諾斯洛普·格拉曼 (NOC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northrop Grumman fourth-quarter earnings conference call. My name is Erin and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Mr. Steve Movius, Vice President of Investor Relations. Please proceed, sir.

Thank you Erin, and welcome to Northrop Grumman's fourth-quarter and year end 2011 conference call. We provided supplemental information in the form of a power point 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. These risk factors may cause actual Company results to differ materially.

On the call today are our CEO, Wes Bush, and our CFO, Jim Palmer. Please go to slide 3. At this time, I would like to turn the call over to Wes.

Thanks Steve. Good morning everyone and thanks for joining us. I'll start this morning by first reviewing our 2011 results. Then I'll address our outlook for 2012. Fourth quarter and full year results for 2011 were outstanding. They demonstrate that our focus on performance, portfolio alignment and effective cash deployment continues to create value.

Despite the challenging top line environment, we delivered strong results by nearly every measure. Segment and total operating margin, earnings per share, cash from operations, and free cash flow all were higher than our 2010 results. Our team continues to build on our strong record of program execution and performance, which is essential to meeting our customer needs for affordable, high quality products and services. I am very proud of how our team has come together these last several years to really drive performance improvements in our business. Achieving these improvements has required some tough decisions across our Company, but these efforts have positioned us to be successful well into the future.

Turning to our results, fourth-quarter earnings from continuing operations more than doubled to $2.09 per share. And for the year, earnings per share from continuing operations increased 17% to $7.41. Segment operating income rose in both periods. For the quarter, segment margin rate increased 100 basis points to 11.9%. And for 2011, segment margin rate expanded 90 basis points to 11.6%. Pension adjusted operating income also increased for both periods. And for 2011, our total operating margin rate adjusted for net FAS / CAS pension expanded 90 basis points over 2010 to 10.9%.

Cash from operations and free cash flow were outstanding for both the quarter and the year. Before discretionary pension contributions, 2011 cash from operations totaled nearly $3 billion, and free cash flow totaled $2.5 billion. For the year, conversion of earnings from continuing operations to free cash flow before the effect of discretionary pension contributions, was 120%. Our strong cash flow and the $1.4 billion Huntington Ingalls spinoff contribution allowed us to return substantial cash to our shareholders through share repurchases and dividends. In total, we spent $2.3 billion to repurchase more than 40 million shares, and at year end, approximately $1.7 billion remained on our share repurchase authorization.

We also raised our quarterly dividend by 6.4% last May, our eighth consecutive annual increase, and we paid our shareholders $543 million in dividends in 2011. Through share repurchases and dividends, we returned cash of $2.8 billion to our shareholders in 2011, 150% of our free cash flow from continuing operations. And, through the Huntington Ingalls spinoff, we distributed an additional $1.8 billion of equity value to our shareholders. During the quarter, new business awards totaled $7.1 billion, a book-to-bill ratio of 109%. For the year, new business awards totaled $25.3 billion, a book-to-bill ratio of 96%. We ended the year with a total backlog of nearly $40 billion.

Looking ahead, we remain focused on aligning our cost structure with our customers' affordability and efficiency objectives. Actions to date to support affordability have included consolidating business units across the enterprise, reducing overhead in our operating businesses, restructuring our debt to reduce interest expense, streamlining our corporate office and redesigning our benefit plans. Looking ahead for this year, we expect 2012 earnings per share from continuing operations of $6.40 to $6.70. Our 2012 guidance calls for sales of $24.7 billion to $25.4 billion, double-digit segment and total operating margin rates, cash from operations of $2.3 billion to $2.6 billion and free cash flow of $1.8 billion to $2.1 billion.

Let me focus for a moment on our top line guidance. As we discussed in our third quarter call, our 2012 sales outlook includes about a $500 million impact from our portfolio shaping and the adoption of units of delivery accounting for the (inaudible) (coughing). In addition, approximately $1 billion in revenue reduction is driven by changes in a number of our large programs, including the DWSS termination, the transition from F/A-18 multi-year two to multi-year three, the wind-down of B-2 upgrade programs, lower in theater sales and lower ICBM volume. Beyond that we expect growth of about 2% in our core portfolio, which brings us up to the top end of the range. This includes continuing growth in our cyber business and unmanned programs such as BAMS, Fire Scout and Navy UCAS.

From there our guidance considers a range of uncertainty that recognizes the potential for additional program changes resulting from budget decisions and timing issues, such as potential award delays, the pace of in theater troop draw downs and potential continuing resolution funding for the 2013 budget. We see this range of uncertainty representing up to about 3% of sales off the top end of the range. Based on Secretary Panetta's outline of our nation's new strategic security direction, we believe we are well aligned with the priority investment areas to support a smaller, more agile, technologically advanced security force.

