諾斯洛普·格拉曼 (NOC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northrop Grumman first quarter earnings conference call.

My name is Michael, and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question-and-answer portion at the conclusion of the presentation.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr.

Paul Gregory, Vice President of Investor Relations.

Please proceed, sir.

Very good.

Thank you, Michael.

Good morning, everyone, and welcome to Northrop Grumman's first quarter 2010 conference call.

We provided supplemental information in the form of a PowerPoint presentation that you can access at www.northropgrumman.com.

Before we start, please understand that matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor provisions of Federal security laws.

Forward-looking statements involve risks and uncertainties which are detailed in today's press release and our SEC filings, and may cause actual Company results to differ materially.

During today's call, we'll discuss first quarter results and our guidance for 2010.

We will refer to non-GAAP measures, which are defined and reconciled in our earnings release.

I also want to point out that results for all periods reported reflect the TASC divestiture, which was completed in December of 2009.

On the income statement, TASC sales, operating income and the net gain on sale are accounted for as discontinued operations for the first quarter of 2009, and for all periods presented.

On the call today are our CEO and President, Wes Bush, and our Chief Financial Officer, Jim Palmer.

With that, I think we're ready to go to slide three, and at this point I would like to turn the call over to Wes.

Wes?

Thanks, Paul.

Good morning, everyone, and thanks for joining us.

This morning we'll discuss our first quarter results, operational highlights and Northrop Grumman's outlook for 2010.

Overall, we're pleased with the quarter.

EPS grew 37% to $1.51, as a result of higher sales, higher operating income and lower shares outstanding.

We now expect 2010 earnings from continuing operations of $5.75 to $6 per share, due to operational improvements.

Cash flow for the quarter was impacted by some timing issues, but as we look at the year we're comfortable that we will meet our cash guidance.

During the quarter we repurchased 8.3 million shares of our stock for approximately $500 million, and approximately $440 million remains on our current authorization.

Combined with last year's fourth quarter repurchases of 8.4 million shares, we have now essentially offset the TASC divestiture's impact to 2010 earnings per share.

As a result, we expect share repurchases to moderate from the pace of the last two quarters.

First quarter new business awards totaled $6.9 billion, bringing total backlog to $67.5 billion or approximately two years of sales.

The decline from year end is almost entirely due to a $1.4 billion decline in shipbuilding backlog, where order flow is more lumpy due to the size and duration of contract awards.

Looking ahead, we have many exciting new business opportunities.

At the Company level, EMARSS is a key competitive ISR opportunity that evolved from the Aerial Common Sensor requirements.

Northrop Grumman can bring an unparalleled set of capabilities to this pursuit from across our sectors.

An EMARSS announcement is expected sometime in the fall.

For aerospace, in the unmanned domain, we're pursuing several major new programs, including UCLASS.

This is a multi-billion dollar Navy opportunity that builds on our UCAS work, and leverages our industry-leading unmanned technology.

We're also pursuing NATO AGS, a $2 billion program to deploy Global Hawks for NATO, and other promising international targets.

We continue to make good progress on BAMS, our Global Hawk derivative for the Navy.

This program is currently in development, and the Navy has plans to procure multiple systems in the future, and this represents a terrific opportunity for us down the road when the program going into production.

On the manned side, we have major international opportunities on Advanced Hawkeye and the F/A-18.

In space, we have opportunities for additional advanced AEHF payload builds and upgrades, and we're pursuing the Precision Tracking Space System, which builds on the recently launch STSS missile tracking program.

We continue to be excited about our broad array of differentiated sensor products in electronics, such as VADER, our Vehicle and Dismount Exploitation Radar, which is capable of tracking vehicles and foot traffic over a wide area, and SABR, our Scalable Agile Beam Radar, which will provide state-of-the-art radar performance for the F-16.

Our information system sector continues to pursue a robust set of targets, including the Joint Space Operations Center Mission System, which we expect to be awarded later this year.

We're also excited about being BAE's teammate on the Ground Combat Vehicle, which, over the long term, could be a major program for the Company.

In shipbuilding, we're working with the Navy on follow-on awards at the DDG, LPD and LHA classes.

Finally, technical services also has a number of new opportunities, primarily in the logistics and maintenance area, including longer-term opportunities like the C-21 and C-9 CLS programs.

So although we expect top line budgets to remain under pressure in the coming years, we continue to address a very robust new business pipeline.

Now I'd like to touch on a few of the operating highlights.

As I said on our last call, our number one priority is to achieve sustainable operating performance improvement.

Our sector results this quarter support achievement of our performance objectives for the year.

Aerospace systems had a strong quarter, in which they expanded their operating margin rate to 11%.

We continue to see growth in our manned and unmanned programs, as development programs like Global Hawk and Advanced Hawkeye move into production, complementing strong performance in legacy programs such as the FA-18 and B-2.

During the quarter, we continued to build on our base of franchise programs, with new business awards for Advanced Hawkeye, Global Hawk, restricted work, ICBM, Joint STARS and the F/A-18 program.

