Good day, ladies and gentlemen, and welcome to Northrop Grumman’s Third Quarter 2020 Conference Call. Today’s call is being recorded. My name is Natalia, and I’ll be your operator today. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Mr. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed.

Thank you, Natalia. Good morning, everyone, and welcome to Northrop Grumman’s third quarter 2020 conference call. This morning, we’ll refer to a PowerPoint presentation that is posted on our website. Before we start, matters discussed on today’s call, including 2020 guidance and remarks regarding 2021 and beyond reflect the company’s judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, which are noted in today’s press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today’s call will include non-GAAP financial measures that are reconciled to our GAAP financial results in our earnings release. On the call today are Kathy Warden, our Chairman, CEO and President; and Dave Keffer, our CFO. At this time, I’d like to turn the call over to Kathy. Kathy?

Thank you, Todd. Good morning everyone, and thank you for joining us today. We hope you and your families are well. As you all know, we continue to operate in the midst of a global pandemic. Our focus remains on the safety and wellbeing of our people, delivering on our customer commitments and supporting our suppliers and communities. As the pandemic continues, we are operating under protocols that we instituted earlier in the year to help preserve the wellbeing of our employees. And these are helping us to meet our commitments to customers and deliver strong operating results, while also continuing to strengthen our foundation for the future. In addition to COVID-19, we have experienced locally devastating natural disasters this summer. I especially want to recognize our Northrop Grumman employees in Lake Charles, Louisiana, who have persevered through two hurricanes in the last two months. Despite experiencing personal loss, they have returned to work and continue to support the U.S. Air Force through the sustainment of JSTARS aircraft. Their resiliency embodies the spirit of Northrop Grumman employees everywhere. Also, before I discuss this quarter’s results, I want to take this opportunity to thank Janis Pamiljans, who is retiring as President of Aeronautics Systems. In his more than 34 years with Northrop Grumman, he has made significant contributions to the business through his leadership and unwavering commitment to our employees and customers. And I want to congratulate Tom Jones, who will succeed Janis on January 1. Tom currently leads Airborne Sensors & Networks in Mission Systems. This business delivers large scale, mission critical C4ISR systems and complex hardware and software products for airborne platforms, including many in aeronautics. Tom is a seasoned executive with 30 years of aerospace and defense experience, and we’re fortunate he will be leading our Aeronautics business as it continues to deliver critical national security solutions. Now focusing on our third quarter results, I want to thank our employees for their dedication to delivering for our customers and shareholders. We had a strong third quarter, and based on year-to-date results, we are raising our guidance for the year. Our sales grew 7% in the quarter and 6% year-to-date, driven by sales growth at Space, Mission Systems, and Aeronautics. Space continues to be our most robust growth driver with sales increasing 17% in the third quarter and 13% year-to-date, and Mission Systems is our second fastest growing sector. Strong performance from all of our sectors generated segment operating income growth of 10% in the quarter and 4% year-to-date, and we delivered an 11.5% segment operating margin rate in both periods. Earnings per share grew 7% in the third quarter and 9% year-to-date. Third quarter free cash flow increased 22% to $1.1 billion after capital spending of $287 million. Year-to-date, free cash flow has increased 80% to $1.9 billion, reflecting solid operational performance, as well as the benefit of customer actions to support the industrial base. Our new business awards are again a highlight. Third quarter bookings totaled more than $20 billion or 2.2 times sales, and year-to-date we’ve captured $43 billion in new business, which brings our year-to-date book-to-bill to 1.6. As of the end of the quarter, our total backlog stood at more than $81 million, a 25% increase from year-end and a new record for Northrop Grumman. This year’s new awards demonstrate our portfolio’s alignment with the nation’s highest priority global security mission, including space, nuclear deterrence, advanced weapons, electronic warfare, and all domain command and control. Turning to sector highlights, I’ll begin with Space. In early September, the Air Force awarded Northrop Grumman a $13.3 billion contract for the engineering and manufacturing development phase of the Ground Based Strategic Deterrent. I want to congratulate the members of our nationwide team for their exceptional work on this program. This next phase of our nation’s program to replace the Minuteman III ICBM, which was first fielded in 1970, culminates more than 10 years of planning across two presidential administrations, as well as a series of competitions. The EMD award includes weapon system design, qualification testing evaluation, and nuclear certification, and we expect to work for the production phases of the program. Now that the EMD phase has been awarded, GBSD will ramp quickly. For 2021, we expect GBSD to contribute nearly $1 billion of incremental growth at Space Systems. Our nationwide team looks forward to delivering a secure, reliable, and effective nuclear deterrent capability to our nation. An award of this size impacts business mix by increasing cost-type development work as a percent of sales, particularly at Space and to a lesser extent the entire company. While we expect this mix shift will pressure next year’s margin rate at Space, we will work to offset that pressure across the company through program performance and cost management. In addition to GBSD, we also captured one of three evolved strategic Satcom or ESS awards to rapidly prototype a strategic communications payload with enhanced resilience and cybersecurity capabilities. ESS will be designed to seamlessly interoperate with and eventually replace the Advanced Extremely High Frequency system. This effort is critical to extending our nation’s secure satellite communications infrastructure and we expect it will represent a multibillion dollar competitive opportunity. Program milestones achieved in Space this quarter included the successful tests of the Space Launch System booster for NASA’s Artemis program and the MEV-2 launch in August. And