諾斯洛普·格拉曼 (NOC) 2011 Q1 法說會逐字稿

Good day and welcome to the first-quarter 2011 Northrop Grumman earnings teleconference.

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

We will conduct a question-and-answer session after management's remarks.

(Operator Instructions).

I will now turn the presentation over to your host, Vice President of Investor Relations, Mr.

Paul Gregory.

Sir, you may proceed.

Thank you Candace.

Good morning and welcome to Northrop Grumman's first-quarter 2011 conference call.

We've 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 securities 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 will discuss first-quarter 2011 results and our 2011 guidance for continuing operations.

Our first-quarter results and our 2011 guidance reflect the spinoff of our shipbuilding business, Huntington Ingalls Industries on March 31.

Shipbuilding results for the first quarter are reported as discontinued operations in the press release and this quarter's 10-Q filing.

Our results for discontinued operations may not reflect Huntington Ingalls' results of operations or financial condition as an independent publicly-owned company.

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

At this point, please go to Slide 3 and I'd like to turn the call over to Wes.

Good morning everyone.

Thanks for joining us.

On today's call, we'll discuss first-quarter highlights and our outlook for the rest of the year.

First-quarter financial results were strong, and we are off to a solid start for the year.

We completed the spinoff of Huntington Ingalls Industries to Northrop Grumman shareholders on March 31.

Our shareholders received one share of HII for every six shares of Northrop Grumman.

Along with providing greater investor choice, we believe that the separation of the businesses supports value creation for the shareholders, customers and employees of both companies.

Today, we also announced that we are raising our dividend and increasing our outstanding share repurchase authorization to $4 billion, which includes committing the $1.4 billion spinoff contribution to share repurchases.

This approach means that the full value of the shipbuilding business will be transferred to our shareholders.

I want to acknowledge the hard work of everyone involved in successfully executing the spinoff.

I also want to thank Mike Petters, the CEO of Huntington Ingalls, and his team for their contributions to Northrop Grumman.

Finally, I'd like to thank the Navy for their construction engagement throughout the spinoff process.

Northrop Grumman is now much more sharply focused on our core markets, integrated C4ISR, cyber security, unmanned systems, and logistics.

Our four sectors are well-positioned and have tremendous opportunities for collaboration synergy.

As a management team, we are looking forward to maximizing our opportunities in these markets.

While we believe the Company's portfolio is well aligned with our customers' priorities, we always look for opportunities to improve performance and alignment, including continued portfolio shaping.

As a management team, we are also focused on improving our execution and cost competitiveness while maintaining flexibility in a rapidly changing environment.

Our priority is to position Northrop Grumman for success in an increasingly competitive environment.

Turning to financial highlights for the quarter on Slide 4, earnings per share from continuing operations rose 25% to $1.67.

On a consolidated basis, our segment operating margin rate expanded by 50 basis points.

Our leadership team continues to focus on sustaining and building on the substantial performance improvement we achieved in 2010.

All four sectors delivered higher operating income and each of the sectors is building a track record of consistent execution.

Operating income increased 19%, reflecting higher pension income, stronger segment operating income, and lower corporate expenses.

Our year-over-year sales variance was primarily driven by the decision to reduce our participation in the Nevada National Security Site joint venture.

Excluding this change, first-quarter sales would've been relatively comparable to last year.

So our top line has been fairly resilient despite operating under the continuing resolutions for the last six months.

Our experience is that the series of CRs held up new contracts and also negatively influenced customer willingness to spend on some existing contracts and programs in order to preserve funds, should the CR continue.

Sales for Aerospace Systems were slightly higher in the quarter due to increased volume for manned aircraft, unmanned systems and restricted programs, which more than offset declines in civil space programs.

Aerospace Systems ended the quarter with a $20 billion backlog and continues to have several large pending awards, including LRIP 4 for the F-35 and the latest multi-year for the F/A-18.

Sales for Electronic Systems and Information Systems, our shorter cycle businesses, were more impacted by acquisition delays caused by domestic and international budget uncertainties.

At Technical Services, the sales decline was solely the result of our strategic decision to reduce our participation in the Nevada National Security Site joint venture.

That decision also reduced our backlog by $1.7 billion.

At the end of the quarter, total backlog adjusted for the HII spinoff was $43.7 billion.

New business awards for the quarter totaled $5.3 billion, and at the end of the quarter, total backlog represented about 1.6 times sales.

While budget uncertainty is a reality and reductions to certain programs are likely inevitable, we believe we will continue to see strong demand in our core integrated C4ISR, unmanned systems, cyber security and logistics markets.

Given the challenges of irregular warfare and other emerging threats, investments in persistence awareness through integrated C4ISR systems are essential to global security.

We have a strong, broad foundation of capabilities and mission expertise in C4ISR, and we continue to work with our customers to expand our C4ISR capabilities.

In particular, we are developing advanced multi-function sensors and network capabilities with open-system architectures to meet emerging customer information needs.