We expect about 75% of 2012 sales to come from our four strategic focus markets; C4ISR, unmanned systems, cyber security, and logistics, plus our business focused on manned strike aircraft. While we were generally encouraged by the elements of the defense budget discussed by Secretary Panetta last week, including continuing support for our Global Hawk Block 40 system, the Navy's BAMS program and other unmanned systems such as Fire Scout and Navy UCAS, we were disappointed by the Air Force plan to cancel the Block 30 program on Global Hawk. We will be working with the Pentagon to assess alternatives to Block 30 termination that will ensure a more cost effective transition into production for the other programs that are based on Global Hawk. Aside from Global Hawk Block 30, the elements of the President's budget introduced last week demonstrate an increasing alignment between Northrop Grumman's core capabilities and priority areas of customer investment.

Overall, it validates the portfolio shaping we have done over the last several years to increase our focus on C4ISR, unmanned systems, and cyber security, and it also supports some of our longstanding core competencies in space and of course long-range strike. Cyber, both defensive and offensive, is one of the budget areas that is expected to increase. The DOD also expressed a strong commitment to the new bomber as a critical component of our nation's ability to project power in denied environments. The budget also protected funding for space systems, including the Space-Based Infrared System and the Advanced Extremely High Frequency communications system.

Both are programs in which we participate. And sea-based, unmanned ISR systems, such as our Fire Scout, were specifically cited for increased investment. We also view this military strategy as supportive of our efforts to market our products internationally, so that our allies can build their capacity to more effectively play an increasing role in global security. We expect the 2013 budget process may be long and contentious with another continuing resolution likely as the Administration and Congress (coughing) balance the need for fiscal restraint with the need to protect against a wide range of national security threats. It is unclear how the issue of sequestration will be resolved, but we certainly share Secretary Panetta's view that the budget cuts mandated as a result of the failure of the supercommittee would seriously endanger national security.

Despite these uncertainties in our environment, our 2011 results demonstrated that we are building a high performing portfolio that aligns well with our customers' priority investment areas. Our leading capabilities in these areas will be essential to securing our national interests with a smaller, more agile force structure and reduced defense budgets. We have a diversified government customer base that includes substantial exposure to the Air Force, the Navy and restricted customers, and we provided a slide that depicts our estimated 2012 revenue by customer.

In conclusion, creating shareholder value in this environment means that we must continue to be absolutely focused on our key priorities; driving performance, effectively deploying our cash, and optimizing our portfolio for the future. Our record these past few years demonstrates that we can do this successfully and I'm delighted to be working with our Company's talented team to create long-term sustained value.

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

Thanks, Wes, and good morning, ladies and gentlemen. My comments will focus on our 2011 results and then 2012 guidance. But first, I'd like to reiterate Wes' comments relating to 2011 results, which, in my view, were outstanding. We again challenged our team to significantly step up performance, and they did, delivering higher earnings and converting those earnings into strong cash flow, all done in a challenging environment.

Turning to the sectors on slide 5, Aerospace Systems had a strong finish to the year with solid sales and higher operating income. AS margin rate expanded 60 basis points to 12.1% from 11.5% in the prior year through a combination of improved performance on several programs and lower purchased intangible amortization. Now we are also doing some additional portfolio realignment in Aerospace, and as of January 1 of 2012, the missile business, principally the ICBM program, will transfer from Aerospace Systems to Technical Services.

Schedule 6 of the earnings release provides a reconciliation of the historical results and results adjusted for that transfer. So with that adjustment, AS has 2011 sales of about $10 billion. And based on what we know today regarding our programs, we would expect Aerospace 2012 revenues to range from between $9.7 billion and $10 billion, with low to mid 11% margin rates. Estimated 2012 sales reflect higher volume for programs like Fire Scout and E-2D Advanced Hawkeye, which are being offset by the DWSS termination, lower F-18 volume during the multi-year three start up, and declining volume across a number of other programs.

Electronic Systems 2011 sales declined 3%. Forced reductions in overseas contingency operations reduced volume for programs like LAIRCM and the Vehicular Intercommunication Systems, or VIS. We also had lower domestic postal automation sales as we began to deemphasize that business in 2011. Operating income in 2011 increased 5%, and margin rate expanded 110 basis points to 14.5%. The 2011 trends reflect improved program performance and positive adjustments for several programs and our land and self-protection business and our ISR business.