Our industry leading unmanned systems continue to deliver mission-enabling capabilities to our customers.

Global Hawk is providing unparalleled in-theater service.

It also recently demonstrated its utility in civil missions, with inaugural science flights for NASA, and in support of earthquake relief efforts in Haiti.

And Fire Scout, deployed aboard the USS McInerney, successfully supported its first drug interdiction mission.

Electronic systems also had solid results for the quarter, with a 12% operating margin rate.

The lower margin rate this quarter principally reflects lower performance on our Flats sequencing system program, which resulted from higher integration, test and deployment costs.

We expect ES will meet our guidance of a mid to high 12% margin rate for the year, despite the slow start in the first quarter.

Operational highlights for the quarter included a $143 million order for more than 500 light-weight laser designated range-finders for the Army.

To date, more than 1,300 of these systems have been delivered and fielded in Iraq and Afghanistan.

We delivered our 500 Directional Infrared Countermeasures aircraft self-protection system, and our STARLite program completed all of its testing.

STARLite is a lightweight, multi-function radar that can support a variety of manned and unmanned platforms for tactical reconnaissance, surveillance and target detection.

Shortly after the end of the first quarter, our F-35 radar successfully flew its first mission systems flight.

Information system sales were slightly lower than last year, primarily due to the planned decline in civil systems volume related to lower state and local government volume.

We view improving performance in IS as one of our best opportunities, so we're particularly pleased with the 8.9% margin rate for the quarter.

We continue to move along a path of sustainable performance improvement at IS.

We had important positive developments this quarter on our VITA program.

The Commonwealth of Virginia announced a comprehensive set of changes to the VITA contract.

We believe the new agreement is an important step forward for both parties.

Upon completion of its review period in late June, the modified agreement will significantly improve the clarity of program scope and performance expectations.

Another positive was the 7% increase in IS new business awards.

We were one of two contractors selected for the development phase of the Navy's Consolidated Afloat Networks and Enterprise Services program, or CANES.

This will lead to a down-select of the contract to improve interoperability and affordability of shipboard network systems across the fleet.

We also continued to capture restricted business in our intelligence division, and defense systems was awarded additional work for our Battlefield Airborne Communications Node, or BACN, which is providing in-theater war fighters with critical real-time battlefield information.

For shipbuilding, first quarter sales increased 25%, which reflects the extra working days this year, and revenue step backs in last year's first quarter.

We continue to focus on improving performance in the Gulf, and our 6.2% margin rate this quarter reflects that progress.

The four LPD ships in the Gulf remain our biggest challenge going forward.

As we said last quarter, our improved operating system provides enhanced visibility that enables us to continually assess performance.

Last week, we redelivered the USS Enterprise to the Navy.

The recent redeliveries of the Enterprise, the Carl Vinson and the George H.W.

Bush will result in lower carrier volume going forward, and will contribute to more ratable shipbuilding sales for the balance of the year.

Technical services had a very strong quarter, with margin rate expansion to 6.4%.

This reflects our strategy of focusing on higher-margin opportunities, especially in the life cycle optimization and engineering business area.

In summary, we're refining our sales estimate for the year to approximately $34.5 billion, and raising our EPS guidance to reflect this quarter's strong operational performance.

The new range is $5.75 to $6 per share.

Our focus for the remainder of the year, and our number one priority across the entire organization, will continue to be achieving sustainable performance improvement.

Improving performance and disciplined cash deployment continue to be Northrop Grumman's greatest shareholder value drivers.

As a management team, we are firmly committed to realizing positive performance improvements in all of our businesses, and we demonstrated some of that improvement with our first quarter results.

So now I'd like to turn the call over to Jim for a more detailed discussion of our quarter, and our 2010 outlook.

Jim?

Thanks Wes, and good morning, ladies and gentlemen.

During my comments this morning, I'll give you my perspective on the quarter, the sector results and our guidance for the sectors, as well as cash flow performance and guidance for the year.

As Wes said, it was a good solid quarter, and a good start for the year.

EPS growth was 37%, with sales, operating improvement, and a lower share count being the biggest growth drivers.

Due largely to cost caps implemented in 2006, we did not have a charge related to the recent legislative changes impacting the Medicare Part D subsidies.

You all might remember that we had indicated in our 10-K that Medicare Part D subsidies were not significant.

So let's look at the quarter, starting with sales.

A growth rate of 8.5%, which included the impact of more working days than this year's first quarter.

Excluding that impact, we estimate that sales growth was consistent with our guidance for the low single-digit growth rate.

Operating income increased 24%, due to lower net pension expense, higher segment operating income, and lower corporate allocated expense.

And then the third driver of EPS growth was a nearly 8% reduction in our weighted average share count as a result of our share repurchase program.

So let me start with sales then again, and try to put it into a little bit of perspective due to the additional working days.

Depending on the sector of the impacts, and impacts like the snow on the East Coast that we saw in the first quarter, the additional days ranged anywhere from two to five days, and obviously the impact was not uniform across the five sectors but I estimate it accounted for about $400 million of this quarter's year-over-year growth.

