Q3 2023 Northrop Grumman Corp Earnings Call

Good day, ladies and gentlemen, and welcome to Northrop Grumman's third quarter Conference call. Today's call is being recorded my name is Josh and I will be your operator today at this time all participants are in a listen only mode.

I would now like to turn the call over to your host Mr. Todd Ernst Vice President Investor Relations. Mr. Ernst. Please proceed.

Thanks, Josh and good morning, everyone and welcome to Northrop Grumman's third quarter 2023 conference call on the call. This morning will refer to a presentation that is posted on our IR website.

Before we start matters discussed on today's call, including guidance and outlooks for 2023 and beyond.

The company's judgment based on information available at the time of this call may constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities laws.

We're looking statements involve risks and uncertainties, including those 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 at this time I'd like to turn the call over to Kathy Kathy.

Todd.

Morning, everyone. Thank you for joining us.

We are all witnessing significant geopolitical tension across the globe, including the ongoing war in Ukraine, and the horrific attacks in Israel.

Truly hope that peace and safety can be established for the people in these regions and we will continue and are steadfast support for the U S and our allies in their pursuit of global security and stability.

On this morning's call. In addition to reviewing our third quarter results and important program events in the quarter I'll address the U S budget and trends, we see in the global environment.

And as usual at this time of year I'll provide our initial outlook for next year.

So starting with the quarter.

Our book to Bill was one five times with approximately $15 billion in award and our sales increased 9% year over year with growth across all four of our business segments.

Our backlog now stands at $84 billion. It is a new record and it strengthens the foundation for our future growth.

It also continues to reflect the alignment we have with our customers' priorities and the continued success of our business strategy.

Segment operating income increased by 8% year over year and the O M rate increased over last quarter.

Earnings per share were $6 18.

Up 5% compared to last year.

Strong earnings drove nearly $900 million in free cash flow in the quarter and we remain on track to achieve our 2023 free cash flow target.

Excellent cash generation continues to provide us the flexibility to invest in our capabilities and capacity, while returning capital to shareholders.

We remain committed to Richard and over 100% of our free cash flow to investors this year, including one $5 billion of share repurchases and year to date, we've returned approximately $2 billion to shareholders in dividends and repurchases.

So turning now to the U S defense budget.

As is common in recent years the federal government is operating under a continuing resolution to start fiscal year 2024.

We're encouraged by bipartisan support for National Security priorities and are hopeful an agreement will be reached on full year appropriations soon.

Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's third quarter conference call. Today's call is being recorded.

Our guidance and outlook assume a full year budget is passed by the end of this calendar year or early next year.

Josh: My name is Josh and I will be your operator today. At this time, all participants are in a listen only mode.

And as we saw last week. The administration continues to make supplemental request for urgent needs, including those in Ukraine and Israel to include investments in weapons systems and defense industrial base readiness.

Todd Ernst: I would now like to turn the call over to your host, Mr. Todd Ernst, vice president, investor relations, Mr. Ernst, please proceed.

Kathy Warden: Thanks Josh and good morning everyone and welcome to Northrop Grumman's third quarter, 2023 conference call. On the call this morning, we will refer to a presentation that is posted on our IR website. Before we start, matters discussed on today's call, including guidance and outlooks for 2023 and beyond, reflect the company's judgment based on information available at the time of this call.

The federal government is also developing its budget plans for fiscal year 2025, which we expect will be submitted to Congress early next year.

We are working closely with our customers to plan for future capabilities and navigate the fiscal pressures safety to ensure our programs remain well supported.

As we have been discussing throughout the year. We are also seeing an increase in international demand for our capabilities. We've seen a particular increase in our weapons systems portfolio as missile defense technologies like the <unk> product line.

Kathy Warden: They constitute four looking statements pursuant to save harbor provisions of federal securities laws. For looking statements involve risks and uncertainties, including those noted in today's press release and our SEC violence. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-gap financial measures that are reconciled to our gap results in our earnings release.

One. Notable example of this growing demand is with Argos E. R where we've now received interest for more than a dozen countries and just this week the opportunity for a foreign military sale to someone wants to know.

Kathy Warden: On the call today, our Kathy Warden, our chair CEO and president, and Dave Kepher, our CFO.

We are also working with the U S government to provide new advanced weapons capabilities during.

Kathy Warden: At this time, I'd like to turn the call over to Kathy Kathy. Thanks, Todd. Good morning everyone. Thank you for joining us. We are all witnessing significant geopolitical tensions across the globe, including the ongoing rules, the war in Ukraine, and the horrific attacks in Israel. We truly hope that peace and safety can be established for the people in these regions. And we will continue and our steadfast support for the US and our allies in their pursuit of global security and stability.

During the second quarter, we received a $705 million contract from the United States Air Force to develop the Stanton attack weapon also known as saw an air to ground weapon with the capability to strike mobile defense targets.

Our store offering builds on the capabilities, we provide with our high speed, arguing missile which is in production.

Building off of mature products baseline were able to reduce the developmental time cost and risk to the salt program.

Kathy Warden: On this morning's call, in addition to reviewing our third quarter results and important program events in the quarter, I'll address the US budget and trends we see in the global environment. And as usual at this time of year, I'll provide our initial outlook for next year. So starting with a quarter, our book to bill was one and a half times with approximately $15 billion in awards. And our sales increased 9% year over year, and the growth across all four of our business segments.

These missiles are expected to be the air to ground weapon of choice for the F 35, and other fighters.

And our space business, we remain focused on being at the forefront of technology and that strategy has enabled us to build a differentiated portfolio that provides end to end solutions for our customers from new space architectures to launch capabilities.

We see broad applications for the technologies, we've developed with a particular focus on national security missions.

Kathy Warden: Our backlog now stands at $84 billion. It's a new record and it strengthens the foundation for our future growth. It also continues to reflect the alignment we have with our customers' priorities and the continued success of our business strategy. Segment operating income increased by 8% year over year, and the OM rate increased over last quarter. Earnings per share were $6.18 up 5% compared to last year. From earnings drove nearly $900 million in free cash flow in the quarter, and we remain on track to achieve our 2023 free cash flow target.

This includes helping to turn the space development agencies vision of a new low earth orbit constellation of satellites into reality.

In August we were awarded a $712 million contract to design and build 36 satellites for Sta's tranche to transport layer data constellation.

With this award along with our work on Fda's tracking layer and tranche one of the transport layer. We are now building nearly 100 satellites for the proliferated warfighter space architecture or.

Our success in this area highlight our ability to compete and win and highly competitive and dynamic new markets within the space domain.

Kathy Warden: Excellent cash generation continues to provide us the flexibility to invest in our capabilities and capacity while returning capital to shareholders. We remain committed to returning over 100% of our free cash flow to investors this year, including $1.5 billion of share repurchases. And year to date, we've returned approximately $2 billion to shareholders' individence and repurchases.

In addition, we had two notable launch events in the quarter, we successfully launched our 19th resupply mission to the international space station as we continue to execute under NASA commercial resupply contract.

And five of our Gem 63 solid rocket boosters helped to power UL as Atlas five launch of a national security payloads.

Kathy Warden: The turning now to the U.S. Defense Budget. As is common in recent years, the federal government is operating under a continuing resolution to start fiscal year 2024. We're encouraged by bipartisan support for national security priorities and are hopeful and agreement will be reached on full-year appropriations soon. Our guidance and outlook assume a full-year budget is passed by the end of this calendar year or early next year. And as we saw last week, the administration continues to make supplemental requests for urgent needs, including those in Ukraine and Israel, to include investments in weapon systems and defense industrial based readiness.

These rocket Motors will continue to support future you at late launches during Q clued UL as Vulcan rocket.

For next generation Interceptor, we successfully manufactured the first set of solid rocket motor cases in August and we're on track for a preliminary design review in the fourth quarter more than a year earlier and the original contract date.

These are just a few examples of the focus we have on strong program performance across the portfolio.

Now before I turn the call over to Dave to provide more details on the quarter I'd like to provide some initial color on our 2020 for outlook.

We continue to see solid growth across all four of our businesses with sales growth of approximately 4% to 5% compared to our latest 2023 guidance, which we've now raised by $800 million throughout the year.

Kathy Warden: The federal government is also developing its budget plan for fiscal year 2025, which we expect to be submitted to Congress early next year. We are working closely with our customers to plan for future capabilities and navigate the fiscal pressures they see to ensure our programs remain well supported. As we have been discussing throughout the year, we are also seeing an increase in international demand for our capabilities. We've seen a particular increase in our weapon systems portfolio and missile defense technologies, like the IBCF product line.

We also expect operating income to grow by 45% year over year.

We reaffirm our free cash flow outlook range of $2, two $5 billion to $265 billion in 2024, which accounts for continued investment in the capabilities and capacity needed to grow our business and support our customers.

Kathy Warden: One notable example of this growing demand is with Argon E.R., where we've now received interest for more than a dozen countries, and just this week, the opportunity for a foreign military sale to Finland was announced. We are also working with the U.S, government to provide new advanced weapons capabilities. During the second quarter, we received a $705 million contract from the United States Air Force to develop the standard attack weapon, also known as SAW, an air-to-ground weapon with the capability to strike mobile defense targets.

So in summary, Northrop Grumman is well positioned to drive value creation for our customers and our shareholders. We are focused on executing our strategy driving operating performance and generating cash for our disciplined capital deployment.

So now with that I'll turn it over to Dave to provide some more details on the segment results 2023 guidance and our outlook. Thanks, Cathy and good morning, everyone. As Cathie described we generated another strong quarter of results.

<unk> is well positioned in growing segments of the market and we are delivering key capabilities that address our customers' missions.

Kathy Warden: Our SAW offering builds on the capabilities we provide with our high-speed Argon missile, which is in production. Building off some mature product baseline, we're able to reduce the developmental time, cost, and risk to the SAW program. These missiles are expected to be the air-to-ground weapon of choice for the F-35 and other fighters.

As macroeconomic conditions improve and pension and tax cash flow headwinds reverse over the next few years, we have a great opportunity to create value for shareholders through substantial cash flow growth.

Consistent with our long term strategy.

Taking a look at our demand metrics, we ended the third quarter with a record backlog of 84 billion.

Kathy Warden: In our space business, we remain focused on being at the forefront of technology, and that strategy has enabled us to build a differentiated portfolio that provides end-to-end solutions for our customers, from new space architectures to launch capabilities. We see broad applications for the technologies we've developed with a particular focus on national security missions. This includes helping to turn the space development agencies' vision of a new low-earth orbit constellation of satellites into reality.

Bolstered by several new competitive awards in.

And as a result, we now expect our full year book to bill ratio to be well over one times.

Turning to the top line, we continued to build on our momentum from the first half of the year.

With overall sales growth of 9% in the third quarter.

This includes growth in all four of our segments for the second straight quarter as our teams continue to ramp up new wins.

New talent and manage through continued pressures in the supply chain.

Kathy Warden: In August, we were awarded a $712 million contract to design and build 36 satellites for SDA's Tronch2 transport-layer data constellation. With this award, along with our work on SDA's tracking layer and Tronch1 of the transport layer, we are now building nearly 100 satellites for the proliferated warfighter space architecture. Our success in this area highlight our ability to compete and win in highly competitive and dynamic new markets within the space domain.

At the segment level Aeronautics posted sales growth of 9% driven by higher volume on manned aircraft programs.

<unk> grew by 6% on continued strength in their missile defense and armaments portfolios, including <unk> <unk> and <unk>.

Mission systems continued to generate rapid growth of restricted sales in the networked information solutions business driving their top line up 7%.

And space again delivered double digit sales growth as a result of the continued ramp on programs like GBS D and Gi <unk> and several in the restricted domain.

Kathy Warden: In addition, we had two notable launch events in the quarter. We successfully launched our 19th resupply mission to the International Space Station as we continue to execute under NASA's commercial resupply contract. And five of our Gem 63 solid rocket boosters helped to power ULA's Atlas V launch of a national security payload. These rocket motors will continue to support future ULA launches to include ULA's Falcon rocket. For next-generation interceptor, we successfully manufactured the first set of solid rocket motor cases in August and were on track for our preliminary design review in the fourth quarter, more than a year earlier than the original contract date.

Moving to segment margins. We're pleased with these bottom line results in a dynamic environment in total segment operating income grew by 8% compared to the third quarter of last year.

As we expected we delivered an incremental improvement in our segment Om rate from earlier quarters. This year.

Expanding to 11, 1% in Q3.

Program performance remained strong across the portfolio.

Our aeronautics and defense businesses generated a healthy volume a favorable EAC adjustments through efficient execution and risk retirements.

<unk> margins were down slightly as mix shifted to more cost type development efforts, particularly in their restricted portfolio.

Kathy Warden: These are just a few examples of the focus we have on strong program performance across the portfolio.

Kathy Warden: Now, before I turn the call over today to provide more details on the quarter, I'd like to provide some initial color on our 2024 outlook. We continue to see solid growth across all four of our businesses, with sales growth of approximately four to five percent compared to our latest 2023 guidance, which we've now raised by $800 million throughout the year. We also expect operating income to grow by four to five percent year over year.

In that space, given the rapid backlog growth, we've experienced strong execution and program performance our top priorities.

Margins improved by 80 basis points this quarter compared to Q2.

Diluted EPS in the third quarter were $6 18.

Up 5% from the prior year.

The increase was driven by higher sales and segment performance, along with a lower share count.

We also recognized a gain from the sale of an Australian minority investment in Q3.

Kathy Warden: We reaffirm our free cash flow outlook range of $2.25 to $2.65 billion in 2024, which accounts for continued investment in the capabilities and capacity needed to grow our business and support our customers. So in summary, North of Perman is well positioned to drive value creation for our customers and our shareholders. We are focused on executing our strategy, driving operating performance, and generating cash for our discipline, capital deployment.

We described on prior calls and included in our guidance.

Partially offsetting these items was lower net pension income of roughly $1 per share and.

Non operational impact consistent with the first two quarters.

Q3 was a strong period for cash generation with free cash flow of nearly $900 million.

On a year to date basis. This brings us to nearly $500 million of free cash flow well ahead of where we were at this time last year.

Dave Keffer: So now with that, I'll turn it over to Dave to provide some more details on the segment result 2023 guidance and our outlook. Thanks, Kathy.

We continue to remain disciplined in managing our working capital and we saw improvements in these accounts across the company in Q3.

Dave Keffer: Good morning, everyone. As Kathy described, we generated another strong quarter of results. The business is well positioned in growing segments of the market, and we're delivering key capabilities that address our customer's missions.

With respect to cash taxes.

<unk> recently provided additional guidance on the amortization of research and development expenditures under section 174 of the tax code.

This guidance did not change our interpretation of the provision.

Dave Keffer: As macroeconomic conditions improve, and pension and tax cash flow headwinds reverse over the next few years, we have a great opportunity to create value for shareholders through substantial cash flow growth, consistent with our long-term strategy. Taking a look at our demand metrics, we ended the third quarter with a record backlog of $84 billion, bolstered by several new competitive awards. And as a result, we now expect our full-year book to bill ratio to be well over one times.

Upon finalizing our 2022 tax returns we lowered our estimates for section 170 forecast taxes based on applicable R&D costs that were below our original estimates.

Offsetting the lower 174 taxes as an increase in other tax items. The net result of which is a multiyear cash tax forecast that is roughly unchanged.

Yes.

Moving to 2023 guidance I'll begin with a few updates to our segment estimates as shown on slide seven in our earnings deck.

Dave Keffer: Turning to the top line, we continue to build on our momentum from the first half of the year, with overall sales growth of 9% in the third quarter. This includes growth in all four of our segments for the second straight quarter, as our teams continue to ramp up new wins, add new talent, and manage through continued pressures in the supply chain. At the segment level, Aeronautics posted sales growth of 9% driven by higher volume on their craft's program.

First based on the strength of our year to date results. We now expect modestly higher sales at our aeronautics business in the mid to high $10 billion range.

This represents a return to growth this year at the.

A year earlier than expected.

Continues to assume that we will be awarded the first <unk> on the B 21 program in the fourth quarter after first flight.

As the Air Force said in September at the IFA Conference, we're progressing through ground testing and we're on track to enter flight testing this year in line with the program baseline schedule.

Dave Keffer: D.S. Group by 6% on continued strength in their missile defense and armaments portfolios, including IBCS, GMLRS, and HACM. Mission systems continue to generate rapid growth of restricted sales in the networked information solutions business driving their top line up 7%. In space, again delivered double digit sales growth as a result of the continued ramp on programs like GBSD, NGI, OPIR, and several in the restricted domain.

And we are again, increasing our top line expectations for our space segment based on new wins and continued strength in this business.

We now expect 2023 sales of approximately $14 billion.

Which represents year over year sales growth of 14%.

For operating margin rate, we are projecting a slightly lower operating margin rate at MFS to reflect our year to date trend line.

Dave Keffer: Moving to segment margins, we're pleased with these bottom line results in a dynamic environment. In total, segment operating income grew by 8% compared to the third quarter of last year. As we expected, we delivered an incremental improvement in our segment OM-8 from earlier quarters this year, expanding to 11.1% in Q3. Program performance remained strong across the portfolio. Our aeronautics and defense businesses generated a healthy volume of favorable EAC adjustments through efficient execution and risk retirements. MS margins were down slightly as mix shifted to more cost type development efforts, particularly in their restricted portfolio.

Other segments are unchanged.

At the enterprise level, we are increasing our sales guidance by another $400 million and now expect 2023 sales of approximately $39 billion.

This represents year over year growth of roughly six 5%.

We are maintaining our guidance for segment operating income.

Year to date trends would indicate a figure towards the lower half of that range.

And we are reaffirming our estimates for EPS and free cash flow.

Next I'll build on Kathy's comments on our 2024 outlook sales.

Sales growth has accelerated sooner than we expected in 2023, and we continue to project growth at all four of our business segments next year.

Dave Keffer: In that space, given the rapid backlog growth we've experienced, strong execution and program performance are our top priorities. Space margins improved by 80 basis points this quarter compared to Q2. The LUTED EPS in the third quarter were $6.18, up 5% from the prior year. The increase was driven by higher sales and segment performance, along with a lower share count. We also recognized to gain from the sale of an Australian minority investment in Q3 that we described on prior calls and included in our guidance. Partially offsetting these items was lower net pension income of roughly $1 per share, a non-operational impact consistent with the first two quarters.

We expect segment margins in the low 11% range.

And we continue to project improvement overtime.

We see benefits from the stabilizing macro environment, our cost efficiency initiatives and our business mix improvements.

We continue to anticipate capex to be roughly consistent as a percentage of sales in 2024 before declining in 2025 and beyond.