We are also developing new concepts for more agile and persistent ISR capabilities which integrate airborne and space platforms using a balanced mix of manned and unmanned systems that can address a broad range of security challenges.

Examples in this area include our "bake in" system, LEMV, and the migration of our flexible unmanned architecture model to additional platforms such as the Bell 407 helicopter.

We also believe that investment in unmanned systems will be a priority, both domestically and internationally.

As Global Hawk continues to demonstrate its robust C4ISR capabilities across a multitude of military and nonmilitary global missions ranging from monitoring developments in the Middle East to gathering information in the aftermath of the earthquake in Japan, we are seeing increased international interest in this versatile platform.

Development of BAMS, its maritime derivative, is proceeding well.

We would expect this platform to demonstrate a similar level of mission versatility.

We continue to extend our technological leadership and broaden the capabilities and missions of our unmanned systems with the development of platforms ranging from the fixed-wing UCAS-D to rotary wing platforms like Fire scout and Fire-X.

We continue to invest in and capture cyber security work, and we are currently providing advanced cyber security technology to the defense and intelligence communities.

Our acquisition of Essex several years ago brought unique capabilities and customer intimacy that successfully supported our growth in this area.

We expect the demand for advanced cyber security solutions to continue to expand.

This growth will be driven by investment in unique cyber security opportunities as well as the broader recognition of the need to embed cyber security in our critical systems.

We believe we are also well-positioned in logistics, where we expect continued growth in the maintenance, repair and overhaul, or MRO, market, as pressure on the investment accounts drives the need for service life extension of existing platforms.

We are a major player in this area, currently providing MRO services for the B-2, Joint STARS, KC-10, UK AWACS, A-10, and C-20.

This month, our Lake Charles maintenance and modification center was selected the 2011 MRO Facility of the Year in the military MRO category by Aviation Week and Overhaul and Maintenance magazines.

The Lake Charles maintenance and modification center provides maintenance, repair and overhaul support to platforms such as Joint Stars and KC-10.

Our portfolio is also well aligned with longer-term opportunities, including the long-range strike initiative and emerging directed energy and non-kinetic products and systems.

We have a number of activities underway to position Northrop to compete successfully for the long-range strike initiative.

Our solid-state directed energy laser demonstrated its capability in a Navy exercise in which a small moving vessel was successfully targeted and disabled.

We believe that our capabilities and technologies are vital to global and national security and that the need for our products and services will continue.

Our actions on the dividend and share repurchase authorization demonstrate the confidence we have in our portfolio, our ability to execute, and our outlook for continued strong cash generation.

After the spinoff of the shipbuilding business, which represented approximately 20% of our annual sales, we are not only maintaining our quarterly dividend but increasing it by more than 6% to $0.50 per share, or $2 per share on an annualized basis.

Looking ahead, based on this quarter's performance, we now expect earnings per share from continuing operations to range between $6.50 and $6.70.

In closing, I would reiterate that we continue to position the Company for an increasingly competitive and challenging environment.

Deficit reduction is becoming a higher priority for our national leadership as deficit and debt levels are widely expected to be unsustainable.

It's likely that there will be a significant amount of debate in the coming months regarding deficit reduction and defense spending.

Our challenge is to continue to anticipate the needs of our customers and aggressively address our cost structure, operational execution, and productivity.

As I've said before, ours is not a top-line story.

We believe that we can continue to create value for our shareholders even in an environment of constrained top-line growth by focusing on our key priorities -- building on our performance improvements, optimizing our portfolio, and effectively deploying our cash.

We are off to a very good start to the year with our first-quarter results.

So now I'll turn the call over to Jim for a more detailed discussion of results and guidance.

Good morning, ladies and gentlemen.

My comments will begin on Slide 5, where I'll provide a little bit more color on our first-quarter results, which as Wes said is a great start to the year.

Highlights for the quarter were the higher segment operating income and a 10.7% segment operating margin rate, improved total operating income and margin rate due to higher pension income, and lower corporate unallocated expense, 25% in earnings per share driven by the higher segment operating income and pension income with lower corporate unallocated and interest expense.

Our higher tax rate for the quarter was offset by the impact of this quarter's lower share count.

Moving to the segments, Aerospace Systems had a solid quarter with a 1% sales growth and a 2% increase in operating income.

Margin rate for the quarter was unchanged at 11% and in line with our guidance for the year.

Our sales for the quarter reflected higher volumes for manned programs, including an additional F-18 delivery, as well as higher volumes for unmanned systems and restricted programs.

The increase in operating income is consistent with the higher volume for the quarter.

For the year, we continue to expect relatively stable Aerospace revenue characterized by volume increases for manned, unmanned and restricted programs, which will be offset by lower volume for civil space programs.

In particular, as work on NPOESS transitions to the new Defense Weather Satellite System, we expect a decline in civil space sales.

For example, in the first quarter, volume for NPOESS declined by about $80 million on a year-over-year basis.