2011 was particularly strong due to positive performance adjustments on mature programs and programs nearing completion. For 2012, we expect modest decline in ES revenues to a range of $6.9 billion to $7.2 billion, reflecting the deemphasis of the domestic postal automation business and continued troop draw downs that will impact programs like VIS, the lightweight laser designated range finder and some of our C4ISR networking for the Army. We expect ES to continue its strong performance with margin rates in the mid to high 13% range exceeding our long term guidance target of 13%. Information Systems 2011 sales reflect lower volume in civil agencies and our defense businesses, including reduced funding for existing programs and program completion. As our shortest cycle business, IS has most been impacted by our customer's cautious spending in this uncertain budget environment. Operating income, on the other hand, improved by about 1%, and IS margin rate expanded 70 basis points to 9.7% for the year. The higher margin rate reflects improved performance in civil programs, including the impact of the County of San Diego contract sale, both of which more than offset the impact of lower sales.

For 2012, we expect IS sales of $7.4 billion to $7.6 billion, due to lower volume for in theater programs like the Command Post Platform and FBCB2 I kits, lower civil revenues resulting from the 2011 sale of the San Diego contract, which contributed $50 million of revenue in 2011, and then just the overall budget uncertainty. Due to their improving business mix, however, we expect IS will sustain much of the margin rate improvement that we saw in 2011, so we are forecasting a mid 9% margin rate for IS in 2012.

Moving to Technical Services, 2011 sales declined 16%, but operating income increased by 5%. Margin rate expanded 160 basis points to 8%. These results reflect the impact of the reduction in the participation in the Nevada Test Site program, as well as portfolio shaping actions to reduce our exposure to base operations programs. For 2012, we expect sales of $2.6 billion to $2.7 billion, which reflects our continued portfolio shaping actions, the addition of the missile systems business at volumes that are about $100 million less than what we saw in 2011 due to the wind-down of a major hardware upgrade program in the missile business, as well as lower KC-10 volume and lower volume for several other programs. We expect Technical Services 2000 (Sic-See Press Release) margin rate will be in the mid 8% range, reflecting the improving business mix to transfer the missile business from AS and just overall performance.

Now, our 2012 margin rate expectations for all four of our businesses exceed our long-term target rates for each of the four businesses, which is, as you know, are 11% for Aerospace, 13% for Electronics Systems, 9% for Information Systems and 8% for Technical Services. Moving to slide 6, a summary of our 2012 guidance, Wes discussed the impacts of 2012 sales and how we establish our guidance. So I'm going to move on to the balance of the chart. On a consolidated basis, we expect the sectors to generate a segment margin rate of about 11%. And we expect a total operating margin rate in the mid to high 10% range, which reflects a positive net FAS / CAS pension adjustment of approximately $130 million and corporate unallocated expenses comparable to 2011. Earnings from continuing operations are expected to range between $6.40 and $6.70 per share.

We expect cash from operations of $2.3 billion to $2.6 billion, and free cash flow of $1.8 billion to $2.1 billion. And again we expect that cash flow will be weighted towards the second half of the year, as has been our historical pattern. I would note that we are currently not planning any discretionary pension contribution in 2012 and that our required 2012 pension contributions are about $65 million. I should point out that in the fourth quarter of 2011, we made an additional $500 million discretionary pension contribution, bringing our total 2011 discretionary contributions to $1 billion.

Slide 7 provides a bridge or walk between 2011 earnings per share and our 2012 guidance. Lower sales had an impact that ranges between $0.30 and $0.45, and lower segment margin rate accounted for another 30% to 35% -- $0.30 to $0.35 of the variance. Our net FAS / CAS pension adjustment for 2012 is declining from a positive adjustment of $400 million in 2011 to a positive adjustment of $130 million, which impacts 2012 earnings per share by about $0.65. 2012 net FAS / CAS adjustment is based on our planned asset returns of about 6.5% in 2011, a 75 basis point reduction in the discount rate to 5% from 5.75% last year, and a 25 basis point reduction in our expected long-term rate of return to 8.25% from the 8.5% that we previously had used.

The net pension adjustment also reflects a planned design change that reduces both FAS and CAS costs in 2012. That design change takes out significant future costs, thereby improving our competitiveness and affordability. This is an example of how we are adjusting our cost structure in response to our customers' need for affordability. I would also point out that even with the 75 point basis reduction in the discount rate, the funded status of all of our plans at year end was 88% on a GAAP basis. 2012 earnings per share assumes a tax rate of 34.25%, about a $0.15 impact due to the expiration of the research and development tax credit. And lastly, our guidance includes continued capital deployment activities that result in a decrease in the weighted average shares outstanding of about 9%.