shortly after the end of the third quarter, our Cygnus spacecraft was launched; awarded an entire rocket to complete our 14th resupply mission to the International Space Station. At the Aeronautics sector, in addition to higher restricted volume, F-35 deliveries have recovered to first quarter levels. Through the end of the third quarter, we’ve now delivered 719 F-35 center fuselage units and we are continuing to manufacture at a pace that supports our scheduled delivery. On the E-2D program, we’ve now delivered 44 of the 75 aircraft under contract. The U.S. Navy has approved an 11-plane increase to that program of record and is now working to identify funding for this additional aircraft. I would also note that international opportunities for E-2D continue to be promising. In addition to Japan’s 13 E-2Ds, France and Taiwan are expected to procure E-2Ds in the coming years. In Autonomous Systems, Triton’s inaugural deployment to Guam occurred in January, and led to an early operational decision by the Navy in May. Following these critical milestones, Triton is quickly becoming an invaluable asset in the Seventh Fleet Maritime Patrol and Reconnaissance Command. Despite the likely budget pressure on our health portfolio beyond this year, we have a promising set of future autonomous opportunities, including Skyborg and the MQ-9 replacement among others. Turning to Defense Systems. In the third quarter, the U.S. Army conducted live-fire tests of our IBCS system and successfully engaged multiple targets. These exercises conducted as part of the IBCS limited user test demonstrated our system’s ability to maintain continuous track of the targets despite contested environment conditions by fusing data from multiple sensors. A successful test for the ability to share data across platforms and sensors is a significant demonstration of our underlying architecture, which is applicable to joint all-domain operations and increases the value and power of our customers’ legacy platforms and weapon systems. Defense Systems also completed the first environmental test of AARGM-ER’s new extended-range rocket motor, a major milestone toward motor qualification and the first live fire flight test in 2021. And in hypersonics, we successfully completed a captive carry test in support of the DARPA and U.S. Air Force Hawk program. With our prime contractor, we are on track to proceed to free flight testing, and we are now establishing manufacturing plans to meet initial low-rate production quantities. And finally, Mission Systems. We continue to meet or exceed prior year deliveries for the F-35 program. In the third quarter, Mission Systems delivered 41 radars consistent with 2019 quantities and delivered 47 GaAs chipsets and 50 CNI chipsets, year-over-year increases of 30% and 40%, respectively. Mission Systems also received a task order contract valued at $690 million for the Defense Intelligence Agency’s TALOS system. This effort focuses on the build of new big data systems for the DIA, including MARS, the Machine-assisted Rapid Repository System, transforming current databases into multidimensional, flexible, and rigorous data environments. MARS is expected to create a military intelligence environment accessible for up-to-date information by the intelligence community and warfighters. And DARPA awarded Mission Systems a contract for its Gamebreaker program. This innovative program seeks to develop and apply artificial intelligence to existing real-time strategy games. The Gamebreaker effort gives us an opportunity to evaluate and develop artificial intelligence technology to improve flexible planning, optimization, and discovery of products that operate in dynamic environments. Looking ahead, we believe our customers will require integrated artificial intelligence and machine learning capabilities in the same way as cyber resiliency is now broadly required in products and systems, and Northrop Grumman is well positioned to support these emerging customer requirements. We’re extremely proud of our team’s results for the third quarter and year-to-date. And I want to recognize the rebound and productivity our workforce has demonstrated since late March and early April. As we look ahead to the remainder of the year, our guidance assumes that our team’s productivity, as well as the operations of our customers and suppliers, remain at or near current levels. It also reflects the strength of year-to-date results and our expectations for a strong fourth quarter. Based on our current assumptions, we now expect 2020 sales of $35.7 billion to $36 billion, which is a 6% top-line growth at the midpoint. EPS should grow to between $22.25 and $22.65, which is also 6% growth at the midpoint. And we now expect free cash flow to increase to between $3.3 billion and $3.6 billion, a 14% increase over 2019 at the midpoint. Regarding capital deployment, we continue to focus on a balanced strategy that calls for robust investment, strengthening of the balance sheet through debt reduction and funding of our pension plan, and returning cash to shareholders, which we will do by resuming share repurchases and maintaining a competitive dividend. We believe our strong cash flow and current cash balances will allow us to address all of these value-creating deployment opportunities. Turning to the U.S. budget environment, we expect to see continued strong bipartisan support for national security in the future. As indicated by the $740 billion targeted for FY 2021 appropriation. We are pleased that Congress and the administration agreed to a continuing resolution that funds the government through December 11, and avoids disruption in the execution of critical national security missions. And I will note that funding under continuing resolutions supports our programs, including GBSD even if the continuing resolution is extended into early next year. We continue to believe that bipartisan support for defense spending will endure and that our portfolio is well-aligned to support national defense strategy. While we plan for various budget scenarios, defense spending is largely threat-driven and today’s threat environment warrants a strong defense. Emerging threats are intensifying, and we believe both political parties are committed to effectively countering these threats. While there are many external uncertainties, Northrop Grumman has a strengthening foundation for growth and the capabilities and people necessary to address our nation’s most challenging problems. We are investing for the future, delivering value to our shareholders, and meeting our commitments to our customers and all of our stakeholders. So now I’ll turn it over to Dave to provide more detail on our sector’s results, 2020 guidance updates, as well as a preview of certain trends in 2021.

