The Operator introduces the Northrop Grumman's Second Quarter 2024 Conference Call and hands over to the host, Todd Ernst. Todd Ernst welcomes everyone and mentions that the matters discussed on the call are based on the company's judgment and may contain forward-looking statements. He also mentions that the call will include non-GAAP financial measures and refers to a presentation on the company's Investor Relations website. Kathy Warden, the Chair, CEO, and President of Northrop Grumman, takes over and thanks everyone for joining. She highlights the company's strong operating results, sales growth, and program performance in the second quarter.

In the second paragraph, the speaker discusses the strong financial performance of the company in the first half of the year, with a 19% increase in EPS and significant growth in free cash flow. As a result, the company is increasing its revenue and EPS guidance for 2024. The speaker then highlights the diverse portfolio of the company, with 85% of sales coming from advanced technology capabilities in various sectors of national security. The remaining 15% comes from two prime programs supporting the nation's strategic deterrent. With the recent realignment of the company's divisions, there are now four strong and equal segments with multiple avenues for growth. The company's business is well aligned with the U.S. National Defense strategy.

The company has won significant roles in long-term programs and is expanding its exportable product offerings. They are also investing in increasing their capacity to deliver necessary products to the US and its allies. The company expects solid growth in various areas and international sales are progressing. Their outlook is supported by the national security spending environment. Additionally, they are focused on enhancing profitability through various measures.

The U.S. fiscal year 2025 defense budget is receiving support and Northrop Grumman's programs, particularly the B-21 Sentinel, are well positioned in this environment. The Department of Defense has certified the Sentinel program as part of the Nunn-McCurdy process and is working to restructure it. The majority of the cost growth is expected to occur in the production phase, which is beyond the current phase. Northrop Grumman is continuing to execute on its existing contract and has made significant progress on the program. They remain committed to partnering with the U.S. on the program.

The Air Force is working to find ways to reduce the costs associated with the B-21 program, which is progressing well and remains within schedule and cost estimates. The program contributes less than 10% of total sales, but is expected to grow in profitability as it moves into advanced production and adds modernization and sustainment revenue. The company's portfolio includes a mix of technology-driven capabilities and franchise programs that have resulted in organic revenue growth and strong cash flows. The company is reiterating its long-term cash flow outlook, which predicts a compound annual growth rate of greater than 15% through 2026.

The company is maintaining their investments and capabilities to support growth in their business. They are targeting $1.8 billion in capital expenditures and investing $3 billion in their portfolio. They also increased their dividend by 10% and have a strong outlook for the future. The recent segment realignment has been discussed and will be reflected in future financial reporting.

In the second quarter, Q2 net awards were over $15 billion, resulting in a book-to-bill ratio of 1.5 times and increasing backlog to over $83 billion. All four segments saw year-over-year growth, with Aeronautics leading the way with a 14% increase in sales. Second half of the year sales are expected to gradually ramp up, with Q3 projected to be similar to Q2. Segment operating income was up 5% and total operating income was up 13%, reflecting strong program performance and lower corporate unallocated expense. Aeronautics generated an operating margin rate of 10% for the second straight quarter, showcasing the impact of strong program performance and productivity initiatives. There were no significant changes to the LRIP EAC for B-21 this quarter.

The B-21 program currently has 21 aircraft in baseline for the first five LRIP lots, with an additional 19 production aircraft in subsequent lots. These lots have not-to-exceed pricing, set in 2018 with an economic price adjustment clause to protect against inflation. Negotiations for final quantities and terms for these additional aircraft are ongoing, but the program is expected to be profitable. Production is expected to ramp up in the second half of the decade, with production sales surpassing EMD in 2026. Other B-21 efforts for modernization and sustainment are also expected to generate profit. Defense Systems had a strong quarter with a 23% increase in operating income and a 13.5% margin rate. Mission Systems' margin rate was 13%, lower than the previous year due to lower net EAC adjustments and changes in contract mix. However, opportunities for margin improvement are expected in the second half of the year.

The company is making investments in their factories to improve performance and increase production volumes, which has resulted in a 14% increase in operating income for their space program. Earnings per share have also increased by 19%, and the company had a strong quarter of cash generation. They have increased their sales guidance for both Aeronautics and Missiles and Space due to strong year-to-date results. Aeronautics sales are expected to flatten out in the second half of the year, but the company maintains strong margins across a mix of mature production programs and early-stage development programs.

The increase in sales at AS and DS offsets the decrease in margin rate at MS. The company has increased their sales guidance for this year, mainly due to the realignment of the SDS division to DS. Space sales are expected to be relatively flat this year and decrease in 2025 due to the removal of NGI and a restricted program. The rest of the space portfolio is expected to continue growing. The company expects a margin rate of approximately 10% at DS and a low 10% rate at space. Overall, the company expects sales of $41 billion to $41.4 billion and a 5% growth at the midpoint. Segment OM dollars are expected to grow at the same rate as sales. Corporate unallocated expense is expected to be $150 million, and the federal tax rate is expected to be in the mid-17%. Interest expense is expected to be around $650 million.

The company is closely monitoring tax legislation and has lowered its estimate for weighted average shares outstanding. They have had a strong first half of the year and are expecting to continue creating value in the second half. The first 21 B-21 aircraft have a higher ceiling for average unit price, but the final pricing for the next 19 aircraft is yet to be determined. The company is confident that the next 19 aircraft will be profitable. The slot 6 of the B-21 program is expected to have a positive profit rate based on current projections.