This reflects our lower share count at the beginning of the year, due to the substantial 2011 share repurchases, the issuance of shares in 2012 for incentive compensation and stock option exercises, and anticipated 2012 share repurchases. The lower share count positively impacts 2012 earnings per share ranging from $0.60 to $0.65. In summary, we continue to expect solid performance from our businesses in 2012 with margin rates that exceed our long-term targets, and continued strong cash flow. So Steve with that introduction, I think we are ready for some Q & A.

Thanks, Jim. Erin, we are ready to start the Q & A process.

(Operator Instructions) Doug Harned, Sanford Bernstein.

I'm interested in Information Systems, and in the quarter, your backlog was down about 18%. And could you talk about where you are seeing the decline in the backlog across defense systems, intelligence systems and civil? And where you think that is going to go longer term? And I ask that specifically, because with the strong position in cyber and some other priority areas, one might expect some strength there. But can you talk about the sub segment trends?

Yes. Doug, the reduction that you are seeing in Information Systems backlog is principally due to the adjustment we made across the portfolio, but largely concentrated in Information Systems around our future expectation for amounts remaining on contract to be converted into future sales. So, we went through a process this year that looked at amounts that were put under contract for which the period of performance had largely expired and had been very little activity. So on one hand there was amounts remaining on backlog, but it just felt like to us that in the current environment, they may not be converted into future sales. And so we made an adjustment or reserve against some of that backlog to reflect our view that some of that may not be realized as future sales. That is the largest adjustment.

Let me give you a little bit of flavor Doug too by some of the business areas. If you just look at our progress over the last year in terms of awards in the business, we are doing quite well. And the three components that you mentioned -- civil, defense and intel -- civil is about 20% of the top line, defense is about 50% and intel is about 30%. Just very rough numbers for the make up of the business. And as you might imagine we are seeing some pressure on the defense side in particular and Jim mentioned that in his commentary with some of the changes relative to the needs in theater. The defense areas where the majority of that work has been performed for in theater support.

When we strip that piece of it away, your earlier comment about our position on cyber, which plays through actually all three of those areas, puts us in a place where we think that this business is quite well positioned the for the future. We are not overly wringing our hands around either the component makeup of the business or how we are doing in the business captured. But Jim's point was a very important one about if you just look at that total backlog number it reflects a very specific set of decisions we made this year in terms of our convention for reporting the backlog.

And that decision -- but that decision is essentially made to reflect some of the trends that I would say are weaker, going forward, I assume.

I know this was largely a thought process. You know there is a lot of different conventions for reporting backlog that we see in our industry. There are those who report their future expectations of the [award on] task order, variety of IQs for which they have qualified. We don't do that. There is sort of a standard convention for once you have captured an award it goes into backlog and stays there unless terminated or other action is taken. We've gone through I think a really rigorous process of going through a scrub that Jim mentioned that we think is appropriate given the environment. But most of that clean up was not necessarily a reflection of just this past year's decision.

Or even 2010.

That's right. It is more of a long-term look back on the clean up that we felt was appropriate in light of all of the pressures that we see our customers facing. So, it would be inappropriate to read that as an indicator of the success of the business in either capturing awards or, at least over the last couple of years, in fulfilling those awards.

Well then is there a point here from what you described about declines in certain areas, such as those related to current overseas operations? You see decline in certain areas; you see growth in others. Is there a point when you are really seeing the transition where you expect this will turn around in terms of a top line trend?

It is hard to call that over the longer term. We are guiding for this year. I think we are going to all learn a lot by looking at the details of the President's budget that is due out here over the next couple of weeks, and the details of the '13 budget to see how that all parses out into the different pieces. But I wouldn't want to be in the spot of trying to call it in terms of where that begins to turn around. Obviously a big factor in that will be the transition of the overseas deployments and how that actually plays out. I would say there is still some uncertainties surrounding that.

Okay. Very good. Thank you.

Howard Rubel, Jefferies.

Thank you very much. Good morning, gentlemen. I want to sort of want to ask one -- make one comment and that ask a question that is not probably totally fair, Wes. The comment first is I like the presentation that Jim does with respect to pension contributions after cash, after taxes rather. Most people don't do that, so I think that is a very good and fair and balanced true up approach, and I appreciate that.

Good.

