The paragraph introduces the Northrop Grumman Third Quarter Conference Call and identifies the operator and host. It also mentions the company's outlook and guidance for 2023 and beyond, as well as the risks and uncertainties involved. The CEO, Kathy Warden, then addresses current geopolitical tensions and the company's support for the US and its allies. She also mentions that the call will cover third quarter results and important program events, as well as the US budget and global trends.

The company's book-to-bill ratio was 1.5x and they received $15 billion in awards, leading to a 9% increase in sales and a record backlog of $84 billion. Segment operating income and earnings per share also saw growth, and the company generated $900 million in free cash flow. They plan to return over 100% of their free cash flow to shareholders, including $1.5 billion in share repurchases. The federal government is operating under a continuing resolution, but the company remains optimistic about bipartisan support for national security priorities and hopes for a full year budget to be passed soon. The administration has also made a supplemental request for urgent needs, including investments in weapon systems and defense industrial-based readiness.

The federal government is working on its budget plans for fiscal year 2025 and is collaborating with customers to ensure programs remain well-supported. There is an increase in international demand for capabilities, particularly in the weapon systems and missile defense technologies. The company has received interest from over a dozen countries for the AARGM-ER and has also received a contract from the US Air Force to develop the Stand in Attack weapon. In the Space business, the company is focused on being at the forefront of technology and sees potential applications for their developed technologies in national security missions, including the Space Development Agency's vision for a new low earth orbit satellite constellation.

Lockheed Martin has been awarded a $712 million contract to design and build 36 satellites for SDA's tranche two transport layer data constellation. This, along with their work on SDA's tracking layer and tranche one of the transport layer, brings their total number of satellites for the proliferated war fighter space architecture to nearly 100. They have also had successful launch events, including their 19th resupply mission to the International Space Station and five GEM 63 solid rocket boosters helping to power ULA's Atlas V launch. They are also on track for their preliminary design review for the next-generation interceptor, and expect solid growth across all four of their businesses in the 2024 outlook. They reaffirm their free cash flow outlook range and continue to invest in capabilities and capacity to support their customers.

Northrop Grumman had a strong quarter with record backlog and sales growth in all four segments. They have a strong demand and expect their book-to-bill ratio to be over 1x. Aeronautics, DS, and Mission Systems all saw growth in their sales, driven by various factors such as higher volume on manned aircraft programs and strength in their missile defense and armaments portfolios. Northrop Grumman is well positioned to create value for shareholders through cash flow growth in the coming years.

In the third quarter, In Space saw double-digit sales growth due to the success of various programs. Segment operating income increased by 8%, and the segment's operating margin also improved. Program performance remained strong, with Aeronautics and Defense businesses showing efficient execution and risk retirements. Diluted EPS increased by 5%, driven by higher sales and segment performance. Cash generation was strong, with nearly $900 million in free cash flow in the quarter. The company remains disciplined in managing working capital, leading to improvements in these accounts across the company.

The IRS has provided guidance on the amortization of research and development expenses, which did not change the company's interpretation of the provision. The company has lowered its estimates for Section 174 cash taxes for 2022, but this is offset by an increase in other tax items. The company expects modestly higher sales in its Aeronautics business and has increased its top line expectations for its Space segment. There is a slightly lower operating margin rate projected for the MS segment, but the other segments remain unchanged. At the enterprise level, the company is increasing its sales guidance by $400 million and maintaining its guidance for segment operating income.

The company's year-to-date trends suggest that their EPS and free cash flow estimates will be towards the lower end of their range. They are reaffirming their estimates and expect sales growth in all four business segments for the next year. They also anticipate improvement in segment margins and plan to prioritize shareholder returns. The company's pension plans are currently above 100% funded and they expect minimal required cash contributions in the coming years. However, changes in financial markets could potentially impact their GAAP EPS for 2024.

The company is seeing a modest impact on cash flows from higher CAS estimates, but remains confident in its long-term value creation and disciplined capital deployment. In the Aeronautics division, the decline in legacy programs is stabilizing and the ramp-up of the B-21 program is expected to contribute to growth. The company is still aiming for 10% margins in the coming years.

The speaker discusses the stability of the F-35 and E-2D programs and expects growth in AS. They anticipate margin rates to remain around 10% and expect a 4-5% increase in sales and operating income in 2024. The company is still on track for margin improvement and sees opportunities for further improvement in the future. These improvements are related to macroeconomic trends such as inflation, labor costs, and productivity.

Northrop Grumman is expecting modest margin rate improvement next year, with a focus on free cash flow growth. The company has faced headwinds in the past, but these are dissipating and they anticipate a 20% year-over-year growth in free cash flow. The company has also prepared for an increase in demand and has invested in production capabilities to handle this surge.

The company has invested in their workforce and facilities to support the high demand for their products, and they are able to meet their customers' needs. They are also focused on increasing productivity and helping their suppliers improve productivity. The company anticipates the first LRIP contract for the B-21 will be awarded in the fourth quarter.

