Northrop Grumman Corporation — 2024 Q1

Yes. Doug, as we've talked about before, awards can be very lumpy, and so we tend to look at our book-to-bill over a longer stretch of time. And our last 2 years have been well over 1, so we expected this first quarter to be lighter and we had signaled that. As we look at the full year, we still believe that we'll be near 1. And it's largely going to be driven by our shorter-cycle businesses, so think Commission Systems and Defense Systems and space will clearly be the lowest as we digest the NGI loss and, of course, the cancellation that we had in the first quarter. But I'll remind you, our space business has nearly doubled over the last 4 years, and the book-to-bill there has been incredibly strong. So they're still carrying a large backlog of business that supports the growth rates that we're projecting for them.

We had talked about Sentinel growth coming flattening out for a few years and then returning to growth as we moved into the production phase later in the decade that still holds true. That timing has, of course, moved as the program schedule is moving, but the profile still is quite similar to what we have been discussing. And it was so far out in the future, it really wasn't in any of the projections that we had in '24 or even '25. It was well beyond that. Still a healthy ramp is expected for that program, and we are laser-focused on delivering and meeting the schedule commitments that we are working towards with the Air Force.

It doesn't change the economics of the program. What happened is the budget was set based on the independent cost estimates. And as we move towards the contract phase where LRIP was exercised the first option, the government is now reconciling to our contract value. There was no change in price schedule quantities. It's just a reflection of them moving off of an independent cost estimate and moving to our contract value, which, of course, was lower than their independent cost estimates.

Yes. So our Defense Systems portfolio has been undergoing a transformation over the past several years. As you know, we divested the services business, and we still have a sustainment and modernization business. That business has been flattish. And this year, we talked about a headwind in that business to growth associated with an international training program. You see that weighing a bit on first quarter growth in DS being 3%. Over time, we expect that growth rate to reflect the other 2 portions of the business more and more as that mix shifts toward weapons and our battle management portfolio. That's where IBCS sits.

Yes. So we're obviously disappointed to learn that we weren't selected on this phase of the CCA program. The -- as Air Force has described this acquisition strategy as a continuous competition and they're already outlining future phases. So we'll see what that presents in terms of future entry point. We also see the other services in the U.S., and I talked about international partners as well, continuing to look to add to their autonomous vehicle fleet. And so we are pursuing those opportunities.

We are obviously working toward affordability in our product line, so we do not want to be viewed as only offering exquisite and expensive technology. So we've been working to drive down the cost of our offerings, and I think we had quite a compelling offering on CCA and can compete in that marketplace. We are really positioned to provide the best solutions that our customer needs against a high-end threat, however, we are not looking to compete in a more commoditized part of the market that's very low cost and not survivable systems. That's just not our business model, and we know that. So we'll remain disciplined in where we invest in the pieces of the market that we pursue, but we think that what we provide is still highly relevant.

It's a bit of mix as we've been talking about. They have a higher cost plus mix now than they have historically, and we expect that to shift over time, but they are still at a high watermark. And there also is a productivity element to the story. We've talked about supply chain disruption as we have ramped and we are also increasing the scale of that business. You see a mid-single-digit level growth in Mission Systems. But with price coming down on microelectronics, it's actually a much higher volume ramp than is reflected in the total sales growth of the business.

Yes. As we look at the slower growth, it is largely development programs that are dilutive to the both space margin rate and the company margin rate. So as -- that part of the business is no longer as significant. You will see that be both margin and cash tailwinds because there was also CapEx investments planned that we will not extend in those programs now either.

Good performance, Kathy. So following up on Dave's focus on space, I think I've got 2 questions. First, the restricted program that was canceled, is there any chance that we heard a rumor it might have been related to a supplier issue. Is there any chance that, that function or that program might reappear again in the future?

So let me start with your first question on the restricted program. There's very little I can say, given the nature of that program, except to say that the Air Force canceled that program largely due to budgetary concerns and prioritization, but the requirement likely does still exist. And so we will see how that plays out over time. I also -- as we look at the broader space portfolio, we'll answer your SDA question more generally. We see a whole variety of opportunities that we can pursue, so we're simply selective on which ones we're best positioned to win, where we think that we can competitively.

But you did know bid that one program. As we move forward, is the pricing here getting a little bit more competitive as more people join the party?

The way I think about bid strategies is if there is an area where you have a differentiated value, then you are going to be able to price accordingly. If you don't, you won't. And so we don't bid when we don't feel like we have a differentiated value that's going to be successful with the price we need to bid to both win and execute. It's really a decision we make on every capture. It's fundamental to the way we both commit and execute as well as deliver the returns that we expect. So no change there and no difference in the states than it is in other parts of our portfolio.

We looked at the FY '25 president's budget is very much in line with our expectations. So no surprises and no concerns about our portfolio. Obviously, we talked about two things where budget was a factor in DA choosing to down select early on NGI was largely due to budgetary constraints. And then, of course, the restricted space program that we mentioned, but those we have now digested and, of course, reflected not only in our outlook, but my comments about the FY '25 budget. .

They're about 14% right now. And while we don't see that moving significantly in the near term because there's opportunities I noted in the pipeline do take a while to prosecute and turn into sales. We do expect that, that will be a faster segment of growth than our domestic business over the next several years, just the richness of the pipeline.

Absolutely. It's a critically important part of our portfolio. We're very focused on delivering for our customers in that portfolio. And there have been challenges that we own. We've been working on a development program for nearly 10 years. It's going to deliver an amazing step function improvement in propulsion for the Columbia class submarines. And we are near delivering those first care of turbine generators. And that's what the Secretary of the Navy was referring to in his testimony on the Hill.

Yes, I appreciate the question. As you know, we'll provide more specific guidance for all of our businesses and at the enterprise level later this year and provide some indications on the October call as is our traditional approach. I think the broader themes that we've talked about in space today are important. We've touched on the restricted program cancellation in the NGI down select news. But broadly speaking, the doubling of that business's backlog over the last 5 years, the 17% CAGR in sales over that business in the last 4 years, both position us really well for continued success in that business.

Yes, of course. So as we look at our weapons portfolio today, it's about 6% to 7% of revenue. It's growing double digit, and we expect that to continue. A good part of that growth will be supported both by the supplemental that I spoke about in my opening comments in response to Ron's question, but also the European demand has strengthened. So we have a number of opportunities, countries across Europe looking to do the exact same thing the U.S. is doing in replenishing stockpiles for munitions.

Yes. So in terms of backlog, what you would look to see as we signed the IBCS deals that I mentioned with additional countries as we sign the contracts for Triton that I highlighted in the call today. The IVEWS that are in the early stages, the 2 countries progressing toward awards. These are all awards that would be in new franchises that we have not had in the past. While we continue to see just the standard growth in areas like F-35 international and the Triton portfolio with the Australians that are already underway or E-2D franchise with France and Japan. So those are still in the backlog and then you'd add to that, the opportunities that I highlighted this morning that are new franchises for us.

It has, although really what we see now is a whole set of opportunities for product lines that were not in our backlog over the last 5 years. So that's the difference. Our portfolio has largely been high-end capabilities that aren't exportable. And as you look at how the portfolio has evolved over time, these new franchises that I spoke about today or franchises like Triton now getting permissibility for exports to more countries is really opening up a whole new set of opportunities for our company.

So they were largely in line with our expectations, which is reflected in the fact that we had no EAC change in the quarter. We are far along in negotiations with all of our suppliers, and we expect to be closing on those shortly that we're making sure that we have the best scale possible and that we work those negotiations diligently. So I've not set a time barrier to the team more so an outcome, I've set of objectives for them, and they're doing quite well against those expectations. And our suppliers are obviously key to us. We want to make sure that they are able to support the investment in this program that's necessary. And so we're taking their interest in line as well.

The first quarter was particularly strong. As we mentioned, we had anticipated an opportunity for productivity gains and indirect rate-driven enhancement to the margin as well this year that was baked into our guidance. And the timing was such that a lot of that came in, in the first quarter, which is why we've noted that we expect the margin rate to be slightly lower in subsequent quarters than it was right out of the gate set at 10%. And so while there's no single onetime item in the first quarter, it was a particularly strong start and a great way to kick off the year for AS.

Well, there has been strong bipartisan support for the program. We expect that will continue. It, of course, is the nation's policy as reviewed in the nuclear posture review to have 3 legs of strategic deterrence. So we do expect that the program will be recertified, but the government needs to take the process seriously. It's a good process. And they're working through the phases of that recertification now. And as I said, we're providing support to them and stay committed and very focused on delivering the program in the meantime, not getting distracted by the activity associated with the Nunn-McCurdy but supporting it fully.

Sure. I agree with your characterization that there was good progress in the first quarter. And you'll see that further detailed in our 10-Q disclosures as well. We had been running substantially above the levels of 2022 and 2023 in prior years before the macroeconomic disruptions. And so over time, we anticipate that we will normalize to levels more like our history and we saw progress towards that in the first quarter, as you mentioned, particularly in AS.

So we are seeing interest in modernizing really the entire architecture and space. And I've been talking about this for a while, so whether it's intelligence surveillance reconnaissance, communications, missile warning and tracking, the entire space architecture is being upgraded, both in terms of advancing the capability of those sensors and payloads but also the coverage with the broadening of the space architecture. And so we're involved selectively in all of those areas. As you know, we play a key role in ISR communications, and very informed of both missile tracking and missile warning.

Yes. They are, and we do participate in the ground segment. I'd say our strength is more in the sensors and payloads but we look at a full integrated solution and often are asked by the government to support them on the ground systems development that go with the satellites that we're fielding. And so we see that as a marketplace where we absolutely can compete. We just choose to be a bit more selective there, again, back to where we're more differentiated.

Josh, have time for one more question.

Yes. Some part of why we highlighted today some of those investments that we're making that will support growth over the long term is to reflect the statements that we've made that we do see this year being the peak 4% of revenue CapEx expenditures and then starting to see those come down gradually more towards a normalized level in our company, still see those as a robust growth environment. And so there will be investments that we're making. We're committed to do that. But we do not see the same demand for those investments over the next several years that we've seen over the last several.