The other question, or the question is, we measure kind of performance on earnings per share and you are going to have down results for this upcoming year. And while I recognize if we look at the cash flow yield for this upcoming year, it is, call it 13%, give or take a little bit. So, on one measure, great number going forward. On another measure, it is not really value creating. How do you square that, Wes? And how do you think a little bit longer term on this challenge of growing earnings?

Clearly, there is a couple of components to it and I think it is a very fair question, Howard. The pressures on the top line are the reality. That is the budget environment that we are in. It is imperative on us to make sure our portfolio is very well aligned as best we possibly can. Part of the reason for that extra chart we included in the presentation today, the little pie chart, was to help you -- help everyone make their own assessment of how well they think that is aligned. We think it is a good alignment. But, we wanted to provide a little bit more detail in the way we see our portfolio and everyone can certainly make their own assessment of that.

So focusing on the alignment to really manage our way through the budget pressures is very important. But, the other big lever, I would point out two other very big levers in this process, are how well we are actually executing on the business. We look at that I think most perceptively in terms of margin rate and cash conversion. The margin rates are going very well. We have made a lot of progress in our Company these last several years in delivering more effectively the opportunity that's inherent in the contracts. That goes to risk management, that goes to just good old downright program execution, and it also goes to cost management. And those are all areas that we have taken on very aggressively and we are seeing the benefits translate into EPS.

And then I mentioned of course free cash flow, converting earnings into cash. And if you can't do that, it is sort of empty to start with. And then on the back side of that, what you actually do with the cash. So when we think about value creation, because I think that was inherently the essence of your question. From my perspective, it means getting the best alignment with where things are going, so that we can manage our way through the budget pressures. It means executing very, very effectively so that we are generating good earnings and turning those earnings into good cash. And it means being very smart about what we are doing with that cash. That is the way we are thinking about the value equation in our Company.

Thank you very much.

Cai von Rumohr.

Thank you. Yes and excellent performance. A question about pensions. So you have contributions of $65 million required and yet kind of by what you said it looks like you are under funded by about $2.8 billion and the government is writing you checks for $500 million. So essentially pension is a cash flow plus on a pre-tax basis of you know, over $400 million. So is that sustainable cash flow? I mean if we look to the future, are you going to have to put more money in, either this year or in the future? Or is the CAS going to come down so that your free cash flow that you are talking about this year in a steady state environment is going to erode?

Actually, Cai, good questions. Frankly my view would be over the foreseeable future CAS costs are actually going to go up, largely because CAS amortizes what we all remember as the significant negative investment performance in 2008 over 15 years. So we are just beginning to -- on the front end of that amortization process. CAS costs likely are going up. You have the benefit of CAS amortization that it will be stepped in over the next five years as well. So on a look forward basis, I think we all would see CAS costs largely going up now.

To the extent that we have really great investment performance over the next couple of years, again that would be amortized over that 15-year period on a go forward basis, so those are all offsets. I do think that as I said, CAS costs go up over the next few years looking forward. You are correct that if we don't make any other voluntary contributions this year, we do have a cash flow benefit that comes from essentially recognizing the past actions we've taken to fund the plan ourselves, ahead of when we got reimbursed for the CAS cost.

And then does that mean in the future your -- if CAS is going up, your cash contributions also will have to go up? Or how will that work?

That a -- so as I think many of you know, we have three sets of different rules that we have to deal with. And essentially cash contributions are governed by the ERISA rules and PTA funding. They -- the cash contributions required there are a function of how well funded you are. And again at our 88% funding on a GAAP basis, on an ERISA funded basis, we are close to 100%. In fact, you really have to look at every plan itself. When we do that ERISA funding for purposes of cash contributions, the lowest funded plan is probably in the 95% range and some of them are well over 100%. But on an aggregate basis, just about 100% funded.

So, and again that ERISA funding is a function of how well funded you are under that ERISA determination, with a big factor being interest rates. And they use a different set of interest rates that we need to use for FAS purposes or for CAS purposes. So I know that is a long-winded answer, but different set of rules. It is affected by how well funded your plans are to begin with. And so we have a huge step up in that regard and then interest rates play a factor as well.

Very helpful. Thank you very much.

Joe Nadol, JPMorgan.

Jim, on the segment margins, you indicated that in each of the segments they are expected to run this year at slightly above your projected long-term average.

Yes.

I was wondering if you could maybe characterize at a high level why you think you are going to be able to sustain that this year? It is down about 60 basis points off of a great performance in 2011. But maybe something around mix. Is the mix more favorable? And also I would imagine that you are probably spending some money below -- in there somewhere on restructuring, given the sales declines, and that is probably you know, negatively impacting you. So some color there would be helpful.