In Electronics, sales declined by 4% for the quarter.

As we mentioned in the last quarter's call, we expect ES to have a slower start in the first half of the year due to lower IDIQ deliveries for LAIRCM, and vehicle intercommunication systems, or VIS, as well as some delays that we experienced last year in international programs.

Despite the lower sales volume, operating income increased 5% and margin rate expanded 110 basis points to 13.1%.

The strength in operating income reflects improved performance for land and self-protection systems in the coastal automation program.

For the year, we expect ES revenues to be relatively stable, but we may experience some softness if delays in international awards and acquisition delays continue.

We continue to expect an operating margin rate of approximately 13% in this business.

Information Systems also generated strong operating income for the quarter despite slightly lower sales.

Sales volume reflects a restricted program's transition from development to maintenance and lower volume for the counter-Narcoterrorism IDIQ program, as well as an impact from the continuing resolution.

Operating income increased 6% for the quarter and margin rate expanded 70 basis points to 9.6%.

Improved program performance more than offset the decline in volume.

For the year, we continue to expect low single-digit revenue growth with a margin rate of approximately 9% in this business.

Similar to Electronic Systems, we could experience some softness relative to our sales guidance depending on the timing of new awards and the continued budget uncertainty.

Moving on to Technical Services, first-quarter sales declined by 10% with the single biggest factor contributing to that decline being our reduced participation in the Nevada National Security Site joint venture.

As I think you know, effective January 1, we no longer consolidate revenue for this joint venture, which had sales of $136 million in last year's first quarter.

Higher sales for the KC-10 program, which began in earnest last February, partially offset the impact of the joint venture.

TS operating income increased 10% and margin rate increased 140 basis points.

Higher operating income reflects improved program performance with the margin rate expansion for the quarter primarily due to the change in the joint venture revenue recognition.

We continue to expect sales of about $2.5 billion for TS, which reflects that reduced participation in the joint venture and contemplates the phaseout of some business lines that are not meeting our return expectations.

We continue to expect a margin rate in TS to improve to approximately 8%.

On a consolidated basis, we expect a total operating margin rate of approximately 11% for the year, and we continue to expect a net pension adjustment of about $355 million or so for the year.

So, the major drivers of this quarter's earnings per share growth were the improved pension cost.

Higher segment operating income, lower corporate unallocated expenses, and lower interest expense were also could important contributors to earnings per share growth with a lower share count offset by a higher effective tax rate.

Turning to cash, as expected, cash from operations and free cash flow were seasonally low but much better than last year's first-quarter results.

Cash from continuing operations was $112 million, and free cash flow, which was an outflow of $11 million after capital expenditures and related outsourcing contract and software cost.

Both cash from operations and free cash flow were stronger this year with the improvement principally driven by the more positive working capital trends.

As we said during last-quarter call, we expect cash to again be heavily weighted towards the second half of this year.

At the end of the quarter, our cash balance was just over $4 billion, reflecting the $1.4 billion contribution from HII and our strong cash generation at the end of 2010.

Out of an abundance of caution related to the disclosure process surrounding the spinoff, as well as the likely reduction in our stock price after the spinoff, we took a pause in our share repurchase program in the first quarter.

But with the increase in our authorization, we will resume our share repurchases.

So, looking ahead, I expect that we will have a significant drawdown of cash in the coming months.

Along with the share repurchases, we have two tax payments that we need to make in the second half -- or second quarter, rather -- that total approximately $500 million.

As I said before, we anticipate making a discretionary pension contribution in this quarter, second quarter, that will total approximately another $500 million.

So in conclusion, good first quarter.

Those results demonstrate positive trend in operations, improved pension expense, and the optimization of our portfolio.

We remain focused on generating shareholder value through performance improvements, optimization of our portfolio, and effective cash deployment.

Paul, with that, I think we are ready to turn it over for some questions.

Thank you Jim.

Candace, I think we are ready to go to Q&A.

This begins the question-and-answer session.

(Operator Instructions).

Robert Spingarn, Credit Suisse.

Good morning.

A high-level question, Wes -- you've been probably one of the earliest to recognize the pressure in DC, and fairly responsive to that, I would say, over the last year or so.

How do you see your backlog evolving in the various segments as we go forward here?

I know you've been clear this is not a top-line story, but if you could give us a little sense for how the four segments might move up and down over the course of the next few quarters.

And then a question for Jim on the cadence of the share repurchase.

Let me start with the question on the backlog.

I think it's important to decompose it.

I also think, as we have completed the spin-out of HII, it's a good opportunity to kind of stand back and reflect on the portfolio and how backlog looks for different portfolio elements.

Historically, with shipbuilding inside of Northrop Grumman, we had two substantial sectors that were platform driven and whose backlog would come in to big lumps that typically go with the platforms.

Today, we are -- one of our four sectors that is platform-driven, and that is AS.

If you look at our report on backlog there, you'll see a backlog that is characteristic of the large platform businesses; it's running close to two times annual sales.