And shareholder returns will remain a top priority for our free cash flow deployment, including returning at least 100% of free cash flow to shareholders next year.

Given the volatility in the financial markets I'd also like to provide a quick update on our pension plans.

Dave Keffer: Q3 was a strong period for cash generation with free cash flow of nearly $900 million. On a year-to-date basis, this brings us to nearly $500 million of free cash flow, well ahead of where we were at this time last year. We continue to remain disciplined in managing our working capital and we saw improvements in these accounts across the company in Q3.

Our funded status is now above 100% as of the end of Q3.

And we continue to expect minimal required cash contributions over the next several years.

This is a discriminator for us.

The ports are affordability and competitiveness as well as our capital deployment Optionality.

Given that our GAAP earnings per share are affected by net pension income as we did last year. We have provided a pension income sensitivity table for 2024 on slide nine.

Dave Keffer: With respect to cash taxes, the IRS recently provided additional guidance on the amortization of research and development expenditures under section 174 of the tax code. This guidance did not change our interpretation of the provision, but upon finalizing our 2022 tax returns, we lowered our estimates for section 174 cash taxes based on applicable R&D costs that were below our original estimates. Offsetting the lower 174 taxes is an increase in other tax items, the net result of which is a multi-year cash tax forecast that is roughly unchanged.

Our forecast in early 2023 was predicated on asset returns of seven 5% and a discount rate of roughly five 5%.

Through September 30 financial market movements have led to a roughly 50 basis point increase in discount rates and a year to date asset returns of 1% to 2%.

This combination of results would reduce net <unk> pension income and increased Cas recoveries from our prior projections.

Dave Keffer: Moving to 2023 guidance, I'll begin with a few updates to our segment estimates as shown on slide seven in our earnings deck. First, based on the strength of our year-to-date results, we now expect modestly higher sales in our[inaudible] This represents a return to growth this year at AS, a year earlier than expected, and continues to assume that we will be awarded the first L-Rip lot on the B-21 program in the fourth quarter after first flight.

Based on the sensitivities highlighted on this slide the net result would be an impact to 2020 for GAAP EPS of roughly <unk> 50.

Compared to our initial outlook provided in January.

Keep in mind that Fas pension income is noncash in nature.

Higher Kaz estimates would provide a modest benefit to our cash flows but could have a modest downward impact on <unk> in the quarter in which they are updated consistent with this year's pattern.

Speaking of cash flow, we continue to see a path to grow our cash flows at a greater than 20% CAGR next year and through 2025 with further expansion in the following years.

Dave Keffer: As the Air Force said in September at the AFA conference, we are progressing through ground testing and we're on track to enter flight testing this year in line with the program baseline schedule. And we are again increasing our top-lining expectations for our space segment based on new wins and continued strength in this business. We now expect 2023 sales of approximately $14 billion, which represents year-over-year sales growth of 14%. For operating margin rate, we're projecting a slightly lower operating margin rate at MS to reflect their year-to-date trend line.

As is our practice, we will provide our latest multi year outlook for free cash flows on the January earnings call. We remain confident in the long term value creation opportunity from free cash flow expansion and disciplined capital deployment through the rest of the decade.

With that let's open the call up for questions.

Thank you.

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

Dave Keffer: Other segments are unchanged. At the enterprise level, we're increasing our sales guidance by another $400 million and now expect 2023 sales of approximately $39 billion. This represents year-over-year growth of roughly 6.5%. We are maintaining our guidance for segment operating income. Year-to-date trends would indicate a figure toward the lower half of that range. And we're reaffirming our estimates for EPS and free cash flow.

<unk> plus press star one to ask a question as a reminder, please limit yourself to one question and one follow up one moment for questions.

Okay.

Our first question comes from Douglas <unk> with Bernstein you May proceed.

Good morning, Thank you.

And.

And the Aeronautics you're raising your topline guidance, Dave you talked about this I mean, Cathy we've talked about this subject many times with.

Dave Keffer: Next, I'll build on Kathy's comments on our 2024 outlook. Sales growth has accelerated sooner than we expected in 2023. And we continue to project growth at all four of our business segments next year. We expect segment margins in the low 11% range. And we continue to project improvement over time as we see benefits from the stabilizing macro environment, our cost efficiency initiatives, and our business mix improvements. We continue to anticipate CAPEX to be roughly consistent as a percentage of sales in 2024 before declining in 2025 and beyond. And shareholder returns will remain a top priority for our free cash flow deployment, including returning at least 100% of free cash flow to shareholders next year.

With the valley that you had.

Kind of forecast for revenues this year.

As legacy programs decline, but.

Things are getting better so.

What are what are the puts and takes here that appear to be starting you on a growth path going forward.

And given the mix do you still see aeronautics is able to maintain.

10% margins in the coming years.

Thanks, Doug.

So the puts and takes that we've been talking about has materialized as we expected. The biggest factor was the programs that were declining are largely through our year over year compares now those include global Hawk, which isn't Sustainment Triton, which is still in production, but as we look forward that rate.

Dave Keffer: Given the volatility in the financial markets, I'd also like to provide a quick update on our pension plans. Our funded status is now above 100% as of the end of Q3. And we continue to expect minimal required cash contributions over the next several years. This is a discriminator for us that supports our affordability and competitiveness as well as our capital deployment optionality.

<unk> is fairly stable and so it is not contributing to significant grow what is contributing to growth as b 21, and we expected that ramp to start.

This year and continue and we still anticipate that and then other stabilizing factors with the F 35, <unk> large program that have generally remained constant.

As we look forward, we see that same profile in those program categories and that will contribute to growth.

Dave Keffer: Given that our CAP earnings per share are affected by net pension income, as we did last year, we have provided a pension income sensitivity table for 2024 on slide 9. Our forecast in early 2023 was predicated on asset returns of 7.5% and a discount rate of roughly 5.5%. Through September 30, financial market movements have led to a roughly 50 basis point increase in discount rates and a year-to-date asset return of 1 to 2%.

We do expect that margin rates will be near that 10% Mark that we've been talking about and we've gone through again those major categories of the portfolio and how they contribute our mature production is about 60% of the portfolio and that tends to have.

Above 10% margins, whereas the B 21 has contributed lower margins and will as we move into production contribute zero on the production. That's our planning assumption of course, and so it's the mix of that entire portfolio that brings us to that approximately 10.

Dave Keffer: This combination of results would reduce net phas pension income and increase cash recoveries from our prior projections. Based on the sensitivities highlighted on the slide, the net result would be an impact to 2024 gap EPS of roughly 50 cents compared to our initial outlook provided in January. Keep in mind that phas pension income is non cash in nature. Our amount of benefit to our cash flows but could have a modest downward impact on EACs in the quarter in which they are updated consistent with this year's pattern.

Some expectation for the near to midterm.

And then when you look forward into 2024.

I know in the guidance today, you said, 4% to 5% increase.

The increase in sales, 4% to 5% increase.

And operating income.

That implies really no no margin expansion overall in 2024 can you talk about that and just how youre thinking about margin progression going forward.

Dave Keffer: Speaking of cash flow, we continue to see a path to grow our cash flows at a greater than 20% keger next year and through 2025 with further expansion in the following years. As is our practice will provide our latest multi year outlook for free cash flows on the January earnings call. We remain confident in the long term value creation opportunity from free cash flow expansion and disciplines capital deployment through the rest of the decade.

Absolutely. So at this point in the year as is normal we wanted to provide an outlook there broad ranges. So the 4% to 5% both for sales and operating margin.

US an opportunity to do further planning and characterizing the budget as that becomes more clear and we will provide more precise guidance in January what I would say is that we are still on track for the trends that we have spoke of in operating margin.

Operator: With that, let's open the call up for questions. Thank you, ladies and gentlemen, if you wish to ask a question, please press star followed by one one on your touch tone telephone again, plus press star one one to ask a question. As a reminder, please limit yourself to one question and one follow up one moment for questions.

See improvement that's reflected in our guidance for 2023 in the fourth quarter.

Again sequential improvement over Q3 performance and we expect as we move into next year. There are continued opportunities for improvement in operating margin. They are related to macroeconomic trends largely inflation labor costs productivity and so we'd like to get a little bit.

Douglas Harned: Our first question comes from Douglas Arnett with Bernstein, you may proceed. Good morning, thank you. In aeronautics, you're raising your top line guidance, Davey talked about this. I mean, Kathy, we've talked about this subject many times with the valley that you had kind of forecast for revenues this year as legacy programs decline. But things are getting better. So what are one of the puts and takes here that appear to be starting you on a growth path going forward.

More time under our belt before we get concrete about what that improvement might look like so we are expecting some modest margin rate improvement into next year as we have outlined for Q4 of this year. I also just wanted to point to the fact that the free cash will have growth is the real <unk>.

For our investors.

Understand while earnings growth will be there. We also have headwinds that have historically in the last couple of years challenged us on free cash flow that are dissipating, we've talked about and I'm sure. We'll talk more on today's call about section 174, which is decreasing headwind over time.

Douglas Harned: Given the mix, do you still see aeronautics is able to maintain 10% margins in the coming years? Thanks, Doug. So the puts and takes that we've been talking about have materialized as we expected. The biggest factor was the programs that were declining are largely through our year for year compares now, those include global hawk, which is in sustainment, frightened, which is still in production, but as we look forward that rate is fairly stable.

Also see the pension headwinds curtailing and then of course as we reduced our capex spend starting in 2025, even more robust free cash flow growth, but looking at 20% year over year free cash flow growth is really an important milestone for us and something we're very focused on delivering.

Okay very good thank you.

Douglas Harned: And so it is not contributing to significant growth. What is contributing to growth is B21 and we expected that ramp to start this year and continue and we still anticipate that. And then other stabilized factors with the up 35 the E2D large program that have generally remained constant. As we look forward, we see that same profile in those program categories and that will contribute to growth at AS. We do expect that margin rates will be near that 10% mark that we've been talking about, and we've gone through, again, those major categories of the portfolio and how they contribute.

Thank you one moment for questions.

Our next.

That goes from Ronald Epstein with Bank of America, You May proceed.

Hey, good morning, good morning.

But across the industry theres been a lot of discussion about that.

From supply chain capacity.

The constrained labor constraints.

One thing that popped up in a lot of discussions as just availability of solid rocket motors for missiles, and so on and so forth.

Just broadly Katherine how is northrop handling.

Youre getting a surge in demand at a time, where.

Kind of post Covid and all of that mean Labor's been tough and supply chains are tough I mean, I mean, how's it going.

Douglas Harned: Our mature production is about 60% of the portfolio and that tends to have above 10% margins, whereas the 21 has contributed lower margins than will as we move into production. And so it's the mix of that entire portfolio that brings us to that approximately 10% expectation for the near to midterm. And then when you look forward in 2024, I know in the guidance today you said 4% to 5% increase in sales, 4% to 5% increase in operating income.

What's north of doing the handle that.

Ron We got ahead of seeing the demand not quite to the degree that the demand has increased in the last 18 months that we had forecasted an increase in demand, particularly in our solid rocket motor business, but broadly as we've been ramping up for production of satellite aircrafts and mission systems.

Capability across the board, it's why our Capex has been elevated and so first and foremost we did what's necessary and that is investing in our workforce.

Douglas Harned: That implies really no margin expansion overall in 2024. Can you talk about that and just how you're thinking about margin progression going forward? Absolutely. So, at this point in the year as is normal, we wanted to provide an outlook, there are broad ranges, so the 4 to 5% both for sales and operating margin. It gives us an opportunity to do further planning and characterizing of the budget as that becomes more clear and will provide more precise guidance in January.

Our facilities to be able to support that demand and that's what's allowing us to support both our direct customers and primes, who are now coming to us asking for that capability. We are going to continue to do that and Thats why we still have some whereabouts capex plans in place for 2024 reflected in the outlook.

We provided.

We are seeing labor.

Back to pre pandemic levels in terms of our ability to hire retain certainly inflation is causing more labor rate escalation than we saw pre pandemic, but we are able to get the workers that we need our focus now is on productivity and there too we have invested in training we've invested in standard.

Douglas Harned: What I would say is that we are still on track for the trends that we have spoke of in operating margin. We see improvement and that it's reflected in our guidance for 2023 in the fourth quarter, again sequential improvement over to three performance. And we expect as we move into next year, there are continued opportunities for improvement in operating margin. They are related to macroeconomic trends, largely inflation, labor cost, productivity. And so, we'd like to get a little bit more time under our belt before we get concrete about what that improvement might look like.

Our construction.

In digital technology, all of which are enabling productivity in our workforce.

That has been a little slower to materialize with our supply chain and so we are spending a lot of Northrop Grumman resource with our supplier co located with them and helping them to improve productivity as well and once we remove that bottleneck I think as an industry to be able to no longer have.

Capacity, our constraining factor, but with that said and now we're looking at our supplemental.

Growing international demand all of which continue to add to the demand equation. So we are still going to be a bit in a catch up mode. Because it does take generally 18 to 24 months delay in new capacity to support that demand.

Douglas Harned: So, we are expecting some modest margin rate improvement into next year as we have outlined for Q4 this year. I also just want to point to the fact that the free cash flow growth is the real point for our investors to understand while earnings growth will be there. We also have headwinds that have historically in the last couple of years challenged us on free cash flow that are dissipating. I mean, we talked about, and I'm sure we'll talk more in today's call about section 174, which is a decreasing headwind over time.

Got it got it and then maybe a follow on for Dave is there can you give us any update on how youre thinking about the B 21, L. Rip because thats something thats kind of always on everybody's mind.

Sure it's David so.

We continue to anticipate as we noted in the earlier part of the call that the first <unk> contract will be awarded in the fourth quarter.

Douglas Harned: We also see the pension have went for tailing. And then, of course, as we reduced our capex spend starting in 2025, even more robust free cash flow growth. But looking at 20% year-for-year free cash flow growth is really an important milestone for us and something we're very focused on delivering. Okay, very good. Thank you. Thank you, one moment for questions.

That's consistent with our.

Expectations that we've described throughout the year and reliant upon.

First flight occurring between now and that.

<unk> contract award and we continue to evaluate our performance and our outlook on the.

<unk> phase of the program each quarter.

And did not make any significant changes to our estimates for that phase.

During the third quarter. So we'll continue to update everyone over time is as we have updates.

Ronald Epstein: Our next question comes from Ronald Epstein with Thank you, America.

Great. Thank you.

Kathy Warden: Good morning. In the craft industry, there's been a lot of discussion about everything from supply chain, capacity constraints, labor constraints. One thing that's popped up in a lot of discussions is just the availability of solid rocket motors for missiles and so on and so forth. It's just broadly, Kathy, how is Northrop handling, you're getting a surge in demand at a time where kind of post COVID and all that. I mean, labor's been tough and supply chains are tough.

Thank you one moment for questions.

Sure.

Our next question comes from Sheila <unk> with Jefferies. You May proceed.

Good morning, guys. Thank you, thanks, Cathy and Dave and Todd.

You highlighted a few moments ago that free cash flow growth is the real story here. So I wanted to focus on that since you mentioned that.

Can you talk about multi year free cash flow growth you've done so in the past, but how do you think about the biggest drivers from a top line.

Networking net income drop through tax Capex perspective.

Kathy Warden: I mean, how's it going and what's Northrop doing to handle that? Ron, we got ahead of seeing the demand, not quite to the degree that the demand has increased in the last 18 months, but we had four doubts that an increase in demand, particularly in our solid rocket motor business, but broadly as we've been ramping up for production of satellite aircraft and mission systems capability across the board, it's why our capex has been elevated.

Hey, Sheila its Dave I am happy to provide some additional color there.

The 2024 updates that we provided on the call today should give you a sense for our near term sales and earnings growth expectations underlying that free cash flow expansion, we do.

We expect to continue to see.

A leading sales profile in the growth of our business and as we've talked about.

Kathy Warden: And so first and foremost, we did what's necessary and that is invest in our workforce and our facilities to be able to support that demand, and it's what's allowing us to support both our direct customers and times who are now coming to us asking for that capability. We are going to continue to do that and that's why we still have some robots capex plans in place for 2024 reflected in the outlook we provided.

We anticipate long term margin expansion opportunity as well and so both of those are foundational to our multi year free cash flow growth expectations on top of that.

We've talked about the last couple of years.

The 2023, and 2024 would be a period of peak capital intensity for the business and that is consistent with our current expectation large programs that we've had for a number of years as well as new wins, we've had that have grown our backlog so significantly over the past couple of years have all contributed to a peak period of capital intensity right.

Kathy Warden: We are seeing labor back to pre pandemic levels in terms of our ability to hire retain certainly inflation is causing more labor rate escalation than we saw pre pandemic, but we are able to get the workers that we need. Our focus now is on productivity and there to we've invested in training, we've invested in standard work instructions in digital technology, all of which are enabling productivity in our workforce, that has been a little slower to materialize with our supply chain.

Now that we have clarity on sources of decline.

In the middle of the decade, and so we expect that.

Capital intensity to be alleviating in 2025 and beyond.

Working capital performance is really among the best in class at this point.

Even with.

A modest headwind from the progress pay changes.

Kathy Warden: And so we are sending a lot of Northrop Grumman resource with our suppliers co-locating with them and helping them to improve productivity as well. And once we remove that bottle, I think we'll as an industry be able to no longer have capacity be our constraining factor. But with that said, and now we're looking at a supplemental and growing international demand, all of which continue to add to the demand equation. So we are still going to be a bit in a catch up mode because it does take generally 18 to 24 months to lay in new capacity to support that demand.

We anticipate continuing to be able to deliver stable working capital performance not a meaningful driver of headwind or tailwind there and then you get to the two items Kathy mentioned earlier.

Modestly higher Cas pension recoveries currently projected over the next few years of course, those will continue to fluctuate based on <unk>.

Primarily on asset returns, but other actuarial.

Changes that are possible as well.

And then on the cash tax side as we've noted a pretty stable outlook for free.

Cash taxes from what we've been anticipating previously and that outlook is for declining cash taxes over the next several years largely driven by.

Dave Keffer: Got it, got it, and then maybe a follow on for Dave, is there, can you give us any update on how you're thinking about the B-21 L-Rip? Is that something that's kind of always on everybody's mind? Sure on this day, so we continue to anticipate, as we noted in the earlier part of the call, that the first L-Rip contract will be awarded in the fourth quarter. That's consistent with our expectations that we've described throughout the year and reliant upon first flight occurring between now and that L-Rip contract award.

The section 174 movement as we get through the period of amortization over these five years. So all in all a number of key tailwind.

Dave Keffer: And we continue to evaluate our performance and our outlook on the L-Rip phase of the program each quarter and did not make any significant changes to our estimates for that phase during the third quarter. So we'll continue to update everyone over time as we have updates.