We are. It's true, Joe, that we are spending some money on restructuring. We try to manage our overhead rates to accommodate that. It's also very important to get out in front of those activities so that you don't have a negative impact on your programs. So, there is a delicate balance there. It is costing us some in terms of the efforts that we need to undertake to restructure. In terms of just margin rates, overall, we do have some programs transitioning from one to another, point to F-18 multi-year two to multi-year three. So a mature program, a mature finishing production to -- although a mature product on the front end of the new development or new production of the multi-year three contract.

We have instances like that across the board. And as I pointed out in my prepared comments, the Electronics Systems guys had just a fabulous year in 2011, margin rates well above what I view as the target for that industry. I do expect they are going to maintain some of that momentum, but I don't think they can maintain all of that momentum that we saw in 2011. That is why you see their margin rates essentially declining from let's call it around 14.5% in 2011 to the mid 13% that we guided to -- mid to high 13%s that we guided to for 2012.

And from a mix standpoint, just thinking through one more level maybe you are cutting it slightly differently. From a mix standpoint, would you characterize domestic versus international as consistent with the long-term trend? And then also maybe fixed price versus cost plus or mature versus R&D oriented?

I don't know, Joe, that there is a significant shift in the overall mix, our fixed price content of the aggregate portfolio on a year-over-year basis. I think it is much more -- as we are seeing some decline in the revenue base, programs that are nearing completion that are mature, having reduced volume on a go forward basis and so that is reflected in some reduction in margin rates. Potentially have to absorb more costs with a lower volume on the remaining programs.

Yes. Okay. Thank you, guys.

Myles Walton, Deutsche Bank.

Maybe to go back to Cai's question first for a second, Jim, on pension.

Yes.

And then we'll move over to the operations. On the funding side, ERISA 100% today. But I think that is more on an ABO basis. As you look out, when do the required contributions start to more tie back to the 88% funded status? Is it '14? Is it '15? And are those sizes kind of in the $300 million to $500 million range?

Yes. All of -- you are asking for this huge crystal ball that has perfect clarity. So, let me give you a perfect clarity answer. (laughter) That obviously is going to depend on investment earnings in '12 and '13. It's going to depend on interest rates in '12 and '13. But if I were able to hold all of everything constant and achieve my long-term investment rate of return, I would be looking at contributions, required contributions in the 2013 time frame of around $300 million.

Okay. Great. That's a -- I think that clarifies it. And then on the operations, I think the NRO surprisingly publicly stated a couple of weeks ago that they were going to award the follow on imaging satellite sole source to Lockheed this year. I think you guys are pay load for that. I'm curious two things. One is, would that be a booking sizable in 2012? And second, would it be a source of growth in '13 or beyond?

Myles, I think we will refer you to the NRO to get the best response to that question.

Damn. Okay. (laughter) Thanks. I tried.

It was a good try.

Robert Spingarn, Credit Suisse.

Doug touched on the backlog decline in IS and you went through that in detail. But from a higher level could you talk about the 12% decline year on year in total backlog. The unfunded piece of that is fairly significant. And now your total backlog, both funded and unfunded as a ratio of sales, has come down quite significantly over the last few years. So is this timing related? Or do we have a -- is there a bookings issue coming?

I don't think so, Rob. So let me try to review again what went on in backlog. First, as Wes said in his comments, $25.3 billion of awards this year, roughly equal to sales. Let's start there. So we did have some backlog adjustments. We had this reserve that I talked about that aggregated about $3 billion across the portfolio, but largely in IS. In addition to that, we did have restructuring of the NPOESS contract and a couple of other space contracts where took a $1.5 billion of backlog out of -- backlog at the beginning of the year to reflect the cancellation of the NPOESS contract and then some change in some space programs. You can -- if you want, you can go back and look as I recall in the second quarter when we disclosed that.

And then in the first quarter last year with the decision to reduce our participation in the Nevada Test Site joint venture, we took the backlog that was -- because we are no longer consolidating sales, we no longer consolidate the backlog. We took $1.7 billion out of the backlog to reflect that. Those are the three principal unusual activities, if you want to call it that, that occurred in backlog during the year.

Is there a way for you Jim, to quantify the duration of the backlog, today versus what it used to be?

I -- the best way that I would do it is to take each of the amounts for the four sectors and divide by revenues, and that is kind of a rough approximation. Obviously the IS, the shorter cycle business, has a lower backlog to sales ratio than any of the other segments of the business.