Our other businesses are typically shorter-cycle businesses in terms of the duration of their contracts.

They also are businesses that tend to have a higher volume of IDIQ business that doesn't reflect into the backlog the same way that the other contracts do.

So you'll see lower multiples of annual sales in the backlogs for those businesses.

Together, as I indicated in my remarks, about 1.6 times is kind of where we are running today.

Your question was more forward-looking though.

My view on that really goes to where we see some of these pressures going.

That may have implications on things like production rates, on platform businesses.

I think that will put some pressure there.

We feel a little bit more positive about that because of the heavier reliance that we have on unmanned systems, which we think are going to get perhaps a little bit more of the relative share of investment, so we like that positioning on unmanned.

But I would expect a little bit more volatility over time in the platform businesses, not just ours but across our industry, given the scrutiny that's going to be applied I think more broadly to how much the nation can afford in terms of production rates.

The other businesses I think are going to tend to trend to about the levels of backlog multiples that we are seeing.

Now, there's going to be overall pressure on sort of the total top line, so you can argue about where the top line goes.

But in terms of backlog-to-sales ratios, the level of multiples I think is generally indicative of the way the customer executes its business, whether we are in a more robust top-line environment or a reduced top-line environment.

So as a multiple of sales, I think that model is probably fairly consistent.

So I hope that answered your question.

Jim you were going to --

Yes.

Bob, on your question on cadence on share repurchase, a couple of thoughts here.

You will recall that, at the beginning of the year, I said that our guidance for the year anticipated a modest reduction or a modest share repurchase program for the year.

It clearly contemplated the pause that we had in the first quarter.

Frankly, we didn't know for sure when the shipbuilding spin would be completed.

As we said in our guidance for the year, we anticipated it would be completed during the year, but didn't really peg a time for when that would be completed.

We do, as we said in the press release announcing earnings and the share authorization increase, we're in the market from time to time.

We normally don't give a time frame for when we are going to complete that $4 billion authorization that we have.

But probably the best way to try to address your question is to address it from the perspective of the guidance for the year.

As I look at guidance for the year, I contemplate a range of share repurchase alternatives, a range of operating improvements as well.

I think it's fair to say that the guidance at this point contemplates about a 3.5% reduction in the average shares outstanding for the year.

Doug Harned, Sanford Bernstein.

Good morning.

On IS& -- on basically Information Systems, you had very good margins for the quarter.

Could you talk about where that unit is headed in terms of margin longer-term?

I know it's been great that we haven't talked a lot recently about the State of Virginia and San Diego County.

Maybe you could give an update on those.

Do we have those issues really behind us now?

Let me talk about margins, and I think Wes will add a couple of comments on the other two programs as well.

For quite a while now, we've talked about 9% margins in this business as where we thought the business ought to perform.

Clearly, we'd like to push it above that, but 9% is our guidance for the year.

We were at 8.9% as I recall for last year, 9.6% for this quarter.

This quarter did have some increased deliveries on some programs that have some hardware associated with improved margins with them.

We expect that to kind of tail off as we go through the year here.

So that's why we are looking at about a 9% for the year.

Clearly all of us are incentivize to do better than that.

I kind of think the 9% or so little bit on the upside is where this business ought to be and where we are driving it to be.

You asked about the County of San Diego and VITA.

I would say both have come a long way in terms of stabilization, the County of San Diego operating quite well.

With respect to VITA, we see continued, steady improvement on the performance there.

Our first step on VITA has been transforming the environment across a very widely disparate set of IT systems, transforming that into a new state-of-the-art environment.

That transformation process on VITA is nearing completion.

The agencies that we have transformed are seeing good, steady performance and performance improvements.

We are still occasionally experiencing some challenges in the few remaining agencies that are continuing to operate under their older legacy, if you will, environments.

So from time to time, we see those flare up with issues, but we believe those issues will be mitigated as we complete the transformation process.

We are working very, very closely with the Commonwealth on that remaining transformation schedule.

We see that as on the right track.

The program I think as you know continues to operate at a loss.

That is not an attractive business proposition for us at all, but we are committed to be operating effectively with the Commonwealth to meet our commitments and make sure this thing operates and is transformed very successfully.

I think we're making really good progress on that.

Howard Rubel, Jefferies.

Jim, these are all for you.

Sorry Wes.

It's all sort of related to some of the financial metrics you talked about.

First, could you -- the dividend increase sort of points to a 30% payout ratio.

Maybe you could -- so there's sort of three parts to this.

One is could you address what you're thinking about your payout ratio, what you're thinking about RONA, return on invested capital going forward, because that's sort of part of where you're going to go.

If you're not going to grow a lot, you've got to maximize the return on equity.

Then third, if I did the math right, 3.5% shrink of the shares is only like $600 million.

I thought you said you are committed to the $1.4 billion for the purchase of the stock.

So is there a loose end there?

So, a couple of thoughts here.

On the 3.5%, that's from last year's weighted average shares.