Most critical of which of course is the expectation of continued growth and margin opportunity in the business.

Great. Thank you.

Douglas Harned: Great, thank you.

Thank you one moment for questions.

Our next question comes from Myles Walton with Wolfe Research you May proceed.

Thanks, Good morning.

Operator: Thank you, one moment for questions.

Kathy could you comment a bit on relative growth rates at a minimum for the segments next year and just playing off the space backlog, which continues to expand pretty pretty wildly maybe just dig in a little bit deeper as to how the complexion of that backlog might play out on hopefully a margin expansion profile from here.

Sheila Kahyaoglu: Our next question goes from Sheila Kahyaoglu with Jeff Rees, you may proceed.

Yes, Myles so.

We have been saying all year long, we affect space growth to moderate as we go into next year still be our fastest growing segment, but the growth profile across the four businesses will be more similar next year.

Sheila Kahyaoglu: Good morning, guys. Thank you. Thanks, Kathy and Dave. And Todd, Kathy, you highlighted a few moments ago that three cash flow growth is a real story here. So I want to focus on that since you mentioned it. You know, can you talk about multi-year free cash flow growth? You've done so in the past, but how do you think about the biggest drivers from a top-line network net income drop through tax cap experts factors?

More tightly clustered if you will around that growth rate or projecting for the enterprise at 4% to 5%.

Diaz cinema will likely be around that profile in the mid single digit range, Although I will say DFS. This year is experiencing some upward pressure on growth due to the demand that we spoke about particularly globally for air and missile defense and weapon systems.

Sheila Kahyaoglu: Sheila, Dave, I'm happy to provide some additional color there. You know, the 2024 updates that we provided on the call today should give you a sense for our near-term sales and earnings growth expectations underlying that free cash flow expansion. We do expect to continue to see a leading sales profile in the growth of our business. And as we've talked about, we anticipate long-term margin expansion opportunity as well. And so both of those are foundational to our multi-year free cash flow growth expectations.

If that continues that would continue to push gso's growth expectations, even higher into 2024 and then.

We'll still be in growth territory, but as we've talked about it will be modest growth.

Into 2024, so that gives you a sense of the relative order that we see and for space in particular.

While we have approximately.

<unk> doubled that business in the last five years. So it's been just a tremendous growth tear we are very focused now on the performance of that backlog and ensuring that we can as you said deliver the margin expansion and that is still very much our pathway in 2024.

Sheila Kahyaoglu: On top of that, we've talked about the last couple of years that 2023 and 2024 would be a period of peak capital intensity for the business. And that is consistent with our current expectation. Large programs that we've had for a number of years as well as new wins we've had that have grown our backlogs so significantly over the past couple of years have all contributed to a peak period of capital intensity right now that we have clarity on sources of decline in the middle of the decade.

And can I just clarify on the underlying margins <unk> were still negative within the space is there.

We've seen that for now five quarters are there specific programs you can point to to say it because these are running off and that's why we're going to have this margin expansion profile.

Sheila Kahyaoglu: And so we expect that capital intensity to be alleviating in 2025 and beyond. Working capital performance is really among the best in class at this point. And even with modest headwind from the progress pay changes, we anticipate continuing to be able to deliver stable working capital performance, not a meaningful driver of headwind or tailwind there. And then you get to the two items Kathy mentioned earlier, modestly higher CAS pension recoveries currently projected over the next few years.

It's Dave on that one there has not been any one or two particular programs driving the majority of the.

The negative EAC adjustments youre, referring to over the last.

Year plus.

Broader and to Cathy's earlier point, there has been so much backlog expansion that there are so many new programs in our space business over these last few years examples that really strong market share gains.

And it's been across a number of those programs that we've seen EAC pressure given the newness of those development programs and so I wouldn't characterize them as falling off anytime soon if anything we see opportunities for a number of programs in our space business to transition to more mature.

Sheila Kahyaoglu: Of course, those will continue to fluctuate based on primarily on asset returns but other actuarial changes that are possible as well. And then on the CAS tax side, as we've noted, a pretty stable outlook for CAS taxes from what we've been anticipating previously. And that outlook is for declining CAS taxes over the next several years largely driven by the section 174 movement as we get through the period of amortization over these five years. So all in all, a number of key tailwinds, most critical of which of course is the expectation of continued growth and margin opportunity in the business.

Phases of those programs, including production phases over the next couple of years, which is important to the broader margin expansion opportunity point that cathie described so I think what wed see here's an opportunity for <unk>.

Sheila Kahyaoglu: Great. Thank you. One moment for questions.

Margin growth as we see the continued stabilization of the macro factors that have really been underlying.

Industry wide pressures over the past couple of years and the continued mature maturity of those programs over those same couple of years coming up.

Okay. Thank you.

Okay.

Thank you one moment for questions.

Our next question comes from Cristina <unk> with Morgan Stanley You May proceed.

Myles Walton: Our next question comes from Myles Walton, with wolf research you may proceed. Thanks, good morning. Kathy, could you come a bit on relative growth rates at a minimum for the segments next year and just playing off the space backlog, which continues to expand pretty wildly. Maybe just dig in a little bit deeper as to how the complexion of that backlog might play out on hopefully a margin expansion profile from here. Yes, Myles, so as we have been saying all year long, we expect space growth to moderate as we go into next year, still be our fastest growing segment, but the growth profile across the four businesses will be more similar next year, more tightly clustered if you will around that growth rate or projecting for the enterprise at four to five percent.

Hey, good morning, everyone.

Good morning.

Kathy on the stand and attack weapon when some of your competitors indicated that the risk reward profile wasn't as strong in this particular program can you provide more color on your competitive edge and how this pursuit jives with the risk tolerance of demonstrated elsewhere like on the decision not to bid on and that is it.

Time.

Yes. Thank you so in my comments I alluded to the fact that.

Argon is a product line that we have we've talked about based on <unk> product, the argon ER or extended range and now the Sol Award and we with each of those products are building off of a mature technical baseline as I've talked about our approach thinking about fixed.

I have often said fixed price as appropriate where it's either a commercial item or an item that has reached a design maturity and then risk reduced to where we know what it will take to deliver that product.

Myles Walton: D.S, and Emma will likely be around that profile in the mid-single digit range, although I will say D.S, this year is experiencing some upward pressure on growth due to the demands that we spoke about, particularly globally for air and missile defense and weapon systems. If that continues, that would continue to push D.S, growth expectations even higher into 2024, and then AS will still be in growth territory, but as we've talked about, it'll be modest growth into 2024.

Because of the maturity of argon and us having a product line that the air force requirements for small to bring forward, we are able to reduce cost schedule and of course.

Better risk management that allows us to have the risk tolerance them to bid.

And I recognize that in competition. There are many factors, but when a company has invested and gotten a mature product line. There is a natural advantage that comes with that and that's what the situation we found ourselves with Sol.

Myles Walton: So that gives you a sense of the relative order that we see and for space in particular, while we have approximately doubled that business in the last five years, so it's been just on a tremendous growth tear. We are very focused now on the performance of that backlog and ensuring that we can, as you said, deliver the margin expansion, and that is still very much our pathway in 2024. And just clarify, on the underlying margins, EACs are still negative within space.

And that specific competition.

Great. Thank you for the color and a follow up question on the B 21 does the current budget standoff in DC impacts flight testing or the timing of the Allograft Award.

No it does not.

As we look at the timing of the <unk> Award as Dave said, we still expect that to happen. This year and as we have talked about before first flight is a milestone that the air force is looking to achieve before they make that award and we are on track still.

Myles Walton: Is there, and we've seen that for now five quarters, are there specific programs you can point to say, these are running off, and that's why we're going to have this margin expansion profile? Well, Dave, on that one, there has not been any one or two particular programs driving the majority of the negative EAC adjustments you're referring to over the last year plus. It's broader, and to Kathy's earlier point, there has been so much backlog expansion that there are so many new programs in our space business over these last few years, examples of really strong market share gains.

Anticipating first flight this year.

Great. Thank you.

Okay.

Thank you one moment for questions.

Our next question comes from Robert Stallard with vertical you May proceed.

Thanks, so much good morning, good morning.

Yeah.

Myles Walton: And it's been across the number of those programs that we've seen EAC pressure, given the newness of those development programs. And so I wouldn't characterize them as falling off anytime soon. If anything, we see opportunities for a number of programs in our space business to transition to more mature phases of those programs, including production phases over the next couple of years, which is important to the broader margin expansion opportunity point that Kathy described.

Kathy I just wanted to follow up on your budget commentary at the start of the call. I was wondering if you are putting any contingency plans in place in case, we get.

The tree Dod budget cuts as a result of this craziness in Congress.

So well we have looked at it.

Irresponsible of us not to run some numbers and look at where we might have risk.

As I mentioned in my commentary, we are working with our customers to navigate any budget challenges that they see either as a result of not getting appropriations passed in a timely fashion in accordance with the fiscal responsibility act requirement or even as they look into 2025 and the pressures that they have there with a minimal.

Myles Walton: So I think what we'd see here is an opportunity for margin growth as we see the continued stabilization of the macro factors that have really been underlying industry-wide pressures over the past couple of years and the continued maturity of those programs over those same couple of years coming up. Thank you. One moment for questions.

Top line growth rate, but we are not seeing any significant risks to our portfolio at this time, but we will continue to monitor that as such as discussions progress.

Very pleased to see that the house has a speaker and we should expect to begin to see the bill moving through Congress now.

Kristine Liwag: Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed.

Kathy Warden: Hey, good morning, everyone. Good morning. Kathy, on the stand-in attack weapon when some of your competitors indicated that the risk-reward profile wasn't as strong in this particular program. Can you provide more color on your competitive edge and how this pursuit drives with the risk tolerance you've demonstrated elsewhere, like on the decision not to bid on end-gather as a prime. Yes, thank you. So in my comments, I alluded to the fact that Arkham is a product line that we have.

And then as a follow up you mentioned the strong demand in the defense export market at the moment I was wondering if there could be any capital deployment opportunities there either Northrop Grumman acquiring companies overseas, we're making other investments.

Yeah.

We are already making capital investments that support that growing demand in missile defense and armaments and so as we have talked about our capex investments over the last several years and planning forward into 2024 does do support our international product line.

Kathy Warden: We've talked about the base Arkham product, the Arkham ER extended range, and now the SAW award. And we, with each of those products, are building off of a mature technical baseline. As I've talked about our approach to thinking about fixed price, I have often said fixed price is appropriate, where it's either commercial item or an item that has reached the design maturity and then risk reduced to where we know what it will take to deliver that product.

Kathy Warden: Because of the maturity of Arkham and us having a product line that met the Air Force requirements for SAW to bring forward, we are able to reduce cost schedule and, of course, have better risk management. That allows us to have the risk tolerance them to bid fixed price. And I recognize that in competitions, there are many factors. But when a company has invested and gotten the mature product line, there is a natural advantage that comes with that. And that's what the situation we found ourselves in with SAW and that specific competition.

We are not seeing a significant increase that we would anticipate in.

That demand signal yet we are monitoring it both through the supplemental but we've already baked in a good bit of products line growths that we've accounted for in our Capex planning over the next several years and so at this point in time, I don't see that providing more upward pressure on capex.

That's great. Thank you very much.

Thank you one moment for questions.

Our next question comes from Cai von rumor with TD Cowen You May proceed.

Yes, thanks, so much.

To go back to Doug's question Youre looking for basically flat margins next year and kind of in recent quarters. Cathy you've made the point about the opportunity for space margins to go up.

If I look at defense basically with more munitions moving up I think you've made the point that there should be some opportunity there.

What the target down for MFS, this year, which would suggest an easier base of comparison for next year.

Kathy Warden: Great, thank you for the color. And a follow-up question on the B21. Does the current budget stand off on DC impacts like testing or the timing of the algorithm award? No, it does not. As we look at the timing of the algorithm award, as Dave said, we still expect that to happen this year. And as we have talked about before, first flight is a milestone that the Air Force is looking to achieve before they make that award. And we are on track still anticipating for flight this year.

Robert Stallard: Great, thank you. Thank you. One moment for questions.

I think you've talked about aero as being roughly flat, but as you look at your portfolio is.

Is there opportunity for those margins to move up next year and if so which are the sectors that have the greatest opportunity for margin improvement and which are the ones that perhaps face the greatest risk that margins would be flat to them. Thank you.

Yes.

I like the way Youre thinking it's exactly the challenge that you me and the team are discussing amongst ourselves as to how we do.

<unk> margin improvement next year and in the Q2 call I laid out for our investors what that path is.

Robert Stallard: Our next question comes from Robert salad with vertical. You may proceed. Thanks very much.

Key factors associated with improvement in so let me just touch on each of those and then I can tie it also to where the segment see the greatest opportunity for macroeconomic factors I've talked about those already on the call. We are seeing inflation be a bit stickier than we had hoped at this point in time, we are incorporating that into.

Kathy Warden: Good morning. Kathy, if you wanted to follow up on your budget commentary at the start of the call, and wondering if you were putting any contingency plans in place in case we get the arbitrary DOD budget cuts as a result of this craziness in Congress. So Rob, we have looked it would be irresponsible of us not to run some numbers and look at where we might have risk. And as I mentioned in my commentary, we're working with our customers to navigate any budget challenges that they see either as a result of not getting appropriations passed in a timely fashion and accordance with the fiscal responsibility act requirement.

Our forward estimates, but it is impacting our ability to return to higher levels of profitability faster productivity is another area, where we are working to improve productivity not just within our company, but our supply chain that has opportunity.

That would be upside to a flattish look next year, although as I also indicated we are expecting some modest improvement in margin rate next year.

Kathy Warden: Or even as they look into 2025 and the pressures that they have there with a minimal hotline growth rate. But we are not seeing any significant risk to our portfolio at this time that we will continue to monitor that as budget discussion progress. We're just very pleased to see that the House of Speaker and we should expect to begin to see those still moving through Congress now.

What then we look at is the mix and that has been a factor for both space and mission system.

Over the last couple of years, particularly notable for mission systems. This year, we don't see a significant mix shift going into next year. It is a very gradual mix shift.

And so that those two pieces of the business will still feel some margin rate pressure.

Kathy Warden: Yeah, and then as a follow-up, you mentioned the strong demand in the defense export market at the moment. I was wondering if they could be any capital deployment opportunities there either Northrop Grumman acquiring companies overseas or making other investments. We are already making capital investments that support that growing demand in missile defense and armaments. And so as we have talked about our capex investments over the last several years in planning forward into 2024, those do support our international product line.

Till they can shift more production in the portfolio as you note our defense systems business has the most both topline and margin upside that could come as a result of growing international demand as well as what we see domestically, particularly through the south.

Momentum those are uncertain at the moment. So we do factor those in our plan, but that could be a source of upside, but then of course, we are managing risks across the entire portfolio and so when we put all of that together, we're looking at some modest rate improvement into next year and.

Kathy Warden: We are not seeing a significant increase that we would anticipate in that demand signal yet. We are monitoring it both through the supplemental, but we've already baked in a good bit of product line growth that we've accounted for in our capex planning over the next several years. And so at this point in time, I don't see that providing more upward pressure on capex. That's great. Thank you very much. Thank you. One moment for questions.

It really driving to do better but at this point in the year, we are very comfortable with what we've laid out a set of expectations.

Good answer thanks, so much thank you.

Thank you one moment for questions.

Our next question comes from Ken Herbert with RBC Capital markets. You May proceed.

Yes.

Yes, hi, good morning.

Kaivon Rumor: Our next question comes from Kaivon Rumor with TD Cowan, you may proceed. Yes, thanks so much. So to go back to Doug's question, I mean, you're looking for basically flat margins next year. And kind of in recent quarters, Kathy, you've made the point about the opportunity for space margins. To go up, certainly, if I look at defense, basically with more munitions moving up, I think you've made the point that there should be some opportunity there.

Hey, Kathy maybe you could just wanted to follow up on the strong bookings. This year can you call out or maybe maybe help quantify how much of that could have been or is international and as we think about sort of this growing set of international opportunities maybe not so much in 'twenty four but how much interim.

National growth could you see next year and into 'twenty, five and I guess more importantly, how crude how could that impact margins as I think about maybe international being slightly accretive to margins.

Kaivon Rumor: You've brought the target down for MS this year, which would suggest an easier base for comparison for next year. I think you've talked about arrow as being roughly flat, but as you look at your portfolio, is there opportunity for those margins to move up next year? And if so, which are the sectors and have the greatest opportunity for margin improvement? And which are the ones that perhaps face the greatest risk that margins would be flat to down?

Yes, Ken So you are pulling on all the right thread our bookings are up.

For the international portfolio this year and as we look into our future plans. We expect that that trend will continue it takes a little while to then materialize that into sales in a meaningful way. So we see a gradual shift in terms of the percentage of our <unk>.

Overall sales that will come from international we've talked about achieving a double digit growth rate.

Kaivon Rumor: Thank you. Yeah. Like the way you're thinking, it's exactly the challenge that me and the team are discussing amongst ourselves is to how we do drive margin improvement next year. And in the Q2 call, I laid out for our investors what that passes and the key factors associated with improvement. And let me just touch on each of those, and then I can tie it also to where the segments see the greatest opportunity for macroeconomic factors.

I would expect that not necessarily in 2024, but into 2025 because of the time. It takes to ramp sales on these awards and so you could also expect that any upward margin opportunity would also be more material starting in that 2025 timeframe in 2012.

Four but we are actively working those opportunities now so that they do materialize in that timeframe.

Kaivon Rumor: I've talked about those already on the call. We are seeing inflation be a bit stickier than we had hoped at this point in time. We are incorporating that into our forward estimates, but it is impacting our ability to return to higher levels of profitability faster. Productivity is another area where we are working to improve productivity, not just within our company, but our supply chain. That is opportunity. That would be upside to a flatish look next year, although as I also indicated, we are expecting some modest improvement in margin right next year.

That's helpful and is there any way to think about just with obviously a lot of what we hear in the geopolitical environment are you seeing that translate into sort of bid opportunities. When you think of international I'm, just trying to get a sense as to with all of the all of sort of this growing expectation how much youre actually seeing that yet.

Transpire or actually materialized in terms of real opportunity youre going after.

We are seeing it in signals of demand. So I mentioned on our last call that we have over 10 countries that have expected.

Kaivon Rumor: What then we look at is the mix, and that has been a factor for both the base and mission systems over the last couple of years, particularly notable for mission systems this year. We don't see a significant mix shift going into next year. It is a very gradual mix shift. And so those two pieces of the business will still feel some margin rate pressure until they can shift to more production in the portfolio.

