諾斯洛普·格拉曼 (NOC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Northrop Grumman's Fourth Quarter 2013 Conference Call.

My name is Derek, and I'll be your operator for today.

(Operator Instructions)

I would now like to turn the call over to your host, Mr. Steve Movius, Vice President, Investor Relations.

Mr. Movius, please proceed.

Thanks, Derek, and welcome to Northrop Grumman's fourth quarter and year-end 2013 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 Security 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.

Matters discussed on today's call may also include non-GAAP financial measures that are reconciled in the supplemental PowerPoint presentation.

On the call today are Wes Bush, our Chairman, CEO, and President, and Jim Palmer, our CFO.

At this time, I'd like to turn the call over to Wes.

Thanks, Steve.

Hello, everyone.

Thanks for joining us.

As I look back on 2013, a year characterized by a great deal of uncertainty, it's gratifying to have achieved strong performance.

We met or exceeded our guidance for every metric, and that's due to the hard work and dedication of our entire team.

So I want to start our call today by congratulating our employees on a job well done in 2013.

Our financial results for the year demonstrate the benefit of superior program performance.

We continue to focus on reducing costs, innovating for affordability, meeting program commitments to our customers, shaping our portfolio, and of course, generating cash and deploying our cash to create long term value.

Our sectors continued to produce strong segment operating margin rates.

Although we had slightly lower segment operating income, the benefit of our share repurchases more than helped offset the EPS impact.

Full year diluted earnings-per-share rose 7%, and on a pension adjusted basis, 2013 diluted earnings-per-share increased 5.5%.

Cash generation was also strong.

For the year, before the impact of pension pre-funding, we generated cash from operations of $2.8 billion, and Free Cash Flow of $2.4 billion.

On our reported basis, free cash flow of $2.1 billion represents a free cash flow yield of approximately 13%, and net income conversion of 109%.

In 2013 we used our cash to invest in our businesses, fund our pension plans, repurchase stock, and pay dividends.

Our capital spending increased by approximately $50 million in the fourth quarter, as we ramped up our investments in our Aerospace Systems centers of excellence.

In addition, we made a $500 million discretionary pension contribution, and we repurchased 27.3 million shares of our common stock for $2.4 billion.

As of year-end we repurchased 20.8 million shares toward our previously announced goal of retiring 60 million shares by the end of 2015, market conditions permitting.

Share repurchases in 2013 reduced our weighted average diluted share count by approximately 8%.

We also increased our quarterly dividend by 11% last year, and paid shareholders dividends of $545 million.

In 2013, we distributed nearly $3 billion of cash to our shareholders through share repurchases and dividends.

This represents approximately 140% of reported free cash flow.

Cash on the balance sheet was more than $5 billion at year-end, reflecting the $2 billion of net new debt we raised last year, and the substantial cash generated by our operations.

So as I look at 2013 performance, I'm particularly proud of our results in the context of last year's challenging US Government budget environment.

In contrast to the challenges in the US market last year, we are seeing growth in our international business.

In 2013, we grew our international sales by approximately 20% to $2.5 billion.

International sales were slightly more than 10% of total revenue in 2013.

Our Aerospace Systems and electronic systems sectors both posted higher sales for the year, and growth in international business was a significant contributor to top line growth for both sectors.

At AS, the ramp up on NATO AGS contributed to their sales growth.

And for ES, growth in their core portfolio of international offerings was a driver of their top line growth in 2013.

We see emerging opportunities around the globe that our portfolio should allow us to address.

In 2014 we expect international sales to increase to approximately 13% of total revenue.

Beyond 2014, we see growing demand for our unmanned platforms, manned military aircraft, airborne surveillance, electronics, cyber, sustainment, and other offerings.

We captured new awards of $21.9 billion in 2013, for a book-to-bill of 89%, and we began 2014 with a total backlog of $37 billion.

Awards in 2013 were impacted, and in some cases, moved to the right, as a result of budget uncertainty and turmoil.

Now that we have a budget, we and our customers can plan with more confidence, compared to where we were at this time last year.

We're still in a difficult and evolving budget environment, but we now have a 2014 Appropriations Bill that provides program direction.