Okay. And then just one other thing. We've heard from some of your peers on foreign military sales orders being pulled forward into the fourth quarter here and out of Q1. Anything there for you in that sense?

I think the foreign market is an opportunity for us on a go forward basis. I think the Secretary's comments are encouraging. Obviously we have to work through export control issues. But there is a demand or interest in a number of our products across the portfolio and just logically, as US defense budgets are constrained, it would seem we would want to rely on our allies to do more what we may have done in the past. So I think that is ultimately an opportunity for us on a go forward basis.

Hi Rob. You were asking about some pull forwards out of potentially this quarter into the last quarter of last year? Is that --

Only because we've seen it elsewhere.

We did not see anything unusual with that regard in our Company.

And then just lastly, Jim, I might have missed this because I joined the call late. In terms of your buy back for '12, which looks like it's about 8%, something like that, rough number, what is the cadence on that? How are you assuming that goes forward?

Generally spread throughout the year, you know, consistent with largely our historical practice. So, I wouldn't say it's exactly rateable through the year but spread throughout the year.

Thank you. Thank you both.

Sam Pearlstein, Wells Fargo.

Jim, can I go back to pension one more time and can you talk a little bit about what that design change means? Did you change the benefits? What did that mean?

We essentially put a cap on what is called final average earnings for the people who participated or currently participates in the defined benefit plan. So that after a point in time, final average earnings will not continue to grow, which essentially reduces the liability on a long-term basis, reduces cost, starting in 2012 and going forward. Rather you know, it was important that we do that. We got a significant cost benefit out of it and it essentially brought our plans into what we thought was current market conditions.

Does that mean that the liability is peaking now as well?

The liability is dramatically affected, as we saw, by the change in discount rates.

Right.

So, if you tell me what discount rates are going to be, I guess I can tell you whether it's peaked or not.

Okay. All right. That's fair. And then separately, can you just talk a little bit about Global Hawk, Wes? You mentioned about the Block 30 termination. Can you just talk about how the Block 30 to 40 transitions? And obviously, you don't have to -- not expecting you to give me total Global Hawk sales, but can you just talk about directionally in percentages how it looked from '10 to '11 and then '11 to '12 as we are seeing some of those pieces?

Well, let me just say in terms of this transition, that is something that we are beginning the discussions with our customer community around. You know, there is an important set of transitions from the production work we are doing in Block 30, certainly with Block 40, but also in the BAMS. And it would not be appropriate for me to get out in front of those discussions that we are having with our customer in that regard.

I would say, you know, naturally, that we were -- as I said in my comments earlier, we were disappointed with the plan on Block 30, but we were also at the same time very, very pleased with the very strong statement of support that we got from the Department on BAMS, and of course Block 40, and a number of other our unmanned missions, including Fire Scout. So, I don't want to get out ahead of exactly how this will play out. We want to obviously work with the Department to make this work the right way. With respect to the numbers, I would just simply say that we've spent some time thinking about the range of outcomes, and that is included in the range of the guidance that we provided.

Okay. Thank you.

David Strauss, UBS.

Jim, at Aerospace Systems, a lot of moving pieces there, in terms of F-35 and the transition of the missiles business. Can you just walk through all the different moving pieces and roughly how much they each account for? And then on F-35, just an update in terms of exactly where you stand, what's under contract at this point, and what lot, what all rep you are delivering on at this point?

So, let me grab a couple of things here, David. We had $10.1 billion -- $10.4 billion for revenues this year. The missile business takes us down, the transition of that business takes us down to about $10 billion as I said in my comments. And then as we look at some of the other parts of the business that are moving around, we saw some growth in Fire Scout and E-2D. The DWSS contract termination reduces revenues by about $200 million. And the lower volume on F-18 is probably about another $150 million or so. So all of those and then in consideration as Wes said to what may happen or when something may happen on Global Hawk Block 30 allowed us to get to our thoughts around $9.7 billion to $10 billion of sales guidance for 2012. But those are the big pieces that moved from year to year.

And on F-35 units of delivery, how much is that impact?

It's about $100 million.

Okay. And as a follow-up on the share repurchase, you know, the 8% assumption, or the 8% down in terms of the assumption on share count, it doesn't look like based on where you are at the end of the fourth quarter, it doesn't look like you are actually assuming that much more additional in terms of share repurchase for 2012?

Well actually I said 9%, I guess.

Okay 9%.