Thanks, Kathy, and good morning everyone. I’d also like to thank our employees for their strong performance in this quarter. My comments begin with the third quarter highlights on Slide 3. We delivered excellent bookings, sales, operating income, EPS, and cash. And we’re pleased to be increasing our 2020 guidance for sales, EPS, and free cash flow with the assumptions that Kathy articulated. Slide 4 provides a bridge between third quarter 2020 and third quarter 2019 earnings per share. Higher sales and segment operating income drove $0.51 of the increase. Net pension contributed $0.40. These positives were partially offset by a higher corporate unallocated, which was primarily driven by a $50 million increase in state taxes, as well as higher net interest expense, federal income taxes, and other items. I would also note that COVID-19 related expenses are reflected in our current results. I’ll begin a review of sector results on Slide 5. Aeronautics sales rose 5% for the quarter and 4% year-to-date. Sales in Autonomous Systems and Manned Aircraft were higher in both periods, for the quarter and year-to-date restricted activities, and the E-2D contributed to sales growth and for the quarter, F-35 volume was also higher. Defense System sales decreased 4% in Q3 and year-to-date sales are comparable to last year. Third quarter trends included lower volume for Mission Readiness as the Hunter UAV sustainment program nears completion. And in Battle Management & Missile Systems, third quarter sales reflect lower volume at Lake City and on an international weapons program as both of those activities neared completion. Declines in these areas were partially offset by higher volume on GMLRS and AARGM. Year-to-date results reflect similar program trends. Mission Systems sales were up 10% in the third quarter and 6% year-to-date. All four MS business areas contributed to this quarter’s sales growth. Third quarter results reflect higher airborne radar volume for the MESA and F-35 programs, higher volume on self-protection and targeting systems, and higher volume on marine systems and G/ATOR. Year-to-date sales growth reflects higher volume for airborne radars, marine systems, restricted programs, and self-protection, avionics, and targeting programs. Space Systems sales rose 17% in the third quarter and 13% year-to-date, due to higher volume in both business areas, higher volume on restricted programs and other space programs like next-generation OPIR and NASA Artemis contributed to higher sales in both periods. Stronger volume on launch vehicle and hypersonics programs drove higher launch in strategic missile sales in both periods. Now turning to segment operating income on Slide 6. Aeronautics operating income increased 9% and margin rate increased to 10.1%. Year-to-date Aeronautics Systems margin rate is 10%, in both periods Aeronautics Systems recorded lower net EAC adjustments. In the third quarter, lower positive EACs were more than offset by favorable overhead rate performance, and year-to-date results were helped by the second quarter $21 million government accounting benefit. At Defense Systems, operating income increased by 8% in the quarter and 2% year-to-date. Operating margin rate increased 130 basis points in the quarter to 11.7% and 20 basis points year-to-date. Margin rate expansion in both periods is due to improved performance in Battle Management & Missile Systems programs. Operating income at Mission Systems rose 5% in the quarter and 6% year-to-date. Third quarter operating margin was 14.5%, and year-to-date margin rate was comparable to the prior year at 14.6%. Space Systems operating income rose 17% in the quarter and 11% year-to-date. Third quarter operating margin rate improved to 10.2%, and year-to-date operating margin rates declined slightly to 10.3%, principally due to lower net EAC adjustments. Turning to Slide 7, we’ve updated guidance at all four sectors based on our current assumptions and better than expected year-to-date results. At Aeronautics Systems, we now expect sales to grow to the middle $11 billion range, with some potential upside related to additional lower margin sales that may be booked in the fourth quarter. For Defense Systems, we are increasing margin rate to approximately 11%. We’re also increasing our margin rate guidance for Mission Systems. We now expect a mid-14% margin rate this year at Mission Systems. And at Space, based on the increase in development work at the sector, we expect sales will increase to the mid $8 billion range with a low 10% margin rate for the year. Moving to consolidated guidance on Slide 8. We’re raising 2020 sales, adjusted EPS, and free cash flow guidance to reflect the strength of year-to-date results. 