And importantly, the Bipartisan Budget Act passed in December set discretionary spending levels for both 2014 and 2015.

We expect this will alleviate some budget cuts that would have occurred if sequestration had been triggered again.

These actions reduce some of our customer's budgeting uncertainty, and increase their ability to make strategic spending decisions.

Overall, we're pleased with the 2014 budget outcomes for our programs.

But it continues to be a challenging US budget environment, in terms of absolute dollars spent on national security.

And we expect there will be continuing pressure on the investment accounts, especially for research and development.

As our customers deal with these pressures, there is some uncertainty as to the program decisions they may make this year and in the future to conform their spending to these reduced budgets.

The resolution of that near term debt ceiling issue also poses some additional uncertainty.

We understand the need for disciplined spending to address our nation's fiscal challenges.

How we get there needs to be rational and supportive of maintaining our technological superiority and our national security.

Our nation needs a balanced strategic approach to our fiscal challenges.

We need to recognize that to assure our technological advantage over the longer term, our country must invest in the near term.

Now turning to guidance for 2014, we expect sales to range between $23.5 billion and $23.8 billion, with earnings-per-share of $8.70 to $9.

We expect cash from operations of $2.3 billion to $2.6 billion, and free cash flow of $1.7 billion to $2 billion.

At the midpoint, our sales guidance implies a top line decline of approximately $1 billion, or 4%.

Jim will provide more detail, but more than half of the change reflects continued pressure in our short cycle businesses, information systems, and technical services.

The remainder of the variance reflects our expectations for lower volume in some programs at aerospace systems and electronic systems, somewhat offset by our growing international sales in these sectors.

But considering all of these factors together, I see 2014 as another year of good opportunities for our Company, with continued strong cash generation and cash deployment to create value.

Our guidance contemplates continued share repurchases that support our goal of retiring 60 million shares by the end of 2015.

In conclusion, our 2013 results demonstrate strong performance in a challenging environment, and our priorities remain the same in 2014.

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 afternoon, ladies and gentlemen.

I also want to add my congratulations to our team on their outstanding work this past year.

We performed very well in a tough, challenging, and uncertain environment, and importantly, sustained the performance improvements we generated in 2012.

Our team's efforts led to another excellent year for our Company.

So let me spend a few minutes and review those results.

Segment operating margin rate was 12.5% in 2013, versus 12.6% in 2012.

On a year-over-year basis, net favorable adjustments declined by $232 million.

This decline was partially offset by higher contract margin rates resulting from several factors, including the continuing effect of prior net favorable adjustments across our portfolio of contracts.

The total operating margin rate for the year improved 30 basis points, primarily due to a $49 million decrease in corporate unallocated expenses, and an improvement in our net FAS/CAS pension adjustment.

Corporate unallocated expenses improved due to lower provisions for disallowed cost and litigation matters, as well as the favorable settlement of overhead claims, partially offset by changes in state deferred tax assets.

On a pension adjusted basis, our operating margin rate increased to 12%, a new record for the Company.

As Wes mentioned, 2013 cash generation was outstanding, and a real performance highlight.

Before the impact of our voluntary pension pre-funding, cash from operations totaled $2.8 billion, which is comparable to 2012.

Free cash flow, before pension contributions, totaled $2.4 billion, or more than $10 per share.

During 2013, we distributed approximately $3 billion to our shareholders, or more than $12 per share.

Based on our average daily share price during 2013, our cash distribution yield per share was approximately 14%.

And in addition to the cash distribution yield, our share price increased 70%, so it really was an exceptional year for the Company and for our shareholders.

Let me spend a few minutes now and talk about 2013 sector results, and provide some thoughts on 2014 guidance for each of the businesses.

Aerospace Systems fourth quarter sales declined by 7%.

You might remember that AS had a particularly strong fourth quarter in 2012, so this was a difficult comparison.

Aerospace Systems fourth quarter margin rate declined to 11.5% from 13.8% last year.

And again, you may recall that 2012 had an unusually high fourth quarter margin rate that benefited from a couple of large positive adjustments and space programs.

