Northrop Grumman reported strong second quarter results, with sales up 9% and a book-to-bill ratio of 1.14. The company is increasing its full year sales guidance and book-to-bill projection, as well as its full year earnings per share guidance. The company's $79 billion backlog is more than two times its expected 2023 sales, indicating long-term growth potential.

The company is in a good position to meet global demand for their products due to a robust backlog and leading growth outlook. They have provided guidance for a mid 11% segment margin rate in 2023 and anticipate increasing their year-over-year margin rate in 2024 with a 12% target in the longer term. This improvement is based on stabilizing macroeconomic factors, cost management programs, and shifting to more international and production contracts.

The company is taking steps to reduce supply chain disruptions caused by the pandemic, such as buying ahead of schedule and placing more people at suppliers. They have had success in growing their headcount and reducing attrition rates, and are now focusing on optimizing labor efficiency and innovative training programs. Inflation has been a challenge, but cost growth has begun to moderate, and the company is factoring in higher inflation expectations for new bids and working to drive additional discipline in their bid approaches to protect against future dynamics. Their focus is on cost management to improve affordability and competitiveness, and they are laser-focused on overhead cost reduction.

Boeing is implementing digital solutions across its business to drive performance, productivity, and efficiency. This includes a digital ecosystem that accelerates program execution, digital systems in factories, a digital thread for advanced manufacturing technology, and a centralized procurement system to leverage purchasing power and reduce costs. This is expected to lower supplier costs and improve productivity, as well as transition to production throughout the decade for key franchise programs.

This paragraph discusses the company's cost plus mix and how it has been increasing with their first house revenue at 55% Cost Plus. It also discusses how the company is transitioning programs into production, which should result in improved margins and stronger free cash flow growth. Lastly, it mentions the company's capital deployment strategy which prioritizes investments to support their business plan and returns cash to shareholders.

The company reported a solid second quarter with $10.9 billion in new awards and a book-to-bill of 1.14. Sales were up 9%, and the company is expecting more production awards in the second half of the year, including the first lot of B-21 LRIP. The company is focused on margin expansion opportunities and converting this to free cash flow growth in order to deliver value for customers and shareholders. The company has also increased its full year guidance.

In the second quarter, all four of the businesses saw growth, with Space leading the way with 17% sales growth. Segment margins were 11%, with program performance remaining strong despite the pandemic. Earnings per share were $5.34, and free cash flow was over $600 million, a significant increase compared to the same period in the previous year. There were some headwinds, including a $36 million unfavorable adjustment on the NASA program and lower net pension income for all periods in 2023 compared to 2022.

The company is expecting increased sales and bookings for their Space business, leading to higher sales guidance of $13 billion. Defense Systems is also expected to have a low single digit growth rate. The company is maintaining segment operating income expectations and increasing their EPS guidance range by $0.60. They are also reducing their share repurchase expectations and expecting a 17% tax rate.

Northrop Grumman is on track to double its current level of free cash flow over the next five years and is investing over $2.8 billion in R&D and CAPEX this year. The company is also returning excess capital to shareholders via its quarterly dividend and share repurchase plans and expects to return over 100% of its free cash flow to shareholders. In response to a question about the B-21 LRIP and the impact of the end of the F-18, Kathy Warden noted that the company is expecting a breakeven margin on the LRIP.

The DOD has allocated $60 million for B-21 LRIP procurement due to inflationary impact, which is expected to be awarded later this year. The company's projections also incorporate the wind down of the F-18 production line, with programs shifting from development to production across all four segments. The HALO program is a fixed price program, with the company being disciplined in ensuring the appropriate use of fixed price contracts for commercial items or production programs with stable requirements and mature designs.

Kathy Warden of Northrop Grumman has confirmed that the company will not be bidding on the NGAD Sixth-Generation Fighter Program as a prime, but they are responding to other bidders' requests for proposals as a supplier. She noted that they are remaining disciplined in assessing the right programs to pursue, and that their decision on this program does not impact their path to sales and earnings growth.