The company has set higher prices for the B-21 units 22 to 40 and is working on cost efficiencies and program performance to ensure positive profitability. The units also include an EPA clause that is being monitored. The company has addressed the issue of sourcing ammonium percolate for solid rocket motors and has created an alternate supply, giving them more confidence in managing the supply. They are also buying IP from other sources.

The DoD recently conducted a review of the Sentinel program and found that cost growth was primarily due to inflation and underestimated complexity. The company is working with the Air Force to perform better and is considering design alternatives and ensuring the right team is in place for the program.

The company is continuing to improve its staff and systems engineering for the program, and most aspects of the program are progressing well. The Air Force has publicly expressed its satisfaction with the program, but the ground structure is causing the majority of the cost growth. The company is focused on addressing this issue through a restructure. The CEO has had meetings with members of Congress who have generally been supportive of the program and the company's role in it. The Department of Defense has also spoken positively about the program. While not everyone is a supporter of the land-based leg of the triad, the program has received full funding from Congress.

The speaker discusses the Mission Systems business, which has seen a shift in mix towards more cost-type work. However, they expect this mix to shift back towards more fixed-price work in the future. They also mention deliberate actions being taken to improve productivity and performance in the business, which they believe will lead to higher margins in the second half of the year. A question is then asked about how this mix will evolve in the longer term.

Kathy Warden, CEO of the company, discussed the decline in the Space segment for next year, which is expected to be offset by solid growth in three of the four segments. The company expects a 5% growth rate for this year, following a 5% compound annual growth rate for the past five years. Space is expected to be the exception, with a flat performance this year and a modest decline next year due to the impact of a canceled program. However, the company still expects overall growth and is not concerned about the slight decline in the Space segment. In the Aeronautics segment, there was strong margin performance in the first half of the year, leading to an increase in guidance, but the company expects a slight decline in the second half.

The company has been projecting and noting that sales growth rate would moderate in the second half of the year due to timing of top line items in aeronautics. The first half of the year saw strong year-over-year growth rates and the company has increased their guide for sales and margin rate for the year. However, the second half of the year will involve slightly slower growth and lower margin rates. The company has a diversified mix of programs that are in healthy production levels and delivering strong results. The peak margin rate headwind from the B-21 program is expected to occur in the future, and the company anticipates increased dollar growth and modest sales growth. The company did not specifically outline the timing of equitable adjustments beyond Lot 6.

During a conference call, Kathy Warden, CEO of Northrop Grumman, was asked about the B-21 program and its expected profitability. She clarified that the $1.6 billion charge taken over five lots was already accounted for and the company is now looking at the anticipated results going forward. She also addressed the restructuring of the Sentinel program, stating that the cost growth driving the Nunn-McCurdy review is mostly outside of the program's current phase, which the company is on contract for. Northrop Grumman has taken a cautious approach in its financial projections and booking rate for the program.

The speaker discusses the company's expected improvement in booking rate as they achieve more percentage performance milestones. They also mention a strong quarter for bookings and expect to have a book-to-bill ratio over 1 for the year. The mix of domestic and international sales will contribute to this, with strong bookings in the shorter-cycle businesses of new defense systems and Mission Systems. Both segments have been strong in the past and have a solid backlog.

Analyst Doug Harned asks about the potential for a shift in mix of sales with a higher percentage of international sales due to flat budgets in the U.S. Kathy Warden, CEO of the company, responds that they are expecting international sales to grow at a faster rate than domestic sales. She also mentions that their alignment with the National Defense Strategy and prioritization of their programs will lead to more share of the budget, despite each program being well below 1% of the overall DoD budget. Myles Walton then asks about the expected growth rate for the Sentinel and B-21 programs, and Warden clarifies that the budget profile from the department includes things that are not part of their contract, such as staffing and support for testing and sustainment.

The speaker discusses the progress of the company's EMD and production, as well as the impact of modernization and sustainment on the portfolio. They also mention improved performance in the space business and the potential for future opportunities in the Department of Defense, though the timing is uncertain due to budget priorities.

During a conference call, Northrop Grumman CEO Kathy Warden expressed confidence in the company's position regarding potential movements by Boeing. She also mentioned that they have agreements in place with Spirit AeroSystems, a supplier for the B-21 program, and declined to comment on specific discussions. Warden also mentioned that there are potential export opportunities for the Triton program, with announcements expected soon from NATO and Norway. She highlighted the relevance of Triton in surveilling large areas of ocean, particularly in the Pacific and Arctic regions.

Kathy Warden, CEO of Northrop Grumman, was asked about the 81% increase in cost for the DoD's Sentinel program and the potential impact on other budget priorities. She explained that the cost projection covers a long period of time and is largely due to the fielding of the system in the next decade. She also stated that there are still opportunities to reduce costs by making decisions and restructuring the program, and that Northrop Grumman is committed to helping the Air Force do so. Additionally, she noted that the cost growth projections are based on independent government estimates, not industry estimates, and do not reflect current performance on the contract.

The company expects to maintain its strong working capital performance in the coming years, with no significant changes anticipated. The focus will be on expanding operating profits through increased sales and margin expansion. Capital expenditures will decrease in the future, and pension recoveries are expected to improve.

The company's free cash flow is expected to grow by 15% due to a decline in Section 174 impact on cash taxes and flat working capital. B-21 is not expected to be a significant headwind for margins, and the company is focused on getting macroeconomic headwinds behind them and improving cost efficiency to reach a 12% margin.

The speaker discusses the company's investments in digital enablement and other measures to improve program performance and drive margin growth. They also mention the retirement of a long-time executive and the introduction of a new CFO. The call concludes with thanks to the team and an invitation to join future calls.

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