Interest in our Ics product line today I noted another dozen or so that have expressed interest in Oregon.

We look forward, we do expect that that demand signal for many of those countries will translate into.

Contracts, but it takes time and that's why I was talking about seeing 2024 is a timeframe where it wouldn't be working to translate those demand signals into contracts, but 2025 being more of that timeframe, we expect them to materialize and I'd say the same is true with the domestic marketplace as we look to replenish.

Kaivon Rumor: As you note, our defense systems business has the most both top line and margin upside that could come as a result of growing international demand as well as what we see domestically, particularly through the supplemental. Those are uncertain at the moment, so we do factor those in our plan that that could be a source of upside, but then of course we are managing risk across the entire portfolio. And so when we put all of what together, we're looking at some modest rate improvement into next year and really driving to do better, but at this point in the year, we are very comfortable with what we've laid out as a set of expectations. Good answer. Thanks so much. Thank you.

Stockpile ore to work through the supplemental budget.

I would expect to be more material for us in 2025, but we're working now to ensure that were qualified to be a supplier.

On either second source or new missile program.

Great. Thank you Kathy.

Thank you one moment for our questions.

Our next question comes from Scott Shaw with Deutsche Bank You May proceed.

Hey, good morning.

Good morning.

Kathy and the emergency supplemental request from the White House. There was $2 6 billion included for classified Air Force procurement programs.

Do you have any sense for whether that could potentially help support your programs in the event that there is.

Ken Herbert: One moment for questions. Our next question comes from Ken Herbert with RBC Capital Markets.

An extended CR here or is that just entirely a black box as we might otherwise expect.

Ken Herbert: He may proceed. Yeah, hi, good morning. Hey, Kathy, maybe I just wanted to follow up on the strong bookings this year. Can you call out or maybe maybe help quantify how much of that could have been or is international. And as we think about sort of this growing set of international opportunities, you know, maybe not so much in in 24, but how much international growth could you see next year and into 25?

Yeah, there's really nothing I can comment on with regard to that Scott I will simply say, we do continue to work with the air force on ensuring that we have the resources necessary to make the B 21 program successful.

Fair enough and then Dave the updated margin guide on MFS implies something like a 15, 9% margin in the fourth quarter. Just curious if you could talk a little bit about the drivers there obviously, you've done above 16% before so assume something something like what we've seen historically, but just curious for any commentary on drivers. Thank you.

Ken Herbert: And I guess more importantly, how could that impact margins as I think about maybe international being slightly accretive to margins? Yeah, Ken. So you're pulling on all the right threads. Our bookings are up for the international portfolio this year. And as we look into our future plans, we expect that that trend will continue. It takes a little while to then materialize that into sales in a meaningful way. So we see a gradual shift in terms of the percentage of our overall sales that will come from international.

Couple of thoughts there one.

So a similar trend last year in our EMS business with its strongest margin performance in.

In the fourth quarter of the year driven by the mix of business that we tend to see spike in the fourth quarter with more predominance of mature fixed price programs in that fourth quarter sales mix, we anticipate a similar trend this year with that said.

We need to continue to perform and execute well and with efficiency across that portfolio to deliver on that result.

Ken Herbert: We've talked about achieving a double digit growth rate. I would expect that not necessarily in 2024, but into 2025, because of the time it takes to ramp sales on these awards. And so you could also expect that any upward margin opportunity would also be more material starting in that 2025 timeframe than 2024. But we are actively working those opportunities now so that they do materialize in that timeframe.

In the aggregate 2003.

Margin guidance change for EMS is really driven by mix a lot of the growth in EMS. This year has been in.

Critical work in the restricted portfolio that tends to be at this phase in its lifecycle cost type work there is opportunity for that work to shift back towards more fixed price overtime.

The fact that most of the growth in MMS. This year has been driven by growth and cost type contracts has been a pressure on its margin rate with that said.

Kathy Warden: That's helpful. And is there any way to think about just with obviously a lot of what we hear in the geopolitical environment? Are you seeing that yet translate into sort of bid opportunities when you think about international just trying to get a sense as to with all of the all of sort of this growing expectation, how much are actually seeing that yet? That transpire or actually materialize in terms of real opportunities you're going to, after.

It along with the rest of our businesses drove margin dollar growth year over year in Q3, and we anticipate the same trend in Q4.

Great. Thank you.

Thank you one moment for questions.

Our next question comes from Gavin Parsons with UBS you May proceed.

Kathy Warden: We are seeing it in signals of demand. So I mentioned on our last call that we have over 10 countries that have expressed interest in our IDCS product line today. I noted another dozen or so that have expressed interest in Argonne. As we look forward, we do expect that that demand signal for many of those countries will translate into contracts. But it takes time. And that's why I was talking about seeing 2024 as a timeframe where it would be working to translate those demand signals into contracts.

Thanks, Good morning.

Good morning.

Dave I was hoping you could go into just a little bit more detail on the section 174 change in what the offset is given it would seem like that has to be pretty sizable, especially if you get some recapture from 2022.

Sure happy to go into that.

I think the important takeaway here is that our cash tax forecast is in the aggregate largely unchanged.

It remains a tailwind for our free cash flow outlook over these next several years.

To your point 174, driven taxes have come down a bit in that outlook largely due to lower than projected.

Kathy Warden: But 2025, seeing more of the timeframe, we expect them to materialize. And I'd say the same is through with the domestic marketplace as we look to replenish US stockpile or do work through the supplemental budget that I would expect to be more material for us in 2025. But we're working now to ensure that we're qualified to be a supplier on either second source or new missile program.

Cost applicable to the 174 guidelines not a change in our interpretation of.

The latest guidelines.

To be clear there, we will continue to assess any future guidance that comes out on 174 and continue to apply.

Our best interpretation of that guidance too.

Our own.

Kathy Warden: Great. Thank you, Kathy. Thank you. One moment for questions.

Costs in the appropriate and applicable costs there.

With that said the issue that others in the industry have discussed around the difference between cost type and fixed price.

Scott Tushal: Our next question goes from Scott Tushal with Deutsche Bank. You may proceed. Hey, good morning. Good morning. Kathy, in the emergency supplemental request from the White House, there was 2.6 billion included for classified Air Force procurement programs. Do you have any sense for whether that could potentially help support your programs in the event that there's an extended CR here or is that just entirely a black box as we might otherwise expect?

<unk>.

R&D related expenditures is less impactful for us than it appears to be for some of our peers.

Particularly given the reduction in our 2022.

174, driven costs, so less of an impact based on our interpretation than for others. So with all of that said there are some puts and takes.

Cross a business of our scale.

With as many.

Scott Tushal: Yeah, there's really nothing I can comment on with regard to that Scott. I will simply say we do continue to work with the Air Force on ensuring that we have the resources necessary to make the B-21 program successful.

Open tax years, as we have and we've disclosed all this and some clarity on our 10-Qs every quarter.

There is a balance of upside and downside items that are largely driving an unchanged cash tax forecast.

Got it that's helpful. Kathy you mentioned stickier inflation any update on discussions with customers for relief on that front.

Dave Keffer: Okay, fair enough. And then Dave, the updated margin guide on MS implies something like a 15.9% margin on the fourth quarter. Just curious if you could talk a little bit about the drivers there. Obviously, you've done about 16% before. So since something, something like what we've seen historically, which is serious for any common turn on drivers. Thank you. Sure. A couple thoughts there. One, you saw a similar trend last year in our MS business with its strongest margin performance in the fourth quarter of the year driven by the mix of business that we tend to see spike in the fourth quarter with more predominance of mature fixed price programs in that fourth quarter sales mix.

Discussions continue and I think we're making good progress in having awareness of the issue and with Congress setting a precedent last year of having some funds available I'm hopeful that once again this year, we will see funds appropriated the gift the departments of flexibility.

In language and dollars to address these issues.

Thank you.

Thank you.

One moment for questions.

Dave Keffer: We anticipate a similar trend this year with that said, need to continue to perform and execute well and with efficiency across that MS portfolio to deliver on that result. In aggregate, the 23 margin guidance change for MS is really driven by mix. A lot of the growth in MS this year has been in critical work in the restricted portfolio that tends to be at this phase in its life cycle cost type work.

Our next question comes from Seth <unk> with Jpmorgan you May proceed.

Okay.

Thanks, very much and good morning.

Apologies to be deep.

Deep in the weeds on the taxes, but kind of what I got left here.

And so just wanted to ask you Dave.

Dave Keffer: There is opportunity for that work to shift back toward more fixed price over time. But the fact that most of the growth in MS this year has been driven by growth in cost type contracts has been a pressure on its margin rate. With that said, it along with the rest of our businesses drove margin dollar growth year over year in Q3 and we anticipate the same trend in Q4.

Just to understand that a little better and your interpretation of this if I look at what Lockheed paid and 174 payments last year. It was like 38, 39% of their IRA and you guys paid like 75% of your IRR. So you.

Dave Keffer: Great, thank you. Thank you.

It would seem like that's a very different interpretation and it would seem like there.

Operator: One moment for questions.

The guidance is consistent with the idea of that.

The idea that Iran is kind of the basis of.

That's subject to two.

Section 174, and so maybe if you can provide.

I know we spoke about this but just a little bit more color on what's what's different.

About about your business.

So I appreciate the question Seth I know.

Gavin Parsons: Our next question comes from Gavin Parsons with UBS. You may proceed. Thanks. Good morning. Dave, I was hoping you could go into just a little bit more detail on the section 174 change and what the offset is given. It would seem like that has to be pretty sizable, especially if you get some recapture from 2022. Sure, I'm happy to go into that. I think the important takeaway here is that our cash tax forecast is in the aggregate largely unchanged, in that it remains a tailwind for our pre-cash flow outlook over these next several years.

<unk> been a common line of discussion for us and it's an interesting topic.

I would say this probably isn't the time or the place for us to assess differences in our own interpretation of guidance from from peers, we're not familiar with the interpretations of our peers when it comes to our own view.

View of section 174, it is broader than Iran. And includes a portion of our contract driven.

R&D as well with that said as I mentioned, we will continue to assess potential future guidance.

You've been following on in clarifying guidance provided in September and we're open to two.

Gavin Parsons: To your point, 174 driven taxes have come down a bit in that outlook that's largely due to lower than projected costs applicable to the 174 guidelines, not a change in our interpretation of the latest guidelines. To be clear there, we will continue to assess any future guidance that comes out on 174 and continue to apply our best interpretation of that guidance to our own costs and the appropriate and applicable costs there.

Two different interpretations based on different guidance, we may get in the future, but importantly, as I mentioned our.

A difference in contract type interpretation is not nearly as impactful for us as.

As others have said it is for them and so I think in aggregate there should be less of a focus that interpretation difference should be less of a focus for the street going forward than it has been for us in the recent past.

And the important point to take away is that our cash tax forecast.

Gavin Parsons: With that said, the issue that others in the industry have discussed around a difference between cost type and fixed price R&D related expenditures is less impactful for us than it appears to be for some of our peers, particularly given the reduction in our 2022 174 driven costs. So less of an impact based on our interpretation than for others. So with all of that said, there are some puts and takes across a business of our scale with as many open tax years as we have and we disclose all this in some clarity in our 10Qs every quarter. There is a balance of upside and downside items that are largely driving an unchanged cash tax forecast.

Change in any meaningful way and remains a tailwind for us it's a small piece of the much more important puzzle that is.

Really strong free cash flow growth opportunity for us over these next five years, leading to a lot of optionality as it relates to capital deployment and I think that's the more important headlines.

Okay very good I'll stick to one thanks for indulging me and we will probably never have to speak of this again.

Understood. Thanks, Josh we have time for one more question.

Thank you.

And our final question comes from David Strauss with Barclays. You May proceed.

Great. Thanks, Thanks for squeezing me in.

Wanted to ask specifically on B 21, and your guidance for it sounds like 10% margins at at AOS next year are you, assuming Kathy any incremental inflation room deep on B 21 in that.

Kathy Warden: That's helpful. Kathy, you mentioned stickier inflation. Any update on discussions with customers for relief on that front? The discussions continue and I think we're making good progress in having awareness of the issue and with Congress setting a precedent last year of having some funds available. I'm hopeful that once again this year we will see funds appropriated to give the departments the flexibility both in language and dollars to address these issues. Thank you. One moment for questions.

So we look at the EAC and it has a number of factors incorporated into it our expectations performance our expectations for the contract terms and so all of that is factored in to then what goes into the expectations that I laid out for <unk>.

21, and as we've consistently said through the year, we are planning at a zero profitability that we have to perform and we are.

Seth Seifman: Our next question goes from Seth Seichman with JP Morgan. You may proceed. Thanks very much and good morning.

Working hard to ensure that that plan is what we achieved.

Dave Keffer: Apologies to be deep in the weeds on the taxes, but what I got left here now and so just wanted to ask you Dave just to understand that a little better and your interpretation of this. If I look at what Lockheed paid in 174 payments last year, it was like 38-39% of their IRAD and you guys paid like 75% of your IRAD. So it would seem like that's a very different interpretation and it would seem like the guidance is consistent with the idea that the idea that IRAD is kind of the basis of what's subject to section 174. And so maybe if you can provide, I know we spoke about this, but just a little bit more call it on what's different, about your business.

Okay.

I apologies, David I got a I got to go back to the section 174 Jets just to.

Just to level set us are you in your in your free cash flow forecast. This year are you still assuming $700 million.

<unk> from Central 174, and stepping down roughly 20% from there next year.

I appreciate the clarifying question, we have stepped down about 20% below our prior estimates for the impacts of.

The annual effect of section 174, and we've detailed that further in our 10-Q in terms of the <unk>.

Impacts on 2022, 2023 and beyond based on the numbers that we've calculated with the benefit of actual cost to apply as we.

We have formulated our 2022 tax returns so it's a bit lower than that as I mentioned thats offset by a couple of factors moving the other direction, which in aggregate leads to no change in our cash tax forecast for this year or the next couple of years. So no change to that element of the free cash flow guidance.

Dave Keffer: So I appreciate the question, Seth. I know it's been a common line of discussion for us and it's an interesting topic. I would say this probably isn't the time of the place for us to, you know, assess differences in our own interpretation of guidance from peers. We're not familiar with the interpretations of our peers. When it comes to our own view of section 174, it is broader than I rad and includes a portion of our contract-driven R&D as well.

Okay. That's very helpful. I appreciate that.

Thanks, David So quickly before concluding the call I just want to take a moment to acknowledge our team and thank them for their contributions to our company and our customers and in particular I want to thank our general Counsel Sheila Justin.

Dave Keffer: With that said, as I mentioned, we'll continue to assess potential future guidance, even following on and clarifying guidance provided in September. And we're open to different interpretations based on different guidance we may get in the future. But importantly, as I mentioned, a difference in contract type interpretation is not nearly as impactful for us as others have said it is for them. And so I think in aggregate, this should be less of a focus.

Is retiring after 13 years with the company Sheila has been instrumental in instilling a culture of strong ethics and she has provided outstanding counsel for the company and been a trusted partner to the board and me and the leadership team.

Kathy Simpson as our new General Counsel. She is also a valued member of our team spend with us for many years and she brings a wealth of broad based legal and strategic expertise to the role. So we're thrilled to have her and I also want to congratulate Ron Fleming, our new space system sector precedent and thank Tom Wilson for his leadership in guiding the space business for the last several.

Dave Keffer: That interpretation difference should be less of a focus for the street going forward than it has been for us in the recent past. And the important point to take away is that our cash tax forecast hasn't changed in any meaningful way and remains a tailwind for us. It's a small piece of the much more important puzzle that is really strong, free cash flow growth opportunity for us over these next five years, leading to a lot of optionality as it relates to capital deployment. And I think that's the more important headline.

Years during a period of just tremendous growth Tom is now taking a new role with the company. He is going to help us expand our business development capabilities across the entire enterprise and Rob has extensive experience running complex businesses. During his 18 years with our company.

Notably and recently led the strategic space Systems Division, which is the largest segment of our space sector and I think what you see from our team is that the depth and strength of our team allows us to make these internal transition very smoothly I'm looking forward to working with them and then meeting you.

Seth Seifman: Okay, very good. I'll stick to one. Thanks for indulging me and we'll probably never have to speak of this again. Thank you.

<unk> in future.

David Strauss: And our final question comes from David Strauss with Barclays. You may proceed. Great. Thanks. Thanks for squeezing me in. Wanted to ask specifically on on B21 and your guidance for template comes from margins at AS next year. Are you assuming happy any incremental inflation rule if I'm B21 in that? So we look at the EAC and it has a number of factors incorporated into at our expectations performance, our expectations for the contract terms.

Years. So thank you for joining the call today, and we look forward to speaking with you again on our fourth quarter call in January.

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

Okay.

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David Strauss: And so all of that is factored into then what goes into the expectations that I laid out for B21. And as we've consistently said through the year, we are planning at a zero profitability, but we have to perform and we are working hard to ensure that that plan is what we achieve. Okay.

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Dave Keffer: And Paul, David, I got to I got to go back to section 174 just just to just to level set us. Are you in your in your forecast for forecast this year? Are you still assuming $700 million or impact from section 174 and stepping down roughly 20% from there next year? I appreciate the clarifying question. We have stepped down about 20% below our prior estimates for the impacts of the annual effect of section 174 and we detailed that further in our 10 queue in terms of the impacts on 2022, 2023 and beyond based on the numbers that we've calculated with the benefit of actual cost to apply as we have formulated our 2022 tax returns.

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Dave Keffer: So it's a bit lower than that. As I mentioned, that's offset by a couple of factors moving the other direction, which an aggregate leads to no change in our cash tax forecast for this year or the next couple of years. Thank you. Okay, that's very helpful. Appreciate that. Thanks, David.

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Kathy Warden: So quickly before concluding the call, I just want to take a moment to acknowledge our team and thank them for their contributions to our company and our customers. And in particular, I want to thank our general counsel, Sheila Chaston, who is retiring after 13 years with a company. Sheila has been instrumental in instilling a culture of strong ethics and she has provided outstanding counsel for the company and been a trusted partner to the board and to me and the leadership team.

Okay.

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Kathy Warden: Kathy Simpson is our new general counsel. She is also a valued member of our team and spend with us for many years and she brings a wealth of broad-based legal and strategic expertise to the role so we're thrilled to have her. And I also want to congratulate Rob Slimming, our new space system sector president and thank Tom Wilson for his leadership in guiding the space business for the last several years during a period of just tremendous growth.

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Kathy Warden: Tom is now taking a new role with the company. He's going to help us expand our business development capabilities across the entire enterprise. And Rob has extensive experience running complex businesses during his 18 years with our company, most notably and recently led the strategic space systems division, which is the largest segment of our space sector. And I think what you see from our team is that the depth and strength of our team allows us to make these internal transitions very smoothly. I'm looking forward to working with them and them meeting you in future years.