For the year, AS sales totaled $10 billion, slightly higher than in 2012.

And margin rate of 12.1% in 2013 is comparable to the prior year.

For 2014, we expect AS sales to range between $9.7 billion and $9.9 billion, with a margin rate in the mid to high 11% range.

The expected sales volume reflects lower volume for programs like Global Hawk, Fire Scout, B-2 and the James Webb Space Telescope, partially offset by expectations for higher volume for NATO AGS and E-2D.

Electronic Systems also had outstanding results this year.

Fourth quarter sales increased 6% due to higher volume for space programs, international, and combat avionics.

And fourth quarter margin rate declined, due to somewhat lower net favorable adjustments.

And for the year, ES sales increased 3%, reflecting higher volume in space and international programs, while maintaining a robust 17.1% margin rate.

For 2014, we expect the ES revenues will range between $6.8 billion and $7 billion.

Our top line guidance for ES contemplates slightly lower volume, due to some continued impacts from force reductions in overseas contingency operations, and lower revenues for some radar programs partially offset by higher international sales.

We expect ES operating margin rate in the low to mid 15% range for 2014, and although lower than 2013, I think still very healthy and indicative of continued strong execution at ES.

Information systems, sales declined by 14% in the fourth quarter and 10% for the year.

Declines in both periods reflect lower funding levels, including the impact of sequestration and the government shutdown, and lower volume due to in-theater force reductions, as well as some contract completions.

In addition for 2013, the transfer of intercompany sales to our shared services organization reduced sales by almost $100 million.

And excluding the transfer, sales would have declined by 9%.

IS maintained a strong 9.9% operating margin rate in the fourth quarter, and for the year margin rate was 9.6%, which is about 70 basis points lower than last year, largely due to a $73 million decrease in net favorable adjustments.

For 2014, we expect IS sales will range between $6.1 billion and $6.2 billion, a decline of about 7% due to the continue in-theater force reductions, wind down of several programs, and lower funding across a number of our contracts.

We expect IS to maintain a strong mid 9% operating margin rate in 2014.

Moving to technical services, fourth quarter and 2013 sales both declined by 6%.

Trends in both periods reflect lower volume for integrated logistics and modernization programs like the KC10, as well as the ICBM program restructuring.

Operating income for both the fourth quarter and the year reflect lower sales, partially offset by improved performance.

Operating margin rate expanded by 40 basis points in the fourth quarter, and 30 basis points for the year.

Higher margin rates for both periods reflect improved performance across several programs.

For 2014, we expect TS sales of approximately $2.7 billion, a decline of about 5%, reflecting lower funding and in-theater force reductions, as well as some lower volume for the ICBM program.

For margin rates, we expect a high 8% margin rate for TS in 2014.

So on a consolidated basis, we expect 2014 segment operating margin rate will be in the high 11% range.

Turning to pension items, our 2013 plan asset investment returns were slightly more than 8%.

So on a GAAP basis, the funded status of our plans increased to 93% at the end of 2013, from 83% at the end of 2012.

Due to higher interest rates, the discount rate has increased to 4.99% from 4.12% at the beginning of the year, and we are maintaining our 8% long term rate of return expectation as well.

So based on those assumptions, we expect 2014 FAS expense of approximately $115 million, or a decline of about $260 million from 2013.

And we expect our CAS recovery to be approximately $555 million, which is an amount comparable to 2013.

I should point out that the CAS amount could move up or down by about $40 million, dependent upon actual participant demographics and we would expect to know those results in the third quarter of 2014.

So at this point, we expect our net FAS/CAS pension adjustment will be income of approximately $440 million, or an improvement of $272 million from 2013.

We expect 2014 corporate unallocated expenses to return to a more normal level in the range of let's say $150 million to $200 million, compared to the $119 million in 2013.

And as I pointed out, 2013 included some non-recurring items that reduced corporate unallocated expenses that we don't expect to repeat in 2014.

When you consider all of that, we would expect a total operating margin rate in the high 12% in 2014.

We expect interest expense of approximately $285 million, up from $257 million in 2013, with the additional interest expense reflecting a higher debt level for the full year of 2014.

