kathy was that I assume was that getting more towards cost plus.

When you work in GBS gross and if so is that a headwind.

If that's the case what are the segments, where you expect to see margin expansion.

Yes, so I should have been more clear and thanks for pointing that out we do expect more cost plus work in the space over the next couple of years with Cvs fee continues to grow. We're also executing on next generation interceptor, which is a big growth driver and then some.

Classified efforts that are in the development phase and continuing to scale as well.

In terms of the other businesses.

Are moving in the opposite direction, so stronger margin rates Aeronautics is one that we see having stronger margin rates.

You already see that in our guidance for this year being higher than last.

And we anticipate that we'll continue to see strong and healthy margin rates there.

Defense and mission systems already perform at very strong margin rates. So we expect that to continue but the real upside that we see as space and Arrow and I will also say that in space. We've seen the bulk of that pressure already because keep in mind, while gvhd will.

<unk> to grow in the E&P space.

To the extent that we've seen it went from a couple hundred million dollars, a year or two over $2 billion and so over this time period and the majority of that will already have happened through the 'twenty two period.

Great. Thank you and then just a quick follow up on on rocket Motors and loss.

First of all it seems like there is some.

Yeah.

Friction in the supply chain for rocket Motors based on some comments.

Last week I assume that's not.

Northrop Grumman, but do you see any opportunity to take share as a result, and secondly is there any supply chain or other friction for the Northrop space business as a result to disruption in the space supply chain for more in Ukraine.

Yeah. So there's a lot to unpack there let me start with the commentary around rocket motor provider, we are performing well.

Across the board for our Prime and we do not believe that any comments that were made relate to Northrop Grumman performance. We continue to offer a capability to any who we'd like to have a rocket motors and we're going to continue to do that and we're investing in that business to make sure that we are a good and stable.

Performer and provider in terms of our exposure to Ukraine, and Russian rocket Motors, we do have some exposure on our Crs contracts. So this is where you are on target launch vehicle, we procure rocket motors from Russia and core.

<unk> from Ukraine, we have what we need for the next two launches and so there isn't.

There isn't immediate disruption and we have a plan in place that we could use other sources if needed beyond those two launches but of course, it's our preference to keep the relationship intact between Russia and the U S around the space station and that's what these rocket motors are used for too.

Take cargo to the international space station, but we're working closely with NASA to make sure. We're following the U S government's lead in that case.

Great. Thank you very much.

Okay.

Thank you. The next one we have the line of <unk> <unk> with Morgan Stanley .

Hey, good morning, guys.

And Kathy taking a 30000 foot view I mean, the outlook for defense in the U S and our allies is positive you on two legs of the nuclear triad and there's clear bipartisan support for this program.

Cash flow is stable.

When you take a step back the company future, it's pretty visible here.

The FTC blocking the Lockheed Aerojet Rocketdyne deal large M&A seems to be off the table for now.

The company's and Northrop had bought back about half its shares outstanding in the past 15 years.

The priority is still buybacks at some point in the distant future.

May not be any more stock to buy.

How do you think about long term uses of cash, especially as.

Free cash flow remained positive and you've got so much visibility.

Well, it's an excellent strategic question, Christine and one that we spend a good deal of.

Time thinking about and I will say our first priority is investing in the business and you have seen us invest at an elevated level of capex as well as our R&D as a percentage of sales over the last several years and we are not backing away from that core part of our strategy I noted when I laid out our strategic plan the technology leader.

A shift in innovation is core to how we have attained the position that we're in and in my view will be the most important factor to retaining that position of strength and so we will continue to invest in our business, but with that strong cash flows and as you noted a strong outlook for growth.

Those cash flows gives us a lot of optionality in our capital deployment strategy.

We do believe that at some point M&A may come back on the table, but for the immediate term as large needle moving M&A is likely not to be a strategy that we can execute and so we are looking at returning capital to our shareholders at this important time through a competitive dividend.

And share buybacks, we do tend to prefer share repurchase in this environment just to give us a little more flexibility.

Mental factors change, but share repurchase is still a core part of our strategy, but it's by no means the only methods that we believe we create value for shareholders.

Okay.

<unk> seen in our company.

Great. Thank you very much.

Thank you. The next one we have the line of Cai von <unk> with Cowen. Please go ahead.

Yes, thanks, so much.

So I recall on the <unk>.

Q4 call, but you talked about book to Bill being I believe one or a little below one this year you started out strong, particularly in space could.

Could you tell us.

How has that changed can you is there any thought you could be above one and how should we think about all of the areas because space looks like it's on its way to being well above one.

Yes, hi.

We do not expect book to bill to be over one this year. It is off to a stronger start than we expected and so we'll be clear it is likely to be higher than we anticipated coming into the year, but still don't see it crossing the one point of thresholds and space is a key driver as you've noted that.

But we see broad strength in booking this year beyond what we had expected some nice competitive wins in our defense systems business and our Aero business also having strong awards, particularly as we look to book lot 15 aggregate demand on F 35 this year.

Sure.

What we look at and I've mentioned this on prior calls is a multi year book to bill and so having a portfolio where we brought in some very sizable long term awards like the 'twenty, one and G. B S C.

We have a backward looking book to bill over one point to aggregate for the last three years.

So we don't expect to have that kind of performance and book to Bill every year, but we still expect our four year average once we take 22 into consideration to be well over one one so sustaining the backlog growth that we need to fuel the business growth we anticipate.

Very good and sort of as a follow up we have a strong FY 'twenty two.

Appropriation, we have a big 23 request, which everyone expects to be plus stuff by Congress any color as you think about going forward.

Is that book to Bill likely Dbg as your best guess at it goes up over the next couple of years.

Any color you could provide would be great.

Yeah, I would just say that we see an environment, where we can keep to that.

Multiyear average well above one.

Terrific. Thank you very much.

Thank you. Thank you.

The next one we have the line of Myles Walton with UBS. Please go ahead.

Thanks, Good morning, first one just a clarification maybe for Dave.

100% free cash flow returned to investors in 'twenty, two is that before the amortization tax impact or.

How does that work.

Thanks for the clarification of miles that is independent of.

The section 174 determination. So we intend to return at least 100% of free cash flow in either case, whether it is deferred or not.

So if it is deferred would you return.

The guided number that is not adjusted for the tax so that is two 5% to $2 eight or would you just.

Just because I think it's a 100%.

That's correct. So we have roughly $1 billion run rate on the dividend side, we've committed to 1 billion and a half of share repurchase.