And then another $100 million of growth reflects the first quarter 2009 step back in sales that we recorded in shipbuilding, due to the negative contract adjustments on the LPD and DDG programs last year in the first quarter.

So adjusting for those two items, sales growth was between 2% and 3%, and as I said, consistent with our updated guidance for the year.

On an earnings per share basis, the additional working days represent about $0.08 per share.

So looking ahead, the fourth quarter of 2010 will have fewer working days than last year's fourth quarter, with the second and third quarters having the same number of work days as in 2009.

Let's spend a few minutes and talk about each of the sectors.

Aerospace sales reflect the impact of the extra working days, with some modest growth beyond that.

For the year, we continue to expect stable revenues, with some variability depending upon the timing of the NPOESS restructuring.

Until that program is restructured, we continue to work under our current contract, with 2010 first quarter revenues for NPOESS being comparable to last year.

Aerospace sales performance reflects the overall strength of its portfolio, especially in light of last year's KEI termination, which represented about $60 million in sales in last year's first quarter that were not repeated this year.

Solid sales results were accompanied by the strong 11% operating margin, 50 basis points better than last year, due to the improved performance across a number of different programs.

For the year, we continue to expect a mid-10% operating margin rate, but I think we could potentially do slightly better as well.

Electronic sales grew 5%, reflecting the extra days, with a 12% operating margin.

The lower margin rate this quarter reflects the lower performance on our Flats sequencing system program, as well as lower royalty income than in the prior year, and a small provision for work force reduction at some selected sites at ES.

They recently announced a small reduction in work force to rebalance the skill mix required for the existing backlog and anticipated new awards.

And for the year we continue to expect ES operating margin rates in the mid to high 12% range.

For information systems, the additional days were not a significant benefit in the quarter, due to the snow days on the East Coast.

The decline in civil revenues, which were anticipated or planned, were partially offset by about a 4% increase for our intelligence programs, where we continue to see growth opportunities.

In our defense systems division, revenue was down slightly this quarter, due to the higher volume of in-theater hardware deliveries during the first quarter of 2009.

This included programs like the Command Post Platform, Trailer Mounted Support System, Counter Rocket Artillery and Mortars, and Integrated Base Defence Security System.

Looking forward, we continue to see good demand in our core C4ISR areas, with -- and intelligence domains, particularly in a number of restricted areas.

We do see some pressure on IS sales for the year, but we are also increasing our margin rate guidance for information systems to the mid 8%, from low to mid 8%.

Shipbuilding sales increased 25%.

This increase needs to be put in context, in terms of what I expect for the balance of the year.

$346 million sales growth for the quarter was driven by several factors.

First, the additional days accounted for about $115 million of growth.

Secondly, last quarter's first quarter sales were reduced by about a $100 million step-back in revenues for the LPD and DDG EAC adjustments.

And thirdly, we experienced some cost growth in LPDs this quarter, as we worked towards ensuring that we are producing and delivering quality ships.

Looking ahead, shipbuilding sales will be more ratable for the rest of the year, due to the redelivery of the Enterprise, which contributed about $55 million of revenues in the first quarter that obviously won't continue for the balance of the year.

As Wes said, we expect shipbuilding sales will be approximately $6.2 billion for the year, and are comparable to the 2009 sales level, with margin rates between 5% and 6%.

Technical services had a 21% sales growth, and their operating income increased 32% to 6.4%.

First quarter sales benefited from the additional days, and included higher volume for existing programs like the Counter Narco-terrorism Program, as well as new programs like KC-10 and C-20, which were competitive captures in 2009.

Higher operating income and higher operating rate reflect the volume increases, as well as the more favorable contract mix towards the higher-margin life cycle optimization engineering programs.

We continue to expect a low to mid 6% margin rate, and sales could be stronger than our original guidance of 2% to 4% depending upon ID/IQ task order levels over the balance of the year.

Turning to the cash for the quarter, operations used $531 million of cash, and free cash flow outflow totaled $669 million for the quarter.

As many of you know, the first quarter is typically our lowest quarter, but in addition to the seasonality issues there were several timing issues that impacted our results.

The first was a delay in information systems', billings and collections, which was related to the TASC divestiture; this, along with a decrease in payables, negatively impacted working capital by about $425 million.

These are timing issues; we're already in process of recovering those issues in the second quarter.

The first quarter also included an additional payroll payment due to the additional days in the quarter, as well as a higher Federal tax payment.

These two items represented about $150 million.

And so when I consider each of those items, as Wes said we're comfortable with our guidance for cash flow, and we continue to expect cash flow from operations of $2.5 billion to $3 billion for the year, and free cash flow in the range of $1.7 billion to $2.2 billion before discretionary pension contributions.

And also as Wes mentioned, based on first quarter results we now expect earnings from continuing -- earnings per share from continuing operations to be $5.75 to $6 per share, an additional -- and an increase of $0.05 for the year; driven by higher sales at shipbuilding, I'd say potentially higher sales in aerospace systems and technical services, with higher margin rates for information systems and potentially a slight increase in aerospace systems, I see as the drivers for the increase.