We obviously issued shares, share in the first quarter, for our annual incentive compensation programs, so new options, new performance shares.

So that's an upper to last year's weighted average shares that you probably haven't factored into that analysis calculation.

Again, realize we are not going to be able to start our share repurchases until this information is public for a number of days.

And so when you look at weighted average shares, it's going to take more than your dollar amount, the $600 million you talked about, to affect that weighted average shares for the year.

In terms of payout ratios and yields, we actually look at both payout ratios and yield, pay more attention to payout ratios.

We look at payout ratios both on a GAAP basis as well as a pension-adjusted basis and in relationships to our peers.

Yes, we target around what's called a third or 30% type of payout ratio.

As you know, RONA is one of our objectives, long-term performance measures, that our team is incentivized on, so we work to improve RONA.

Holding cash is not very effective, so yes there is some incentive to go deal with the cash balances as it relates to RONA.

Did I get all your questions Howard?

Yes, more or less.

Thank you very much.

Just one other perspective.

There is the math that goes with the share repurchase.

I would just say it's also instructive to look at our history.

When we get a share repurchase authorization, we execute to make sure we get things done on a meaningful time line.

So I think we have a pretty good history there as well.

I appreciate that.

Thank you.

Myles Walton, Deutsche Bank.

Thanks.

Good afternoon guys.

Wes, you talked about ISR, cyber, unmanned and logistics as being kind of the marquee headline businesses you want to be in.

How much of your portfolio today directly fits into those buckets?

Then in the context of portfolio shaping, is it that you want to wind down towards centering on those buckets, and anything that's not in them is in play, or is this more of the direction of where you want to grow and acquire?

I would characterize those areas as the predominance of focus.

They are four.

We are a company that this year is $27.5 billion in annual revenue that we are driving towards, so certainly not everything either does nor should fit into four specific categories.

We highlight those though to make sure that there is some clarity around the way we think about alignment with a customer's emerging needs.

So they are not, if you will, criteria that we are using to determine perhaps in or out on the portfolio.

They are more intended to serve as a way of framing the way we think about investing, the way we think about aligning capabilities internally where we see substantial opportunities for our four businesses to work together to create synergy.

They do represent a large fraction of our portfolio.

We have not broken that out publicly in the past.

I want to be a little bit careful about doing that.

But it is a substantial fraction of our sales.

You asked a little bit about M&A as well.

From my perspective, we have what we need in these areas.

We are not looking at a big gap from a capability perspective.

We do look in the marketplace to see what emerging capabilities might augment that over time, but given the strength of the portfolio we have in these areas, I don't feel that we need to take any dramatic actions that would be a departure from the disciplined approach that we've taken in our investment philosophy.

So it's not a laying of the groundwork, if you will, for some substantial M&A program here.

It is more intended to provide a very solid framework for how we are thinking about the move forward on the Company, the alignment with where we see the customer going, and how we are shaping our priorities for investment.

That's really helpful.

One quick follow-up to that -- you mentioned portfolio shaping.

I'm curious if you can size what kind of level of portfolio shaping you'd anticipate being on the table in 12 to 24 months.

It will be a product of the continued activity that we go through.

We have a pretty robust program internally to decompose our portfolio, not necessarily just along the lines of our organizational structure but along the lines of what our customer is doing, along the lines of the market trends that we see.

We also look at it financially in terms of performance metrics.

So we decompose it routinely to try and look forward into where we see the market going.

In those areas where we see departures from our ability to generate value either through just the straightforward operations of that part of the business or through synergy, we want the different parts of the businesses to be working together so that we can generate more value.

Where we see departures from those criteria, we look at whether or not we might be able to create more value for our shareholders and our customers and our employees by separating.

We've been doing this now rather routinely for a number of years.

We have divested elements of our Electronic Systems portfolio over the last few years, and I think very effectively executed on those.

We've divested components of our Information Systems business, most notably the TASC business, and then of course the most recent substantial activity with the spin-out of our shipbuilding business.

I think those are reflective of the way we think about portfolio management from a -- does it fit?

Is it generating synergy and where is it going?

So I wouldn't want to call out any specific actions we might take, but I would want to emphasize the fact that we do think that active portfolio management is a key part of the value creation opportunity that we see going forward, particularly in the environment where things are going to continue to shift.

Wes, I just might add that those actions, shipbuilding, TASC, electronics activity, that's $8.5 billion of revenue over the last two years, two-plus years that have been addressed.

Yes, so that's pretty active.

Yes.

Joe Nadol, JPMorgan.

Good afternoon guys.

Congrats on the successful spin this quarter.

My question -- I hate to come back to the topic, but I'm going to ask it a little differently.

And that's on the share repurchase again.

What I'm really trying to get at is what you're committing to in terms of total share repurchase, because as a matter of course, you guys have made over $1 billion per year each of the last several years anyway.