Kathy Warden explains that Northrop Grumman has a strategy of being disciplined in their bidding process, taking into account the right combination of risk and reward. This is to ensure that they can expand their margins back to what investors expect of the company. They have learned lessons from their own experience to apply to their decisions on what to bid and what not to bid.

Kathy Warden expects that the government will negotiate higher costs for future contracts in order to account for inflationary pressures. She also believes that the government's budget will need to include additional money to cover these higher costs.

Kathy Warden states that the majority of the $1.6 billion of sales growth in 2023 is coming from two programs: GBSD and MGI, with the other half coming from a broad set of programs, most notably the national security portfolio. The margin profile is similar across these businesses, with early space development having lower margins, but the potential to go higher in the long term. Performance and mix will play a part in getting margins closer to 10%.

Dave Keffer of Lockheed Martin reported that the company is in a good place with their working capital status, having seen a $1 billion improvement in free cash flow due to successful invoicing and collections efforts. The GAO report on the Sentinel/GBSD program showed schedule pressure due to supply disruption, but the company is working with the US Air Force to optimize the schedule and maintain the initial operating capability day.

David Keffer answers Peter Arment's questions about the company's mix of cost plus and fixed price work and its working capital profile. He states that this year will be the peak year for cost plus work, and that the mix will shift back to a 50/50 or 60/40 fixed price mix over the next four to five years. He also states that they are pleased with their working capital efficiency and expect it to remain so through 2022 and 2023.

Dave Keffer of the company mentioned that they were expecting the first option of their B-21 aircraft to be called in the third quarter. He also mentioned that the first flight of the aircraft was powered on in Q2 and that they were still on track for first flight this year, depending on events and data. He also mentioned that the growth in sales volume, margin rate, and the conversion of those margin dollars to cash flow will drive the opportunity to double their current run rate of free cash flow over the next five years, while capital intensity will ease to more historical levels and cash taxes will decline based on current tax law.

Dave Keffer explains that the growth rate for the year for space is expected to be in the low double digits, however the year-over-year growth rate in the second half of the year may be lighter due to a strong fourth quarter in 2022. He also notes that the company's sales guidance is split roughly evenly between the first and second half of the year, demonstrating continued sequential growth.

Kathy Warden answered a question from Seth Seifman about the space business and its margin pressure. She noted that the space business is performing well, but there is more risk in development programs. She also discussed the NGAD strategy and confirmed that they are looking closely at the separate solicitation for the collaborative combat aircraft portion.

Myles Walton asked Kathy Warden about the margin expansion expected in 2024, and David Keffer clarified that the $100 million gain mentioned in the 10-Q is expected to close in the third quarter and is already incorporated into the guidance range.

Kathy Warden and David Keffer discussed the company's growth rate for the year, noting that a good portion of it was due to a strong backlog and the late delivery of supplier orders. They expect growth to continue into 2024 and to be more balanced across the four sectors, with opportunities for growth in each of them. They also discussed the F-18, noting that it is still a significant factor for the company and when they expect it to run off.

Kathy Warden and David Keffer discussed the remaining 30% of backlog from the end of 2021, which is relatively small due to the lack of production awarded. However, the Sentinel program is a cost plus program that was awarded in 2020 or 2021 and is part of the backlog. This program is significant and will carry forward for several more years.

Kathy Warden explains that the transition of the space market from large and exquisite assets developed under cost plus and low quantity to less dollars going into development and higher quantity production has changed the mix of development to production in the market. This has allowed for the potential of space programs to operate above 10% margin rate, which has historically been lower due to cost plus work.

Kathy Warden explains that Northrop Grumman takes a disciplined approach when deciding whether to be a prime or merchant supplier, taking into account the risk and rewards of each opportunity. She also notes that the company's diverse portfolio allows them to choose to be a prime or supplier depending on the situation, while still providing the capabilities the government needs.

Kathy Warden thanked everyone for joining the call and expressed her appreciation to the Northrop Grumman team for their work in global security. She wished everyone a good summer and looked forward to seeing them in October. The conference call then concluded.

This summary was generated with AI and may contain some inaccuracies.