You can take from that that there.

Would be incremental potential if 61 74 were deferred.

Thanks, and then Kathy is is it within in terms of supply chain issues everybody sees something.

Are you seeing it within defense systems as it relates to some of the munitions is that sort of where you might be seeing it or it doesn't look like you're being terribly affected or youre forecasting it better than most so maybe just give some color there.

So Myles I wouldn't point to any one part of our business, where we are seeing dramatic impact.

Where we have high volume line in F 35, we saw it last year.

Definitely.

As we got into the first quarter of this year and the plan that we've laid in place. We are meeting that plan on F 35, but there was impact.

Phil.

It's working to address that impact on the F 35, other than that there's really no single program or area of the business that I point to just a little bit of a sluggish attendance coming into this year due to COVID-19 cases.

Light impact on electronics apply both to mission systems, and defense system, but nothing material enough to really call out individually.

Okay. Thank you.

Yeah.

Thank you. The next one we have the lines Robert Spingarn with Melius research.

Good morning.

Given us really great incremental detail on B 21, but I just wanted to perhaps flesh this out a little bit further if you can talk about the revenue cadence with AMD.

M D L. Rip overlap or are we going to have a peak revenue year or does the L. Rip grow enough in the AMD small enough that we should see growth through the rest of the decade.

Okay.

Well I would point you to the find it so the budget does not show a peak revenue here through fiscal year 2027.

So I can't provide too much more than that because the quantities and the like are classified but if you just look at what was in the <unk>.

What the administration's submitted now of course this has to go through appropriations and it's always subject to annual revision as well, but what was submitted this year for the five year outlook does not show a peak here through 2025.

Okay, and then and just based on what you talked about with profitability and relative to the margins.

Would it be fair to assume that the profit cadence is not the same as the revenue cadence in other words the margin mix the margins would drop at some point because of the switching contract and then just Kathy as a follow up to that do you think possibly going forward, we will see less fixed price development on new.

<unk>.

Not so much focused on B 21, but what we're seeing elsewhere in the industry.

Across the industry all the charges on a lot of these programs.

Yes.

Well I can't really comment on V 21 mix.

Emt and production.

Right and so let me go straight to your broader strategic question, which is an important one on whether the government will likely shift away from fixed price development I do believe that there will be a shift away and I think we've already seen that to a large degree and frankly be 'twenty, one well we were at.

The fixed price already we did not have a fixed price development phase of that program and there is a very important distinction in my mind between production even early.

The stages of production at fixed price in the development phase being at fixed price and of course Gvhd is a cost plus development program. So that's why I suggest that we are already seeing a shift on major weapon systems development to a cost plus development phase, which in my mind has always been the right approach for the government to call.

For development.

There is inherent technology developments and risk associated with that phase and you want to be able to apply resources to reduce that risk into production and if the government doesn't have that latitude because they're setting the price and the contractor has to do that often out of their own profit, which is really tough decisions to make.

And I think it impacts the ability then for the program to be successful over the full life cycle and of course, the majority of the government costs are in the production and Sustainment phase into the lifecycle not development.

The government recognizes this and it's why we've seen a shift away from fixed price development on these large weapons systems out there.

Phil will be some fixed price development in the system, but I don't see it being a material driver.

Thank you very much.

Yeah.

Thank you. Our next question is from the line George Shapiro with Shapiro research.

Oh, yes, good morning.

Dave I wanted to ask Unbilled receivables were up like $600 million in the quarter now does that reflect the F. 35 work that you've done, but you cant show as revenues yet until the.

Lot, 15% to 17 contract is signed and if so then that $600 million hurt first quarter revenues and will help sometime later in the year. So if you could just comment on that.

So thanks for the question George.

Payments as well we tend to have an outflow in the first quarter of the year and this year is almost exactly in line with the average over the last four or five years. So no significant single items there on F 35.

The P&L sales and other lines were not affected by the timing of contract negotiations to your point nor would they be.

<unk> to be in a meaningful way.

Through the end of this year.

Because I noticed I mean, the unbilled receivables were up like about double what they were in last year's first quarter. That's part of the reason for the question No I. Appreciate the question last year as last year's first quarter was actually the anomaly, there, where we had a stronger <unk>.

Free cash flow result in working capital change in the first quarter of the year than we had had in any of the prior five or six.

So this year is more in line with history. So it's a very good point last year was the unusual warm.

Okay, and then just one for you Cathy.

Fence looks like it's going to be the weaker business going forward just wanted to get a smaller businesses you considered divestiture of any pieces of that business.

Well George as you know, we did look at the entirety of our portfolio and divested the it services business that was in defense and we were very intentional and thoughtful about that but we looked at the rest of the portfolio and feel that it has nice synergy with our business and we do see.

Our opportunity to grow that business, just a little bit of a reset here.

Did that business is experiencing the.

The weapons portfolio continues to grow and we have nice synergy between the aircraft Sustainment and modernization and our aeronautics business and our Ics portfolio sits in there and we absolutely as that programme now is maturing and we have one full rate production see growth there. So we're.

We're happy with the portfolio, a little bit of transition to growth.

That we're still working our way through here, but no nothing else that I would look to divest in that portfolio right now.

Okay. Thanks very much.

Yeah.

Thank you. The next one we have the line of Richard Safran with Seaport Research. Please go ahead.

Kathy Dave Todd Good morning.

A lot's been asked already and so I have a general question regarding one of Dave's opening remarks.

With respect to major platforms and systems, you know you've rapidly gained a lot of share.

<unk> programs in development you have been talking about it all morning, now historically one problem that comes along with that is having to use the ATM than the b team et cetera, and all the while maintaining execution, which by the way just judging from the incentive fee on the B 21, that's actually pretty darn. Good there was still opt.

<unk> out there. So my question is is Northrop's flight school.

You mentioned labor to both of you feel you have sufficient resources to support bringing on additional programs and still maintain the current level of execution. Thanks.

Yes.

Thanks for the questions certainly those are topics and priorities that are front of mind for us. These days you heard both cathie and I comment in the opening remarks about the criticality of execution.

And labor our people our resources.

You know the hearts and minds of this company or at.

The center of our execution capability to your point we've had.

Demonstrated ourselves well over the last few years of execution efficiency of maintaining cost and schedule them on many key programs.

And we devote a lot of resources to that I wouldn't say that.

We're at a point, where we're at capacity, where we couldnt take on additional work, we're certainly devoting all potential resources to bringing additional capacity on board and have ramped significantly over the last few years, both in head count and key supplier relationships.