You're committing this $1.4 billion, but is that in addition to the share repurchase activity we could normally expect, say, as a percentage of your cash flow, or is that sort of funding the normal share repurchase?

The second part of it Wes and/or Jim is as you thought about the share repurchase and what you're going to do with this dividend from Huntington, did you consider a special dividend?

If so, what were the various factors that you went back and forth -- why did you come up with share repurchase as opposed to a dividend?

Joe, let me try to clarify here.

The $1.4 billion obviously is the contribution that we received from the shipbuilding.

What we tried to say is that, in thinking about our total authorization, we added that amount to what we had currently and some additional amount to get to the $4 billion authorization that obviously the Board approved.

That does not mean that we are going to spend $1.4 billion in the quarter or in the year.

Frankly, some of the analysts I think have gotten a little bit ahead of us on what we were going to do for this year because, as I said in the year-end call, we said modest reduction contemplating the pause that we had put in place for our share repurchases.

My comment to I guess it was Rob on share repurchases for this year that the guidance anticipates about a 3.5% reduction in the average shares outstanding for the year, so you can essentially do the math, recognizing that we had very little share reduction in the first quarter.

We're only going to be able to start share repurchases here sometime in May.

So to get that kind of 3.5% reduction over the year with the increase that we've already had in shares outstanding with the new grants in February, we're going to spend a reasonable amount of cash this year on share repurchases.

Could we do more?

Potentially, but we'll -- let's take this in steps as we go through the year.

Cai von Rumohr, Cowen & Co.

Good morning guys.

Not to beat a dead horse, but this authorization is $4 billion.

The last couple have been for $2 billion to $2.5 billion.

If you kind of look as you (inaudible) suggested that we should look at what you've been doing, you essentially completed your full authorization.

In the past it looks like an approximately 18 to 24 months.

So you've given us some of the tactics here on why the first quarter and second quarter will have that impact.

But would it be realistic for us to expect you, as you have in the past, to get up to a run rate therefore of $2 billion or more?

This is Wes.

Let me just give you my perspective.

We don't want to be very explicit about the timing or quantity of a share repurchase program.

We want the flexibility to do it intelligently.

I think there is a very strong signal here that we didn't just say "All right, here's the $1.4 billion from shipbuilding.

Let's go and just have that be our authorization and go work on it."

As Jim indicated, we added it to -- didn't replace it with -- we added it to an outstanding repurchase authorization that we had, and then we added a little bit more.

So there is an important signal about the way we are thinking about creating value through cash deployment in the Company.

But we are, as we have been, I think we have a really good track record of how we have done share repurchase.

We are thoughtful about each of the steps we enter into.

We are thoughtful about the mechanism that we use, and the pace.

We're going to continue to use that methodology going forward.

So, we are probably not going to say much more here at all about that pace (multiple speakers) forward.

So again, I think there's a lot to be learned by looking at what we have done in the past.

It continues to shape the way we think about going forward.

Robert Stallard, Royal Bank of Canada.

Thanks very much.

Good afternoon.

I've just got a couple of questions for Jim, actually on the financial side.

Jim, I was wondering if you could give us an idea of where you think inventory and CapEx is going to trend from here obviously now that Huntington has gone and whether there is an opportunity to bring those down, and also the progress you've made so far and expect going forward on bringing down the head office expense.

In terms of CapEx, I would look for about $600 million to $700 million kind of for this year.

If we have a slow down in revenue, clearly it will come down as we go forward, but tentative $600 million to $700 million is I think a reasonable range for us.

It's about equal to depreciation and amortization.

So in a kind of flattish environment, I look for that kind of relationship between our investment in the business and amortization of cost.

In terms of progress on home office cost, we still have the challenges that I talked about in the past -- that we are going to have some stranded costs or cost inefficiencies that come from the loss of the $6.7 billion in our base from shipbuilding.

We are working on addressing that.

As I said in the past, it's probably going to take us anywhere from a year or so, maybe two years, to be able to fully address those costs, so that doesn't have an impact an organization on a go-forward basis.

We are in the front end of working on that.

Clearly the move to DC is an opportunity to deal partially with those costs, but I think that's essentially where we are at this point.

I was wondering on inventories as well.

On inventories, I don't see a whole lot of change.

Clearly, I am pushing -- we are pushing the organization to reduce them, but I think we are fairly efficient today in our working capital.

It's always the big variance in our cash flow forecast for the year.

We normally can look at our EBITDA and cash taxes and cash interest and have a good sense of where they are going to come out and the variable that goes into our cash guidance for the year is essentially the working capital variance.

As you know, in years past, we've been able to reduce working capital at the same time while growing sales, which is obviously a difficult challenge but have been able to do that, were not as efficient last year in working capital.

So I think we have some opportunities going into this year again reflected in our range of guidance for cash.

I made it broader than inventories, essentially working capital.

Sam Perlstein, Wells Fargo.

Good morning.

I'll try not to ask about your buyback but two questions just if I could.

One is Electronic Systems, you made a comment about international contract award delays.