Someone else had said 8%. And as I said in my prepared comments, you start at the beginning share counts. We are going to issue some hares here through stock incentive plans at the end of February. We anticipate, as has been the historical practice, that we'll have stock options that are exercised during the year. And then we are going to spend some money during the year as well to buy back shares. You have got to remember that the share count is based on a weighted average share count.

So you spend a dollar in January, it counts as -- let's say if you bought it. You spend a dollar, that was one share. That counts as one share. If you spend that dollar in December, it counts as one-twelfth for this weighted average share count. So the timing of when you spend the money when you buy shares back, is really important to its overall impact on the weighted average shares outstanding for the year. And as I said to an earlier comment, my assumption is that we spend the dollars not exactly rateable but generally spread throughout the year.

Okay. Thanks a lot.

So, those are the moving parts that get us to about an overall 9% decline in weighted average shares.

Thank you.

Robert Stallard, Royal Bank of Canada.

Jim, I was wondering first of all if you could give us a number for what your OCO, or operations exposure, was in 2011, and where you see that trending in '12?

Yes, well, hard to quantify. But as we go and look at, try to find all the pieces, we think it's about 3% of sales.

And where is that heading in '12, because you mentioned it as a head wind in a couple of areas?

Well, we'll see a $200 million down.

Okay. Secondly, there is a lot of goodwill on the balance sheet. I was wondering if you have done year-end sort of impairment review of that valuation and how close some of the goodwill items were to a write down.

Obviously we have to do that every year. Just -- it is part of the normal procedures. We have let's call it a little bit over $12 billion. If you look at the financials, the largest part of that goodwill is in the Information Services business. And so we do take a good hard look at all of our assumptions around that. We are comfortable that there is not an impairment as of the end of the year and we'll have to watch what happens in terms of the future revenues and all of that associated with the overall budget, what it means to each of the businesses. But as I said with the Information Services having the largest piece of the goodwill, if there is any area that might have any exposure, it would likely be in that area.

Okay. That's great. Thank you.

Erin, I think we have enough time for one more.

Jason Gursky, Citi.

I just want to ask the capital deployment question. I can see from a bid, it's not from you there, obviously you have had a pretty balanced approach up to this point between dividends and share repurchases. I'm just curious what you think going through clearly on the acquisition front. I don't need to necessarily get into the details about where you might want to make acquisitions, but just the importance of acquisitions going forward.

Jason, in terms of broadly on thinking about acquisitions, for us it always comes down to the value of creation equation. I've said a number of times and I continue to say it, we really like our portfolio. And, I don't feel like we have large gaping holes that we have got to rush out and deal with. So, it allows us to be you know very thoughtful, very disciplined in how we think about acquisitions. At the same time we do engage in looking at widespread alternatives. We think we have obligations certainly to our shareholders for the long term to be active in our thought process and active portfolio managers.

Ultimately, it comes down to value creation. And I will tell you that of late, as we have looked at what's going on in the M&A space, there are some transactions out there that would be hard for us to solve the equation of value creation if we were looking at it ourselves. So, we have biased our cash deployment toward the areas we have talked about with share repurchase and dividend and I think that's been serving us quite well. But we are going to continue to look and the market obviously will have some ebbs and flows and we will be effective assessors of what those opportunities will be.

Thank you very much. That concludes our call. Wes has a couple follow-up comments to close and then I'm obviously available for additional questions.

Let me just wrap-up with a few thoughts. I think it is helpful, given the dynamics of the environment that we are in to express some fundamentals. When I think about our Company and I mentioned this in my remarks and in response to a couple questions. I think there are three things that are really critical. First, in the time of increasing pressure on our top line, it is even more important that our businesses are delivering on profitability and cash conversion across all of our operations. And I think we have demonstrated some nice improvements over the last few years. It shows that this focus is paying off for us.

Secondly, the large amount of capital that we are returning to our shareholders demonstrates our focus on delivering shareholder value, and that is the way that we are thinking about the overall value equation in our Company. And thirdly, as we have talked about a fair amount, portfolio shaping is going to continue to be key in this emerging environment, making sure that we are well aligned for the future. When I think about it a little bit more broadly and look at the world around us right now, it is clear that our nation's military strategy is going to continue to depend both on the extraordinary capability of our servicemen and women as well as our ability to ensure absolute technological superiority. And this strategy recognizes that we will have to address a range of threats to our nation's security.

We think we are well positioned to deliver that technological superiority to support our nation and our allies. We expect a lot of turmoil in the budget environment in front of us, especially over the course of this year. But, I think it is going to be really important as we go through that to keep these fundamentals in focus. Thanks again for joining us today and thanks for your continued interest in our Company.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.