And we expect a tax rate of about 32% to 32.5% in 2014, versus the 31.8% in 2013.

And as I know you all know, the 2013 tax rate included a benefit actually for two years of R&D tax credits of $37 million.

And our 2014 expected effective tax rate does not include an R&D tax credit, which at this point has expired.

But it does include the benefit of the expected resolution of the IRS exams for the tax years 2007 through 2009.

And our 2014 earnings-per-share guidance of $8.70 to $9 contemplates an 8% reduction in weighted average shares outstanding to approximately 215 million shares, which is again a reduction similar to what we saw in 2013.

We expect cash from operations of $2.3 billion to $2.6 billion, and free cash flow of $1.7 billion to $2 billion.

The cash guidance does include the benefit of 2014's lower pension contributions, net of income taxes, which is essentially offset by lower segment operating margin.

The other major variable is working capital, which has the potential to be plus or minus $100 million.

At this point, due to the strong funded status of our pension plans, our required contributions in 2014 are only $74 million.

Our free cash flow guidance does include a ramp up in capital spending to about $600 million in 2014.

I would expect that this level of capital spending to continue for the next couple of years.

At the same time, I expect that our required cash pension contributions in 2015 and 2016 will also remain low, likely less than $100 million, while CAS pension recoveries are also likely to increase.

So in summary, our guidance contemplates solid operating performance and strong cash generation in 2014.

Barring any major disruption to any of our major programs, we expect this type of performance to continue beyond 2014, which will allow us to make additional investments in our business, while continuing to execute a balanced cash deployment strategy that returns a substantial amount of cash to our shareholders.

So Steve, with that introduction, I think we're ready for Q&A.

Thanks, Jim.

As a reminder, each participant should limit themselves to a single question to allow us to get through the queue.

And with that, Derek, we are ready to begin the Q&A session.

(Operator Instructions)

Our first will be from the line of Finbar Sheehy, Sanford Bernstein.

Good afternoon.

Hello, Finbar, how are you?

Well I'm well, and I hope you're well too.

You had a pretty impressive run on the share price this past year, and you've talked about reducing share count by distributing cash that way to shareholders.

I was just wondering if there's a point at which the share price would give you pause, or how you think about balancing cash to share repurchases to other uses if the share price moves up?

We do talk and have talked for quite a while about a balanced cash deployment strategy, investing in our business, managing the balance sheet, competitive dividend, and returning excess cash to shareholders.

We do take a long term view of the Company, its portfolio, the strength of the portfolio, the cash generation capability of our Company, and all those factors go into our thoughts around our share repurchase program.

So I think that pretty well sums up our thinking.

It really has not changed from where we've been over the last number of years.

As I tried to say in my summary comments, barring any major program changes, I would expect the performance that we've had in 2013 to continue into 2014, and likely beyond.

So you don't have a price where you think about --

We make decisions essentially every day around our repurchase program.

We tend to approach the repurchase program with a 10b5-1 program that we put in place for a period of time, based on a grid that does vary the amount of purchases based on share price.

And we look at that grid on a regular basis whenever we put a new program in place.

All right, thanks, that's helpful.

Your next question is from the line of Jason Gursky, Citi.

Good afternoon, everyone.

Hello, Jason.

Wes and Jim, I was wondering if you could maybe just walk us through the various puts and takes in guidance, and what would cause you to reach both the bottom end of guidance and the top end, just where the risks lie as we move through the years?

So that we can track things.

Well as I thought about the guidance range, and essentially the sector operating margins, probably the biggest variable is both AS and ES, our largest segments, that those would be probably the largest variables.

And really, it's going to come down to individual program performance largely in those two sectors I would think, would be the major variables.

I don't know that we're going to have a lot of movement around necessarily the other two sectors, and tax the rate probably has a little variance around it.

Corporate allocations, unallocated cost always has some variance to it.

And then, frankly, the other variable would be weighted average shares for the year.

Okay.

But I don't want to put words in your mouth, but it sounded to me from a pure operations perspective, it's just execution on the programs that are already under contract.

That there's no reliance on the budget that's coming up, and new signings to get things to where you need to be for the year?

Our business, much of it comes from the backlog in the current year.

A little bit less so at IS, but for the two other longer cycle businesses, much of it does come from the backlog.

The other variable, frankly, would be individual program decisions that may be made during the year that obviously if we had a termination of a major program - unexpected at this point in time- that could be a variable as well.

Okay, great.

That's helpful, thanks, gentlemen.

Thank you.

Your next question is from the line of Joe Nadol, JP Morgan.

Thanks, good afternoon, gentlemen.

Hello, Joe.

Hello.

So Wes, when we look at backlog and bookings, the funded backlog was down 12%.

The overall backlog, I guess including unfunded, was down 9%.

Your sales guidance is, at the middle of the range, down 4% for 2014.

So I guess, it's a single one part question, but really with a couple of components.

Can you offer a bookings guidance for the year to give us some sense if you expect backlog to come back a little bit at some point?

And if not, when does that decline in backlog start accelerating your sales declines?

Each year, we think hard about what's in front of us in terms of the competitive environment, and what our customers may or may not do.

In my remarks earlier, I noted that we saw in 2013, just a general perspective in many parts of our customer community that made it difficult for them to pursue the awarding of new contracts as aggressively as I think many of them would have wanted to.

And we saw some things move to the right.

We may see some more of that this year.

Clearly, the investment accounts continue to be under some pressure in 2014 and I think in 2015, as well as the department wrestles to the ground what it's actually going to do with the appropriated amounts that are out there.

And we all know, it takes a little bit longer to deal with force structure, and investments become a little bit more of the variable as we go through that.

So how do we look at 2014 in that regard?

I think there's going to be real pressure on the investment accounts this year, just as there was last year.

I think we'll gain a little bit more insight into that as we get the President's budget and can see with a little bit more clarity how the department is sorting through the profile that it's going to be using to navigate through 2014 and 2015 as it looks forward to 2016.

But getting out in front of that one right now I think would be a little bit premature.

Clearly, we always want to push for a good book-to-bill, but the message that we've given the team and I think is important for everyone to understand is we're looking at quality and the business, not just quantity.

And we want to make sure that we're doing things in a way that's going to insure that we can continue to grow our value, so that's the domestic side.

The other part that I commented on in my remarks was international.

We expect to see that continuing to grow this year, and there are some opportunities there that would add to the backlog as well.

So we're looking at it comprehensively, and I think that's probably about the breadth of the remark I can make on book-to-bill at this point.

We do have a 2014 budget at this point.

It's 2015 that we're waiting for.

I know of that of course it's very important, but most of your bookings this year would come out of 2013 and 2014 anyway domestically, so --

What I was referring to there, is when the 2015 President's budget gets put on the table, I think we'll have a better insight into potential award profiles over the next few years.

And since your question related to book-to-bill, and not so much sales, that award profile really drives more of the book-to-bill perspective.

Okay, thanks.

Your next question is from the line of Carter Copeland, Barclays.

Hello, good morning, gentlemen, or good afternoon I should say.

Hello, Carter.

At the risk of being extra boring, I'm going to ask you, Jim, about a topic so near and dear to your heart, and that's pension.

I know you like it so much.

So I wondered if you might be able to help us step through what the FAS/CAS adjustment would be with no changes in assumptions if you were to look out to 2015 and 2016?

Well you're really asking me to get my crystal ball out aren't you?

No, no change to assumptions.

No crystal balls.

We'll pretend nothing ever moves.

And we all know that's really the case.

That always happens.

A great assumption, I know.

But to answer your question, if I were to look ahead for the next couple years with no change in assumptions, I probably would see net FAS/CAS moving up about on the range of $200 million to $225 million each year, 2015 and 2016.

Which essentially means that FAS is going to hold about constant where it is, and CAS will move up by about that amount each year.

As we look through time, as you probably know, a big part of that is due to CAS harmonization.

And as we go through time, the CAS harmonization does phase in, and by the end of four years is completely phased in.

The CAS harmonization is essentially much more of a settlement concept, meaning heavily dependent upon the interest rates.

Since to the extent that interest rates do fluctuate over a period of time that could drive a rather significant change in those assumptions around CAS, particularly in the latter years.

Great, thank you.

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

Good afternoon.

Hello, Sam.

Hello, Sam.

If I use some of the numbers, Wes, you put in terms of percentage of sales of international it would seem like you're going to get another 20% plus growth this year.

So I was wondering if you could talk a little bit about what's driving that growth?

And somewhat related, what competitions we should be watching to unfold this year?

There are several things across-the-board driving growth.

Clearly, our electronics business has historically been our strongest performer internationally, and they continue to do very well in that regard.

And in terms of the breadth of their footprint and the breadth of their offerings, I think we're just going to continue to see electronics have a number of broad opportunities scattered around the globe, quite frankly.

The area though that's perhaps new in our story, with respect to international, is unmanned.

And we've started that process with the capture of NATO AGS, and that program continues to go well and is moving up its curve, if you will, in terms of the volume that it represents for Aerospace Systems.

Over the course of this year, an important one to watch of course will be Global Hawk for Korea.

And it too is I think a very important milestone, both in terms of the program itself, but also in terms of what it represents for exportability of this class of capability to our allies around the globe.

So that's an area that, from my perspective, is one that's going to be important as we look to the future.

Now our other businesses, IS and TS also have international opportunities that range from the work that we're doing in C4ISR to cyber to sustainment.

So it's a fairly broad-based activity that we're seeing in terms of the international opportunity space in front of us.

And we're, of course, thoughtful, and we're wanting to make sure that each of the steps that we take on an international basis is aligned with what our allies really need and what our customer community can support.

But I will tell you that we've been seeing an increasing focus within the DOD to help make sure that our allies are able to access the capabilities that they need to, both the interoperable as well as to be a bigger part of the overall global security equation.

And so I'm cautiously optimistic that that trend will continue, and that we'll continue to see this expansion of the footprint of opportunities.

Okay, thank you.

Your next question is from the line of Myles Walton, Deutsche Bank.

Thanks, good afternoon, guys.

Hello, Myles.

How are you?

Good.

I just want to clarify one thing.

I may have misheard it, but the CapEx number for 2014 and go forward of $600 million, I'm just not sure I got that right.

I haven't seen you guys do that since you owned a shipbuilder.

Yes, we are looking at around $600 million in 2014, and I do think the CapEx will stay, I don't know if it's going to be at $615 million or so, but it's going to be higher than its been over the last couple years.

You might remember in the first part of 2013, actually the first quarter, we announced the Aerospace Systems centers excellence, moving some businesses down and expanding our operations down in Florida.

So we're adding to capabilities down there, and we're going to be building that out over the next year and a half for sure, maybe even a little bit longer.

And, Myles, it's Wes.

I would just say that from a broader perspective, that centers of excellence approach, does a number of things for us.

It helps us over the longer term on our affordability, which I think is a critical part of our competitiveness.

It also helps us in terms of better managing our human capital base, and being able to concentrate our activities in a more integrated manner and take maximum advantage of the skill sets that we have.

So this is an important part of our longer term strategy.

And from our perspective, investing in our business makes a lot of sense.

Got it.

Okay.

And the other -- the real question was on the favorable adjustments.

It sounds like they were down $230 million, so the underlying margins were quite strong, even with that decline.

And so I'm curious what kind of profile you've built in or baked in for 2014 versus 2013 in the high 11% in the segment margins?

Our margin guidance, Myles, is based really on our expectation for the overall margins in each of the businesses, as opposed to any expectation, if you will, around individual cumulative catch up adjustments.

But as you know, we've looked at our businesses and our competitors businesses that are similar to ours and have a view of what the benchmark margin rates ought to be for each of those businesses, and they're driving our organization to perform at the top end of those ranges.

So it's really based much more on expectations for what the business ought to do.

Clearly, we have an understanding of margins in our backlog, and all of those become factors in our thinking about margin rate guidance for the year.

Okay.

All right, thanks.

Thanks, Myles.

Your next question is from the line of Ron Epstein, Bank of America.