So I'd say in summary, a good solid quarter, one that supports our improved operational outlook for the year, and demonstrates the focus that Wes talked about in driving sustainable performance improvement, and that performance improvement yielding results.

So Paul, I think with that, we're ready to turn it over for Q&A.

Very good.

Thanks, Jim.

Michael, I think we're ready to go to Q&A.

(Operator Instructions)

Your question comes if the line of Robert Spingarn of Credit Suisse.

You may proceed.

Good morning.

Good morning, Robert.

Wes, this topic has been talked about so much, but I thought perhaps you could quickly walk through your current position on in -- back into tankers as subcontractor, would you be interested?

No, we have withdrawn completely from the tanker competition; we were I think very clear and very transparent around how we made that decision, and I think we came to a very timely notification of the Defense Department and broadly to the community of our position on tanker after the final RFP was released.

So we are no longer participating in the tanker competition.

Anyway, I guess what I'm getting at is would being a sub de-risk it enough to make sense?

No, we concluded we were not interested in participating.

Okay.

And then for Jim, on the shipbuilding revenue flow throughout the rest of the year, you just talked about why it's front-ended, the extra work days, so forth, and the delivery of the Enterprise; how should we think about the Q2 through Q4 run rate, because it sounds like Q4 will be the lowest?

Or should they be more even than the rest of the business?

I'd see it as more even over the next three quarters.

With the margins similar?

Our guidance is 5% to 6% for the year.

Understood.

So you're going to be lower than this quarter, but will the margins be even throughout as well?

We look at margins every quarter.

You know, as I've said a number of times, I look at this business as a very long-term business, and so I don't pay attention to -- that much to the quarterly margin.

I look more at the long-term margin rate.

Okay.

Finally, how did the insurance recovery affect the quarter?

Essentially we -- as we said, we had cost growth in LPDs, and then the insurance recovery was essentially a recovery of the some of the cost growth that we had previously recognized on LPDs.

So those two items taken together, that contributed a small or single-digit type number to the quarter.

In terms of margin and/or cash flow, how should we think about that?

Positive cash flow from the insurance recovery, negative from the cost growth.

Okay.

Thanks very much.

Thanks, Rob.

Your next question comes from the line of Doug Harned with Sanford C.

Bernstein.

You may proceed.

Good morning, Doug.

On information systems, you know, three years ago there had been a strong focus on growing the top line there, and that led to the state and local programs, that have been pretty difficult.

Today, when you look at the environment ahead, and I'd say it's a little bit more challenging, and you've shifted away from pursuing state and local outsourcing deals, can you describe what your top line growth aspirations are for information systems, and which business areas you really see offering the most potential for growth?

This is Wes.

Let me address that.

We have been, I think, very clear, and you referenced it, that we have taken a look -- very careful look over the last few years at state and local to determine that that is not really a very attractive marketplace for us, given the way that we typically bring ultimate value to customers; and so we've been backing away from that, and as we said in our remarks our sales in our civil systems part of IS have been on a planned decline as a result of those decisions that we made.

At the same time, the defense business and the intelligence business and information systems, which together represent right around 75% of our total sales of IS, are strong, healthy businesses.

When I went through my earlier remarks on opportunities, you probably noticed that there were quite a few of the opportunities that I discussed associated with information systems.

We bring a number of what we see truly discriminating capabilities to defense intelligence, ranging from the work that we do in command and control, the work of course that we do in ISR, where we have just some absolutely pre-eminent positions, and the work that we do in cyber security, which we see continuing to grow quite robustly.

So we are optimistic about the outlook at IS, in both intel and defense.

We see sort of a little bit longer cycle for civil, largely driven by bringing the expertise that we have in cyber security from intel and defense into many of our civil applications, where we're beginning to see the cyber capabilities as an enabler to go after more of the sophisticated requirements of other Federal agencies.

So we like this business.

We think it's a good business for our future, and we're looking forward to getting to the right place in our balance of portfolio on civil, and continuing to grow the rest of the business.

Let me also give a perspective of how we're thinking about that growth.

There are various layers in the information systems market.

Now, we are really focusing our attention on the layers where we can bring more value through engineering content, where we have truly differentiated offerings, and where the margin opportunities are consistent with our margin expansion objectives in the Company.

So we will not be going after opportunities in this space simply because of top line revenue opportunities.

We're looking very carefully at the opportunities as to whether or not they support our margin rate objectives.

Okay.

And then just switching gears for a moment, you recently described your UAV business as generating about $2 billion in revenues; what fraction of that is tied to HALE systems?

And when you look at other parts of unmanned air systems, you mentioned a couple in your opening remarks, how do you see growth proceeding there?

Well, our HALE systems represent the preponderance of our sales in UAV.

The HALE systems are large platforms, each individually large, and they're large programs, such as Global Hawk and BAMS.

So naturally, they do represent a substantial fraction.

As we look at the emerging requirements, we see a very healthy continuing future for HALE.