That's certainly a priority for US certainly we're spending a lot of time in that area today.

But we're eager to continue to meet the key demands of our customers and feel that we're well aligned with those areas of demand.

In the budget outlook as we've described on the call.

And that's probably okay place to leave it I think we are blessed to have a lot of Atms. So.

Thanks, everybody for calling in today and listening to our call as always we wish you well and look forward to talking to you again in July .

Take care.

Yeah.

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 first quarter 2022 conference call.

Today's call is being recorded my name is rents 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 your part assistance. Please press Star zero.

And then the operator will be happy to assist you.

I would now like to turn the call over to your host Mr. Todd Ernst.

Sure and Vice President President Investor Relations Mr. Ernst. Please proceed.

Thanks, Brian and good morning, everyone and welcome to Northrop Grumman's first quarter 2022 conference call, we'll refer to a Powerpoint presentation that is posted on our IR website. This morning.

Before we start matters discussed on today's call, including 2022 guidance and beyond including outlooks 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 chair, CEO , and President and Dave Keffer, our CFO .

This time I would like to turn the call over to Kathy Kathy.

Todd Good morning, everyone and thank you for joining us.

We've seen significant changes to the.

Political landscape since our last earnings call Russians invasion of Ukraine has consequences for the stability of the region. In addition to creating a profound humanitarian crisis.

Our thoughts are with the people issue crane and they defend their freedom and protect their way of life.

Through the Northrop Grumman Foundation, we are committing aid to help the people of Ukraine.

<unk> not seen our employee's personal donations to select charitable organizations.

This situation underscores the importance of having strong defensive capabilities to deter broader aggression and contain global conflicts.

At Northrop Grumman, we've worked to ensure our country and its allies have these deterrent capabilities.

Modern deterrence depends on our customers' ability to maintain advantage over competitors in multiple domain from undersea to space and cyberspace and every domain in between.

Northrop Grumman continues to demonstrate our ability to bring the <unk> solution to a more complicated world.

So our unique capabilities in areas, such as stealth fiber space computing propulsion and communications to name a few.

I'll talk more specifically about our capabilities and our strategy in a few moments.

First let's address the budget trends, we see in light of the threat environment.

In the U S. There is bipartisan support for increasing defense budgets.

Congress finalized the fiscal year 2022 defense appropriations in March and the administration have since issued the fiscal year 2023 defense budget request.

Both of these base budget showed solid 4% to 5% topline growth with additional potential in supplemental funding.

Based on initial indications from Congress the final fiscal year 2023 appropriations could be even higher than the initial request as Congress looks to address the evolving threat landscape, but also to offset inflationary pressures.

Currently the fiscal year 2023 budget request includes a 4% increase in the investment accounts.

The main driver behind this increase is a 9% increase in R&D to fund development of critical capabilities, particularly in space and deterrence.

States continues to be one of the SaaS is growing defense budget areas with a 30% plus year over year increase.

The request also fully funds modernization of the strategic deterrent.

Including initial production funding for 'twenty, one as well as significant year over year increase in development funding for GBS scheme.

And naphtha budgets are also growing in support of a new era of space exploration.

Slide 23 budget request includes an 8% increase over FY 'twenty, two including funding ongoing programs, such as Artemis and new initiatives for Moon to Mark's efforts.

And globally. There is an ongoing paradigm shift regarding national security and several alloys have pledged to increase defense spending as a result.

We stand ready to support them in achieving their national security objectives as well.

With the budget environment as context, I will take a few minutes to step back and frame our business strategy.

Our fundamental goal is to be the leading technology company, enabling the U S and its allies to protect freedom deter conflict and sustain our planet.

Our business strategy, which we've been executing for several years is focused on four core areas.

First is maintaining technology leadership, and delivering innovative and affordable solutions with speed.

Next is sustainably and profitably growing our business and our customers' highest priority missions, while maintaining contracting discipline.

Third is keeping a laser focus on performance and driving cost efficiencies and finally, we are focused on deploying our capital in value, creating ways for our customers and investors.

This strategy has created strong alignment with our customer priorities and strengthened our portfolio position.

As we sit here today, we expect this will enable us to accelerate our revenue growth rate in 2023 from the low single digits in our 2022 guidance.

By 2024, we also expect that by growing our business and delivering strong operational performance, we will be able to drive our segment operating margin rate to approximately 12%.

And we continue to expect to grow our transaction adjusted free cash flow at a double digit CAGR through this period.

From a capital deployment perspective investing in our business to support this growth outlook remains our top priority after making such investments we are targeting a return of at least 100% of our free cash flow to investors in 2022.

Underlying these performance goals and expectations is our position in several priority growth areas for our customers.

Our role in supporting deterrence across all domains is in direct alignment to the needs of today's changing global National security environment.

For nearly seven decade, the U S has successfully mitigated the risk of broader global conflict through strategic deterrence.

Northrop Grumman is the prime contractor onto this recurrent deterrence modernization programs.

The B 21 program the Air Force confirmed that the first aircraft have entered the ground tough days paving the way for first flight and there are five additional test aircraft in various stages of assembly.

This progress is partly enabled by our digital design capabilities and advanced manufacturing technologies, which reduce risk ahead of the aircraft's first flight.

And looking forward, we expect sales on the B 21 program to grow as the E&P phase continues and we progress into low rate initial production.

This assumption underpins our expectations for aeronautics revenue to be flat next year and return to growth in 2024.

For GBS fee, we remain on schedule and the program is expected to continue to ramp over the next couple of years as we execute on the $13 billion E&P contract with nearly $1 9 billion in expected revenue in 2022.

We still expect the program to enter production in the 2026 timeframe with initial operating capability plan for 2029.

<unk> production is expected to be a material growth driver in the middle of the decade as is reflected in the President's budget.

In addition, our space business continues to experience rapid growth as our customers re architect their space based capabilities.

This growth is in response to adversary developing more sophisticated weapons.

The need for more capable missile defense warning system as well as the migration of some airborne missions to the space domain.

In the first quarter, we have received several new awards that showcase the breadth of our state portfolio and our ability to compete and win in various domains, including ground systems and proliferated Leo constellations.

These awards build on our significant backlog and positions our space business for expected double digit growth once again this year.

Notable wins in this quarter included nearly $700 million reward for 42 satellites in low Earth orbit that provide high speed low latency communications for the space development agencies transport layer.

And we went to $340 million contract for deep space advanced radar capability or dark that dramatically improve situational awareness, particularly in geosynchronous orbit.