Good morning, guys.

Morning, Ron.

Just wanted to ask a big picture question.

When we think about maybe two things, so one on the financial side.

When you complete the current buyback plan, you will have I think bought back about half the Company incrementally over what the last eight years, approximately.

Why not just buy it all back at once?

Why chase the stock higher?

Why not take the Company private?

Have you thought about it, any thoughts you have on that?

Yes, it's Wes.

Let me give you a broader view.

When we think about capital deployment and the approach that we think that makes the most sense, we often use the term balanced approach.

Because we want to be investing in our business.

We want to obviously take care of our pension plan as we go along, which we've been very good stewards in doing over the last number of years.

As well as returning cash to shareholders.

And, ultimately, when we think about that over a longer term perspective, the path that we've been on for a number of years is what has made the most sense to us.

And, as we've talked about our outlook for this year, we've been pretty clear that that path continues to make the most sense to us.

We go through as every Company does a periodic review of our full range of alternatives.

And as we do that, we think about what really does make the most sense for our shareholders over the longer term as well.

And that has led us to the conclusion that has put us on the path that we're on, and we continue to see that as a very, very good path.

And as we indicated in our remarks, we remain focused on our goal of retiring the shares that we've outlined through the end of 2015.

Trying to project where we'll be beyond the end of 2015 at this point, would be I think a little bit too speculative.

But to answer your question directly, we do think about that broad range of alternatives, and as a conclusion of that thinking, we're doing what we're doing.

Okay.

And then maybe just jumping over now to some more program specific stuff.

How should we think about the transition in the airplane business as we see probably F/A-18s start ramping down and F-35s ramp up?

How do we view the margin exchange there?

Is there some margin headwind, or how do they offset each other?

Well clearly F/A-18 is a very mature production program.

We're not quite there yet on F-35s, so as we transition there may be a little bit of an impact there.

But frankly, our Aerospace sector is much broader than F/A-18s and F-35s.

E-2D is an important part of that portfolio, the space part is an equally important part, as well as the unmanned portion of the portfolio.

All factor into the overall margin rates at Aerospace Systems.

Again, when we look at our competitors in that business, the margins that we've been generating I think are really strong margins for the type of business we're in.

And we'll continue to manage that business as best we really can.

Okay, great.

And then maybe just one last one.

On the investment side again, when we think about -- and there's been some of this in the press, and I realize you're limited in what you can say, but on this next generation Bomber program, given you guys teamed up against a formidable other team, will we expect a ramp up of internal R&D money on that given the importance of that program potentially to the Company in the future?

Ron, it's Wes.

I think all I can say there is that clearly we have a strong legacy in the business of providing bombers to the United States Air Force.

We're proud of that history, and our capability in that regard.

And I think our shareholders should count on us to do the things that we think are appropriate to continue to position our Company for the long term there.

And I think that's about all I can say on it.

Okay, great.

Thank you very much.

Your next question is from the line of George Shapiro from Shapiro Research.

Hello, George.

Good morning.

How you doing?

All right.

Jim, if I take a look at your margin guidance for this year, my question is, is this just the typical conservatism that you've put in earlier in the year or is this really the beginning of a trend to get back to some of those normalized margins that you brought up, I don't know how many years ago for which you've been way over-earning?

George, we look at our business every year based on, as I said, we know what's in our backlog.

We have an expectation as to what the business ought to be able to generate.

Frankly, if I look at our guidance for each of our business versus performance over the last couple years, other than ES, the guidance is very close to what they actually have been performing at over the last couple years.

ES, on the other hand, had just an outstanding 2012 and 2013.

And again, when I look at our competitive situation, those kind of margin rates on a long term basis in that business, I just don't know that you can maintain them over that long term period.

Low to mid 15%s is really strong margins for that business, and so I'm very comfortable with our guidance for this year.

There's always the possibility of changes as we go through the year, as we see actual performance.

So could they do better?

History would say they probably could.

If I look further back, history would say they could probably do a little bit worse.

So on balance, I think, again, it reflects our best judgment at this point in time, or where we think each of these businesses are going to be able to perform for the year.