The idea that you can have an asset at an altitude that affords it an enormous amount of visibility and collection capability, and availability, over many, many long hours of duration of focus, is just a very, very useful tool for military.

That said, while we are really focused on growing HALE, we're also focused on some of the other applications, and there's a long list I could point out, but in one particular is UCAS; the concept of the having unmanned operations off of a carrier will transform a lot of the fundamental concept of operations for force deployment, and we see that as another ground-breaking opportunity in the application of unmanned.

We have a lot of other great actions going on in unmanned, whether it's Fire Scout or even smaller unmanned vehicles.

We continue to apply a lot of engineering innovation to this field, and we want to stay differentiated technology and capability-wise, because we see this as a business area that's got a great future.

Very good.

Thank you.

Your next question comes from the line of Sam Pearlstein of Wells Fargo.

You may proceed.

Good morning.

Good morning.

Can you talk a little bit more about aerospace, just where -- I think you had said in the past that we should see the year fairly stable in revenues, you added the strong growth this quarter, and I know the extra days were in there; and so I'm just wondering as you think about the remainder of the year, is there anything that should be weakening that could take the current margin of 11% back down to the mid 9s, and the growth rate a little bit lower?

Sam, in terms of revenues, as I said in my comments the biggest variable at this point in time is the NPOESS program, and how it's going to be restructured, and what work we're going to retain on a go forward basis.

So we continue to work with customers on potential restructuring, but at this point it's unknown exactly what's going to happen there.

So I guess maybe I'm a little cautious as to what the future revenue outlook is for that program on a go-forward basis.

In terms of performance, margin rate, absolutely wonderful quarter out of those guys this quarter, 11% margins.

As I said, the guidance for the year is still for the mid-10s, with some opportunity I think to increase margins as we go through the year, but probably too early to call at this point in time.

Okay.

Can you frame in terms of how large close NPOESS was in 2009?

I think what we said in the first quarter, or at the call in January year end call, is that NPOESS was kind of about a $520 million kind of number for the year, and it's pretty ratable over the year.

Okay.

Thank you.

And actually, Jim, can you talk about some of the below the operating line numbers as we look forward to the year?

Interest was certainly higher in the first quarter than I would have expected; how do you think that plays out for the year, and the tax rate as well?

Interest, essentially we sold, in I guess it was second quarter of last year, $850 million of debt, so that contributed to the additional interest costs this year, as well as some capitalized leases added some interest costs for the quarter.

In terms of tax rate, on a regular basis I would say the -- kind of the 34.5% is what I would expect on a go-forward basis.

We do have the potential of the resolution of the 2004 to 2006 IRS exam, which would be -- could be favorable to tax rate for the year if resolved in our favor, which frankly that is our expectation.

Okay.

Great.

Thank you.

Your next question comes from the line of David Strauss of UBS.

You may proceed.

Good morning.

Wes, can you talk about where you are with VITA?

It looks like you completed negotiations with Virginia in the quarter.

Obviously, you took up the IT margin expectation for the quarter; did resolution on have anything to do with that?

It helped a little bit.

I think, though, the main perspective on VITA is more forward-looking in terms of where we're going on a contract.

We spent a lot of time together with the VITA organization in the Commonwealth, and with the Administration in the Commonwealth, really working to get the parties together and focused on how we moved the program forward.

As you know, the program involves many, many different agencies across the Commonwealth, and we were very pleased with the modified agreement, because we do think it brings a lot more clarity into the actual scope and the specific performance expectations, so that we get better alignment between the customers and ourselves around where we are applying energy to get to the outcomes.

So we see it as a good step forward.

But we think the goodness of that manifests, you know, in the future as we go forward.

Largely in the future.

So that's the way I would characterize VITA.

Okay.

And Jim, was there any pension contribution in the quarter, and can you give us an update, if there is any, on CAS harmonization?

On pension contributions, we had our normal required contributions, and frankly I don't recall how much that was for the quarter.

We did have a voluntary contribution of $30 million related to some of our foreign pension plans, so that was the only unusual item, if you want to characterize it that way, in the quarter.

On CAS harmonization, we're waiting just like all of you are for some indication of how or when it's going to proceed.

I really don't have any new or more current information, David.

Okay.

And timing on the $300 million that you're looking to contribute this year to the pension plan voluntarily?

Second quarter.

Thank you.

Your next question comes from the Howard Rubel of Jefferies.

You may proceed.

Thank you very much.

To return to the shipyard, Wes, there's obviously a restart that's going to proceed with the DDG-51.

What are you doing to bring this ship into the yard so that it performs -- you know, the work just gets done a lot better and more efficiently and so on, and the planning you're undertaking there?

Howard, thanks for asking.

The DDG restart program is a really important program for our Company.

It represents, as you know, an opportunity to continue a line of ship class that over the years we have demonstrated very, very good performance on, the last few years as we went through some of the struggles in the Gulf, that performance declined.

But we expect that with the new class of ships we'll be able to return to the level of performance demonstrated in the past.