I'm wondering if you -- is that a decision by the customer or is that they've made the decision and they actually haven't given you the contract?

Can you talk a little bit more about that?

Then secondly, on the F-35, I'm surprised we still haven't seen the LRIP 4.

I'm wondering why is it taking so long and when we get to LRIP 5, will there be as big of a gap between when Lockheed gets the contract versus you?

Let me take both of those.

It's Wes.

On the Electronic Systems, our reference there was not to an individual issue.

It was a little bit more broadly that some of the international budget environments have actually held up some of the contract awards that we've been working on for some time.

We see delays there, although I would say and sometimes (inaudible) there are some downward pressures that are similar or even more severe than what we're seeing here, but it's primarily delays that we've been observing.

On F-35, on LRIP 4, as you are probably aware and I am sure have been interacting with our friend Lockheed Martin on this, there is a very, very strong focus on the part of the customer on affordability and how we get the program on a trajectory that is going to make sense both to the US and for our partner countries.

That has resulted in a process on LRIP 4 of kind of standing back and making sure that we are all collectively doing the things we need to do to support getting to the right outcomes there.

It has delayed the contracting discussions as we have focused both on contract type and of course the actual valuations.

So, that's taking a little bit longer.

I think the groundwork we are doing on LRIP 4 is going to help pave the way for future LRIP discussions.

But there is a lot of work to be done on this program to get it to where it needs to be from an affordability perspective, and I think you're seeing a reflection of that in this timing.

Thanks.

David Strauss, UBS.

Good afternoon.

Wes, could you address Global Hawk, the outlook there?

Obviously we had another Nunn-McCurdy, how it did in the fiscal '11 budget, and then how it looks in the fiscal '12 budget and what you're doing from your side to contain costs on the program?

Sure.

Global Hawk is a program that we are really, really proud of.

We never like to see anything like a Nunn-McCurdy breach occur.

That's not a happy place to be.

But I do think there was a lot of clarity in the discussion that the Department provided to the Hill -- clarity that the primary reason for the Nunn-McCurdy breach was the reduction of the Block 40 quantities from I believe 22 down to 11 aircraft due to the budget pressures and the other pressures that the Air Force is dealing with.

There were some other issues identified like managing manufacturing source issues on the Ground segment, getting some of the depots stood up, because we are operating this thing all over the globe in a much more aggressive manner than was ever anticipated when the original plan was created for this program.

That is the original plan against which the Nunn-McCurdys are measured.

If you look at what we are doing with this, we're flying Global Hawks with around-the-clock operations today in the Persian Gulf, in Japan, in North Africa.

They are, to some extent, the victims of their own success in terms of being so successful from a mission perspective that we are sort of scrambling to keep up with them from a budget perspective.

Turning the clock back about a year ago, the Department, the Air Force was very clear that they were not happy with the trajectory and affordability on Global Hawk.

We made commitments and have worked very closely both with the Air Force acquisition teams, Dave Van Buren has been very involved in this, as has [Ash Carter].

We've come a long way on affordability.

I'm very pleased to see the trajectory that we are on there, and I think the department is also pleased to see where we are headed.

I think this is a program with very long legs.

It's demonstrating such an enormous diversity capability, whether it's on the surveillance side with the different mission [sensors] that we're flying, and even more recently on the communications side with the vacant payloads we are putting onto Global Hawk.

So we are looking forward to continuing to deliver a whole range of capability, different versions of this very exceptional system to the Air Force.

As I mentioned in my remarks, the maritime version bands is proceeding well, so we are looking forward to some long legs on this platform with the Navy as well.

Thanks, that's great color.

Jim, a question for you.

Could you address corporate and pension?

I think, on pension (inaudible) you said $355 million now.

I thought that number was $325 million, but might be wrong.

Then on corporate, it was obviously low, but based on your outlook for all-in margins, it looks like that's going to obviously pick up here with the move of headquarters and stuff.

If you could address that and stranded costs and all of that?

Thanks.

In terms of corporate, I essentially see us ending the year a little bit greater than we ended last year, frankly.

Clearly, this year has a bunch of move-related costs that we're going to incur probably more in the third and fourth quarters, and so you're going to see some lumpiness in this as we go through the year.

Some of those costs are going to hit in the third and fourth quarter when the moves actually occur.

We are planning the move from Century City in August.

Some of the people -- some of the costs obviously, there's people-related costs when they move, when they sell their homes, and so those are going to be probably in the third and fourth quarter as well, potentially some in the second quarter.

We are not necessarily always going to have the change in recoverability of state income taxes that occurred in this first quarter.

So lumpiness, but I think on a global basis for the year, as I said, a little bit greater than where we ended last year in terms of total corporate.

Stranded costs, essentially most of the stranded costs -- some of them end at corporate.

A big part of them end up as additional costs being pushed to the operating sectors included in their margin rates, so essentially we are trying to address that that way.

I forgot.

What was the other part of your question?

Oh, pension.