And in Q2, we anticipate an approximately 2 billion dollar award from USA to provide gem 63 motors for launch services, including in support of Amazon's project Kiper.

Another area, where we see meaningful future growth opportunities within mission system, particularly our networked information solutions business, which at its core is a communications and processing business.

In this area, we have proven technology leadership, and connecting and linking military systems with a broad portfolio of products, including networking systems, and radios and fiber computing and AI capabilities.

We're seeing a rapid evolution in this area with ambitious goals from our customers to field opened distributed secure networks that are more survivable.

Initiatives like <unk> or providing demand for our existing platform agnostic solutions as well as providing opportunities for new technologies, we are developing.

And we are creating partnerships like the <unk> partnership with AT&T that we announced this month to strengthen our competitive position.

We believe this communications business will be the fastest growing area of MFS over the next couple of years.

Given all that I've just outlined you can see that our portfolio is aligned to the evolving national security environment and priority areas for our customers.

We continue to demonstrate our ability to deliver compelling solutions in this environment.

Ultimately executing on our strategy depends on having the right culture and people.

This is one of the reasons, we focus on remaining an industry leader in ESG.

I encourage you to look at our annual sustainability report, which we published in March It provides insight to our progressive governance structure, our culture, our commitment to ethics diversity equity and inclusion and environmental sustainability.

As we shared in this year's report we are committing to net zero emissions in our operations by 2035.

We also published our first T. Cfd report, which provides additional transparency around our approach to managing the climate related risks and opportunities across our business.

So with that I'll turn the call over to Dave to provide more detail on our results and guidance and then we'll move on to Q&A.

Thanks, Kathy and good morning, everyone. Our first quarter was a strong start to the year, we generated more bookings than we'd been expecting including competitive wins on several new programs, our robust backlog of 76 billion Kantar.

Continues to be over two times, our annual sales and provides the foundation for future growth.

First quarter sales totaled $8 8 billion down.

<unk>, 2% organically and up sequentially from the fourth quarter of 2021 Q.

Q1 sales represented about 24% of our full year guidance in line with our prior projections we.

We experienced some temporary COVID-19 related productivity and volume impacts to start the year, which receded as the quarter progressed.

Continued tightness in the broader labor market represents a challenge that we're working hard to mitigate as we ramp a large contracts and address strong market demand for our capabilities. We continue to make progress on this front and are pleased with the trajectory that we're on.

Our execution remained solid in the quarter, we delivered a segment operating margin rate of 11, 8% in line with the midpoint of our full year guidance.

And we made progress on several elements of our long term cost efficiency strategy.

At the program level net EAC results varied across sectors as is common in any given quarter.

One of the positive EAC changes in Q1 was a $67 million favorable adjustment on the B 21 program related to performance incentives.

In addition to what Kathy noted, but wanted to take this opportunity to provide a bit more color on this franchise program.

B 21 is currently in its cost type AMD phase with a variety of incentive fees for which we accrue based on anticipated achievement of <unk>.

Projections for certain <unk> incentives improved in Q1, leading to the favorable EAC adjustments.

We are in a critical integration and test a portion of the <unk> phase this year and we continue to focus on production efficiencies.

The low rate initial production or <unk> phase will begin over the next year and run in parallel with <unk> for a period of time.

They will rip for B 21 is fixed price and.

And we expect to recognize revenue for the <unk> separately from AMD.

<unk> units were priced as part of our original bid for the program.

The full rate production phase or FRP has yet to be negotiated and includes the majority of the aircraft volume in the program of record.

Based on our current projections, which run roughly through the end of this decade, we continue to expect production to be priced and profitably executed within the programs average procurement unit cost target.

Now turning back to our Q1 results.

Diluted earnings per share in the quarter were $6 10, reflecting our strong segment performance.

In mind, we had a headwind of roughly <unk> 46 cents.

Bolting from lower Cas pension costs, and our overhead rates that we booked in the first quarter of last year.

In aggregate our transaction adjusted earnings per share were down 7% compared to Q1 2021, primarily due to non operational factors such as lower net <unk> pension and the performance of marketable securities.

It's worth noting that the after tax net <unk> pension adjustment in Q1 was nearly $250 million, representing $1 58 of earnings per share.

This was $40 million lower than Q1, a year ago, and the 19th EPS headwind.

We expect similar impacts in each of the remaining quarters in 2022.

The total net <unk> pension adjustment, primarily reflects the actuarial gains and losses in our pension plans and it's not something we consider when assessing the company's operating performance.

Moving to 2022 guidance, we have minimal changes, we're increasing the sales guidance for our space business due to continued strong momentum in recent capture of New awards as Kathy outlined.

We now estimate sales in the mid to high $11 billion range, which would result in another year of double digit sales growth.

At Defense systems, we are adjusting our estimate to the mid to high $5 billion range to reflect the lower first quarter, particularly on some of our international training programs.

These two adjustments offset each other and our full year company level sales guidance is unchanged.

With respect to our quarterly sales profile.

We expect Q2 sales to be between 24% and 25% of our full year guidance mid point with our expectation near the middle of that range.

From there, we expect accelerating year over year growth in the second half of the year.

Next I wanted to take a moment to talk about cash.

First quarter transaction adjusted free cash flow was consistent with our expectations and in line with our historical seasonal trends the.

The decrease compared to the first quarter of 2021 reflects timing of collections and disbursements and our full year guidance is unchanged.

After the quarter ended we made our first cash tax payment of the year, which included the projected effects of current R&D tax law.

Next estimated tax payment is due June 15th we continue to project the cash taxes would be about $1 billion higher for the full year should the current law will remain in effect.

But we remain optimistic that we will see a deferred or eliminated given the broad bipartisan support for doing so.

Our base case assumption for cash flow and P&L continues to be the section 174, R&D tax law will be changed if and when that happens we would expect to file for any appropriate refunds of taxes paid.

We also recognized a spike in corporate unallocated cost in that quarter associated with the reversal of the deferred state tax asset that had been building year to date.

That we've already incorporated these items in our full year EPS guidance.

We remain committed to providing excellent shareholder returns with at least one 5 billion in share repurchases targeted for this year on top of a healthy competitive dividend.

As Kathy mentioned in aggregate, we expect to return at least 100% of our 2022 transaction adjusted free cash flow to shareholders via dividends and share repurchases over time, we expect the cash on our balance sheet at a typical year end to be roughly $2 billion.

Which would continue to provide flexibility and liquidity.

Our capital deployment strategy also prioritizes investing in our business.