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Operator: So thank you for joining the call today and we look forward to speaking with you again on our fourth quarter call in January. Thank you.

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Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. [inaudible] . .

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Kathy Warden: [inaudible] Strauss, David Strauss, David Strauss,[inaudible] Strauss, David Strauss, David Strauss,[inaudible] David Strauss, David Strauss, David Strauss,[inaudible] David Strauss, David Strauss, David Strauss, David Strauss Before we start, matters discussed on today's call, including guidance and outlooks for 2023 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute four-looking statements pursuant to safe harbor provisions of federal securities laws, four-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC violence. These risks and uncertainties may cause actual company results to different materials. Today's call will include non-gap financial measures that are reconciled to our gap results in our earnings release.

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Good day, ladies and gentlemen, and welcome to Northrop Grumman's third quarter Conference call. Today's call is being recorded my name is Josh and I will be your operator today at this time all participants are in.

In a listen only mode I would now like to turn the call over to your host Mr. Todd Ernst Vice President Investor Relations. Mr. Ernst. Please proceed.

Thanks, Josh and good morning, everyone and welcome to Northrop Grumman's third quarter 2023 conference call on the call. This morning, we will refer to a presentation that is posted on our IR website before we start matters discussed on today's call, including guidance and outlooks for 2023 and beyond reflect the company's judgment based on information available.

The time of this call may constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities laws forward looking statements involve risks and uncertainties, including those 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 at this time I would like to turn the call over to Kathy Kathy Thanks Todd.

Morning, everyone. Thank you for joining us.

We are all witnessing significant geopolitical tension across the globe, including the ongoing war in Ukraine, and the horrific attacks in Israel, we truly hope that peace and safety can be established for the people in these regions and we will continue and are steadfast support for the U S and our allies in there.

Pursuit of global security and stability.

On this morning's call. In addition to reviewing our third quarter results and important program events in the quarter I'll address the U S budget and trends, we see in the global environment and.

As usual at this time of year I will provide our initial outlook for next year.

So starting with the quarter our book to Bill was one five times with approximately $15 billion in award and our sales increased 9% year over year with growth across all four of our business segments.

Our backlog now stands at $84 billion, if a new record and it strengthens the foundation for our future growth.

It also continues to reflect the alignment we have with our customers' priorities and the continued success of our business strategy.

Segment operating income increased by 8% year over year, and the OEM rate increased over last quarter.

Earnings per share were $6 18.

Up 5% compared to last year.

Strong earnings drove nearly $900 million in free cash flow in the quarter and we remain on track to achieve our 2023 free cash flow target.

Excellent cash generation continues to provide us the flexibility to invest in our capabilities and capacity, while returning capital to shareholders.

We remain committed to returning over 100% of our free cash flow to investors this year, including $1 5 billion of share repurchases and year to date, we have returned approximately $2 billion to shareholders in dividends and repurchases.

So turning now to the U S defense budget.

As is common in recent years the federal government is operating under a continuing resolution to start fiscal year 2024.

We are encouraged by bipartisan support for National Security priorities and are hopeful an agreement will be reached on full year appropriations soon.

Our guidance and outlook assume a full year budget is passed by the end of this calendar year or early next year.

And as we saw last week. The administration continues to make supplemental request for urgent need including those in Ukraine and Israel to include investments in weapons systems and defense industrial base readiness.

The federal government is also developing at the budget plan for fiscal year, 2025, which we expect will be submitted to Congress early next year.

We are working closely with our customers to plan for future capabilities and navigate the fiscal pressures safety to ensure our programs remain well supported.

As we have been discussing throughout the year. We are also seeing an increase in international demand for our capabilities and we've seen a particular increase in our weapons systems portfolio as missile defense technologies like Vib's CF product line.

One. Notable example of this growing demand is with <unk>, where we've now received interest for more than a dozen countries and just this week the opportunity for a foreign military sale to someone with Enel.

Kathy Warden: On the call today are Kathy Warden, our Chair, CEO and President, and Dave Keffer, our CFO.

We are also working with the U S government to provide new advanced weapons capabilities.

Kathy Warden: At this time I'd like to turn the call over to Kathy. Kathy? Thanks, Todd. Good morning everyone. Thank you for joining us. We are all witnessing significant geopolitical tensions across the globe, including the ongoing war in Ukraine and the horrific attacks in Israel. We truly hope that peace and safety can be established for the people in these regions and we'll continue and our steadfast support for the US and our allies in their pursuit of global security and stability.

During the second quarter, we received a $705 million contract from the United States Air Force to develop a stand and attack weapon also known as saw an air to ground weapon with the capability to strike mobile defense targets.

Our store offering builds on the capabilities, we provide with our high speed argument, though.

Which is in production.

Building off of mature products baseline were able to reduce the developmental time cost and risk to the salt program.

Kathy Warden: On this morning's call in addition to reviewing our third quarter results and important program events in the quarter, I'll address the US budget and trends we see in the global environment. And as usual at this time of year, I'll provide our initial outlook for next year. So starting with a quarter, our book to bill was one and a half times with approximately $15 billion in awards and our sales increased 9% year-over-year with growth across all four of our business segments.

These methods are expected to be the air to ground weapon of choice for the F 35, and other fighters.

And our space business, we remain focused on being at the forefront of technology and that strategy has enabled us to build a differentiated portfolio that provides end to end solutions for our customers from new space architectures to launch capability.

We see broad applications for the technology, we've developed with a particular focus on national security missions.

Kathy Warden: Our backlog now stands at $84 billion. It's a new record and it strengthens the foundation for our future growth. It also continues to reflect the alignment we have with our customers priorities and the continued success of our business strategy. Segment operating income increased by 8% year-over-year and the OM rate increased over last quarter. Earnings per share were $6.18 up 5% compared to last year. Strong earnings drove nearly $900 million in free cash flow in the quarter and we remain on track to achieve our 2023 free cash flow target.

This includes helping to turn the space development agencies vision of a new low earth orbit constellation of satellites into reality.

In August we were awarded a $712 million contract to design and build 36 satellite for SBA tranche to transport layer data constellation.

With this award along with our work on Fda's tracking layer in tranche one of the transport layer. We are now building nearly 100 satellites for the proliferated, where hydro space architecture.

Our success in this area highlight our ability to compete and win and highly competitive and dynamic new markets within the space domain.

Kathy Warden: Excellent cash generation continues to provide us the flexibility to invest in our capabilities and capacity while returning capital to shareholders. We remain committed to returning over 100% of our free cash flow to investors this year, including one and a half billion dollars of share repurchases. And year to date, we've returned approximately two billion to share holders indivitant and repurchases.

In addition, we had two notable launch events in the quarter, we successfully launched our 19th resupply mission to the international space station as we continue to execute under NASA commercial resupply contract and.

Five of our 763 solid rocket boosters helped to power <unk> outlets five launch of a national security payloads.

Kathy Warden: The turning now to the US defense budget. As is common in recent years, the federal government is operating under a continuing resolution to start fiscal year 2024. We're encouraged by bipartisan support for national security priorities and are hopeful and agreement will be reached on full year appropriation soon. Our guidance and outlook assume a full year budget is passed by the end of this calendar year or early next year. And as we saw last week, the administration continues to make supplemental requests for urgent needs, including those in Ukraine and Israel to include investments in weapon systems and defense industrial based readiness.

These rocket Motors will continue to support future you at late launches during Q clued ULE as Bakken rocket.

For next generation Interceptor, we successfully manufactured the first set of solid rocket motor cases in August and we're on track for a preliminary design review in the fourth quarter more than a year earlier than the original contract date.

These are just a few examples of the focus we have on strong program performance across the portfolio.

Now before I turn the call over to Dave to provide more details on the quarter I'd like to provide some initial color on our 2020 for outlook.

We continue to see solid growth across all four of our businesses with sales growth of approximately 4% to 5% compared to our latest 2023 guidance, which we've now raised by $800 million throughout the year.

Kathy Warden: The federal government is also developing its budget plan for fiscal year 2025, which we expect to be submitted to Congress early next year. We are working closely with our customers to plan for future capabilities and navigate the fiscal pressures they see to ensure our programs remain well supported. As we have been discussing throughout the year, we are also seeing an increase in international demand for our capabilities. We've seen a particular increase in our weapons system portfolio and missile defense technologies like the IBCS product line.

We also expect operating income to grow by 4% to 5% year over year.

We reaffirm our free cash flow outlook range of $2, two five to $2 $65 billion in 2024, which accounts for continued investment in the capabilities and capacity needed to grow our business and support our customers.

So in summary, north of permanent is well positioned to drive value creation for our customers and our shareholders. We are focused on executing our strategy driving operating performance and generating cash for our disciplined capital deployment.

Kathy Warden: We are also working with the U.S, government to provide new advanced weapons capabilities. During the second quarter, we received a $705 million contract from the United States Air Force to develop the stand-in attack weapon, also known as SAW, an air-to-ground weapon with a capability to strike mobile defense targets. Our SAW offering builds on the capabilities we provide with our high-speed argon missile, which is in production. Building off a mature product baseline, we're able to reduce the developmental time, cost, and risk to the SAW program.

Now with that I'll turn it over to Dave to provide some more details on the segment results 2023 guidance and our outlook.

Thanks, Kathy and good morning, everyone. As Cathie described we generated another strong quarter of results. The business is well positioned in growing segments of the market and we're delivering key capabilities that address our customers' missions.

As macroeconomic conditions improve and pension and tax cash flow headwinds reverse over the next few years, we have a great opportunity to create value for shareholders through substantial cash flow growth.

Kathy Warden: These missiles are expected to be the air-to-ground weapon of choice for the F-35 and other fighters. In our space business, we remain focused on being at the forefront of technology, and that strategy has enabled us to build a differentiated portfolio that provides end-to-end solutions for our customers, from new space architectures to launch capabilities. We see broad applications for the technologies we've developed, with a particular focus on national security missions. This includes helping to turn the space development agencies' vision of a new, low-earth orbit constellation of satellites into reality.

Consistent with our long term strategy.

Taking a look at our demand metrics, we ended the third quarter with a record backlog of 84 billion.

Bolstered by several new competitive awards.

And as a result, we now expect our full year book to bill ratio to be well over one times.

Turning to the top line, we continued to build on our momentum from the first half of the year.

With overall sales growth of 9% in the third quarter.

This includes growth in all four of our segments for the second straight quarter as our teams continue to ramp up new wins at new talent and manage through continued pressures in the supply chain.

Kathy Warden: In August, we were awarded a $712 million contract to design and build 36 satellites for SDA's Tranche 2 Transport Layer data constellation. With this award, along with our work on SDA's tracking layer and Tranche 1 of the Transport Layer, we are now building nearly 100 satellites for the proliferated warfighter space architecture. Our success in this area highlight our ability to compete and win in highly competitive and dynamic new markets within the space domain.

At the segment level Aeronautics posted sales growth of 9% driven by higher volume on manned aircraft programs.

<unk> grew by 6% on continued strength in their missile defense and armaments portfolios, including <unk> <unk> and <unk>.

Mission systems continued to generate rapid growth of restricted sales in the networked information solutions business driving their top line up 7%.

In space again delivered double digit sales growth as a result of the continued ramp on programs like GBS D N Gi <unk> and several in the restricted domain.

Kathy Warden: In addition, we had two notable launch events in the quarter. We successfully launched our 19th resupply mission to the International Space Station as we continue to execute under NASA's commercial resupply contract. And five of our Gem 63 solid rocket boosters helped to power ULA's Atlas V launch of a national security payload. These rocket motors will continue to support future ULA launches to include ULA's Valken rocket. For next generation interceptor, we successfully manufactured the first set of solid rocket motor cases in August, and were on track for our preliminary design review in the fourth quarter, more than a year earlier than the original contract date. These are just a few examples of the focus we have on strong program performance across the portfolio.

Moving to segment margins. We're pleased with these bottom line results in a dynamic environment in total segment operating income grew by 8% compared to the third quarter of last year.

As we expected we delivered an incremental improvement in our segment Om rate from earlier quarters. This year.

Spanning to 11, 1% in Q3.

Program performance remained strong across the portfolio.

Our aeronautics and defense businesses generated a healthy volume a favorable EAC adjustments through efficient execution and risk retirements.

Margins were down slightly as mix shifted to more cost type development efforts, particularly in their restricted portfolio.

Kathy Warden: Now, before I turn the call over today to provide more details on the quarter, I'd like to provide some initial color on our 2024 outlook. We continue to see solid growth across all four of our businesses, with sales growth of approximately 4-5% compared to our latest 2023 guidance, which we've now raised by $800 million throughout the year. We also expect operating income to grow by 4-5% year over year. We reaffirm our free cash flow outlook range of $2.25 to $2.65 billion in 2024, which accounts for continued investment in the capabilities and capacity needed to grow our business and support our customers. So in summary, Northrop Grumman is well positioned to drive value creation for our customers and our shareholders. We are focused on executing our strategy, driving operating performance, and generating cash for our discipline capital deployment.

In that space given the rapid backlog growth, we have experienced strong execution and program performance our top priorities space.

<unk> margins improved by 80 basis points this quarter compared to Q2.

Diluted EPS in the third quarter were $6 18.

Up 5% from the prior year.

Increase was driven by higher sales and segment performance, along with a lower share count.

We also recognized a gain from the sale of an Australian minority investment in Q3 that we described on prior calls and included in our guidance.

Partially offsetting these items was lower net pension income of roughly $1 per share and.

Non operational impact consistent with the first two quarters.

Q3 was a strong period for cash generation with free cash flow of nearly $900 million.

On a year to date basis. This brings us to nearly $500 million of free cash flow well ahead of where we were at this time last year.

Dave Keffer: So now with that, I'll turn it over to Dave to provide some more details on the segment result 2023 guidance and our outlook. Thanks, Kathy. Good morning, everyone. As Kathy described, we generated another strong quarter of results. The business is well positioned and growing segments of the market, and we're delivering key capabilities that address our customers missions as macroeconomic conditions improve and pension and tax cash flow headwinds reverse over the next few years.

We continue to remain disciplined in managing our working capital and we saw improvements in these accounts across the company in Q3.

With respect to cash taxes.

Erez recently provided additional guidance on the amortization of research and development expenditures under section 174 of the tax code.

This guidance did not change our interpretation of the provision.

But upon finalizing our 2022 tax returns we lowered our estimates for section 170 forecast taxes based on applicable R&D costs that were below our original estimates.

Dave Keffer: We have a great opportunity to create value for shareholders through substantial cash flow growth consistent with our long term strategy. Taking a look at our demand metrics, we ended the third quarter with a record backlog of $84 billion, bolstered by several new competitive awards. And as a result, we now expect our full year book to bill ratio to be well over one times. Turning to the top line, we continued to build on our momentum from the first half of the year with overall sales growth of 9% in the third quarter.

Offsetting the lower 174 taxes, there is an increase in other tax items. The net result of which is a multiyear cash tax forecast that is roughly unchanged.

Moving.

<unk> 2023 guidance I'll begin with a few updates to our segment estimates as shown on slide seven in our earnings deck.

Based on the strength of our year to date results. We now expect modestly higher sales at our aeronautics business in the mid to high $10 billion range.

Dave Keffer: This includes growth in all four of our segments for the second straight quarter, as our teams continue to ramp up new wins, add new talent and manage through continued pressures in the supply chain. At the segment level, aeronautics posted sales growth of 9% driven by higher volume on manned aircraft programs. DS grew by 6% on continued strength in their missile defense and armament portfolios, including IBCS, GM LRS, and HACM. Mission systems continued to generate rapid growth of restricted sales and the networked information solutions business driving their top line up 7%.

This represents a return to growth this year at the.

A year earlier than expected.

Continues to assume that we will be awarded the first <unk> on the B 21 program in the fourth quarter after first flight.

As the Air Force said in September at the RSA Conference, we are progressing through ground testing and we're on track to enter flight testing this year in line with the program baseline schedule.

And we are again, increasing our top line expectations for our space segment based on new wins and continued strength in this business.

We now expect 2023 sales of approximately $14 billion.

Dave Keffer: And space again delivered double digit sales growth as a result of the continued ramp on programs like GBSD, NGI, OPIR, and several in the restricted domain. Moving to segment margins, we're pleased with these bottom line results in a dynamic environment in total segment operating income grew by 8% compared to the third quarter of last year. As we expected, we delivered an incremental improvement in our segment OM rate from earlier quarters this year, expanding to 11.1% in Q3.

Which represents year over year sales growth of 14%.

For operating margin rate, we're projecting a slightly lower operating margin rate at MFS to reflect our year to date trend line other segments are unchanged.

At the enterprise level, we're increasing our sales guidance by another $400 million and now expect 2023 sales of approximately $39 billion.

This represents year over year growth of roughly six 5%.

We are maintaining our guidance for segment operating income.

Dave Keffer: Program performance remained strong across the portfolio. Our aeronautics and defense businesses generated a healthy volume of favorable EAC adjustments through efficient execution and risk retirement. Williams, MS margins were down slightly as mix shifted to more cost-type development efforts, particularly in their restricted portfolio. In that space, given the rapid backlog growth we've experienced, strong execution and program performance are our top priorities. Space margins improved by 80 basis points this quarter compared to Q2.

Year to date trends would indicate a figure towards the lower half of that range.

And we are reaffirming our estimates for EPS and free cash flow.

Next I'll build on Kathy's comments on our 2020 for outlook.

Sales growth has accelerated sooner than we expected in 2023, and we continue to project growth at all four of our business segments next year.

We expect segment margins in the low 11% range.

And we continue to project improvement overtime as.

As we see benefits from the stabilizing macro environment, our cost efficiency initiatives and our business mix improvements.

Dave Keffer: The Looted EPS in the third quarter were $6.18, up 5% from the prior year. The increase was driven by higher sales and segment performance along with a lower share count. We also recognized again from the sale of an Australian minority investment in Q3 that we described on prior calls and included in our guidance. Partially offsetting these items was lower net pension income of roughly $1 per share, a non-operational impact consistent with the first two quarters.

We continue to anticipate capex to be roughly consistent as a percentage of sales in 2024 before declining in 2025 and beyond.

Shareholder returns will remain a top priority for our free cash flow deployment, including returning at least 100% of free cash flow to shareholders next year.

Given the volatility in the financial markets I'd also like to provide a quick update on our pension plans.