2020 sales are now expected to range between $35.7 billion and $36 billion, a $400 million increase over prior guidance, with top-line growth of 6% at the midpoint. We’ve also increased our total net FAS/CAS pension adjustment by $25 million, in part to reflect the updated demographics study that we completed in the third quarter of each year. No change to our expected federal tax rate or year-end weighted average share count. Based on year-to-date results and expectations for the remainder of the year, we’re increasing mark-to-market adjusted EPS to a range of $22.25 to $22.65. For free cash flow, we now expect between $3.3 billion and $3.6 billion for the year or about $20 per share at the midpoint. Slide 9 provides a bridge between July’s guidance and today’s full-year EPS outlook. The increase in guidance reflects $0.25 of third quarter operational improvement. Regarding capital deployment, capital expenditures year-to-date totaled $828 million, and as we indicated, we retired $1 billion in debt that matured on October 15. As we look ahead to next year on Slide 10, we expect three of our four sectors, Space, Mission Systems, and Defense Systems to have top-line trends consistent with 2020. Space should continue low-to-mid teen percent top-line growth supported by a backlog that has more than doubled this year due to GBSD and robust restricted awards. Mission Systems should generate mid-single digit sales growth, including higher volume from restricted and airborne, and ground radar programs. Defense Systems' top line growth will be impacted by the Lake City wind down, which will be a headwind of approximately $400 million next year. This is a little more than we originally anticipated and reflects the fact that we had more sales than expected in 2020 as we transitioned these activities over to the new contractor. We expect Defense Systems 2021 sales to be comparable to this year. Regarding Aeronautics Systems, we expect several factors will lead to a deceleration from this year’s mid-single-digit growth. In 2021, we believe COVID-19 will continue to impact our commercial programs. F-35 production will begin to plateau, and our HALE portfolio will likely experience defense budget funding pressures. These factors lead us to an expectation of low-single digit growth at Aeronautics in 2021 from the mid $11 billion range this year. Given these sector trends, we expect 2021 sales at the company level will be in the low-to-mid $37 billion range, which includes intercompany eliminations of approximately $2 billion. Looking at segment margin trends, GBSD will pressure the margin rate at Space, but we expect margin rate performance from the other three businesses will be generally consistent with 2020. As Kathy said, we have opportunities to offset mixed pressure at Space Systems through program performance and cost reductions across the company. We will aggressively drive to capture these opportunities. We do continue to expect higher segment margin dollars in 2021, and we expect next year’s segment margin rate will likely trend toward the low end of the 2020 guidance range of 11.3% to 11.5%. Our outlook assumes current productivity levels. And although we’re actively pursuing the recovery of COVID related costs, our outlook does not include significant recoveries. Turning to cash, we continue to expect strong cash flow. There will be a 2021 headwind related to the reversal of about half of this year’s $300 million to $400 million deferred payroll tax related benefit, but we expect to have opportunities to offset that with improvements in working capital. Our 2021 capital expenditures are expected to be about $1.35 billion. Regarding 2021 pension items, I would note that in addition to updates for changes in the discount rate at the end of this year, and actual 2020 planned asset returns, we’re evaluating our pension assumptions, including our long-term expected rate of return, which is currently 8%. For your modeling purposes, we believe the net effect of these and other pension updates effective 12/31 is likely to lower our annual net FAS/CAS pension adjustment by approximately $150 million to $250 million in both 2021 and 2022 versus estimates of $1.75 billion and $1.8 billion respectively, which we provided on January 30. We will provide our detailed outlook on pension items on our fourth quarter call in January. As discussed more fully in our earnings release and our SEC filings, our guidance for 2020 and our outlook for 2021 assume no significant changes to our productivity, to support for our programs or to the federal corporate tax rate. In addition, our guidance and outlook do not reflect any potential discretionary pension plan contributions that we may choose to make in either year. In closing, we’re very pleased with our third quarter and year-to-date results, particularly new awards and our record backlog. Overall, our portfolio is well-aligned with evolving customer priorities. We continue to execute to deliver value for our shareholders and we continue to invest in the future. With that, Todd, I think we’re ready to open the call up for Q&A.