A big part of that is the operating system that we put in place in the Gulf that's up and running, and that's giving us the type of transparency and the degree -- the in-depth understanding that we need to not only better plan the execution, but in real time really see how it's going, in a shipyard that today is managing multiple classes of ships, compared to the past back in the '90s when it really was just the DDG program that was going through.

So we feel good about the progress we've made operationally in being able to get that underway.

The other thing I would say, though, is we are not yet under contract fully for those DDGs, so we are in the process of working through the contracting with the Navy, and we are very focused on making sure that those contracts support our opportunity to perform well.

So we're looking at it both operationally and contracting, to make sure that we end up in the right place.

Just a follow, one more item on the shipyard in general, at one point there was either skill shortages or just other things that just weren't right.

How would you characterize what you've done to sort of give you the confidence that when you wake up in the morning you're not going to find, you know, something bad happen?

Well, I would characterize it on just about every front of the operational perspective of our shipyard in the Gulf.

As you know we integrated, and we brought together the Newport News operations and the Gulf operations under common leadership of Mike Petters at the beginning of 2008, so we're more than two years into that process.

By doing that, we've been able to bring a lot of things from Newport News to the Gulf and, quite frankly, vice versa; we've I think done a very good job under Mike's leadership, Mike and his team's leadership of figuring out how to best optimize where we're going.

That means looking at every single aspect.

We talked a lot about the operating system, and how we actually managed the flow of the work through the yard in the Gulf.

Quality is another area where we've just put an extraordinary focus on changing the way that we've addressed that opportunity.

Leadership development, talent development, training of the work force, you name it, just about every aspect of the operational capacity in the Gulf, and then translating a lot of that back into Newport News.

So I think while we're clearly not out of the woods, we have a margin rate that we're forecasting in shipbuilding this year that's not a margin rate that we would be happy with for the long term, but it does represent a good step up over last year.

We still have several programs, primarily the LPDs in the Gulf, that are operating at a low or no margin rate, that will pull us down for a while on our margin rate improvement curve.

But I see us making the solid incremental steps forward to make the shipbuilding business a business that is doing the right things for both our customers and for our shareholders.

Thank you, Wes.

Thanks, Howard.

Your next question comes from the line of Heidi Wood of Morgan Stanley.

You may proceed.

Thank you.

Jim, a question for you.

Can you talk about the F-35, what kind of revenue growth have you seen year-over-year, and what kind of booking margins are you recognizing now?

Heidi, I'm not going to get into individual booking rates on programs, you know, we did say in the fourth quarter that we adjusted our margin rates on the SDD program at aerospace to reflect our expectation for the change and award fee, and to our milestone and cost schedule prospective.

So we basically did most of that adjustment in the fourth quarter.

We continue to perform on across the Company on LRIP programs, as well as some small amounts still remaining on SDD principally in the information systems area on the SDD, principally in the information systems area on the CNI suites, but a little bit remaining on aerospace on the fuselage program as well.

But most of our effort today on F-35 is LRIP-related, and revenues have an increase over 2009, but I wouldn't characterize it as that significant at this point in time.

Thank you.

Maybe a bigger question, Wes, you guys started strong as gate this year with number of bold initiatives; can you give us some thumbnail your thinking about potential for further strategic initiatives or changes ahead that we might be anticipating?

Well, as we go forward and we understand the environment, we are constantly looking at what I might call strategic initiatives, but I guess Heidi I would continue to focus your attention on the performance activities that we have underway.

I see, given the portfolio we have, which we think is very well aligned with what our customers need, I think our biggest opportunity for shareholder value creation goes to performance improvement, things like margin rate expansion, and being smart about how we deploy our cash.

Those are the two things that we're really focused on and driving on as the most near-term opportunities for shareholder value expansion.

Now that being said, we of course are looking very carefully at our portfolio, we're looking downstream, but our immediate focus is on performance and deploying our cash wisely.

All right.

Thanks a lot, Wes.

Thank you, Heidi.

Your next question comes from the line of Cai von Rumohr of Cowen and Company.

You may proceed.

Thank you very much.

On the insurance claim you mentioned the single-digit net difference; how much was the claim recovery in the quarter, and how much could you still recover, because your Q indicates you still have some claims outstanding?

The recovery on -- related to Hurricane Ike, this was the last piece of what we would have expected to get.

It was $17 million, and the Q essentially refers to the ongoing litigation with FM Global related to Katrina.

Got it, thank you.

And then, you know, I noticed your cash flow indicates, you know amortization of assets of $39 million, but the Q suggests you'll do $65 million over the remainder of the year, which would suggest a big step down, and then $57 million the next year.

Refresh my memory; why are we seeing that?

I mean, are those two items correct, and why are we seeing that sharp fall off?

I'm sure they're correct.

The fall off next year is due to purchased intangibles, some of the amortization being completed this year.

Why 69 versus 39, I'd have to get into the details.

I'll ask Paul to give you a call on that one.

Okay.

Terrific.

Thanks so much.

Okay.

Your next question comes from the line of Joe Nadol of JPMorgan.

You may proceed.

Thanks, good morning.

Wes, on the share repurchase you indicated that it's going to come off after this quarter, and after the past two quarters were, you know, were at higher level.

If you just look at where your volume in the last couple quarters relative to where you were before you sold TASC, it's about $200 or $300 million per quarter higher.

And then -- you know, so that gets you around $500 of excess share repurchase.

Your proceeds were $1.1 billion; just can you help put into context a little bit how you're thinking about share repurchase the rest of the year, and what is kind of the normalized level here?

We've been careful never to give an exact forecast when we're in the market of how much we're buying or when we're buying, so I wouldn't want to start down that path.

The thing I would just point out is, when we divested TASC we were very clear about our intent to offset the dilution to earnings per share resulting from that divestiture through the use of the net proceeds, you point out about $1.1 billion, to repurchase shares.

So we increased our rate rather substantially there for a while.

And my comments this morning were simply intended to say, we feel that we've essentially achieved that offset, so we're going to go back to what we might view as a more typical level.

I think that's about all the flavor I would give to it.

You know, we do have fair amount left in our outstanding authorization, and we continually look at what the level of authorization should be that we seek from our Board, and I think you can see from our history we've got a pretty good track record of what we call balanced cash within our Company.

Is there any color you can provide on how you're thinking about the, you know, M&A?

We're always looking.

We participate in that part of our marketplace very actively.

I would say we will continue to be very disciplined in how we look at it.

Given that we are quite pleased with the portfolio we have today, I don't feel a burning need to fill some gaping hole.

But that being said, we do look, and if there are good value opportunities then we will look at it even more seriously.

But right now I would say that we like the way we've been looking at cash deployment.

Okay, and then just one more for you, Wes.

On the bookings, you know, you were about 0.8 in Q1 in terms of book to bill, and you gave -- you rattled off a whole bunch of pursuits this year; I'm wondering if you can put it into context, and provide what your bookings target is or even a range for the year, or where you expect to end the year in terms of backlog?

No, we typically don't guide in terms of backlog.

The one thing I would say, Joe, in that regard, when we look in our backlog, first off we don't report in our backlog on the unfunded side either unexercised contract options or unfunded IDIQ orders.

And as time has gone by, we're finding more and more things are getting channeled through the IDIQ channel.

So if you look, interestingly, at our funded backlog for the quarter, which is in the release that we put out, every single one of our sectors grew their funded backlog year-over-year.

And that is, I think, a good place for us to be.

We are satisfied with where we are right now in backlog.

Of course I'd like to expand it, and we're working hard to expand it.

So directionally, I would say our objective is up.

But I would shy away from being very quantitative with respect to an outcome of the year.

Okay.

Thanks.

Thank you.

Your next question comes from the line of Robert Stallard of Macquarie.

You may proceed.

Good morning.

Good morning.

Just a couple of quick ship questions, first of all on LPD you said there was cost creep in the quarter; is that just reality sort of trueing up with your estimated cost to complete, or is there any new issues here?

I wouldn't characterize it as new issues, you know, as we have said the operating system and processes that we put in place gives us greater visibility on a more current basis, and so every quarter we look at the performance in those and other ships and make some small adjustments, and that's really what we saw this quarter.

Okay.

And then on the submarine front side, you didn't actually mention that so far, what do you think the impact will be on Northrop Grumman as the Virginia-class submarine moves to two a year, looking at both your revenues and your operating margin?

That's out in the 2012, 2013 time frame, Rob.

But you'll be getting some long-lead items, I would have though, in advance of that?

We're getting some growth in Virginia class between now and then, but when it really starts to make a difference is then.

And it is a good program.

The program is performing that's very well, so we look forward to the opportunity to increase production.

And at this stage you're not prepared to scale how big an impact that could be?

Nope.

Okay.

Your next question comes from the line of George Shapiro Access 342.

You may proceed.

Hey, George.

Good morning, Jim.

I wanted to ask a couple of things.

The first quarter revenue you commented were about $400 million higher because of the additional days.

I assume that that means the fourth quarter will be about $400 million lower?

Yes.

You've got it.

Okay.

And then normally, though, from the first to the fourth quarter the revenues are anywhere from higher by $1 billion to $1.4 billion, so would that still hold this year or it's only going to be, you know, $400 million -- or $800 million difference from the fist to the fourth quarter, as opposed to being normally $1 billion to $1.4 billion difference?

George, as I look at my crystal ball, I would characterize revenues this year much more ratable over the fourth quarter, so what you see in the first quarter is kind of my expectations for the quarterly revenues on a go-forward basis.

Okay.

Then just, Jim, if you could provide a little more detail on -- you had three provisions in electronics -- or three comments on electronics that caused the weaker margin; could you break out how much was like the work force provision versus the other provisions?

Well, those -- so the three items are the Flats sequencing sorting program, it's operational issues, the lower royalty -- you know, last year royalty income was like $4 million, and then the provision for the work force reduction, which is single-digit type numbers.

The way I look at it, George, is if I, you know, adjust both 2010 and 2009 for the royalty and the work force reduction, the 80-basis point decline in margin becomes about 30 basis points.

So that then says that essentially 90 basis points was due to the Flats sequencing sorting program, and the others were these two small items.

Okay.

That's helpful.

Thanks.

Just one last point, for the second quarter in a row we've seen lower corporate and unallocated.

I mean, is there something going on there, or is that just how it happened?

It's lumpy.

Okay.

Thanks a lot.

Thanks, George.

Your next question comes from the line of Noah Poponak of Goldman Sachs.

You may proceed.

Good morning, guys.

Hi, Noah.

Good morning, guys.

Back to IS, I think in your prepared remarks you said pressure on IS sales through the year, it's obviously lower because of TASC, but just wanted to clarify that you meant organically, and if so, can you kind of quantify that?

We didn't change our guidance, first of all, for the sales in IS but as we just look at our business, we do see good growth opportunities in intelligence and the defense business,and we do expect that civil will be down.

So -- and then I look around the industry, and I see other guys having concerns about their information systems, and so I'm factoring a little bit of that concern into the business that we still having -- see as having strong growth in DSD and ISD.

So I'm just hedging a little bit, based on what others are saying about their business, but on the on the other hand as Wes said, we see good opportunities in both the defense piece of our business and the intelligence piece of our business, and the command control C4ISR areas, and obviously cyber as well.

Okay.

But you -- so do you still expect organic growth in the business for the full year?

Yes.

A follow up on tanker, is there any reason you could potentially have to take a charge for bid and proposal activity on that program at any point?

I don't think so.

Not at all.

Okay.

One last question, I think we got some more definitized OCI rules recently and, you know, a Company that obviously knows a lot there, I just wonder if you can maybe comment on whether or not there's anything in there that was surprising, and what the impact might be to, you know, the rest of the industry that hasn't already taken the strategic action you guys did?

I do think it will cause the rest of the industry to take another hard look at their OCI businesses.

If anything -- this is Wes, I think that the outcome that we saw out of the DOD confirmed our thinking in our divestiture, very strongly confirmed it.

The rule that came forward, if you decompose it, really had sort of three basic types of conflicts that it was worried about; cases where there were impaired objectivity, so if a contractor is giving technical advice on a procurement, and the contractor also has some form of financial interest in that procurement, that conflict, it talked about unfair access to non-public information, which is kind of a broad statement around how you would look at access.

And then the third category around bias ground rules, so that's if a contractor happens to be working on one contract, but you're in a position to help set the grown rules for some future acquisition that it might compete for.

These are pretty broad statements about the way that Federal procurement officials need to think about OCI and interpret OCI, and are pretty well aligned with the framework that we saw our largest customers in the TASC business using when they were alerting us last year that we would not be able to compete for some of the business we currently had.

So instead of standing by and watching that business dissipate, we think we took a very appropriate action, both for our customers and our shareholders, to divest that business, put it in the hands of an organization that did not have these types of conflicts so that it can grow and thrive, and I think with these rules it has a good opportunity to grow and thrive, in looking at how it's situated relative to the businesses that remain within some of the other large contractors.

So I do think it will cause others to stand back and think carefully about what they're doing.

That's interesting.

Thanks a lot, and good quarter.

Thank you very much.

We'll do one more.

Your next question comes from the line of Troy Lahr of Stifel Nicolaus.

You may proceed.

Thanks.

I'm wondering if you guys can talk briefly about the competitive landscapes in the information systems areas and technical services; are you seeing more competitors out there as pricing pressure's starting to creep in?

I would say on information systems -- there's two different answers for information systems and technical services.

In information systems, we tend to participate in sort of the higher end of the marketplace that's largely engineering-driven and large-scale solutions driven, and while there is always pricing pressure in every single market that we participate in, there it is largely value determinations that we see in source selection.

So you've got to support the customers' budgets obviously, but I think the customers in those areas have a little bit broader view of value in terms of the solution that's being brought to the table, and how that satisfies their business case.

In technical services that area has always been, and I think will increasingly be, much more price sensitive.

We have sort of three major areas in technical services.

We do a lot of base and range support in our system life cycle -- the system support group.

We do a lot of training work, and of course we do a lot of operations and maintenance and logistics work in our life cycle optimization business.

All three of those have, I would say, intense price sensitivity, and I think we'll continue to have that sensitivity.

So a little bit different flavor for the two different businesses.

Okay.

And then as you wrap up on KC-10, is there profitability, and is that program tracking in line with your expectations?

We're going through the ramp up phase, and working through the what I would characterize as the typical transitional issues in ramp up.

We're satisfied with the trajectory that we see there, and see this as a really good program opportunity for the Company.

Great.

Thanks guys.

Thank you.

Michael, I think with that, we are ready to end the call.

Yes.

So I just appreciate everyone's interest in our call today.

As we said, we think we are off to a good start for the year.

A lot of work to be done.

Pleased that we could raise our EPS guidance, and look forward to discussing it with you again on our next quarter call.

Thanks, everyone.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day.