We continue to expect capital expenditures for 2022 to be in line with 2021 levels.

Later today, we will file an S. Four with the SEC as the final step of the Obligor exchange process that we executed last summer on certain debt instruments.

Overall, we're pleased with our first quarter results and achievements as we continue to build a strong foundation to accelerate growth and deliver on our long term value creation strategy and with that we'll open your call up for questions.

Thank you, Sir 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.

We ask that you limit yourself to one question and one follow up.

If you have further questions. Please re enter the queue.

Thank you.

Our first question is from the line of Doug Hi.

With Bernstein. Please go ahead.

Good morning, Thank you.

Kathy you talked about Aeronautics and how you're looking at the top line 2022 to 24.

But.

This has been complicated you've got several mature programs that are set to decline this year even F 35.

Trajectory looks complicated <unk> appears to be ending in 2024, and then beneath that you've got high.

High growth on the B 21 ahead, you've got a budget boost for Triton.

Can you help us understand the puts and takes here.

To those revenue expectations for the next few years.

Sure, Doug and you did a nice to have of outlining the key moving parts in the Aero portfolio let.

Let me start with the mature programs. These are the ones we've been talking about for several years Global Hawks joint stars that are in the Air Force plan for retirement.

That is happening in the near term then we have things like what you noted with Youtube.

Reached its program of record quantities over the next several years. So we don't see this as an issue in 'twenty, three and 'twenty four but as we look to 'twenty five and beyond that program will be reliance on international sales and I will say that we are building a quite a bit of international interest for EQT and Prost.

<unk> on a pipeline there with a navy program of record will.

The full quantity and then F 35, we look at that it's fairly stable over the next couple of years.

What we've been saying and I know there was question about the quantity and the budget request and how that impacts the Northrop Grumman quantities. It really doesn't have a material impact because we already were planning to build toward our capacity and working with Lockheed Martin. It appears that that plan is still intact and.

Then as you know there are some opportunities that layer additional sale.

The plan over the next several years B 21 being the most notable for the first time the President's budget shows the production.

Starting in 2023, and you can see that that grows significantly in that same timeframe. So lots of puts and takes but as we look forward to 2023, we see those netting out to about flat with where we expect to finish 2022, and then largely based on B 21.

On growth and not having any major headwinds in 2024 from the other programs I just outlined we see growth in 2024.

Well.

Just as a follow up within that.

The new budget.

A big boost for Triton.

And if I look at it.

Unmanned systems.

This has been an area, where I mean at least a while back.

The company had talked a lot about differentiation because of the operating architectures that had been developed at Northrop Grumman.

We saw we've seen global Hawk come down hail systems.

I think the <unk>.

Boost is good but how do you think of growth potential in unmanned systems overall from this point.

Okay still see both the Air Force and the Navy looking at unmanned systems is a key part of their architecture that these won't be either the highest quantity where the highest priced assets in their fleet. So when you think about the overall materiality of unmanned systems and in aeronautics portfolio, whether it be our.

Or where others, it's not going to be one of the bigger drivers.

<unk> for growth over the next decade, but it will be important and the capabilities that we have and that we have refined through our work on our hale platforms as well as some smaller platforms. I think is highly relevant to our positioning for this market in the future.

Okay, great. Thank you.

Okay.

Thank you.

Our next question is from the line of Robert Stallard with vertical research. Your line is open.

Thanks, so much good morning.

Good morning, Rob.

Kathy Thanks for the additional detail on the B 21 that.

But I was wondering if we could begin any further on this you mentioned that the <unk> portion is fixed price and would've been signed a few years ago. I was wondering how this now stands with regards to the inflation and the whole world is dealing with and how you're going to manage that.

Yeah. Thanks for the question because this is an important thing for us to touch on and Thats, why we provided a bit more clarity on.

What production looks like on the B 21 program as we are approaching that phase we did bid a that quantity that quantity is not something I can share, but it's a small portion of the overall program of record as part of the initial bid and that is what constitutes our and that was it.

Right and as we put that bid together of course, we at the time laid in some expectations around growth and inflation.

To adjust to this time period, and we will continue to look at whether those assumptions still holds I'll remind you we're not really going to be into the production phase for a couple of years in any significant way and so we still have a good bit of time and we expect inflation is going to modulate <unk> seen based on.

The assumptions, we've made today a material impact to the program and part of what Dave shared how we think about the accounting on the program is so that you know we are already looking at those hour blocks since we.

<unk> are obligated under our initial proposal for those quantities and still expect to be able to produce those within the government target price, which is published and is updated and adjusted for inflation on a regular basis. The last time the airports did that within 2019, a little over 600.

April .

And we continue to look at our own bid.

And.

It make sure that we see a path to executing those quantity profitably and we reiterated that again today.

That's very helpful. Thank you.

Yeah.

Thank you. Our next question is from the line of Sheila <unk>.

With Jefferies. Please go ahead.

Good morning, Kathy Todd Thank you.

Since we're on the topic of profitability Kathy you laid out some margin expansion targets through 2024, I think you mentioned, 12%.

Given the growth drivers you have how are you also thinking about just mix I began you touched on inflation that doesn't seem a big deal and productivity overall.

Sure.

So mix is becoming less of a factor for us in the next few years, we have talked about our mix being roughly 50% cost type and 50% fixed price that's exactly where we are as we sit here in the first quarter and we don't see that varying too much over the next couple of years maybe.

<unk> point.

Higher on cost plus or two as we look at the next couple of years, when we see that inflection point to more fixed price is there's both be 'twenty, one and GBS, Steve start to move into their production phases, and so you can think of that Notionally around 25, 2006 timeframe the middle part.

Of the decade, and even that we don't see a very large swings in our mix because we still have development work that we'll be bidding and continuing to execute in the pipeline. So mix is less of a factor as we look forward at the company level now I will note that when you get into the segment level for instance.

It's Dave.

Drivers are more pronounced benefit we do see a bit more of a mix shift there.

And you asked about how we think about in terms of profitability, so mix no longer being a big driver when we think about profitability and cost efficiency and performance in the two big drivers that we are focused on when I talked about that in our strategy in terms of cost efficiencies. We've put in place a dedicated team at the company level and we're working.

All elements of cost to ensure that we're operating as efficiently as possible.

Alright, thank you.

Thank you. The next one we have the line of Peter Arment with Baird.

Please go ahead.

Yes, good morning, Kathy, Dave Hey, Dave maybe I could just.

Follow up on kind of the kathy's comments on the outlook kind of through 2024, you mentioned double digit growth.

Cash flow, how do we think about from kind of the puts and takes on a just an overall conversion rate.

100% currently.

What's the right way to think about as we look to.

Through 2020.

Sure. Thanks for the question Peter.

No significant changes to our free cash flow outlook from when we described in some detail a quarter ago.

Three year outlook that we intend to.

Modify on a quarterly basis, unless they are material changes and.

And so the same drivers exist today, we do see an opportunity over the next few years for us to continue investing appropriately in the business, but to have capex come down slightly especially in 2024.

Comparison to 'twenty two 'twenty three so thats one of the drivers of free cash flow acceleration. We also have the end of the.

Payroll tax deferral issue that benefited us in 'twenty and as an outflow in <unk>.

In the next.

Following two years, and so that will benefit 'twenty, three and 'twenty four on the kind of working capital side.

As we've noted.

In 1920 were very strong years of working capital efficiency at this point, we've put our working capital metrics up against any in the industry were very proud of the efficiency of our balance sheet in the next year that we see opportunities for continued.

Enhancement there is largely 2024 due to the timing of.

Some payment expectations in that year incentive milestones and such.

So again no changes to the outlook there those are some of the key moving pieces relatively stable on the working capital front in 'twenty, two and 23 before seeing those opportunities in 'twenty four and as we've noted we do see expansion in the core business, both the topline and the Bottomline supporting that outlook over the next few years as well.

That's great color. Thanks, so much.

Thank you. Our next question is from the line of Ron Epstein with Bank of America.

Your line is now open.

Yeah, Hey, good morning.

Kathy what have you seen.

International markets since.

The events in the Ukraine started to play out we've heard from several NATO members that theyre going to up their defense spending to two.

2%.

Florida, potentially right I mean, Germany kind of doubled their defense spread it over a weekend. So what have you seen on the international front end.

Customer interest there and then I have a follow on after that.

Sure Ron we've definitely seen interest pick up across Europe , and we've been engaging with customers there to understand their needs and timeline of course, we haven't seen a dramatic shift in immediate spending plans.

Part of what I know each of the countries are thinking their way through is what the need is and then what the request will be and what their reliance on U S product will be so we expect that to be more of a 'twenty three 'twenty four timeframe to get clarity and to start to see real award opportunities.

In the meantime, we are providing a great deal of support to.

Ukraine, just in the sense of our assets being used either by the U S or our NATO partners to provide surveillance intelligent monitoring.

Monitoring of the situation and as well, providing some additional capabilities into Poland.

Got it got it and then kind of a follow on there more domestically focused.

Do you expect maybe.

Maybe the nuclear posture review I guess isn't out yet and some changes in that and what that could mean for GBS D. At some of the other programs you are on.

And in the wake of what's gone on in Eastern Europe .

Well, even though the nuclear posture review has since been fully release there has been a executive summary provided.

The precedent has supported all three legs of the Tri Ed in the nuclear posture review as I was spending time.

On the Hill, just this week I still see very strong bipartisan support for all three legs of the triad and to your point I think that support has even grown in the last two months as a result of Russia Foundation, if your crane and a recognition of the importance of the triad to contain that conflict.

So we see that continuing to be a tailwind to the modernization programs that are underway.

Great. Thank you very much.

Okay.

Thank you. The next one we have the line of Mr. David Strauss with Barclays. Please go ahead.

Thanks, Good morning.

Good morning.

Kathy you talked about the upside in the fiscal 'twenty two enacted budget proposed 23 budget is there any way you can quantify what that might mean to your <unk>.

Revenue growth trajectory in 'twenty three 'twenty four I know it takes time to come through but I guess relative to whatever you were thinking maybe six to 12 months ago. I mean does this add a 100 basis points 200 basis point any sort of quantification you can give.

Yeah, David as I mentioned in my remarks, we do expect our revenue growth to accelerate into 2023 right now we see that in line with 2023 consensus. It is really early even in this year, but we expect 2022 to be in low single digit growth outlined in our guide.

And with the growth rate accelerating in the second half.

We do expect that momentum that we see in the second half of this year to carry into 2023 and of course, the 2023 President's budget is a good indication that demand for our products is holding up extremely well.

The one thing I would note is we're really mindful of the supply side challenges that continue certainly we saw that was most notably at the beginning of this year and they have in our case really moderated as we looked at March and April performance, but we're keeping a close eye on everything.

The tight labor market to inflation and COVID-19 related headwinds that could slow down our growth rate, even though we have strong.

And support for our program.

In sum all that up by saying there is reason for optimism.

We have optimism, but is cautious optimism and it's a bit early in the year for me to try to put a number on our 2023 growth rate given all of those puts and takes but we'll certainly keep you updated on each quarterly call on our outlook for next year.

Okay. That's helpful color.

A follow up.

Offered a little bit more detail on B 21, the sort of thought I would ask this.

It looks like in the in the budget there was about a 2 billion dollar funds.

<unk> need to increase in fiscal 'twenty three versus the rate that.

Are the levels that we've seen over the last several years I mean is that the kind of revenue growth kind of increase we're looking at would be 'twenty. One looking out over the course of the next couple of years.

Well the government.

Is looking at layering production on top of the M D and so what you can see in the finance is a pretty stark jumped in 'twenty three as production gets flared and that of course keep in mind all of those dollars won't be spent in calendar year 'twenty three and then there is not as pronounced just step up after that but production funding.

<unk> remains healthy as EMC starts to come down and that's the profile. We would typically see on a program like that but it does project robust funding funding for B 21 through the decade and that is what we are anticipating.

Dissipating as well.

Alright, thanks very much.

Thank you. The next one we have the line of Seth.

<unk>.

With JP Morgan Your line is now open.

Okay. Thanks very much.

Good morning.

Starting off with a quick clarification earlier about the move to the 12%.

Segment margin when you talked about the mix change in space Kathy was that I assume was that getting more towards cost plus as.

When you work in GBS grows and if so is that a headwind and if that's the case what are the segments where you.

Do you expect to see margin expansion.

Yes, so I should have been more clear and thanks for pointing that out we do expect more cost plus work in the space over the next couple of years with Cvs C continues to grow. We're also executing on next generation interceptor, which is a big growth driver and then some assorted classified efforts that are in the development phase and <unk>.

<unk> scale as well.

In terms of other businesses that are moving in the opposite direction. So stronger margin rate Aeronautics is one that we see having stronger margin rates.

You already see that in our guide for this year being higher than last and we anticipate that we'll continue to see strong and healthy margin rates there.

First in mission systems already perform at very strong margin rates. So we expect that to continue but the real offset that we see as space and arrow and I will also say that in space. We've seen the bulk of that pressure already because keep in mind, while gvhd will continue.

To grow in the E&P space, we're not to the extent that we've seen it went from a couple of hundred million dollars, a year or two over $2 billion and so over this time period and the majority of that will already have happened through the 'twenty two period.

Great. Thank you and then just a quick follow up on on rocket Motors and loss.

First of all it seems like there is some.

Friction in the supply chain for rocket Motors based on some comments.

This past week I assume that's not.

Grumman, but do you see any opportunity to take share as a result, and secondly is there any supply chain or other friction for the Nordstrom space business as a result to disruption in this space supply chain for more.

Great.

Yeah. So there's a lot to unpack there let me start with the commentary around rocket motor provider, we are performing well across the board for our prime and we do not believe that any comments that were made relate to Northrop Grumman performance, we continue to offer a capability to any.

Who would like to have a rocket motors and we're going to continue to do that and we're investing in that business to make sure that we are a good and stable <unk>.

Her former and provider in terms of our exposure to Ukraine, and Russian rocket Motors, we do have some exposure on our Crs contracts. So this is where you are on target launch vehicle, we procure rocket motors from Russia and of course from you.

Crane, we have what we need for the next two launches and so there isn't.

There isn't immediate disruption and we have a plan in place that we could use other sources if needed beyond those two launches but of course, it's our preference to keep the relationship intact between Russia and the U S around the space station and that's what these rocket motors are used for too.

Take cargo to the international space station, but we're working closely with NASA to make sure. We're following the U S government's lead in that case.

Great. Thank you very much.

Okay.

Thank you. The next one we have the line of squeezing <unk> with Morgan Stanley .

Hey, good morning, guys.

And Kathy taking a 30000 foot view I mean, the outlook for defense in the U S and our allies is positive you on two legs of the nuclear triad and there's clear bipartisan support for this program.

Cash flow is stable.

When you take a step back the company's futures is pretty visible here.

The FTC blocking the Lockheed Aerojet Rocketdyne deal large M&A seems to be off the table for now.

The company's and Northrop had bought back about half its shares outstanding in the past 15 years.

It's a priority is still buybacks at some point in the distant future.

May not be any more stock to buy.

How do you think about long term uses of cash, especially as <unk>.

Free cash flow remained positive and you've got so much visibility.

Well, it's an excellent strategic question, Christine and one that we spend a good deal of time thinking about and I will say our first priority is investing in the business and you have seen us investing in elevated levels of capex as well as our R&D as a percentage of sales over the last several years and we are not backing away from.

That core part of our strategy.

I noted when I laid out our strategic plan the technology leadership and innovation is core to how we have attained the position that we're in and in my view will be the most important factor to retaining that position of strength and so we will continue to invest in our business, but with that strong cash flows.

You noted a strong outlook for growth to fuel those cash flows gives us a lot of optionality in our capital deployment strategy.

We do believe that at some point M&A may come back on the table, but for the immediate term and a few large needle moving M&A is likely not to be a strategy that we can execute and so we are looking at returning capital to our shareholders at this important time through a competitive dividend.

And share buybacks, we do tend to prefer share repurchase.

In this environment to give us a little more flexibility as environmental factors change, but share repurchase is still a core part of our strategy, but it's by no means the only method that we believe we create value for shareholders and we stay focused on investing in our company.

Great. Thank you very much.

Yeah.

Thank you. The next one we have the line of Cai von rumor.

Please go ahead.

Yes, thanks, so much.

So I recall on the.

Q4 call, but you talked about book to Bill being I believe one or a little below one this year you started out strong, particularly in space could.

Could you tell us.

How has that changed can you is there any thought you could be above one and how should we think about all the areas because space looks like it's on its way to being well above one.

Yes, hi.

We do not expect book to bill to be over one this year. It is off to a stronger start than we expected and so we'll be clear it is likely to be higher than we anticipated coming into the year, but still don't see it on crossing the one point of thresholds and space is a key driver as you noted that.

Strength, but we see broad strength in booking this year beyond what we had expected some nice competitive wins in our defense systems business.

Our Aero business also having strong awards, particularly as we look to book lot 15 aggregate demand on F 35 this year.

What we look at and I've mentioned this on prior calls is a multi year book to bill and so having a portfolio where we brought in some very sizable long term awards like the 'twenty one in gvhd.

We have a backward looking book to bill over one point to aggregate for the last three years.

So we don't expect to have that kind of performance and book to Bill every year, but we still expect our four year average once we take 22 into consideration to be well over one one so sustaining the backlog growth that we need to fuel the business growth we anticipate.

Very good and sort of as a follow up we have a strong FY 'twenty two.

Appropriation, we have a big 23 request, which everyone expects to be plus up by Congress any color as you think about going forward.

Is that book to Bill likely to BG is your best guess at it goes up over the next couple of years.

Any color you could provide would be great.

Yeah, I would just say that we see an environment, where we can keep to that.

Multiyear average well above one.

Terrific. Thank you very much.

Thank you. Thank you.

The next one we have the lens Myles Walton with UBS. Please go ahead.

Thanks, Good morning, first one just a clarification maybe for Dave.

100% free cash flow returned to investors in 'twenty, two is that before the amortization tax impact or.

How does that work.

Thanks for the clarification miles that is independent of.

The section 174 determination. So we intend to return at least 100% of free cash flow in either case, whether it is deferred or not.

So if it is deferred would you return.

The guided number that is not adjusted for the tax so that is two 5% to $2 eight or would you just.

Just because I think it's a 100%.

That's correct. So we have roughly $1 billion run rate on the dividend side, we've committed to 1 billion and a half of share repurchase.

You can take from that that there.

Would be incremental potential if 60 174 were deferred.

And then Cathy is it within in terms of supply chain issues everybody sees something.

Are you seeing it within defense systems as it relates to some of the munitions is that sort of where you might be seeing it or it doesn't look like you're being terribly affected or youre forecasting it better than most so maybe just give some color there.

So Myles I wouldn't point to any one part of our business, where we are seeing dramatic impacts arrow, where we have high volume line in F. 35, we saw it last year and we talked about that clearly as we got into the first quarter of this year and stuff.

One that we've laid in place we are meeting that plan on F 35, but there was impact.

We still are.

Working to address that impact on the F 35, other than that there's really no single program or area of the business that I point to just a little bit of sluggish attendance coming into this year due to Covid cases, some light impacts on electronics apply both to mission systems and defense.

System, but nothing material enough to really call out individually.

Thank you.

Yeah.

Thank you. The next one we have the lines Robert Spingarn with Melius research.

Good morning.

Given us really great incremental detail on B 21, but I just wanted to perhaps flesh this out a little bit further if you can talk about the revenue cadence with AMD.

And ill rip overlap or are we going to have a peak revenue year or does the <unk> grow enough AMD small enough that we should see growth through the rest of the decade.

Okay.

Well I would point you to the fire.

It does not show a peak revenue here through fiscal year 2027.

So I can't provide too much more than that because the quantity and the like are classified but if you just look at what was in the <unk>.

The administration's submitted now of course this has to go through appropriations and it's always subject to annual revision as well, but what was submitted this year for the five year outlook does not show a peak year through 2025.

Okay, and then and just based on what you talked about with profitability and relative to the margins.

Would it be fair to assume that the profit cadence is not the same as the revenue cadence in other words the margin mix the margins would drop at some point because of the switching contract and then just Kathy as a follow up to that do you think possibly going forward, we will see less fixed price development on new contract.

<unk>.

Not so much focused on B 21, but what we're seeing elsewhere in the industry.

Across the industry all the charges on a lot of these programs.

Well I can't really comment on V 21 mix.

Emt and production.

Right and so let me go straight to your broader strategic question, which is an important one on whether the government will likely shift away from fixed price development I do believe that there will be a shift away and I think we've already seen that to a large degree and frankly be 'twenty, one well we were at.

As to the fixed price already we did not have a fixed price development phase of that program and there's a very important distinction in my mind between production even early.

The stages of production at fixed price in the development phase being at fixed price and of course Gvhd is a cost plus development program. So that's why I suggest that we are already seeing a shift on major weapon systems development to a cost plus development phase, which in my mind has always been the right.

Broach for the government to contract for development by definition, there is inherent technology developments and risk associated with that phase and you want to be able to apply resources to reduce that risk into production and if the government doesn't have that latitude because they're setting the price and the contractor has.

To do that often out of their own profit, which is really tough decisions to make and I think it impacts the ability then for the program to be successful over the full life cycle and of course, the majority of the government costs are in the production and Sustainment phase into the lifecycle not development, but I think the government recognizes this and it's why we've seen a shift.

Just away from fixed price development on these large weapons systems now there still will be some fixed price development in the system, but I don't see it being a material driver.

Thank you very much.

Yeah.

Thank you. Our next question is from the line of George Shapiro with Shapiro research.

Oh, yes, good morning.

Dave I wanted to ask Unbilled receivables were up like $600 million in the quarter now does that reflect the F. 35 work that you've done, but you cant show as revenues yet until the.

Lot, 15% to 17 contract is signed and if so then that 600 million hurt first quarter revenues and will help sometime later in the year. So if you just comment on that.

So thanks for the question George.

No is the short answer.

Unbilled receivable growth does not direct related directly related to F 35, or any one other program in the portfolio, rather I would point you to the common seasonality that we tend to see in the first quarter given the timing of receipts in that case and more broadly speaking about free cash flow seasonality.

The timing of.

Payments as well we tend to have an outflow in the first quarter of the year and this year is almost exactly in line with the average over the last four or five years.

So no significant single items there on F 35.

The P&L sales and other lines were not affected by the timing of contract negotiations to your point, nor would they be anticipated to be in a meaningful way.

Through the end of this year.

Because I noticed I mean, the unbilled receivables were up like about double what they were in last year's first quarter. That's part of the reason for the question No I. Appreciate the question last year as last year's first quarter was actually the anomaly, there where we had a stronger.

Free cash flow result in working capital change in the first quarter of the year than we had had in any of the prior five or six.

And so this year is more in line with history.

It's a very good point last year was the unusual warm.

Okay, and then just one for you Cathy.

The fence looks like it's going to be the weaker business going forward just wanted to get a smaller businesses you considered divestiture of any pieces of that business.

Well George as you know, we did look at the entirety of our portfolio and divested the it services business that was in defense and we were very intentional and thoughtful about that but we looked at the rest of the portfolio and feel that it has nice synergy with our business and we do see.

Our opportunity to grow that business, just a little bit of a reset.

Or did that business is experiencing.

The weapons portfolio continues to grow and we have nice synergy between the aircraft Sustainment and modernization and our aeronautics business.

Our Ics portfolio sits in there and we absolutely as that programme now is maturing and with one full rate production see growth. There. So we're happy with the portfolio a little bit of transition to growth.

We're still working our way through here, but no nothing else that I would look to divest in that portfolio right now.

Okay. Thanks very much.

Thank you. The next one we have the line of Richard Safran with Seaport Research. Please go ahead.

Kathy Dave Todd Good morning.

Yes.

A lot's been asked already and so I have a general question regarding one of Dave's opening remarks.

With respect to major platforms and systems, you know you've rapidly gained a lot of share a number of programs in development <unk> been talking about it all morning.

Historically, one problem that comes along with that is having to use the ATM and the <unk> team et cetera, and all the while maintaining execution, which by the way just judging from the incentive fee on the B 21 is actually pretty darn. Good now there are still opportunities out there. So my question is is northrop's plateful.

Dave You mentioned labor to both of you feel you have sufficient resources to support bringing on additional programs and still maintain the current level of execution. Thanks.

Yeah.

Thanks for the questions certainly those are topics and priorities that are front of mind for us. These days you heard both cathie and I comment in the opening remarks about the criticality of execution.

And labor our people our resources.

The Hearts and minds of this company or at the.

The center of our execution capability to your point, we've demonstrated ourselves well over the last few years of execution efficiency of maintaining cost and schedule them on many key programs.

And we devote a lot of resources to that I wouldn't say that we're at a point, where we're at capacity, where we couldnt take on additional work, we're certainly devoting all potential resources to bringing additional capacity on board and have ramped significantly over the last few years, both in head count in key.

Supplier relationships.

So that's <unk>.

Certainly a priority for US certainly we're spending a lot of time in that area today.

We are eager to continue to meet the key demands of our of our customers and feel that we're well aligned with those areas of demand.

In the budget outlook as we've described on the call.

And that's probably okay place to leave it I think we are blessed to have a lot of <unk>. So.

Thanks, everybody for calling in today and listening to our call.

Always we wish you well and look forward to talking to you again in July .

Sure.

Yes.

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