Natalia, please remind everyone how to get in the queue and ask questions.

Your first question comes from the line of Robert Stallard with Vertical Research.

Thank you so much. Good morning. And thanks for all the detail there on the 2021 guidance. But Kathy, just on another topic, on GBSD, I was wondering if you could comment about how confident you are about this program staying on track because there has been some commentary it could be at risk or the change of administration and a tougher budget environment. And in relation to that, as the program progresses, do you think 2021 will be this trough year for space margins? Thank you.

Thanks, Rob. Every new administration has conducted an analysis of the triad, and we expect that to happen again after the election or working with the new administration. But I’ll also note that each administration has reaffirmed that it has a critical role to play in our national security. Since 1994, the DoD has had a formal Nuclear Posture Review process. And in that, they evaluate the nation’s strategic deterrent posture and have validated all three legs of the triad as being critically important. And I’ll note that the two most recent Nuclear Posture Reviews, one conducted in 2010 by the Obama-Biden administration, and the other in 2018 by the Trump-Pence administration, both confirmed the need for the triad to include GBSD and the B-21. Historically, when defense spending declined and conventional military forces come under budget pressure, the U.S. and its allies have relied even more heavily upon nuclear deterrence to ensure global stability. So we think that this triad is going to be viewed as even more important from a budgetary priority perspective if those conditions exist. So we’re confident that a new administration would recognize that value and continue to support the modernization efforts that are well underway for both GBSD and B-21.

Your next question from the line of…

Natalia, just before we move on, you had a second part to the question, Rob. So let me address that quickly. You asked about space margins and whether 2021 would be the trough given the mix pressure that we will have from the GBSD program. I’ll remind you that we’re expecting nearly $1 billion of incremental growth from GBSD next year, but we also expect significant growth going from 2021 into 2022, so that mix pressure will persist. But as Dave noted in his commentary, we are working to offset that pressure at the company level with strong cost reduction and program performance. And Natalia, now we’re ready for the next question. Thank you.

Your next question is from the line of Carter Copeland with Melius Research.

Hey, good morning, everyone.

Good morning, Carter.

Kathy, I wonder if you could talk about what you expect in terms of backlog growth opportunities in 2021, given that 2019 and 2020 were so strong with some big lumpy awards. Do you think you can still grow backlog next year? Or is that going to be tougher, given the compares? Thanks.

We certainly see the opportunity to continue to grow backlog next year. We have a number of opportunities that we’re pursuing across all sectors. I’ll point to a few—Next-Generation Jammer in Mission Systems, as well as the 3DELRR replacement called SpeedDealer. Also in Mission Systems, we have NGI, the Next Generation Interceptor, which would be in Space. So these are just a few examples of large potential awards, new starts that we could look to bolster our book-to-bill next year. But certainly we expect that book-to-bill won’t be as robust as this year, just given the singular effect of the GBSD award and the strong backlog that we have across our sectors. Just to provide a little bit of color on that, we don’t tend to look at awards and book-to-bill on a quarterly basis; we look at it on a longer-term basis, and we are well above a year of sales in backlog in Space, Aerospace, Aeronautics, and Mission Systems. Defense Systems tends to run as the short-cycle business more with a backlog about equal to sales, but that’s typical. So we see strong backlog in all of our sectors and the opportunity to continue to build backlog at the company level.

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

Good morning. I was interested in trying to get a sense for where services are headed. You’ve had some very good top line growth in product sales, but services have really been flat at best. And perhaps you could talk about why that is. And do you expect to see the services revenues grow from here? And do you expect F-35 sustainment to be a significant part of that?

Thanks, Doug. So let me start with the last part of the question first, and then I’ll talk more generally about services. We view F-35 sustainment growth as a contributor to our overall services business, but I’ll also note that some of that F-35 sustainment growth runs through our Aeronautics business and our Mission Systems business. When we’re talking about spares and repairs, those get done by the businesses that produce the products themselves, not necessarily through our Defense Systems business, where our aircraft modernizations team is involved in the sustainment of the program for the F-35. So we see sustainment spread across the company and we see that growth contributing to all three of the sectors that I noted. In terms of services growth within Defense Systems, we have seen that business be relatively flat. We have talked about some of the headwinds there that have been running off over the last couple of years based on strategic decisions we’ve made about businesses to not pursue, and that has certainly slowed even into our 2021 results. But we’ve also seen some nice new program wins in that business; we talked about our large restricted program earlier in the year. We had a significant award in our services – IT services business in the third quarter. So we are seeing growth; it’s just offset by those headwinds that we’ve been talking about. And as you know, we’ve been executing on that strategic repositioning for our services business in both Tactical Services and now Cyber Services for several years.

Your next question is from the line of Jon Raviv with Citigroup.