Dave Keffer: Q3 was a strong period for cash generation, with free cash flow of nearly $900 million. On a year-to-date basis, this brings us to nearly $500 million of free cash flow, well ahead of where we were at this time last year. We continue to remain disciplined in managing our working capital, and we saw improvements in these accounts across the company in Q3. With respect to cash taxes, the IRS recently provided additional guidance on the amortization of research and development expenditures under Section 174 of the tax code.

Our funded status is now above 100% as of the end of Q3.

And we continue to expect minimal required cash contributions over the next several years.

This is a discriminator for us that supports our affordability and competitiveness as well as our capital deployment Optionality.

Given that our GAAP earnings per share are affected by net pension income.

Dave Keffer: This guidance did not change our interpretation of the provision, but upon finalizing our 2022 tax returns, we lowered our estimates for Section 174 cash taxes based on applicable R&D costs that were below our original estimates. Offsetting the lower 174 taxes is an increase in other tax items, the net result of which is a multi-year cash tax forecast that is roughly unchanged.

As we did last year, we have provided a pension income sensitivity table for 2024 on slide nine.

Our forecast in early 2023 was predicated on asset returns of seven 5% and a discount rate of roughly five 5%.

Through September 30 financial market movements have led to a roughly 50 basis point increase in discount rates and a year to date asset returns of 1% to 2%.

This combination of results would reduce net <unk> pension income and increased Cas recoveries from our prior projections.

Dave Keffer: Moving to 2023 guidance, I'll begin with a few updates to our segment estimates, as shown on Slide 7 in our earnings deck. First, based on the strength of our year-to-date results, we now expect modestly higher sales in our aeronautics business in the mid-to-high $10 billion range. This represents a return to growth this year at AS, a year earlier than expected, and continues to assume that we will be awarded the first LRIP lot on the B-21 program in the fourth quarter after first flight.

Based on the sensitivities highlighted on this slide the net result would be an impact to 2020 for GAAP EPS of roughly <unk> 50.

Compared to our initial outlook provided in January.

Keep in mind that Fas pension income is noncash in nature.

Higher Kaz estimates would provide a modest benefit to our cash flows but could have a modest downward impact on <unk> in the quarter in which they are updated consistent with this year's pattern.

Speaking of cash flow, we continue to see a path to grow our cash flows at a greater than 20% CAGR next year and through 2025 with further expansion in the following years.

Dave Keffer: As the Air Force said in September at the AFAA conference, we are progressing through ground testing and we're on track to enter flight testing this year in line with the program baseline schedule. And we are again increasing our top line expectations for our space segment based on new wins and continued strength in this business. We now expect 2023 sales of approximately $14 billion, which represents year-over-year sales growth of 14%. For operating margin rate, we're projecting a slightly lower operating margin rate at MS to reflect their year-to-date trend line.

As is our practice, we will provide our latest multi year outlook for free cash flows on the January earnings call. We remain confident in the long term value creation opportunity from free cash flow expansion and disciplined capital deployment through the rest of the decade.

With that let's open the call up for questions.

Thank you.

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

Dave Keffer: Other segments are unchanged. At the enterprise level, we're increasing our sales guidance by another $400 million, and now expect 2023 sales of approximately $39 billion. Sanders. This represents your over-year growth of roughly 6.5%. We are maintaining our guidance for segment operating income. Year-to-date trends would indicate a figure toward the lower half of that range. And we're reaffirming our estimates for EPS and free cash flow.

Again, plus press star one to ask a question as a reminder, please limit yourself to one question and one follow up one moment for our questions.

Okay.

Yes.

Our first question comes from Douglas <unk> with Bernstein you May proceed.

Good morning, Thank you.

Sure.

Yes.

And then the aeronautics you're raising your topline guidance, Dave you talked about this.

Dave Keffer: Next, I'll build on Kathy's comments on our 2024 outlook. Sales growth has accelerated sooner than we expected in 2023. And we continue to project growth at all four of our business segments next year. We expect segment margins in the low 11% range. And we continue to project improvement over time, as we see benefits from the stabilizing macro environment, our cost efficiency initiatives, and our business mix improvements. We continue to anticipate capex to be roughly consistent as a percentage of sales in 2024 before declining in 2025 and beyond.

We've talked about this subject many times.

With the valley that you had.

Kind of forecast for revenues this year.

Legacy programs decline.

But.

Things are getting better so.

What are what are the puts and takes here that appear to be starting you on a growth path going forward.

Good morning, given the mix do you still see aeronautics is able to maintain.

10% margins in the coming years.

Thanks, Doug.

So the puts and takes that we've been talking about has materialized as we expected. The biggest factor was the programs that were declining are largely through our year over year compares now those include global Hawk witches, and Sustainment, Triton, which is still in production, but as we look forward that ray.

Dave Keffer: And shareholder returns will remain a top priority for our free cash flow deployment, including returning at least 100% of free cash flow to shareholders next year. Given the volatility in the financial markets, I'd also like to provide a quick update on our above 100% as of the end of Q3. And we continue to expect minimal required cash contributions over the next several years. This is a discriminator for us that supports our affordability and competitiveness, as well as our capital deployment optionality.

<unk> is fairly stable and so.

Is not contributing to significant grow what is contributing to growth as the 'twenty, one and we expected that ramp to start.

This year and continue and we still anticipate that and then other stabilizing factors with the F 35, <unk> large program that have generally remained constant.

As we look forward, we see that same profile in those program categories and that will contribute to growth.

Dave Keffer: Given that our gap earnings per share are affected by net pension income, as we did last year, we have provided a pension income sensitivity table for 2024 on slide 9. Our forecast in early 2023 was predicated on asset returns of 7.5% and a discount rate of roughly 5.5%. Through September 30, financial market movements have led to a roughly 50 basis point increase in discount rates and a year-to-date asset return of 1 to 2%.

We do expect that margin rates will be near that 10% Mark that we've been talking about and we've gone through again, those major categories of the portfolio and how they contribute.

Mature production is about 60% of the portfolio and that tends to have.

Above 10% margins, whereas the B 21 has contributed to lower margins and will as we move into production contribute zero on the production. That's our planning assumption of course, and so it's the mix of that entire portfolio that brings us to that approximately 10%.

Dave Keffer: This combination of results would reduce net phas pension income and increase cash recoveries from our prior projections. Based on the sensitivities highlighted on the slide, the net result would be an impact to 2024 gap EPS of roughly 50 cents compared to our initial outlook provided in January. Keep in mind that phas pension income is non-cash in nature. Higher CAS estimates would provide a modest benefit to our cash flows, but could have a modest downward impact on EACs in the quarter in which they are updated, consistent with this year's pattern. Speaking of cash flow, we continue to see a path to grow our cash flows at a greater than 20% cager next year and through 2025 with further expansion in the following years.

Spectation for the near to mid term.

And then when you look forward into 2024.

I know in the guidance today, you said, 4% to 5%.

<unk> sales, 4% to 5% increase.

And operating income.

That implies really no no margin expansion overall in 2024 can you talk about that and just how youre thinking about margin progression going forward.

Absolutely so.

At this point in the year as is normal we wanted to provide an outlook. There are broad ranges. So the 4% to 5% both for sales and operating margin.

Dave Keffer: As is our practice, we'll provide our latest multi-year outlook for free cash flows on the January earnings call. We remain confident in the long-term value creation opportunity from free cash flow expansion and disciplines capital deployment through the rest of the decade, with that.

Give us an opportunity to do further planning and characterizing of the budget as that becomes more clear and we will provide more precise guidance in January what I would say is that we are still on track for the trends that we have spoke of in operating margin.

Operator: Let's open the call up for questions. Thank you.

Douglas Harned: Ladies and gentlemen, if you wish to ask a question please press star followed by one one on your touch tone telephone. Again, press press star one one to ask a question. As a reminder, please limit yourself to one question and one follow up one moment for questions.

The improvement is that it's reflected in our guidance for 2023 in the fourth quarter.

Again sequential improvement over Q3 performance.

We expect as we move into next year. There are continued opportunities for improvement in operating margin. They are related to macroeconomic trends largely inflation labor costs productivity and so we'd like to get a little bit more time under our belt before we get concrete about what that improve.

Ronald Epstein: Our first question comes from Douglas Harned with Bernstein, you may proceed. Good morning, thank you. In aeronautics, you're raising your top line guidance, Davey talked about this. I mean, Kathy, we've talked about this subject many times with the valley that you had kind of forecasted. We've asked for revenues this year as legacy programs decline, but things are getting better. So what are one of the puts and takes here that appear to be starting you on a growth path going forward.

<unk> might look like so we are expecting some modest margin rate improvement into next year.

Have outlined for Q4 of this year I also just wanted to point to the fact that the free cash we will have growth is the real.

For our investors.

Understand while earnings growth will be there. We also have headwinds that have historically in the last couple of years challenged us on free cash flow that are dissipating, we've talked about and I'm sure. We'll talk more on today's call about section 174, which is decreasing headwind over time.

Ronald Epstein: Given the mix, you still see aeronautics is able to maintain 10% margins in the coming years. Thanks, Doug. So the puts and takes that we've been talking about have materialized as we expected. The biggest factor was the programs that were declining are largely through our year over year compares now, those include global hawk, which is in sustainment, frightened, which is still in production, but as we look forward that rate is fairly stable.

Also see the pension headwind curtailing and then of course as we reduced our capex spend.

Starting in 2025, even more robust free cash flow growth, but looking at 20% year over year free cash flow growth is really an important milestone for us and something we're very focused on delivering.

Okay very good thank you.

Ronald Epstein: And so it is not contributing to significant growth. What is contributing to growth is the 21 and we expected that ramp to start this year and continue and we still anticipate that. And then other stabilized factors with the up 35 the E2D large program that have generally remained constant. As we look forward, we see that same profile in those program categories and that will contribute to growth at as we do expect that margin rates will be near that 10% mark that we've been talking about.

You.

Thank you one moment for questions.

Yes.

Our next question comes from Ronald Epstein with Bank of America, You May proceed.

Hey, good morning, good morning.

But across the industry theres been a lot of discussion about that.

From supply chain.

Capacity constraints labor constraints.

One thing Thats popped up in a lot of discussions is just the availability of solid rocket motors for missiles, and so on and so forth.

Just broadly Katherine how is northrop handling.

Ronald Epstein: And we've gone through, again, those major categories of the portfolio and how they contribute our mature production is about 60% of the portfolio and that tends to have above 10% margins, whereas the 21 has contributed lower margins and will as we move into production, contribute zero on the production that their planning assumption, of course. And so it's the mix of that entire portfolio that brings us to that approximately 10% expectation for the near to midterm.

Youre getting a surge in demand at a time, where.

Kind of post Covid and all of that mean, Labor's been tough and supply chains are tough I mean, how's it going.

With north of doing the handle that.

Ron We got ahead of seeing the demand not quite to the degree that the demand has increased in the last 18 months that we had forecasted an increase in demand, particularly in our solid rocket motor business, but broadly as we've been ramping up for production of satellite aircrafts and mission system.

Capability across the board, it's why our Capex has been elevated and so first and foremost we did what's necessary and that is investing in our workforce and our facilities to be able to support that demand and that's what's allowing us to support both our direct customers and primes, who are now coming to us asking for that capability.

Ronald Epstein: And then when you look forward in 2024, you know, I know in the guidance today, you said 4 to 5% increase in sales, 4 to 5% increase in operating income. I mean, that implies really no margin expansion overall in 2024. Can you talk about that and just how you're thinking about margin progression going forward? Absolutely. So at this point in the year, as is normal, we wanted to provide an outlook. There are broad ranges, so the four to five percent both for sales and operating margin.

Ability, we are going to continue to do that and that's why we still have some robust capex plans in place for 2024 reflected in the outlook. We provided we are seeing labor.

Back to pre pandemic levels in terms of our ability to hire retain.

Certainly inflation is causing more labor rate escalation than we saw pre pandemic, but we are able to get the workers that we need our focus now is on productivity and there too we have invested in training we've invested in standard work instructions.

Ronald Epstein: It gives us an opportunity to do further planning and characterizing of the budget as that becomes more clear and will provide more precise guidance in January. What I would say is that we are still on track for the trends that we have spoken of in operating margin. We see improvements, and that it's reflected in our guidance for 2023 in the fourth quarter, again sequential improvement over to three performance. And we expect as we move into next year, there are continued opportunities for improvement in operating margin.

In digital technology, all of which are enabling productivity in our workforce that has been a little slower to materialize with our supply chain and so we are spending a lot of Northrop Grumman resource with our supplier co located with them and helping them to improve productivity as well and once lever.

Remove that bottleneck I think as an industry be able to no longer have capacity, our constraining factor, but with that said and now we're looking at our supplemental and growing international demand all of which.

Ronald Epstein: They are related to macroeconomic trends, largely inflation, labor cost, productivity. And so we'd like to get a little bit more time under our belt before we get concrete about what that improvement might look like. So we are expecting some modest margin rate improvement into next year as we have outlined for Q4 this year. I also just want to point to the fact that the free cash flow growth is the real point for our investors to understand while earnings growth will be there.

Continue to add to the demand equation. So we are still going to be a bit in a catch up mode. Because it does take generally 18 to 24 months delay in new capacity to support that demand.

Got it got it and then maybe a follow on for Dave is there can you give us any update on how youre thinking about the B 21, L. Rip because thats something thats kind of always on everybody's mind.

Ronald Epstein: We also have headwinds that have historically in the last couple of years challenged us on free cash flow that are dissipating. We've talked about, and I'm sure we'll talk more in today's call about section 174, which is a decreasing headwind over time. We also see the pension had wind per tailing. And then of course, as we reduce our capex spend starting in 2025, even more robust free cash flow growth. But looking at 20% year-for-year free cash flow growth is really an important milestone for us and something we're very focused on delivering. Okay, very good. Thank you. One moment for questions. Our next question goes from Ronald Epstein with Thank you, America.

Sure it's David so.

We continue to anticipate as we noted in the earlier part of the call that the first <unk> contract will be awarded in the fourth quarter.

Ronald Epstein: You may proceed.

Consistent with our.

Expectations that we've described throughout the year and reliant upon.

First flight occurring between now and that.

<unk> contract award and we continue to evaluate our performance and our outlook on the.

<unk> phase of the program each quarter.

And did not make any significant changes to our estimates for that phase.

During the third quarter. So we'll continue to update everyone over time is as we have updates.

Great. Thank you.

Kathy Warden: Good morning. Across the industry, there's been a lot of discussion about everything from supply chain capacity constraints, labor constraints. One thing that's popped up in a lot of discussions is just the availability of solid rocket motors for missiles and so on and so forth. Just broadly, Kathy, how is Northrop handling? You're getting a surge in demand at a time where, you know, kind of post COVID and all that. I mean, labor's been tough and supply chains are tough.

Thank you one moment for questions.

Our next question comes from Sheila <unk> with Jefferies. You May proceed.

Good morning, guys. Thank you, thanks, Cathy and Dave and Todd Kathy.

Kathy you highlighted a few moments ago that free cash flow growth is the real story here. So I wanted to focus on that since you mentioned that can.

Can you talk about multi year free cash flow growth you've done so in the past, but how do you think about the biggest drivers from a top line.

Working net income drop through tax Capex perspective.

Kathy Warden: I mean, how's it going and what's Northrop doing to handle that? Ron, we got ahead of seeing the demand not quite to the degree that the demand has increased in the last 18 months. But we had boarded up did an increase in demand, particularly in our solid rocket motor business, but broadly as we've been ramping up for production of satellite aircraft and mission system capability across the board. It's why our capital has been elevated.

Hey, Sheila its Dave I am happy to provide some additional color there.

The 2024 updates that we provided on the call today should give you a sense for our near term sales and earnings growth expectations underlying that free cash flow expansion, we do.

We expect to continue to see.

A leading sales profile in the growth of our business and as we've talked about.

Kathy Warden: And so first and foremost, we did what's necessary and that is invest in our workforce and our facilities to be able to support that demand. And it's what's allowing us to support both our direct customers and prime who are now coming to us asking for that capability. We are going to continue to do that. And that's why we still have some robots capex plans in place for 2024 reflected in the outlook we provided.

We anticipate long term margin expansion opportunity as well and so both of those are foundational to our multi year free cash flow growth expectations on top of that we've talked about the last couple of years.

The 2023, and 2024 would be a period of peak capital intensity for the business and that is consistent with our current expectation large programs that we've had for a number of years as well as new wins, we've had that have grown our backlog so significantly over the past couple of years have all contributed to a peak period of capital intensity right.

Kathy Warden: We are seeing labor back to pre pandemic levels in terms of our ability to hire retain certainly inflation is causing more labor rate escalation than we saw pre pandemic, but we are able to get the workers that we need. Our focus now is on productivity and there to we've invested in training, we've invested in standard work instructions in digital technology, all of which are enabling productivity in our workforce. That has been a little slower to materialize with our supply chain.

Now that we have clarity on sources of decline.

In the middle of the decade, and so we expect that.

Kathy Warden: And so we are sending a lot of Northrop Grumman resource with our suppliers co locating with them and helping them to improve productivity as well. And once we remove that bottle, I think we'll as an industry be able to no longer have capacity be our constraining factor. But with that said, and now we're looking at a supplemental and growing international demand, all of which continue to add to the demand equation. So we are still going to be a bit in a catch up mode because it does take generally 18 to 24 months to lay in new capacity to support that demand.

Capital intensity to be alleviating in 2025 and beyond.

Working capital performance is really among the best in class at this point.

Even with.

A modest headwind from the progress pay changes.

We anticipate continuing to be able to deliver stable working capital performance not a meaningful driver of headwind or tailwind there and then you get to the two items Kathy mentioned earlier.

Modestly higher Kaz pension recoveries currently projected over the next few years of course, those will continue to fluctuate based on <unk>.

Primarily on asset returns, but other actuarial.

<unk> that are possible as well.

And then on the cash tax side as we've noted a pretty stable outlook for free cash.

Cash taxes from what we've been anticipating previously and that outlook is for declining cash taxes over the next several years largely driven by.

Dave Keffer: Got it, got it, and then maybe a follow on for Dave. Can you give us any update on how you're thinking about the B-21 L-Rip? Is that something that's kind of always on everybody's mind? Sure on this day. So we continue to anticipate, as we noted in the earlier part of the call, that the first L-Rip contract will be awarded in the fourth quarter. That's consistent with our expectations. That we've described throughout the year and reliant upon first flight occurring between now and that L-Rip contract award.

The section 174 movement as we get through the period of amortization over these five years. So all in all a number of key tailwind.

Most critical which of course is the expectation of continued growth and margin opportunity in the business.

Great. Thank you.

Thank you one moment for questions.

Our next question comes from Myles Walton with Wolfe Research you May proceed.