$355 million was our -- has been our guidance for the year, not $325 million.

The run rate for the first quarter was a little bit higher than that.

On a CAS basis, we true-up our CAS costs late in the year, probably in the third quarter or so when we complete our census data for the beginning of the year.

You might imagine this is a lengthy process to look at all of the employee populations and all the census, and so we have an original -- an initial estimate that is based on census data that's older.

Then we update it to the actual census data, and that takes us into the third quarter (inaudible) before we get that finished.

I think we have time for one more question.

Jason Gursky, Citi.

Good afternoon everyone.

Let me start with just a really big-picture question on margins and where you see opportunities and risks to margin rates over the next couple of years, given what you see in your backlog.

And then a little bit more of a specific question on unmanned.

You talked a bit about the Global Hawk, or a lot about Global Hawk.

Can you talk a little bit about other opportunities that you might see in the future, given the capabilities that you now have built there on unmanned platforms?

It's Wes.

Just to the first question on where we see both opportunities and perhaps risk in the operating margin part of our business, this has been an area of substantial focus for us.

If you turn the clock back just a couple of years ago, our operating margin rates were below those of our industry peers.

If you look at it sort of segment by segment, there are a lot of reasons for that.

Some of it was the contracts we'd taken on; some of it was program performance.

So we've been working this very, very aggressively.

We demonstrated I think some really good improvements over the last couple of years and have achieved margin rates most recently that are I think margin rates we can be very proud of.

Does that mean we are stopping, that we are not going to continue to push?

No, we want to continue to improve.

There are some natural limitations associated with the nature of the contracts we can enter into with our customers.

but we are being very thoughtful about which contracts.

We have structured our incentive system to ensure that we are aligning the team on making sure we are taking on good contracts, contracts that we can execute for our customers.

So this is as much about performing for our customers as it is our shareholders.

We want to make sure we can perform because, when we perform, we generally do well on profitability.

We're going to continue to put upward focus on that.

The numbers that we've specified for this year I think are good indicators of where we believe sustainable outcomes are.

We are of course going to be working hard to do better than that, but that's where we see the sustainable outcome levels.

With respect to unmanned, unmanned is an area that's just continuing to blossom in terms of the applications.

The early focus had been primarily on fixed-wing and surveillance.

That is what we are seeing today with Global Hawk.

Obviously that transitioned for some platforms, not Global Hawk, but it transitioned to some platforms for weapons delivery.

We are -- obviously the surveillance part of this mission is going to continue to grow.

We have taken a broad view to the application of the technology we've developed, primarily this concept of a very open architecture that we're able transport between different platforms.

We've demonstrated this now with a number of platforms, including Rotary Wing.

We've had the Fire Scout program.

Now we are working on the -- with the Bell helicopter, the Firebird program.

We've taken it over to UCAS, which is truly a transformational opportunity to put a large unmanned vehicle in the mode of landing on an aircraft carrier.

We succeeded in our first flight on that earlier this year and have had several subsequent successful flights.

So we see basically anything that's been manned in the past has opportunities for unmanned.

Unmanned further extends the opportunity space because some of the constraints associated with putting human beings in the aircraft that have limited the mission applications are gone.

So we do see a whole emerging set of new areas for this class of technology.

We are determined to be leaders in this, to continue to stay out in front, and we are investing accordingly.

So I hope that provides a framework for your question.

It does.

Just lastly if you could touch on some of the risks, potential risks, to the margins.

The risks go with the marketplace to many -- to a very large extent.

Obviously, we're going to be very attentive to that as we move into this.

Production rates could always have some implications in that regard.

Just the general market environment and some of our shorter-cycle businesses could also focus in that area.

In the past, if you'd asked that question, I would've had a long list of specific program issues to go through with you.

I think we've made a lot of progress there.

We are not perfect; no company ever is.

There are many programs we continue to work hard on, but I think we've made a lot of progress in managing the individual program risk.

We have a methodology inside our Company for looking at both the risks and opportunities on a program-by-program basis and managing them in accordance with that methodology that I think has helped us a lot.

I think, with that, we will conclude the Q&A.

Wes, do want to make some closing remarks?

Yes, I'll just wrap up quickly.

Just to reiterate a little bit of what I said in my earlier comments, it was a really good start to the year for us.

We are very pleased with our financial results, particularly the continued solid operating performance in our sectors.

This is going to continue to be quite a dynamic environment, both from a customer side and from an industry side, with plenty of challenges.

But as we navigate through those challenges, I just want to reinforce we are absolutely committed to value creation for our shareholders, our customers, and our employees.

We believe we have a portfolio that is well-positioned to support those value creation objectives.

Given that capability, our focus is going to continue to be on performance, on optimizing that portfolio, and making sure we are effectively deploying our strong cash generation.

So thanks for listening in and participating with us on our call today,.

Thank you for your continued interest in Northrop Grumman.

Thank you for your participation in today's conference.

You may now disconnect.

Have a great day.