Thank you, and good morning. Kathy, in your prepared remarks you talked about how there’s uncertainty, but Northrop has a strengthening foundation for growth. What about the foundation for strengthening growth? And I ask in the context of really what is the prospect for growth rate to accelerate after 2021, as new programs ramp up, you overcome some headwinds like Lake City. I know in July we talked about Aeronautics being unremarkable in 2021 and 2022, but just thinking about growth ahead in sustaining that number as you point to maybe, call it, 3% to 5% in 2021.

Yes. Thanks, Jon. Well, as you note, our outlook for 2021 represents another solid year of growth. Growth beyond 2021 will be somewhat dependent on the top line defense budget outlook, but also on our portfolio’s ability to offer the solutions for U.S. governments and our allies field necessary for their most pressing threats. Our recent success in capturing new work indicates that we do have a strong alignment to those high-priority items, but the combination of the budget and portfolio are certainly what will drive our outlook for 2022 and beyond. We’ve seen strong bipartisan support for our key programs like B-21, GBSD, and F-35, and these two will be the key to continuing to see growth beyond 2021. Given the threat environment, we expect that support to continue for those large programs. We have really nice visibility as a result of being on the early end of programs like B-21 and GBSD, which go for many years and have a growth profile in that period. I will acknowledge that a flattening budget could lead to fewer new starts, but we feel well positioned, and that our backlog has been building over the last couple of years very nicely. As I noted earlier, in response to your question, we see the potential to continue building that backlog at least into next year.

Your next question is from the line of David Strauss with Barclays.

Thanks. Good morning.

Good morning, David.

Kathy and Dave, I want to ask about free cash flow, or I guess first of all on pension, how you’re thinking about that and maybe the potential of the front-end load, some of the pension contributions you’re thinking about in the out years, given the cash balance you’re going to have here. And then thinking about the cash profile from here, it looks like despite everything this year that working capital based on your guidance for the full year, it looks like working capital is going to be fairly neutral. Does that benefit you from here? And then last part of it, your CapEx profile, do you still see that stepping down pretty meaningfully in 2022? Thank you.

Sure. Thanks, David. I’m happy to dig into each of those pieces as we look at cash flows in the years 2021 and beyond. I think you’re right that we’ve generated a healthy cash balance at this point with $5 billion at the end of Q3 that certainly enabled us to pay down the $1 billion of debt that we talked about earlier in October. We do continue to plan for a gradual de-leveraging of the balance sheet, so that’s one element of our capital deployment strategy. Investing in the business continues to be the hallmark of our capital deployment strategy. On the CapEx side that you asked about, our outlook there is unchanged at $1.35 billion this year and next with a gradual decline in terms of a percentage of sales thereafter. We don’t see anything that would cause us to change that outlook at this point. Returning cash to shareholders remains a priority as well. And as Kathy talked about earlier, we do anticipate restarting our share repurchase program in 2021 and continuing to maintain a competitive dividend. On the pension side, it is something that we look at in terms of the timing of pension contributions that are anticipated to pick up a bit in 2022. As we noted earlier, those are not incorporated into our free cash flow guidance for this year or next, but the opportunity to make voluntary early pension contributions remains a possibility in either of those years. The bottom line is our intent is not to sit on the current high levels of cash that we have generated over the last couple of years for longer than we believe it’s necessary. You should expect a nice balanced approach to capital deployment over the next couple of years. Digging into the free cash flow question for 2021 a bit further, I think that too is an important topic and I think one to look at on a multi-year basis. Our 2019 cash free cash flow was up 18% from 2018. Our 2020 higher guide calls for about 14% growth at the midpoint from 2019, so exceptional growth in that two-year period. 2020 free cash flow benefits from about $300 million to $400 million from the payroll tax deferral, and also benefits a bit from progress payment changes. Then we have some headwinds related to COVID-related delays and supplier payment accelerations that we’ve done this year, which on an aggregate year-to-date basis total over $800 million. We continue to support those critical suppliers. As we look at 2021, we’ll have the headwind related to the payroll tax deferral from this year; that’s about 50% of that amount. But we’ll work to offset that to your point through continued working capital management and do feel like we can create a bit of a tailwind there. And with comparable CapEx from 2020 to 2021, when you aggregate all of that, we think the net result for 2021 free cash will be continued strong free cash flow on that multi-year basis, but potentially below the higher 2020 free cash flow guide that we’ve provided today because of that combination of factors.

Your next question is from the line of Seth Seifman with JPMorgan.

Thanks very much, and good morning. I wonder, Kathy, maybe if you could talk a little bit more about the autonomous portfolio and kind of the mechanics and timeframe of starting to get growth to pick up there. And in particular maybe the Skyborg award and how you guys think about that, given that it’s kind of a different type of program in terms of being a low-cost solution and kind of the more high-end stuff that Northrop has been focused on traditionally?