Dave Keffer: And we continue to evaluate our performance and our outlook on the L-Rip phase of the program each quarter and did not make any significant changes to our estimates for that phase during the third quarter. So we'll continue to update everyone over time as we have updates.

Thanks, Good morning.

Kathy could you comment a bit on relative growth rates that are at a minimum for the segments next year and just playing off the space backlog, which continues to expand pretty pretty wildly maybe just dig in a little bit deeper as to how the complexion of that backlog might play out on hopefully a margin expansion profile from here.

Douglas Harned: Great. Thank you.

Yes, Myles so.

Operator: One moment for questions.

We have been saying all year long, we affect space growth to moderate as we go into next year still be our fastest growing segment, but the growth profile across the four businesses will be more similar next year.

Sheila Kahyaoglu: Our next question goes from Sheila Kayalo with Jeffries, you may proceed. Good morning, guys. Thank you. Thanks, Kathy and Dave. And Todd, Kathy, you highlighted a few moments ago that three cash flow growth is the real story here. So I want to focus on that since you mentioned it. You know, can you talk about multi-year free cash flow growth? You've done so in the past, but how do you think about the biggest drivers from a top line network net income drop through tax capEx perspective?

More tightly clustered if you will around that growth rate or projecting for the enterprise at 4% to 5%.

Diaz cinema will likely be around that profile in the mid single digit range, Although I will say DFS. This year is experiencing some upward pressure on growth due to the demand that we spoke about particularly globally for Erin missile defense and weapons system.

Sheila Kahyaoglu: Sheila, Dave, I'm happy to provide some additional color there. You know, the 2024 updates that we provided on the call today should give you a sense for our near term sales and earnings growth expectations underlying. That free cash flow expansion, we do, you know, expect to continue to see a leading sales profile in the growth of our business. And as we've talked about, we anticipate long term margin expansion opportunity as well.

If that continues that would continue to push gso's growth expectations, even higher into 2024 and then.

We'll still be in growth territory, but as we've talked about it will be modest growth into 2024. So that gives you a sense of the relative order that we see and for space in particular.

Sheila Kahyaoglu: And so both of those are foundational to our multi-year free cash flow growth expectations. On top of that, we've talked about the last couple of years that the 2023 and 2024 would be a period of peak capital intensity for the business, and that is consistent with our current expectation. Large programs that we've had for a number of years as well as new wins we've had that have grown our backlog so significantly over the past couple of years have all contributed to a peak period of capital intensity right now that we have clarity on sources of decline in the middle of the decade.

We have approximately doubled to that business in the last high here. So it's been just tremendous growth tear we are very focused now on the performance of that backlog and ensuring that we can as you said deliver the margin expansion and that is still very much.

Our pathway in 2024.

And can I just clarify on the underlying margins <unk> were still negative within the space is there and we've seen that for now five quarters are there specific programs you can point to to say because these are running off and that's why we're going to have this margin expansion profile.

Sheila Kahyaoglu: And so we expect that capital intensity to be alleviating in 2025 and beyond. Working capital performance is really among the best in class at this point. And even with, you know, modest headwind from the progress progress pay changes, we anticipate continuing to be able to deliver stable working capital performance, not a meaningful driver of headwind or tailwind there. And then you get to the two items, Kathy mentioned earlier, modestly higher cash pension recoveries currently projected over the next few years.

Hey, Michael it's Dave on that one there has not been any one or two particular programs driving the majority of the.

The negative EAC adjustments youre, referring to over the last.

Year plus.

Broader and to Cathy's earlier point, there has been so much backlog expansion that there are so many new programs in our space business over these last few years examples that really strong market share gains.

And it's been across a number of those programs that we've seen EAC pressure given the newness of those development programs and so I wouldn't characterize them as falling off anytime soon if anything we see opportunities for a number of programs in our space business to transition to more mature.

Sheila Kahyaoglu: Of course, those will continue to fluctuate based on primarily on asset returns, but other actuarial changes that are possible as well. And then on the cash tax side, as we've noted, a pretty stable outlook for for cash taxes from what we've been anticipating previously, and that outlook is for declining cash taxes over the next several years largely driven by the section 174 movement as we get through the period of amortization over these five years. So all in all, a number of key tailwinds, most critical of which, of course, is the expectation of continued growth and margin opportunity in the business. Thank you.

Phases of those programs, including production phases over the next couple of years, which is important to the broader margin expansion opportunity point that cathie described so I think what wed see here is an opportunity for <unk>.

Sheila Kahyaoglu: One moment for questions.

Margin growth as we see the continued stabilization of the macro factors that have really been underlying.

Industry wide pressures over the past couple of years and the continued maturity maturity of those programs over those same couple of years coming up.

Okay. Thank you.

Okay.

Thank you one moment for questions.

Our next question comes from Cristina <unk> with Morgan Stanley You May proceed.

Myles Walton: Our next question comes from Myles Walton with Wolf Research. You may proceed. Thanks, good morning.

Hey, good morning, everyone.

Good morning.

Kathy on the stand and attack weapon when some of your competitors indicated that the risk reward profile wasn't as strong in this particular program can you provide more color on your competitive edge and how this pursuit jives with the risk tolerance, you've demonstrated elsewhere like on the decision not to bid on and that is it.

Myles Walton: Kathy, could you comment a bit on relative growth rates at a minimum for the segments next year and just playing off the space back log, which continues to expand pretty wildly. Maybe just dig in a little bit deeper as to how the complexion of that back log might play out on hopefully a margin expansion profile from here. Yes, Myles. So as we have been saying all year long, we expect space growth to moderate as we go into next year.

Okay.

Yes. Thank you so in my comments I alluded to the fact that.

Argon is a product line that we have we've talked about based argon product the argon ER or extended range and now the THAAD Award and we with each of those products are building off of a mature technical baseline as I've talked about our approach.

Myles Walton: Still the our fastest growing segment, but the growth profile across the four businesses will be more similar next year. More tightly clustered, if you will. Around that growth rate, we're projecting for the enterprise at four to five percent. DS and Emma will likely be around that profile in the mid single digit range, although I will say DS this year is experiencing some upward pressure on growth due to the demands that we spoke about, particularly globally for air and missile defense and weapon systems.

Thing about fixed price I have often said fixed price as appropriate where it's either a commercial item or an item that has reached a design maturity and then risk reduce to where we know what it will take to deliver that product.

Myles Walton: If that continues, that would continue to push DS's growth expectations even higher into 2024 and then AS will still be in growth territory, but as we talked about, it'll be modest growth into 2024. So that gives you a sense of the relative order that we see and for space in particular, while we have approximately doubled that business in the last five years. So it's been just on a tremendous growth tear. We are very focused now on the performance of that back log and ensuring that we can, as you said, deliver the margin expansion, and that is still very much our pathway in 2024.

Because of the maturity of argon and us having a product line that net the airports requirements first of all to bring forward, we are able to reduce cost schedule and of course.

Better risk management that allows us to have the risk tolerance them to bid fixed price and I recognize that in competition. There are many factors, but when a company has invested and gotten a mature product line. There is a natural advantage.

That comes with that and that's what the situation, we found ourselves with Sol and not specific competition.

Great. Thank you for the color and a follow up question on the B 21 does the current budget standoff in DC impacts flight testing or the timing of the Allograft Award.

Myles Walton: And just clarify, on the underlying margins, EACs are still negative within space, is there? And we've seen that for now five quarters, are there specific programs you could point to to say, these are running off? And that's why we're going to have this margin expansion profile. Well, Dave, on that one, there has not been anyone or two particular programs driving the majority of the the negative EAC adjustments you're referring to over the last year plus it's broader and to Kathy's earlier point, there has been so much backlog expansion that there are so many new programs in our space business over these last few years examples of really strong market share gains.

No it does not.

As we look at the timing of the <unk> Award as Dave said, we still expect that to happen. This year and as we have talked about before first flight is a milestone that the air force is looking to achieve before they make that award and we are on track still.

Anticipating first flight this year.

Great. Thank you.

Yeah.

Thank you one moment for questions.

Our next question comes from Robert Stallard with vertical you May proceed.

Thanks, so much good morning.

Myles Walton: And it's been across the number of those programs that we've seen EAC pressure given the newness of those development programs. And so I wouldn't characterize them as falling off anytime soon, if anything, we see opportunities for a number of programs in our space business to transition to more mature phases of those programs, including production phases over the next couple of years, which is important to the broader margin expansion opportunity point that Kathy described.

Good morning.

Kathy I just wanted to follow up on Europe budget commentary at the start of the call and I'm wondering if you are putting any contingency plans in place in case, we get arbitrary dod's budget cuts as a result of this craziness in Congress.

So we have looked at it.

Irresponsible of us not to run some numbers and look at where we might have risks.

Myles Walton: So I think what we'd see here is an opportunity for margin growth as we see the continued stabilization of the macro factors that have really been underlying industry wide pressures over the past couple of years and the continued maturity of those programs over those same couple of years coming up. Thank you. One moment for questions.

Line growth rate, but we are not seeing any significant risks to our portfolio at this time, but we will continue to monitor that as such as discussions progress.

Kristine Liwag: Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed.

Very pleased to see that the house has a speaker and we should expect to begin to see the bill moving through Congress now.

Kathy Warden: Hey, good morning everyone. Good morning. Kathy, on the stand-in attack weapon when some of your competitors indicated that the risk-reward profile wasn't as strong in this particular program. Can you provide more color on your competitive edge and how this pursuit drives with the risk tolerance you've demonstrated elsewhere, like on the decision not to bid on NGAD as a prime? Yes, thank you. So in my comments, I alluded to the fact that Arkham is a product line that we have.

And then as a follow up you mentioned the strong demand in the defense export market at the moment I was wondering if there could be any capital deployment opportunities there either Northrop Grumman acquiring companies overseas, we're making other investments.

We are already making capital investments that support that growing demand in missile defense and armaments and so as we've talked about our capex investments over the last several years and planning forward into 2024 does do support our inner.

Kathy Warden: We've talked about the base Arkham product, the Arkham PR or extended range, and now the SAW award. And we, with each of those products, are building off of a mature technical baseline. As I've talked about our approach to thinking about fixed price, I have often said fixed price is appropriate where it's either a commercial item or an item that has reached the design maturity and then risk reduced to where we know what it will take to deliver that product.

Kathy Warden: Because of the maturity of Arkham and us having a product line that met the Air Force requirements for SAW to bring forward, we are able to reduce cost, schedule, and of course have better risk management. That allows us to have the risk tolerance them to bid fixed price. And I recognize that in competitions, there are many factors, but when a company has invested and gotten the mature product line, there is a natural advantage that comes with that. And that's what the situation we found ourselves in with SAW in that specific competition.

<unk> product line, we are not seeing a significant increase that we would anticipate in that.

That demand signal yet we are monitoring it both through the supplemental but we've already baked in a good bit of products line growths that we've accounted for in our Capex planning over the next several years and so at this point in time, I don't see that providing more upward pressure on capex.

That's great. Thank you very much.

Thank you one moment for questions.

Our next question comes from Cai von rumor with TD Cowen You May proceed.

Yes. Thanks, so much so to go back to Doug's question Youre looking for basically flat margins next year and kind of in recent quarters. Cathy you've made the point about the opportunity for space margins to go up certainly if I look at defense basically with more.

<unk> munitions moving up I think you've made the point that there should be some opportunity there you've brought that target down for MFS. This year, which would suggest an easier base of comparison for next year.

Kathy Warden: Great, thank you for the color and a follow-up question on the B-21. Does the current budget standoff and DC impacts light testing or the timing of the ELRIP award? No, it does not. As we look at the timing of the ELRIP award, as Dave said, we still expect that to happen this year. And as we have talked about before, for flight is a milestone that the Air Force is looking forward to. And to achieve before they make that award and we are on track still anticipating for flight this year.

You've talked about Aero as being roughly flat, but as you look at your portfolio is.

Robert Stallard: Great, thank you. Thank you. One moment for questions.

Is there opportunity for those margins to move up next year and if so which are the sectors that have the greatest opportunity for margin improvement and which are the ones that perhaps face the greatest risk that margins would be flat to down. Thank you.

I like the way Youre thinking it's exactly the challenge that you me and the team are discussing amongst ourselves as to how we do drive margin improvement next year and in the Q2 call I laid out for our investors what that path is and the key factors associated.

Robert Stallard: Our next question comes from Robert Stallard with vertical email proceed. Thanks so much. Good morning.

And with improvement.

Just to touch on each of those and then I can tie it also to where this segment see the greatest opportunity for macroeconomic factors I talked about those already on the call. We are seeing inflation be a bit stickier than we had hoped at this point in time, we are incorporating that into our forward estimates, but it is impacting our ability.

Kathy Warden: Cathy, if you wanted to follow up on your budget commentary at the start of the call, and wondering if you were putting any contingency plans in place in case we get the arbitrary DOD budget cuts as a result of this craziness in Congress. So Rob, we have looked, it would be irresponsible of us not to run some numbers and look at where we might have risk. And as I mentioned in my commentary, we're working with our customers to navigate any budget challenges that they see.

Kathy Warden: The other is a result of not getting appropriations passed in a timely fashion and accordance with the fiscal responsibility act requirements, or even as they look into 2025 and the pressures that they have there with a minimal hapline growth rate. But we are not seeing any significant risk to our portfolio at this time, but we will continue to monitor that as budget discussions progress.

82 return to higher levels of profitability.

Their productivity is another area, where we are working to improve productivity not just within our company, but our supply chain that has opportunity.

That would be upside to a flattish look next year, although as I also indicated we are expecting some modest improvement in margin rate next year.

Then we look at is the mix and that has been a factor for both space and mission system over.

Over the last couple of years, particularly notable for mission systems. This year, we don't see a significant mix shift going into next year. It is a very gradual mix shift.

Kathy Warden: We're just very pleased to see that the House of the Speaker and we should expect to begin to see those bills moving through Congress now.

And so that those two pieces of the business will still feel some margin rate pressure.

Kathy Warden: Yeah, and then as I follow up, you mentioned the strong demand in the defense export market at the moment. I was wondering if they could be any capital deployment opportunities there either Northrop Grumman acquiring companies overseas or making other investments. We are already making capital investments that support that growing demand in missile defense and armaments. And so as we have talked about our capex investments over the last several years in planning forward into 2024, those do support our international product line.

Till they can shift more production in the portfolio as you note our defense systems business has the most both topline and margin upside that could come as a result of growing international demand as well as what we see domestically, particularly through the summer.

Momentum those are uncertain at the moment. So we do factor those in our plan, but that could be a source of upside, but then of course, we are managing risks across the entire portfolio and so when we put all of that together, we're looking at some modest rate improvement into next year and.

Kathy Warden: We are not seeing a significant increase that we would anticipate in that demand signal yet. We are monitoring it both through the supplemental, but we've already baked in a good bit of product line growth that we've accounted for in our capex planning over the next several years. And so at this point in time, I don't see that providing more upward pressure on capex.

It really driving to do better but at this point in the year, we are very comfortable with what we've laid out as a set of expectations.

Kaivon Rumor: That's great. Thank you very much. Thank you. One moment for questions.

Good answer thanks, so much.

Thank you.

Thank you one moment for questions.

Our next question comes from Ken Herbert with RBC Capital markets. You May proceed.

Yes.

Kaivon Rumor: Our next question comes from Kaivon Rumor with TD Cowan, you may proceed. Yes, thanks so much. So to go back to Doug's question, I mean you're looking for basically flat margins next year and kind of in recent quarters, Kathy, you've made the point about the opportunity for space margins. To go up, certainly, if I look at defense, basically with more munitions moving up, I think you've made the point that there should be some opportunity there.

Yes, hi, good morning.

Hey, Cathy maybe I just wanted to follow up on the strong bookings. This year can you call out or maybe maybe help quantify how much of that could have been or is international and as we think about sort of this growing set of international opportunities maybe not so much in 'twenty four but how much interim.

National growth could you see next year and into 'twenty, five and I guess more importantly, how crude how could that impact margins as I think about maybe international being slightly accretive to margins.

Kaivon Rumor: You've brought the target down for MS this year, which would suggest an easier base for comparison for next year. I think you've talked about arrows being roughly flat, but as you look at your portfolio. Is there opportunity for those margins to move up next year? And if so, which of the sectors and have the greatest opportunity for margin improvement? And which are the ones that perhaps face the greatest risk that margins would be flat to down? Thank you. Yeah.

Yes, Ken So you are pulling on all the right thread our bookings are up.

For the international portfolio this year and as we look into our future plans. We expect that that trend will continue it takes a little while to then materialize that into sales in a meaningful way. So we see a gradual shift in terms of the percentage of our <unk>.

Overall sales that will come from international we've talked about achieving a double digit growth rate.

Kathy Warden: Like the way you're thinking, it's exactly the challenge that me and the team are discussing amongst ourselves is to how we do drive margin improvement next year. And in the Q2 call, I laid out for our investors what that passes and the key factors associated with improvement. And let me just touch on each of those and then I can tie it also to where the segments see the greatest opportunity for macroeconomic factors.

I would expect that not necessarily in 2024, but into 2025 because of the time. It takes to ramp sales on these awards and so you could also expect that any upward margin opportunity would also be more material starting in that 2025 timeframe than 2012.

Four but we are actively working those opportunities now so that they do materialize in that timeframe.

Kathy Warden: I talked about those already on the call. We are seeing inflation be a bit stickier than we had hoped at this point in time. We are incorporating that into our forward estimates, but it is impacting our ability to return to higher levels of profitability faster. Productivity is another area where we are working to improve productivity, not just within our company, but our supply chain. That is opportunity that would be upside to a flatish look next year, although as I also indicated, we are expecting some modest improvement in margin right next year.

That's helpful and is there any way to think about just with obviously a lot of what we hear in the geopolitical environment are you seeing that translate into sort of bid opportunities. When you think of international I'm, just trying to get a sense as to with all of the all of sort of this growing expectation how much youre actually seeing that yet.

Transpire or actually materialize in terms of real opportunity youre going after.

We are seeing it in signals of demand. So I mentioned on our last call that we have over 10 countries that have expected.

Kathy Warden: What then we look at is the mix, and that has been a factor for both base and mission systems over the last couple of years, particularly notable for mission systems this year. We don't see a significant mix shift going into next year. It is a very gradual mix shift. And so those two pieces of the business will still feel some margin rate pressure until they can shift to more production in the portfolio.

<unk> interest in our Ics product line today I noted another dozen or so that have expressed interest in Oregon. As we look forward, we do expect that that demand signal for many of those countries will translate into.

Contracts, but it takes time and that's why I was talking about seeing 2024 is a timeframe where it would be working to translate those demand signals into contracts, but 2025 being more of that timeframe, we expect them to materialize and I'd say the same is true with the domestic marketplace as we look to replenish.

Kathy Warden: As you note, our defense systems business has the most both top line and margin upside that could come as the result of growing international demand as well as what we see domestically, particularly through the supplemental. Those are uncertain at the moment, so we do factor those in our plan that that could be a source of upside, but then of course we are managing risk across the entire portfolio. And so when we put all of what together, we're looking at some modest rate improvement into next year and really driving to do better, but at this point in the year, we are very comfortable with what we've laid out as a set of expectations. Good answer. Thanks so much. Thank you. One moment for questions.

Stockpile ore to work through the supplemental budget.

I would expect to be more material for us in 2025, but we're working now to ensure that were qualified to be a supplier.

On either second source or new missile program.

Great. Thank you Kathy.

Thank you one moment for our questions.

Our next question comes from Scott to Charlotte Deutsche Bank You May proceed.

Hey, good morning.

Good morning.

Kathy and the emergency supplemental requests from the White House, there was $2 6 billion and included for classified Air Force procurement programs.

Do you have any sense for whether that could potentially help support your programs in the event that there is.

Ken Herbert: Our next question comes from Ken Herbert with RBC Capital Markets. He may proceed. Yeah, hi. Good morning. Thank you. Kathy, maybe I just wanted to follow up on the strong bookings this year. Can you call out or maybe maybe help quantify how much of that could have been or is international? And as we think about sort of this growing set of international opportunities, you know, maybe not so much in in 24, but how much international growth could you see next year and into 25?

An extended CR here or is that just entirely a black box as we might otherwise expect.

Yeah, there's really nothing I can comment on with regard to that Scott I will simply say, we do continue to work with the air force on ensuring that we have the resources necessary to make the B 21 program successful.

Fair enough and then Dave the updated margin guidance implies something like a 15, 9% margin in the fourth quarter. Just curious if you could talk a little bit about the drivers there obviously, you've done above 16% before so some something something like what we've seen historically, but just curious for any commentary on drivers. Thank you.

Ken Herbert: And I guess more importantly, how could that impact margins as I think about maybe international being slightly accretive to margins? Yeah, Ken. So you're pulling on all the right threads. Our bookings are up for the international portfolio this year. And as we look into our future plans, we expect that that trend will continue. It takes a little while to then materialize that into sales in a meaningful way. So we see a gradual shift in terms of the percentage of our overall sales that will come from international.

Couple of thoughts there one.

So a similar trend last year in our EMS business with its strongest margin performance in the fourth quarter of the year driven by the mix of business that we tend to see spike in the fourth quarter with more predominance of mature fixed price programs in that fourth quarter sales mix, we anticipate a similar.

<unk> this year with that said need.

We need to continue to perform and execute well and with efficiency across that portfolio to deliver on that result.

Ken Herbert: We've talked about achieving a double digit growth rate. I would expect that not necessarily in 2024, but into 2025, because of the time it takes to ramp sales on these boards. And so you could also expect that any upward margin opportunity would also be more material starting in that 2025 timeframe than 2024. But we are actively working those opportunities now so that they do materialize in that timeframe.

In the aggregate the 'twenty three.

Margin guidance change for EMS is really driven by mix a lot of the growth in EMS. This year has been in.

Critical work in the restricted portfolio that tends to be at this phase in its lifecycle cost type work there is opportunity for that work to shift back towards more fixed price overtime.

But the the fact that most of the growth in <unk>. This year has been driven by growth and cost type contracts has been a pressure on its margin rate with that said.

Kathy Warden: That's helpful. And is there any way to think about just with obviously a lot of what we hear in the geopolitical environment. Are you seeing that yet translate into sort of bid opportunities when you think about international just trying to get a sense as to with all of the all of sort of this growing expectation, how much are actually seeing that yet. That transpire or actually materialize in terms of real opportunities you're going, after.

It along with the rest of our businesses drove margin dollar growth year over year in Q3, and we anticipate the same trend in Q4.

Great. Thank you.

Thank you one moment for questions.

Our next question comes from Gavin Parsons with UBS you May proceed.

Kathy Warden: We are seeing it in signals of demand. So I mentioned on our last call that we have over 10 countries that have expressed interest in our IDCS product line today. I noted another dozen or so that have expressed interest in Argonne. As we look forward, we do expect that that demand signal for many of those countries will translate into contracts. But it takes time. And that's why I was talking about seeing 2024 as a timeframe where it would be working to translate those demand signals into contracts.

Kathy Warden: But 2025, seeing more of the time frame, we expect them to materialize. And I'd say the same is true with the domestic marketplace as we look to replenish US stockpile or to work through the supplemental budget that I would expect to be more material for us in 2025. But we're working now to ensure that we're qualified to be a supplier on either second source or new missile program. Great. Thank you, Kathy. Thank you. One moment for questions.

Thanks, Good morning.

Good morning.

Dave I was hoping you could go into just a little bit more detail on the section 174 change in what the offset is given it would seem like that has to be pretty sizable, especially if you get some recapture from 2022.

Sure happy to go into that.

I think the important takeaway here is that our cash tax forecast is in the aggregate largely unchanged.

In that it remains a tailwind for our free cash flow outlook over these next several years.

To your point 174, driven taxes have come down a bit in that outlook, that's largely due to lower than projected.

Cost applicable to the 174 guidelines not a change in our interpretation of.

The latest guidelines.

To be clear there, we will continue to assess any future guidance that comes out on 174 and continue to apply.

Our best interpretation of that guidance too.

Our own.

Costs in the appropriate and applicable costs there.

With that said the issue that others in the industry have discussed around the difference between cost type and fixed price.

Scott Tushal: Our next question goes from Scott to Shaw with Deutsche Bank. You may proceed. Hey, good morning. Good morning. Kathy in the emergency supplemental request from the White House, there was 2.6 billion included for classified Air Force procurement programs. Do you have any sense for whether that could potentially help support your programs in the event that there's an extended CR here or is that just entirely a black box as we might otherwise expect?

Yes.

R&D related expenditures is less impactful for us than it appears to be for some of our peers.

Particularly given the reduction in our 2022.

174, driven costs, so less of an impact based on our interpretation than for others. So with all of that said there are some puts and takes.

Cross a business of our scale.

With as many.

Scott Tushal: Yeah, there's really nothing I can comment with regard to that Scott. I will simply say we do continue to work with the Air Force on ensuring that we have the resources necessary to make the B-21 program successful. Okay, fair enough. And then Dave, the updated margin guide on MS implies something like a 15.9% margin on the fourth quarter. Just curious if you could talk a little bit about the drivers there. Obviously you've done above 16% before.

Open tax years, as we have and we've disclosed all this and some clarity in our 10-Qs every quarter.

There is a balance of upside and downside items that are largely driving an unchanged cash tax forecast.

Got it that's helpful. Kathy you mentioned stickier inflation any update on discussions with customers for relief on that front.

The discussions continue and I think we're making good progress in having awareness of the issue and with Congress setting a precedent last year of having some funds available I am hopeful that once again this year, we will see funds appropriated the gift the departments of flexibility.

Scott Tushal: So soon something something like what we've seen historically, which is curious for any commenter and drivers. Thank you. Sure. A couple thoughts there. One you saw a similar trend last year in our MS business with its strongest margin performance in the fourth quarter of the year driven by the mix of business that we tend to see spike in the fourth quarter with more predominance of mature fixed price programs in that fourth quarter sales mix.

Both in language and dollars to address these issues.

Thank you.

Thank you.

One moment for questions.

Scott Tushal: We anticipate a similar trend this year with that said need to continue to perform and execute well and with efficiency across that MS portfolio to deliver on that result. In aggregate, the 23 margin guidance change for MS is really driven by mix. A lot of growth in MS this year has been in critical work in the restricted portfolio that tends to be at this phase in its life cycle cost type work.

Our next question comes from Seth Sigman with Jpmorgan you May proceed.

Okay.

Thanks, very much and good morning.

Apologies to be deep.

Deep in the weeds on the taxes, but kind of what I got left here.

And so just wanted to ask you Dave.

Just to understand that a little better and your interpretation of this if I look at what Lockheed paid and 174 payments last year. It was like 38, 39% of their Iraq and you guys paid like 75% of your IRA So.

Scott Tushal: There is opportunity for that work to shift back toward more fixed price over time. But the fact that most of the growth in MS this year has been driven by growth in cost type contracts has been a pressure on its margin rate. With that said, along with the rest of our businesses drove margin dollar growth year over year in Q3 and we anticipate the same trend in Q4. Great, thank you. Thank you. One moment for questions.

It would seem like that's a very different interpretation and it would seem like there.

The guidance is consistent with the idea that yes.

The idea that Iran is kind of the basis of.

Whats subject to two.

Section 174, and so maybe if you can provide.

I know we spoke about this but just a little bit more color on what's what's different.

About about your business.

So I appreciate the question Seth I know, it's been a common line of discussion for us and it's an interesting topic.

Dave Keffer: Our next question goes from Gavin Parsons with UBS. He may proceed. Thanks. Good morning. Dave, I was hoping you could go into just a little bit more detail on the section 174 change and what the offset is given. It would seem like that has to be pretty sizable, especially if you get some recapture from 2022. Sure, happy to go into that. I think the important takeaway here is that our cash tax forecast is in the aggregate largely unchanged in that it remains a tailwind for our pre-cash flow outlook over these next several years.

I would say this probably isn't the time or the place for us to assess differences in our own interpretation of guidance from from peers, we're not familiar with the interpretations of our peers when it comes to our own view.

Dave Keffer: To your point, 174 driven taxes have come down a bit in that outlook that's largely due to lower than projected costs applicable to the 174 guidelines, not a change in our interpretation of the latest guidelines. To be clear there, we will continue to assess any future guidance that comes out on 174 and continue to apply our best interpretation of that guidance to our own costs and the appropriate and applicable costs there.

View of section 174, it is broader than Iran. And includes a portion of our contract driven.

R&D as well with that said as I mentioned, we'll continue to assess potential future guidance.

You've been following on in clarifying guidance provided in September and we're open to two.

Two different interpretations based on different guidance, we may get in the future, but importantly, as I mentioned.

A difference in contract type interpretation is not nearly as impactful for us as.

As others have said it is for them and so I think in aggregate. This should be less of a focus that interpretation difference should be less of a focus for the street going forward than it has been for us in the recent past.

And the important point to take away is that our cash tax forecast hasnt.

Dave Keffer: With that said, the issue that others in the industry have discussed around a difference between cost type and fixed price R&D related expenditures is less impactful for us than it appears to be for some of our peers, particularly given the reduction in our 2022 174 driven costs. So less of an impact based on our interpretation than for others. So with all of that said, there are some puts and takes across a business of our scale with as many open tax years as we have and we disclose all this in some clarity in our 10 queues every quarter. There is a balance of upside and downside items that are largely driving an unchanged cash tax forecast.

Change in any meaningful way and remains a tailwind for us it's a small piece of the much more important puzzle that is.

Really strong free cash flow growth opportunity for us over these next five years, leading to a lot of optionality as it relates to capital deployment and I think that's the more important headlines.

Okay very good I'll stick to one thanks for indulging me and we will probably never have to speak of this again.

Understood. Thanks, Josh we have time for one more question.

Thank you.

And our final question comes from David Strauss with.

Barclays You May proceed.

Great. Thanks, Thanks for squeezing me in.

Wanted to ask specifically on B 21, and your guidance for it sounds like 10% margins at Aes next year are you, assuming Kathy any incremental inflation room, if RMB 21 in that.

Kathy Warden: That's helpful. Kathy mentioned stickier inflation. Any update on discussions with customers for relief on that front? Discussions continue and I think we're making good progress in having awareness of the issue and with Congress setting a precedent last year of having some funds available. I'm hopeful that once again this year we will see funds appropriated to give the departments a flexibility both in language and dollars to address these issues. Thank you. One moment for questions.

So.

We look at the EAC and it has a number of factors incorporated into it our expectations performance our expectations for the contract terms and so all of that is factored into what goes into the expectations that I laid out $4 21, and as we've consistently said.

Through the year, we are planning at a zero profitability that we have to perform and we.

Seth Seifman: Our next question goes from Seth Seichman with JP Morgan. You may proceed. Thanks very much and good morning.

Are working hard to ensure that that plan is what we achieved.

Dave Keffer: Apologies to be deep in the weeds on the taxes but kind of what I got left here now and so just wanted to ask you Dave, just to understand that a little better and your interpretation of this. If I look at what Lockheed paid in 174 payments last year, it was like 38-39% of their IRAD and you guys paid like 75% of your IRAD. So it would seem like that's a very different interpretation and it would seem like the guidance is consistent with the idea that the idea that IRAD is kind of the basis of what's subject to section 174 and so maybe if you can provide, I know we spoke about this but just a little bit more call it on what's different, about your business.

Okay.

Policies, Dave I got a I got to go back to the section 174 Jets just to.

Just to level set us are you in your in your free cash flow forecast. This year are you still assuming $700 million.

Impact from section 174, and stepping down roughly 20% from there next year.

No I appreciate the clarifying question, we have stepped down about 20% below our prior estimates for the impacts of.

Of the annual effect of section 174, and we'd be filled that further in our 10-Q in terms of the.

The impacts on 2022, 2023 and beyond based on the numbers that we've calculated with the benefit of actual cost to apply as we have.

We have formulated our 2022 tax returns so it's a bit lower than that as I mentioned thats offset by a couple of factors moving the other direction, which in aggregate leads to no change in our cash tax forecast for this year or the next couple of years. So no change to that element of the free cash flow guidance.

Dave Keffer: So I appreciate the question, Seth. I know it's been a common line of discussion for us and it's an interesting topic. I would say this probably isn't the time of the place for us to assess differences in our own interpretation of guidance from peers. We're not familiar with the interpretations of our peers. When it comes to our own view of section 174, it is broader than I rad and includes a portion of our contract-driven R&D as well.

Dave Keffer: With that said, as I mentioned, we'll continue to assess potential future guidance even following on and clarifying guidance provided in September and we're open to different interpretations based on different guidance we may get in the future. But importantly, as I mentioned, a difference in contract type interpretation is not nearly as impactful for us as others have said it is for them. I think in aggregate, this should be less of a focus.

Okay. That's very helpful. I appreciate that.

Thanks, David So quickly before concluding the call I just wanted to take a moment to acknowledge our team and thank them for their contributions to our company and our customers and in particular I want to thank our general Counsel Sheila Justin.

Is retiring after 13 years with the company Sheila has been instrumental in instilling a culture of strong ethics and she has provided outstanding counsel for the company and been a trusted partner to the board and me and the leadership team.

Kathy Simpson as our new General Counsel. She is also a valued member of our team spend with us for many years and she brings a wealth of broad based legal and strategic expertise to the role that we're thrilled to have her and I also want to congratulate Rob Fleming, our new space system sector precedent and thank Tom Wilson for his leadership and guiding this base business for the last several.

Dave Keffer: That interpretation difference should be less of a focus for the street going forward than it has been for us in the recent past. And the important point to take away is that our cash tax forecast hasn't changed in any meaningful way and remains a tailwind for us. It's a small piece of the much more important puzzle that is really strong, free cash flow growth opportunity for us over these next five years leading to a lot of optionality as it relates to capital deployment. And I think that's the more important headline.

Years during a period of just tremendous growth Tom is now taking a new role with the company. He is going to help us expand our business development capabilities across the entire enterprise and Rob has extensive experience running complex businesses. During his 18 years with our company, most notably and recently led the strategic space systems.

Division, which is the largest segment of our space sector and I think what you see from our team is that the depth and strength of our team allows us to make these internal transition very smoothly I'm looking forward to working with them and then meeting you in future.

Seth Seifman: Okay, very good. I'll stick to one. Thanks for indulging me and we'll probably never have to speak of this again. Thanks.

Operator: Josh, it's time for one more question.

David Strauss: Thank you. And our final question comes from David Strauss with Barclays. You may proceed. Great. Thanks. Thanks for squeezing me in. Wanted to ask specifically on on B21 and your guidance for a template comes from margins at AS next year. Are you assuming happy any incremental inflation room if I'm B21 in that? So we look at the EIC and it has a number of factors incorporated into at our expectations performance, our expectations for the contract terms.

Yes. So thank you for joining the call today, and we look forward to speaking with you again on our fourth quarter call in January.

David Strauss: And so all of that is factored into then what goes into the expectations that I laid out for B21. And as we've consistently said through the year, we are planning at a zero profitability, but we have to perform and we are working hard to ensure that that plan is what we achieve.

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

Dave Keffer: Okay. And Paul, Dave, I got to I got to go back to section 110 before just just to just to levels have us. Are you in your in your forecast for forecast this year? Are you still assuming $700 million or impact from section 174 and stepping down roughly 20% from there next year? No, I appreciate the clarifying question. We have stepped down about 20% below our prior estimates for the impacts of the annual effect of section 174 and we've detailed that further in our 10Q in terms of the impacts on 2022, 2023 and beyond based on the numbers that we've calculated with the benefit of actual cost to apply as we have formulated our 2022 tax returns.

Dave Keffer: So it's a bit lower than that, as I mentioned, that's offset by a couple of factors moving the other direction, which an aggregate leads to no change in our cash tax forecast for this year or the next couple of years. So no change to that element of the free cash flow guidance. Thank you. Okay, that's very helpful. Appreciate that. Thanks, David.

Dave Keffer: So, quickly before concluding the call, I just want to take a moment to acknowledge our team and thank them for their contributions to our company and our customers. And in particular, I want to thank our general counsel, Sheila Chessin, who is retiring after 13 years with a company. Sheila has been instrumental in instilling a culture of strong ethics and she has provided outstanding counsel for the company and been a trusted partner to the board and me and the leadership team.

Dave Keffer: Kathy Simpson is our new general counsel. She is also a valued member of our team, spent with us for many years and she brings a wealth of broad-based legal and strategic expertise to the role so we're thrilled to have her. And I also want to congratulate Rob Fleming, our new space system sector president and thank Tom Wilson for his leadership in guiding the space business for the last several years during a period of just tremendous growth.

Dave Keffer: Tom is now taking a new role with the company. He's going to help us expand our business development capabilities across the entire enterprise. And Rob has extensive experience running complex businesses during his 18 years with our company. He most notably and recently led the strategic space systems division which is the largest segment of our space sector. And I think what you see from our team is that the depth and strength of our team allows us to make these internal transitions very smoothly. I'm looking forward to working with them and them meeting you in future years.

Kathy Warden: So thank you for joining the call today and we look forward to speaking with you again on our fourth quarter call in January. Thank you.

Operator: Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.