Okay.

And let me just ask for, Wes, your comment on the Jammer contract that Raytheon won.

Do you have any color you might share?

No, nothing beyond I think what we've talked about in the past.

We take each of these competitions and approach them with what we think is the right approach, based on our ability to offer and our customer's ability to offer.

And when we don't win, we take that very seriously and go back and scrub and try and learn our best lessons from it.

But I don't, other than as I said that we've communicated on that in the past, I don't think we have any new perspective.

It continues to be an important business area for us.

The whole EW field is one that I think is going to continue to grow.

So nothing about that particular outcome causes us to reevaluating being in this business, if anything it causes us to just learn some lessons and redouble our efforts here.

We think that's a very important business area.

Okay, thanks very much.

Thanks, George.

(Operator Instructions)

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

Good afternoon.

Hello, David.

Guess I just want to come at this margin question in a little bit different way.

Wes, I guess the guidance for lower margins, does it speak to anything around the cost reduction opportunity that you see in the Company today, relative to what you've been able to do over the last couple of years, relative to headcount?

And are maybe at this point some of those savings actually starting to find their way back to DOD as contracts reprice?

Well your perspective is correct.

We're in a business where the results of our cost reduction activities ultimately go back to our customer over time as we go into new contracts, and that's good.

That's an important part of the way our industry works.

It helps us to drive affordability for our customer community during a period of time when obviously their budgets are under a lot more pressure.

But at the same time, when we're talking about profitability, part of the challenge and opportunity that we have is to continue to figure out how to do things at an inherently lower cost, use some of the innovative capacity in our enterprise to do that so that we do have the opportunity to continue to make a good profit on what we're doing.

So there's always a balance point in this.

I would say our guidance obviously reflects where we think we are in our full set of contracts from a total cost perspective and an affordability perspective.

But, let me also be clear that we're going to continue to drive affordability.

Yes, we have taken a lot of actions over the last few years to enhance our competitiveness, and to reduce costs, both in headcount and in footprint, as well as in a broad variety of other efficiencies in our enterprise.

You're never done at working on cost, and we're going to stay at that.

It continues to be an opportunity in front of us, but clearly as we think about guidance on margin rates we factor in that aspect, the aspect of how we price on new contracts as well as, obviously what Jim said, our broader view of how these businesses should perform.

Okay, thanks.

That's helpful.

In terms of a follow-up, on the international side with that ramping up as a percentage of the overall business, is that -- I would assume it's additive to the margin profile.

And then, would you expect some of that work to benefit you on the advances side of things?

Thanks.

On international, yes.

Generally our margin rates on international are a bit more attractive than the domestic business.

Not universally, but overall in aggregate they are.

And depending on the type of contract, whether it's FMS or if it's a direct sale, in some cases yes, that can help on advances.

But each and every one of these is a negotiation, so we deal with them sort of one at a time as opposed to in aggregate.

Thanks.

Thanks, David.

At this time, I'm showing no further questions in queue.

I'd like to turn the call back over to Mr. Wes Bush for any closing remarks.

Thanks, Derek.

And I just would say thanks everyone for continuing to be interested our Company.

As I said in my earlier remarks, we're very pleased with the outcome for 2013 given the challenges of the environment in which we operated.

It is a reflection of the hard work and dedication of the team across our Company.

And quite frankly, it's also a reflection given how difficult last year was in our customer community.

It's a reflection of the partnership that we have with our customers.

They went through some pretty tough times last year.

And I think as a nation, we should all recognize and respect what our customer communities had to deal with in navigating through 2013.

We all feel a little bit better about where we are from a budget perspective in 2014 having an appropriations process that's back closer to normal.

We hope that continues.

We hope that we can get back to regular order on a more regular basis, and see this as the path that will allow our customer community and our industry to plan and to do the things that are necessary to insure our national security.

So thanks, everyone.

Appreciate your continuing interest, and look forward to the opportunity to interact with many of you over the coming months as we prepare and launch into 2014.

Ladies and gentlemen, this concludes today's conference.

We thank you for your participation.

You may now disconnect.

Have a great day.