Thanks, Seth, I’d be happy to. So let me start by talking about our current autonomous portfolio and looking at Triton in particular. We have talked about some budget pressures there. You may be familiar that for Triton the Navy has discussed the production pause for the next two years. That is what is currently programmed into the Navy’s 2021 budget request. We are working with the Navy and Congress to see what that production pause entails in terms of aircraft for next year. But with Australia, we also see some offsets to that production gap that we would experience otherwise with the Navy pause. We do believe the Navy is committed to the program in the long-term based on all of the statements that they’ve made, so this really is an opportunity for the air vehicle to pause and wait for some government-provided sensors that would get integrated into the production vehicles going forward. With regard to Global Hawk, the Air Force is contemplating a reduction in their fleet from largely Block 20s and Block 30s, and while they’ve signaled that, that is not formal direction at this point. We really don’t have more color to add on what those pressures might look like for Global Hawk. But we do anticipate that over the next several years that will become clearer and we will have a stronger projection, and that leads to the question that you asked about Skyborg and other analysis of alternatives that are being considered in this case particularly by the Air Force. I would note that all of the services' strategic plans call for a significant contribution by unmanned systems, particularly aerial unmanned systems including not only the Air Force but the Navy and the Marine Corps. So Skyborg in particular, we look at as an opportunity because of its architectural components more so than just the air vehicle alone. The Skyborg vision is that systems will be operating together instead of on a single platform having the capability to really operate unaided, which is how our HALE platform developed today. That broader range of requirements, as you point out, will be in a lower price point but have some very sophisticated requirements that need to be addressed in areas like connectivity, vehicle management, all things that in the Northrop Grumman portfolio, we have strong capabilities to contribute. We’re actually quite excited about opportunities that look beyond the platform itself to the connectivity of other sensors and aircraft. Because it starts to engage some of the integration that we can do with our Mission Systems programs and products as well. As we look forward, this is an evolution of unmanned that we think is very consistent with what the services have been discussing regarding systems operating together and the work we’ve been doing to lead the way in that all-domain command and control of both unmanned and manned systems.

Your next question is from the line of Cai von Rumohr with Cowen.

Thank you very much. So Kathy, you mentioned that backlog could grow in 2021 just looking at it doesn’t look like the new opportunities are that huge. Maybe I’m wrong there, but so what would it take to get you, are the existing programs; are there big increases coming? You’ve already gotten your money on GBSD, but in the other restricted areas what are the key elements that could get you to a higher backlog next year?

So Cai I noted a few programs, but as you I’m sure appreciate across our program sets, the timing of awards of some large ones like F-35, we expect to have another production award next year, but there are many smaller efforts as well that will just have their natural annual increments, particularly production programs that will flow in next year that create a significant base and foundation of awards. I just referred to a few of the new awards, the new business that we would see contributing to an ability to get to a one or greater book-to-bill next year. There are certainly lots of awards that are anticipated in just the normal course of business across all four of our sectors.

Your next question is from the line of Sheila Kahyaoglu with Jefferies.

Hi, good morning, Kathy, Dave, and Todd. Just given 10% growth in Mission this quarter and the promotion of Tom Jones to lead Aeronautics, your largest segment from a sub-segment in Mission, how do we think about actual growth drivers of Mission growth over the next few years? Because outside of GBSD, it is your most significant growth contributor in your portfolio?

Yes, Sheila, and thank you for recognizing that. Certainly Tom Jones at his leadership at Airborne Sensors & Networks inside Mission Systems has contributed to very strong growth for Mission Systems; it has been of the four businesses inside of Mission Systems, the most significant contributor to growth for a couple of years. But I would also note that all of the businesses in Mission Systems contributed to this year’s growth. I’m pleased to see that it isn’t just one of the divisions driving that growth. Speaking to Tom Jones in particular, I have one of the reasons that I’m pleased to have him stepping into the role at Aeronautics sector is that, in addition to leading our Airborne Sensors & Networks, he was leading our cross-company campaign for Next Generation Air Dominance, which looks at all next-generation aircraft and mission systems that would meet the requirements of the government for their sixth-generation fleet. In that role, he was already working very closely between our Aeronautics and our Mission Systems sectors on how we bring these capabilities together to accomplish the mission that our customers have laid out, both the Air Force and the Navy for their next generation of aircraft and mission programs. That synergy between those two businesses will only get stronger as we have Tom transition into Aeronautics. I’d also note that the team under Tom in Airborne Sensors & Networks is a very strong team. So I fully expect that the growth that we’ve seen there will continue under their leadership.