The company expects to see growth in free cash flow in the coming years, driven by an increase in sales and earnings, margin expansion, and a decrease in capital intensity after 2024. They anticipate a peak period of capital intensity in the next few years due to large programs and new wins, but expect it to decrease after 2024.

The company's working capital performance is strong and is expected to remain stable despite potential headwinds. There are also two key tailwinds, including higher CAS pension recoveries and declining cash taxes. The company expects continued growth and margin opportunities in the business. In terms of growth rates, the space segment is expected to moderate next year, but still be the fastest-growing segment. The growth rates across the four businesses will be more similar and closely aligned with the projected growth rate for the enterprise.

The paragraph discusses the projected growth for the defense and space sectors within the company, with DS and MS expected to see mid-single-digit growth due to increased demand for air and missile defense and weapon systems. AS is also expected to see modest growth. Space has experienced significant growth in the past five years, but the focus now is on improving margins and delivering margin expansion in 2024. The negative EAC adjustments in Space are not attributed to any specific programs, but rather the newness of development programs and backlog expansion. There are no expectations for these programs to fall off anytime soon.

The company sees opportunities for margin growth in its Space business as programs transition to more mature phases. The recent Stand in Attack Weapon win is seen as a strong pursuit due to the company's established product line and risk management approach. This allows them to bid fixed price with confidence.

The speaker discusses the natural advantage that comes with investing in a mature product line in competition. They mention the B-21 and state that the current budget standoff in D.C. will not impact flight testing or the timing of the LRIP award. The speaker also mentions contingency plans in case of arbitrary DoD budget cuts, but states that they are not seeing any significant risks to their portfolio at this time. They also mention strong demand on the defense export market.

Kathy Warden, CEO of Northrop Grumman, discusses the potential for capital deployment opportunities in missile defense and armaments. She mentions that their current CapEx investments support international product lines and they have already accounted for product line growth in their planning. In response to a question about margins, Warden acknowledges the potential for margin improvements next year and mentions the challenge of driving these improvements.

In the Q2 call, the company outlined their path to improvement and discussed key factors such as macroeconomic factors, productivity, mix, and managing risks. They expect some modest improvement in margin rate next year, but are striving to do better. They are comfortable with their current expectations.

Kenneth Herbert asks Kathy Warden about the strong bookings this year and the potential impact of international growth on margins. Warden explains that while bookings are up for the international portfolio, it takes time for them to materialize into sales. She expects a gradual shift towards a double-digit growth rate in international sales by 2025, which could also lead to an increase in margins. Warden also mentions that they are actively pursuing opportunities in response to geopolitical developments, with over 10 countries expressing interest in their IBCS product line.

The company has seen interest in AARGM from a dozen countries and expects to turn those demand signals into contracts by 2024, with materialization in 2025. They also expect to see more material from the domestic marketplace in 2025 and are working to qualify as a supplier for second source or new missile programs. The emergency supplemental request from the White House includes $2.6 billion for classified Air Force procurement programs, but the company cannot comment on how it may impact their programs. The updated margin guide for MS indicates a 15.9% margin in the fourth quarter, driven by historical performance.

The MS business saw a similar trend last year with strong margin performance in the fourth quarter due to a spike in mature fixed price programs. This trend is expected to continue this year, but the company needs to execute well to deliver on this result. The 23% margin guidance change for MS is driven by mix, with most of the growth this year coming from cost-type contracts. However, MS and the rest of the businesses drove margin dollar growth in Q3 and are expected to do the same in Q4. The cash tax forecast is largely unchanged, but the 174-driven taxes have come down due to lower cost applicable to the guidelines. This remains a tailwind for the company's free cash flow outlook.

The company will continue to assess future guidance on Section 174 and apply it to their own costs. The difference between cost type and fixed price R&D expenditures is less impactful for them compared to their peers. There are some upsides and downsides in their business that largely drive an unchanged cash tax forecast. Discussions for relief on stickier inflation continue with hopes for funds to be appropriated by Congress. The analyst asks about the company's interpretation of Section 174 and notes that Lockheed Martin paid a lower percentage of their IRAD compared to the company.

David Keffer, CEO, is asked about the differences in their business and how they interpret guidance from their peers. Keffer explains that their interpretation of Section 174 is broader than others and they are open to different interpretations in the future. He also mentions that the difference in contract type interpretation is not as impactful for them as it is for others. Keffer emphasizes that their cash tax forecast has not changed and remains a tailwind for them, and the more important headline is their strong free cash flow growth and optionality for capital deployment. In the final question, Kathy, CFO, is asked about the B-21 program and if there will be any incremental inflation costs.

Kathy Warden discusses the factors that go into the expectations for the B-21 contract and reiterates the company's plan for zero profitability. David Keffer clarifies the impact of Section 174 on free cash flow and Kathy Warden thanks retiring General Counsel Sheila Cheston and introduces new General Counsel Kathy Simpson.

The speaker is pleased to have a new member, who brings a lot of experience, on their team. They also congratulate the new Space System Sector President and thank the previous leader for their work. The new president has a lot of experience and the team is strong enough to handle internal changes. The speaker looks forward to working with them and speaking with the audience again in the future. The conference call is now over.

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