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

Hey, good morning guys. Thanks. So, Kathy, a bigger picture question for you. The classified programs have become such an important piece of Northrop’s business and I guess for important reasons, right? They’re sort of a black box. How do you want investors to think about it? And kind of as follow-on to that or an addendum to that, with the announcement of NGAD and DoD wanting to do more rapid aircraft programs, prototyping the whole Digital Century Series thing, what kind of opportunity does that present for Northrop? Because presumably that’s all in the classified world as well.

Thanks, Ron. One of the most important things for our performance as a company is the program performance, and so what I want our investors to know first and foremost about our classified and restricted work, is that we have the same level of governance over those programs that we do any other program. The appropriate people are cleared into the details of those programs, reviewing them regularly, understanding what they need to perform, and providing the resources to them to execute successfully. That goes to our ability to continue to have a track record of disciplined and focused performance in our restricted portfolio. In the second part of your question around digital engineering and the important role that our digital enterprise transformation is going to have on all of our programs going forward, I’d actually start by pointing to GBSD where we are using the digital enterprise as the base for executing that program. The work that we have done with the customer already, even under the tech maturation and risk reduction phase of the program was done in a digital environment. We delivered artifacts for review in a fully-digital environment where they were actually looking at things in a model, not documents produced. This is the first time on a program of this size, where that’s been the case. We’re pleased to be pioneering the way in partnership with the Air Force to make that a reality on the GBSD program. Those investments that we’re making for GBSD are being utilized across our entire portfolio. So as we think about Next Generation Air Dominance and the programs that are part of that overall campaign, they too will benefit from a full digital engineering thread as being required by our customers. Even in areas like space and mission systems, in addition to aeronautics, each new start is looking at implementing not only the design in a digital way but a full thread that looks at the producibility and the maintainability through the use of models in the digital environment.

Your next question is from the line of Pete Skibitski with Alembic Global.

Yes. Thanks. Good morning. Kathy, just to follow up on Seth’s earlier question regarding HALE UAVs. I know you touched on Australia, but in general, that was a domestic discussion. Can you talk about UAV export policy? Because I thought maybe there had been some changes made to the MTCR, but I don’t know how radical or not those changes have been, but can you give us your updated view there on regulation around exports for HALEs and maybe whether or not it goes far enough to help exports just given, I think a lot of market share has been ceded to some competitors out there? Thanks.

I think there were changes to the MTCR and they are very encouraging changes. They will open up more international customers to have potential access. Of course, they still go through the same approval process, but now it looks more favorable upon the export of this technology because it isn’t caught up in the missile technology regime as tightly. When we look at this process, we are pleased that the Department of State and the Department of Defense in the U.S. have worked together to make this possible. It will take us some time to work with nations that are now eligible for this technology and get through processes of them requesting it and engaging with them, but it is opening the door that had not been opened before. Over a multiyear period, we do expect this to open up more international sales, not just for the HALE platform which is what we produce today, but for unmanned systems overall, including ones we might develop in the future.

And Natalia, we have time for one more question.

The last question is from the line of Myles Walton with UBS.

Thanks, good morning and thanks for squeezing me in. Maybe a clarification on the pension cash assumptions at 2021 and 2022. Did only FAS move or did CAS and funding respectively change? And then on Space, your growth there for 2021, I think this year you grew space more than 10% without GBSD, so why the implied deceleration to virtually no growth in 2021 ex-GBSD? Thanks.

And Myles, I’ll start on the pension question. We still have a lot of assumptions to finalize there and review internally. That’s why it doesn’t make sense for us at this phase to get into a line-by-line detailed review of those assumptions before they’re fully baked. Of course, we have to see where discount rates end up as well as a full-year asset performance for this year. It’s possible that there will be movement in both the FAS and the CAS lines, but those are still in the works. The net result that we’re talking through of 150 to 250 would cover both of those. From a cash perspective, I don’t think you should think of this as being a meaningful change to our 2021 or 2022 outlook. But again, we’ll have more details and we’ll be able to update that on the January call.

And I’ll say just very quickly, with strategic space we’ve seen a tremendous amount of growth this year as you pointed to, many of those programs ramped throughout this year and achieved more of a steady state growth into next year. Strategic missiles, as they transition from GMD to NGI, we’ll see a little bit of flatness until we get through the other side, but all of that is being more than offset by GBSD and some additional growth in strategic space, just not quite as much there in 2021 on a year-over-year compare as we saw in 2020. So why don’t I go ahead and close today’s call by reiterating our thanks to the Northrop Grumman team for another outstanding quarter of performance. It’s especially impressive in light of the challenging conditions that we’ve all faced this year. We are successfully executing on our strategy with solid results through the first three quarters, and we’re well-positioned to have a strong finish to this year and continue that momentum into 2021. So thank you for joining us today. We look forward to speaking to you again in late January when we’ll report our full year results and provide 2021 guidance. That concludes our call.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation.