Good day, ladies and gentlemen, and welcome to Northrop Grumman's First Quarter 2021 Conference Call. Today's call is being recorded. My name is Mariama, and I will be your operator today. At this time, all participants are in a listen-only mode. [Operator Instructions] 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.

Good morning, and welcome to Northrop Grumman's first quarter 2021 conference call. This morning, we will refer to a PowerPoint presentation that is posted on our IR web page. And before we start, I'd just like to remind you that matters discussed on today's call, including guidance and our outlook for 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. Matters discussed on today's call will include non-GAAP financial measures, which are defined and reconciled in our earnings release and supplemental PowerPoint presentation. 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.

Thank you, Todd. Good morning, everyone. Thanks for joining us today. I want to congratulate the Northrop Grumman team for a very strong start to 2021. One year after the onset of the pandemic, we have adjusted to a new way of working and we continue to support our employees, our customers, our suppliers, and our communities, which has enabled us to deliver outstanding results to our shareholders. Our results demonstrate the strength of our team, our portfolio, our strategy, and our operating performance. Our solid bookings and competitive wins, robust organic sales growth, and excellent operational performance resulted in strong margin rates, earnings, and cash in the quarter. We also closed the divestiture of our IT services business, and successfully transitioned those employees and programs to Peraton. Elaborating on financial highlights. We booked new awards of $8.9 billion, grew sales 6%, and increased segment operating income 13%. GAAP EPS of $13.43 reflects the IT services gain, and transaction-adjusted EPS increased 28% in the quarter. First quarter operating cash improved by more than $900 million year-over-year. Using cash on the balance sheet and divestiture proceeds, we executed a $2 billion accelerated share repurchase agreement that retired an initial 5.9 million shares. We also retired $2.2 billion in debt, including early redemptions of $1.5 billion. Even with share repurchases, dividends, and deleveraging, all of which totaled more than $4.4 billion, we exceeded the first -- we ended the first quarter with $3.5 billion of cash on the balance sheet. As I outlined in January, this year's capital deployment plans continue to include robust investment to drive innovation and affordability and at least $1 billion of additional share repurchases. Based on what we see now over the next couple of years, we expect to return the majority of our free cash flow to our shareholders through share repurchases and dividends. With the strength of our first quarter results, a solid outlook for the remainder of the year, and confidence in our portfolio, we are raising our sales and EPS guidance. We now expect sales will increase to between $35.3 billion and $35.7 billion, a $200 million increase to the prior range. And we are raising transaction-adjusted EPS guidance by $0.85 to a range of $24 to $24.50. As we look forward, we believe our capabilities will remain well aligned with U.S. national security priorities. In early policy guidance, such as its interim national security strategy, the Biden administration has signaled that it views competition with China as the most pressing long-term security challenge, and will invest in the capabilities needed to maintain U.S. national security advantages. In its recent budget framework for fiscal year 2022, the administration described several priority efforts that are closely aligned with our portfolio and technology leadership. These include space, modernizing the nuclear deterrent, advanced weapons and long-range fires capabilities and R&D for breakthrough technologies, such as artificial intelligence, advanced computing, and cyber. Turning to operational highlights in the quarter. Our Space business doubled its backlog in 2020 and achieved 30% revenue growth in each of the last two quarters. This performance confirms our competitive capabilities and our ability to capture market share as our nation ramps up investment in Space. Three competitive awards in the first quarter are good examples: The hypersonic and ballistic tracking space sensor; the protected tactical SATCOM rapid prototype program; and the next-generation interceptor. On HBTSS, we received a $155 million award to build a prototype sensor satellite capability capable of tracking hypersonic weapons from space. For protected tactical SATCOM, we were down selected for a follow-on award to proceed with our ongoing prototype development with a flight demonstration of our PTS payload expected in 2024. We also were awarded a $2.6 billion contract for the next phase of the Missile Defense Agency's next-generation interceptor, known as NGI, with a period of performance through 2026. This contract is for the rapid development and flight test of an interceptor designed to defend against the most complex long-range threats. Opportunities for Northrop Grumman Space also extend to civil and commercial space. NASA's fiscal year 2022 discretionary request is $24.7 billion, a 6.3% increase over the 2021 enacted level. Importantly, the request supports human exploration of the moon, Mars, and beyond. Support for the NASA budget enables our efforts on space launch systems and Halo, the Habitation and Logistics Outpost program. And in commercial space, MEV1 continues to provide life extension services to an Intelsat satellite and has received via satellite technology of the year award. The award recognizes the technology breakthrough that reshapes the way the satellite industry works now and for years to come. I'm also pleased to report that earlier this month, MEV-2 successfully docked with another Intelsat satellite. MEV-2 will provide five years of service before undocking and moving on to provide services for a new mission. Northrop Grumman is a pioneer in this field and remains the only provider of flight-proven life extension services for satellites. As the U.S. continues modernizing its strategic deterrent capabilities, we are proud to be the prime contractor for two legs of the TRIAD: The B-21 bomber and the ground-based strategic deterrent, or GBSD, as well as a key supplier on the third leg. These modernization programs, which were initiated in the Obama administration, are expected to begin filling at the end of this decade. Both GBSD and B-21 are benefiting from our use of innovative digital tools to reduce technical risk and cost. As the Air Force has noted, B-21 development has been unique in that the test aircraft are more mature than other systems have been at this point, allowing us to validate our production processes much sooner in the program life cycle. And our GBSD program successfully completed two major milestone reviews and remains on track to field an initial operating capability by 2029. We are working closely with the Air Force partner and industry teammates to use digital engineering and agile software development to reduce risk and shorten development time lines as we modernize this critical system. The GBSD program has earned the E-Series designation from the U.S. Air Force, affirming the program's cutting-edge approach to digital transformation. All four of our sectors are aligned to the high priority investment areas needed to maintain military superiority. In addition to developing new platforms and weapon systems, we are enabling the modernization of existing platforms to ensure our warfighters have the best technology that their platforms can be modularly upgraded to counter evolving threats. In the first quarter, we received orders totaling approximately $500 million for additional Sabre radar systems for the F-16. With these additional orders, we're now under contract to produce approximately 900 systems in support of F-16 upgrades and new jet procurements for eight FMS countries, as well as upgrades to our U.S. Air Force, Guard, and Reserve F-16 fleets. Also on the F-16 for the U.S. Air Force, we were down selected as the sole offer for the EMD in production of a modern electronic warfare fleet to provide next-generation threat protection and ensure an upgrade path for advanced capabilities against highly agile future threats. And during the quarter, the U.S. Army approved our Kirkham system for full-rate production following a successful six-month initial operational test and evaluation on its helicopters. We also continue to demonstrate how we can connect platforms and sensors to enable joint all-domain command and control, or JADC2. Our fifth-generation connectivity solutions will be featured on multiple platforms in the upcoming Northern Edge 21 Exercise in May. We expect to participate in several other exercises over the next 12 months, including the Army's project Convergence, where IBCS is expected to be featured. And we're responding to the ABMS digital infrastructure investment priority, requiring secure processing, connectivity, and data management. Finally, we are maturing our advanced weaponry and long-range fires capabilities. We conducted a successful live-fire demonstration of our integrated counter UAS solutions this quarter. The demonstration showcased our next-generation proximity ammunition and its capability to defeat Class 1, 2, and 3 unmanned aerial systems. In addition, AARGM-ER had two successful static motor tests of a rocket motor, marking nine consecutive successful tests in preparation for the upcoming flight tests. All of these successes reflect the quality of our team and the benefits of our recent investment in new technology to support national security for the U.S. and our allies. We are focused on competing and winning the programs that enable continued growth and affordably delivering the capability our customers need. This quarter was another demonstration of our commitment to maintain strong returns and cash flows while growing the business. I'll turn the call over to Dave now for a more detailed discussion of our financial guidance, results, and trends.

Thanks, Kathy, and good morning, everyone. I'd also like to thank our team for another quarter of outstanding performance. My comments begin with Q1 sales growth on Slide 4, which provides a bridge between our first quarter of 2020 and the first quarter of 2021. We reported Q1 sales growth of approximately 6%. And as you can see, the IT services divestiture was an approximately $400 million headwind to first-quarter sales. In addition, due to the timing of our accounting calendar convention, we had three more working days in the first quarter of 2021 than in the first quarter of 2020. We view this tailwind as purely timing as it normalizes in Q4 when we will have four fewer days than in the fourth quarter of 2020. The three additional days in Q1 2021 result in an approximately 5% benefit to sales across all of our segments for your modeling purposes. So at the consolidated level, the divestiture and extra working days are largely offsetting for Q1. Adjusting for these two items, revenue growth was 6.4%. As I review the sector results, I'll refer to organic sales growth, adjusting only for the IT services divestiture. Slide 5 provides a bridge of our earnings per share between the first quarter of 2020 and the first quarter of 2021. GAAP earnings per share increased to $13.43, primarily due to the gain on sale. When we adjust for the divestiture-related items, transaction-adjusted earnings per share are up 28% to $6.57. The increase reflects strong segment performance, which drove $0.75 of the year-over-year improvement. Recovery in the equity markets generated favorable earnings on our marketable securities, especially compared to the volatility we experienced in the equity markets last March. Corporate unallocated expense contributed $0.27, primarily due to lower state tax and lower amortization expense in the period. Referring to sector results on Slide 6. Aeronautics Systems sales were up 5% for the quarter, reflecting higher manned aircraft sales due to stronger on restricted programs and E2D, partially offset by lower sales in autonomous systems as certain global hub production programs near completion. At Defense Systems, first-quarter sales decreased 17% or 2% on an organic basis. Lower organic sales reflect the closeout of our Lake City activities, which represented a headwind of roughly $140 million this quarter. Higher volume on GMLRS and AARGM helped to offset that impact. Turning to Mission Systems, we saw a third consecutive quarter of double-digit sales growth, with revenues up 10% or 15% on an organic basis. Organic sales were higher in all four MS business areas as its diversified portfolio continues its strong momentum from last year. In Airborne Multifunction Sensors, we had higher volume for the Sabre and Meso radar programs and higher restricted sales. Maritime land systems and sensors increased primarily due to ramp-up on the G/ATOR program as well as higher volume on marine systems. Navigation, targeting, and survivability sales increased principally due to higher volume on targeting programs, including LITNING. Networked Information Solutions sales were driven by higher volume on electronic warfare programs, including JCREW and restricted programs. Space systems continues to be our fastest-growing segment, with sales up 29% in the quarter, or 32% on an organic basis. Sales were higher in both business areas, with continued ramp-up on the GBSD program driving revenue growth in launch and strategic missiles. Space programs were driven by higher volume on restricted programs, NASA's Artemis programs, and the next-gen OPIR program. Turning to operating income on Slide 7. Segment operating income includes a Q1 benefit of approximately $100 million from lower overhead rates, a reflection of our disciplined approach to cost and affordability. This quarter's benefit includes the reduction in projected CAS pension costs that we mentioned on last quarter's call. While lower CAS costs do present a modest revenue and cash flow headwind going forward, they improve our competitiveness by making our solutions more affordable, and that will be a key competitive differentiator in a flattening budget environment. At AS, operating income increased 17% and margin rate increased to 10.3% due to higher net favorable EAC adjustments driven by reduced overhead rates. Defense Systems operating income decreased 11%, primarily due to the IT services divestiture, and operating margin rate increased 80 basis points to 11.3%. The increase in operating margin rate was largely driven by improved performance in battle management and missile systems programs. Operating income at Mission Systems rose 12%, and operating margin rate increased to 15.3%. Higher operating income reflects higher sales as well as the benefit recognized from reduced overhead rates, partially offset by lower net favorable EAC adjustments at Networked Information Solutions. Space Systems operating income increased 37%, primarily due to higher sales volume. Operating margin rate rose to 10.9% due to higher net favorable EAC adjustments driven by the reduction in overhead rates. At the total company level, segment operating income increased 13% in Q1, and operating margin rate increased to 12%. Higher operating income was driven principally by favorable overhead rates, as well as operational performance at the sectors, which more than offset the lower business base due to the IT services divestiture. Turning to sector guidance on Slide 8. As a result of a continued robust growth in our Space business and the recent win of the NGI program, we are increasing Space sales guidance to approximately $10 billion. Sales guidance remains unchanged for AS, DS, and MS, as does operating margin rate guidance at all four sectors. Moving to consolidated guidance. Slide 9 provides a bridge to our updated guidance, reflecting the improvement in operations as well as the effects of the divestiture on our overall outlook. We are raising our 2021 sales and transaction-adjusted EPS guidance to reflect the strength of first quarter results. We now expect 2021 sales will range between $35.3 billion and $35.7 billion, a $200 million increase to prior guidance. Keep in mind that our fourth quarter year-over-year revenue comparison will include headwinds of fewer working days and the $444 million equipment sale at AS in addition to the divestiture. Our updated guidance on corporate unallocated expenses is driven by the net gain on the IT services transaction and also reflects favorable deferred state tax benefits and other lower unallocated costs. Our operating margin rate guidance includes both the lower corporate unallocated expense and the benefit from the divestiture. Moving to taxes. You can see the estimated tax rate reflects the impact from the divestiture, and our underlying effective tax rate is unchanged. Our year-end weighted average diluted shares count guidance has been reduced to reflect the ASR. Turning to EPS. Slide 10 provides a bridge between our January guidance and today's transaction-adjusted guidance. We are increasing our transaction-adjusted EPS to a range of $24 to $24.50 from our prior guidance range of $23.15 to $23.65. Our higher guidance reflects strong segment performance as well as lower corporate unallocated expenses, favorable pension trends, and lower weighted average shares outstanding. Lastly, I want to take a moment to talk about cash. We continue to pursue a balanced capital deployment strategy that includes investing in the business, returning cash to shareholders through dividends and share repurchases, and managing the balance sheet. In the first quarter, we deleveraged our balance sheet, obtained improved ratings from two credit rating agencies, and executed the ASR program to further reduce our share count. The recently passed American Rescue Plan Act is expected to begin affecting our CAS pension recoveries in 2022. Asset returns and other actuarial assumptions will continue to influence these numbers. But all else being equal, the legislation would further reduce our CAS recoveries. I'd also note that we had already lowered our projected CAS pension cost to a relatively low level in our January outlook, primarily due to outstanding asset performance in 2020. I'd reiterate that we expect minimal cash pension contributions over the next several years. As Kathy mentioned, first quarter operating cash flow increased more than $900 million from Q1 2020. This improvement largely reflects timing of collections and disbursements, and we have not changed our transaction-adjusted free cash flow or capital expenditure guidance for the year. It's worth mentioning that while the divestiture of the IT services business closed in Q1, federal and state cash taxes of approximately $800 million will be paid over the remainder of the year. In closing, we are very pleased with our first quarter results as we continue to deliver for our customers, employees, and shareholders. Our portfolio's shaping and continued investment in the business put us in a strong position to sustain our momentum in value creation and robust cash generation. Okay, Todd. I think we're ready for Q&A.

Mariama, please inform the analysts how they enter the queue and ask questions. Thank you.

[Operator Instructions] Your first question comes from the line of Robert Stallard with Vertical Research. Your line is open.

Kathy, on Space, clearly, a very strong quarter here and tracking very nicely for another strong year. But how do you see this going forward? You're obviously going to be up against a tough comparison in 2022, for example, but you have got this new NGI wins. So I was wondering if you could give us some idea of what is sort of sustainable top-line growth rate could be for this division.

Well, without getting into specific outlook for 2022, let me talk about some of the major drivers that we see. You noted that GBSD will have a tougher compare '22 to '21 because we'll have a full year of GBSD this year. However, I would point to the fact that GBSD is expected to continue to ramp into 2022. The budget shows another, approximately $1 billion increase going from '21 to '22. So not all of that is the Northrop Grumman program. That's the entire budget. But you can see that there is still escalation and growth anticipated for the program going into next year. But more importantly, as you highlighted, there are other activities that we have underway that have a growth profile from '21 to '22. NGI is one of those. The other two awards that I mentioned today are to others. And so we do see the opportunity for Space to continue to grow. It is true that when we look at this business, it grew 18% last year. We are projecting high-teen growth again this year. So those are very robust growth rates. But we do see the potential for Space to continue to be a growth driver for our business and indeed, our fastest-growing segment.

Your next question comes from the line of Robert Spingarn with Crédit Suisse. Your line is open.

Just sticking with Space. Kathy, you touched on this a little earlier in your prepared remarks, but you've had some really nice success recently with Space logistics and your satellite mission extension vehicle. Wondering if you could elaborate a little bit on the opportunity longer-term and update us on how discussions with customers are trending now that the technology is proven. And just wondering if satellite MRO can ultimately be comparable to something like aviation MRO as a very strong recurring business?

Thanks for the question, Rob. We certainly see this business is transforming the way companies think about satellite life extension. And we see that with Intelsat, and of course, we started in the commercial space. Because we had in Intelsat, a willing partner to pioneer with us, and that's really what this is. As I noted, we're still the only company providing this kind of mission life extension capability. And Intelsat has been a fabulous partner in being able to demonstrate those capabilities on two of their satellites. MEV-2 is docked with a satellite that is currently providing mission service. MEV-1, I'll remind you, was taking a satellite that was out of service and bringing it back to service. So as we continue to demonstrate that we can even dock with a moving satellite, providing service and not disrupt those services, I do expect that other customers will see the value. And that business will continue to grow. We also see the opportunity, as we work with our defense customers, to bring those capabilities to military and special systems that our national security relies upon, now that we have demonstrated the capability with commercial clients.

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

I wanted to ask about -- so Aeronautics, you called out the headwind in autonomous, and that's something that you've discussed before. Does that headwind go away by the end of this year? Or does it persist into 2022 on Global Hawk? And I guess, are there any other sort of legacy type of platforms we should be thinking about that might come into the budget crosshairs going forward?

Sure, Seth, it's Dave. I'll get started on that one for you. So yes. As you noted, the Manned Portfolio in AS outgrew the unmanned in Q1. Overall, the sector delivered a strong 5% organic growth rate year-over-year and does project organic growth for the full year, when you exclude the unique equipment sale from last year. In terms of the headwinds you mentioned around Global Hawk. Certainly, there are puts and takes on the Global Hawk program and on the HALE portfolio altogether and no more when we see the updated budget numbers in the coming weeks. But I think in aggregate, it's been a strong start to 2021 for the AS portfolio. There are pockets of new opportunity in the unmanned business that has been in the news in recent months. Certainly, we have a healthy long-term opportunity set in unmanned. And we'll see about the trajectory of the current HALE portfolio. I think in general, that's a flatter portfolio than some of our other higher growth product sets on the manned side that we've talked about in the past. So again, we'll provide more guidance on '22 and beyond as we get further into this year. But that at least gives you a thumbnail sketch of what we're seeing in AS.

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

Kathy, I wonder, if I could just ask briefly about the F-35. I think once it goes beyond lots 14 and gets to 15, 16, and 17, the number of aircraft in those lots is planning to step down a little bit. I know you guys have a bit of a lead in terms of the revenue recognition on your own cost and your own work on that program versus what we may see from the prime contractor. And I just wondered, maybe give us some perspective on the timing of that, and what it means for that F-35 business in those revenues, how we should be thinking about that going forward?

So Carter, as we look at F-35 in its three pieces, I think you're primarily asking about production volume. And, in particular, at Aeronautics, we see that volume relatively flat for the next few years based on the demand signal that we've gotten from Lockheed and what they ask us to quote. Now price continues to come down as we do our part to contribute to the affordability of the aircraft. So that's a little bit of an offset to a flat volume. At the same time, so when you look at the other pieces of the program, modernization and sustainment, those are growing over that period of time. And so all in all, we see our F-35 franchise within Northrop Grumman being relatively flat over the next several years.

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

Maybe how do you guys think about productivity and margin opportunities post-divestiture here? Great margins in the first quarter, 12% ahead of your guidance. When we think about the remainder of the year, whether it's mix or R&D, what sort of headwinds come up? And I guess, how do you think about profitability now that you've streamlined the portfolio?

Sure. Thanks, Sheila. So as you mentioned, we're off to a really strong start in Q1 on the margin front, both in terms of rate and dollar volume at a 12% rate for the first quarter. That is ahead of our full year guide of 11.5% to 11.7% segment OM rate. I'd note that from a timing perspective, Q1 did benefit from the lower overhead rates as we talked about, a portion of which was driven by the lower CAS pension costs and the rest of which was really just strong cost management across the business, overcoming the lower base from the divestiture and such. So we're really pleased with the level of disciplined cost management that we've already demonstrated in 2021. As we look to the rest of the year, we continue to project that 11.05 to 11.07 segment OM rate, which is 10 basis points to 30 basis points better than last year's performance, which was already at a strong level of 11.4%. Going forward, I think you're right to think of mix as one of the drivers. But obviously, we'll continue to strive operationally for both efficiency and the way we execute the program and deliver product, as well as the way we manage the business. Our digital transformation efforts are a good example of that efficiency initiative, again, having been touted on some of our key and newer programs. And certainly, that's also part and parcel of the way we're looking to manage the overall business with as much efficiency and consistency as we can to really deliver that affordability and cost efficiency that drives continued strong margins over time.

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

If you could it looks like the EAC or the CAS benefit of about $100 million, that's consistent with the drop in CAS you projected in Q4. So I assume there's been no change from the ARPU -- from ARPU as a result of that. And then also, what's your current pre-funding level for CAS? And how does that play out over time?

The current pre-funding level is just under $2 billion, it was as of the first of the year this year. The ARPU adjustment to CAS are more limited in their impact to the business in 2021 than the benefits we've talked about in terms of Q1 EACs, which were primarily driven by the asset performance and other actuarial changes as of our last earnings call when we provided the broader outlook. I think what I'd point you to is we've already reduced those CAS pension projections substantially in the January call down to levels of $240 million next year, $340 million in 2023. So there's limited ongoing reduction possible from the ARPU changes. And obviously, there will be other effects or other influences on that number very much to include ongoing asset returns from pension. So it's a modest headwind to free cash flow and even more modest to revenue going forward. In Q1, it was one of the items contributing to the strong margin rate. But obviously, we continue to project a healthy margin rate for the full year, and thus, for the remaining quarters, driven by the strong programming performance and the continued strong cost management we've talked about.

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

Kathy, you mentioned in your prepared remarks that you're seeing the majority or most of your free cash flow going to shareholders over the next few years. Just what's behind -- what's the perspective on talking about that kind of dynamic in terms of how you see the market developing here and what your other capital deployment opportunities are? And then within that context, any preliminary thoughts on how you're thinking about that free cash flow opportunity over multiple years versus this year's free cash flow guide? Any particular big moving pieces we should be aware of, like payroll tax or the R&D dynamic?

So why don't we have Dave start with the second part of your question, which will give you more sense of the capital we have to deploy, and then I'll talk to the deployment strategy.

Sure. Thanks, Kathy. So as we talked about on our last call, our guidance for free cash flow for this year of $3 billion to $3.3 billion requires working capital management improvements from 2020. And we're really pleased with the start we've gotten off to in 2021, having already delivered on some of those working capital enhancements. And you can see the really strong year-over-year compare of our Q1 '21 free cash flow to Q1 2020. So that gives us a good feeling for free cash flow as we enter the final three quarters of the year. Over the next few years, obviously, we'll provide more insights in the coming quarters. But I think you touched on a few of the right points. Certainly, first and foremost for us is what's in our control, and that is continued really strong working capital management in the business, efficiency in our billing and collections process, efficiency in the way we manage our supply base on the payable side, while continuing to maintain a healthy supply base as we have through the accelerated payments we've made now over the last year plus. So those are all critical factors for us on the operational side. We do expect capital expenditures to continue to come down in '22 and beyond as a percentage of revenue, as we've signaled in the past. And then you get into some of the CAS pension dynamics I mentioned shortly ago, which should have -- should be a modest headwind if all else is equal. Obviously, it remains to be seen what influence asset returns and overall market conditions have on CAS pension going forward. And so we'll update you there as we see the year progress. And then on the tax side, new legislation possible certainly to remove the existing R&D amortization rules scheduled to go in place in '22 that would be favorable for us. There's obviously also discussion of the long-term corporate tax rate that could influence our cash taxes going forward. So again, our first priority is what we can control, and we're optimistic about continuing to drive really strong cash flows from the operations of the business. Kathy, over to you for capital deployment.

Thanks, Dave. And so as Dave outlined, our capital deployment strategy has remained consistent. We invest in the business, but we have signaled and continued to see our CapEx as a percentage of revenue starting to come down in 2022, just based on the opportunity set that we have and the robust investments that we've been doing over the last couple of years. We've also been active in portfolio shaping and are pleased with the portfolio that we have now and its alignment to the National Defense strategy. So we've been using proceeds to mature our cash balance and really get to a place for our balance sheet is where we'd like it to be. And we're in a position, therefore, to now focus on dividends and share repurchase. So my comments really reflect that as we sit here today, that we do expect the majority of our cash proceeds over the next couple of years will go to those two methods of returning cash to shareholders.

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

I wanted to touch on the Space margins. They were up a fair amount despite 30-some percent growth, I assume most of that being on a cost-plus basis. So could you maybe, Dave, touch on why the Space margins start to come down from here based on your guidance? And then I know you touched on additional working days you had in Q1. But I think your sales -- implied sales guidance for Q1 both came in -- your sales came in well above your implied guidance. So was there any sort of pull forward in the quarter or anything that -- other than the working days that kind of reverses go -- or goes back the other way later in the year?

Sure. Two good topics there I'm happy to touch on. First, as it relates to Space margins. Space was one of the segments that did benefit from the overhead rate reduction in Q1, which, of course, lifted their margin rate performance in the quarter. The expansion of their base is also a contributor there and the efficiency with which they executed their programs in the quarter and with which they manage the business were both contributors as well. It was a really strong operational quarter for Space, building on a really strong 2020 for Space. For the rest of the year, I wouldn't signal any dramatic change there. Obviously, we have this full-year margin rate guidance around 10%, consistent with the past guidance for Space and reflective of the mix moving more towards cost-type development work, as you mentioned, but obviously off to a strong start there in part due to those EAC benefits because of the operational and cost efficiency in the quarter. You mentioned the working days and the overall revenue profile for the year. It's, I think, an important topic to talk through because there are a couple of moving pieces there. So let me give you a bit of a sense for some of the key quarterly items there. Q1 did include a month of the now divested IT services business. And as we've mentioned, about a 5% benefit in each sector from the additional three working days. In terms of other items, I would say, in general, we had strength at the end of the quarter in terms of the timing of materials and deliveries, which did benefit the quarter. I would call that broad-based across the businesses, not any one particular program or sector. Thinking about the rest of the year, Q4, as we mentioned in our scripted remarks, will be a tough compare. It will have four fewer working days than the prior year. And as we mentioned on our last call, Q4 of 2020 benefited by the $444 million equipment sale in AS in addition to the divestiture. So on top of the divestiture impact on Q4 comparison from a revenue perspective, we'll have those other two unique items. As we think about Q2 and Q3, we expect continued solid organic growth in those quarters, consistent with what we've been able to deliver of late. From a GAAP sales perspective, those will be offset by the divestiture, of course. But again, really strong momentum in the business of late, and that's reflected in our guidance. And in particular, in the $200 million increase that we provided to our sales guidance with the bottom and the top end of that range. As we enter Q2, Q3, and beyond, we'll continue to have an eye on the strength of new business performance and backlog success as the year progresses and evaluate our outlook further as the year continues.

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

Yes. So Kathy, with the decreasing cost of access to Space and the increasing capability of smaller LEO satellites, there's been kind of a proliferation of lots of these smaller satellite builders and rocket builders getting large amounts from stacks. Do you have any aspirations for any forward integration into launchers or commercial -- additional new commercial space ventures? Because it looks like you guys have the capability to do so.

Okay, I appreciate the question. And the reflection on the breadth of our portfolio, you're absolutely right. We already are an important partner to launch providers, including companies that we've been working with and some that are newer entrants into the space. We are working with companies that are new entrants into the defense space that provide unique capabilities in areas like communication or other areas of expertise that we feel can be applied to national security. But our focus, really as a company, remains on our expertise in National Security space. That's where the predominance of the growth in our portfolio is coming from today. And we'll look to use capabilities and products that we build for commercial and space exploration applications just as we do today. But you can expect the predominance of Northrop Grumman's investment as well as our growth to continue to come from National Security space.

Your next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is open.

Kathy, following up on Cai's question about some of these new space companies. I guess what we're seeing with your peers is that they're starting to invest in strategic partnerships. We've seen that with Lockheed and ABL and Raytheon and HawkEye 360. How do you think about strategic partnerships to expand your national security offerings in Space? Would you pursue that, do M&A or invest organically? And are there areas of your portfolio that you're interested in bolstering?

So we're really pleased with the acquisition that we did with Orbital ATK to build out our space portfolio, we saw that as our big investment and as you know, they brought not only capability in National Security space, but commercial space and civil space exploration as well. And so we're quite confident that our portfolio allows us to participate across that wide spectrum of growth and investment in space. We also have partnerships. We tend not to advertise those partnerships, and they aren't always aligned with an investment in other companies, but they are relationships that we have, providing our capability to and through them, or their capability through us to our customers. Look, at the end of the day, we see new entrants in the market as partners in areas like launch, comms, exploration. And the investment that they're making is oftentimes complementary to ours. But we combine them on a solution-by-solution basis, because that's the business that we're in. We look for the best partner for each system that we are bidding and delivering. And so that's been our partnership model, and I expect that to continue to be our partnership model.

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

So Kathy, on the heels of the NGI down select, GBSD had some really important wins recently. When we look out in the pipeline, what are you looking at next? What's the team focused on or kind of key areas or key programs that you'd like to win in the near-term and maybe even in the medium term?

So Ron two years ago, when I sat into the role, I talked a lot about the desire for the company to focus in on campaign areas that were closely aligned to where we believe the National Defense strategy with Space investment, and we continue to believe that those campaigns are focused in the right areas. We see Space continuing to grow faster than other parts of the market, and we see ourselves being able to continue to grow our portfolio and take share there. Strategic missiles continue to be an important area. Our work on GBSD, the down-select, on NGI, so now the interceptor side of that equation, as well as more modernization that the Missile Defense Agency has to do in protective systems against [adversary] CBM, and we see that stretching across domain. So even in Space, we see a tremendous amount of free capitalization in missile tracking and the ability to detect new missile types, like hypersonics, and I talked about the HBTSS award that we have. So space and missiles are very complementary in terms of our strategic focus in both of those areas and still more growth that we see in both of those. Another key area that we've been focused on is joint all-domain command and control. And we were doing it before it was called JADC2 with programs like IBCS, which really fit what the government looks for in being able to integrate sensors and shooters and provide that sort of architecture. It has elements of communications and connectivity, which is an investment area, an area of technical excellence for our company. It has elements of computing and the advancements that's needed to process fortune office data it has advancements in artificial intelligence. And these are all areas that our company continues to invest in and have leadership positions in. So those are just a few examples of the campaigns that we outlined in 2019 that we continue to execute against and see good success. So no new strategy. It's continuing to execute that strategy, which is working well for us and still has legs, we believe, well into the future.

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

When you look at Northrop Grumman's position now, you're a major player on major airborne space platforms. But you've -- you're also an important provider of electronic systems to other platforms. If you go back historically, there's always been this tension where people have tried to have a platform and then ensure that their own systems get on it. And then those have been typically shot down and they've been competed separately. So today, since you're on both sides of this, when you look at the way technology is evolving, the way the threat is evolving, how do you see the competitive landscape? Do you think it will stay the same? Do you think there'll be the ability for people to try and vertically integrate more between platforms and systems? Where do you see this going?

So Doug, it's an excellent question and one that we spend a lot of time thinking about strategically because our portfolio, as you know, does have a good bit of vertical integration opportunity. But that doesn't mean that it's always the right answer to put our systems on our platform. And so we take a very objective look when we are an integrator onto a platform at where the best technology comes from. And that may be inside of Northrop Grumman, or it may be with an industry partner. And to the earlier point in Space, increasingly, maybe new entrants and companies that aren't particularly focused on National Security, but have capability to bring to bear. I would also, though, point out that being a strong competitor in Mission Systems and being able to have the technology that is the winning technology on a platform means that you have to invest and that you have to prioritize in that area, and we have done that quite successfully. So there are many cases where our technology is the best to go on a platform. And even if it's not our platform and another company's desire to vertically integrate, they will not choose, I don't believe, to put their own kit on a platform if it's not the best technology to compete at the platform level. And we've seen that play out time and time again, where there was a fear that our Mission Systems would not be selected by other competitors because they would want to integrate their own capabilities. But at the end of the day, it's incumbent upon the platform primes, ourselves included, to make unbiased choices and look at what is the best capability to provide to our ultimate customer to meet the requirements. And that's where our Mission Systems team has excelled staying at the forefront of technology so that we do compete and we emerge as the best provider. It's why our Mission Systems business has a good deal of full-force work. I talked about the F-16 upgrades on the radar, but also the EW fleet now that we're working with the Air Force that is because we have the best technology. And we are now being selected to move to deliver that capability.

Your next question comes from the line of Mike Maugeri of Wolfe Research. Your line is open.

Dave, you mentioned that lower CAS expense can help make you a little bit more competitive in a flattening budget environment. So in light of that point, I just want to ask, how do you think about B&P discipline and a flattening or contracting budget environment relative to when the budget is expanding?

Sure. We look across our businesses at investment opportunities, both capital expenditures, R&D, B&P, and really make decisions specific to the market conditions and market opportunity sets that we see in different parts of the business. With the overall budget flattening, are expected to flatten over the coming years, we still have a space business that grew nearly 30% this quarter and over 30% last quarter. And so clearly, the opportunity set there is such that significant ongoing investment in R&D and capital expenditures, B&P has been the right decision for the company to have made and continues to be. We have a very healthy outlook there. Really across the business, I wouldn't say we're yet feeling opportunity constrained. And so certainly, we are careful with our investment dollars, and we look at returns on investment dollars in each of those buckets. But at this point, we continue to see a healthy opportunity set in the markets we serve. And to make appropriate investments as a result. Our R&D costs are continuing to be around 3% of revenue, and that's been a healthy level for us over the last couple of years, continues at approximately that level in 2021. I'd certainly put B&P in that same category, again, reflective of the positioning we have with the faster-growing parts of the budget.

Mariama, we have time for one more question.

Your next question comes from the line of Myles Walton with UBS. Your line is open.

Maybe a clarification, Dave, on the slide deck, you called out $0.35 from corporate unallocated. Just how much of that is more corporate unallocated run rate as opposed to one-off? And then, Kathy, as you look at talent acquisition, I think you grew the workforce, 7,000 or so in 2020. Given the pipeline of business that you're having, what is the market for growing that pipeline? And where do you think that number might end up at the end of '21.

Sure. On the lower corporate unallocated, I'd call that a mix of items more unique to this year and other items that will be sustained in future years. As we mentioned, the state tax costs are a bit lower this year than we had anticipated. In other areas, there's ongoing careful cost management and discipline that's led to that efficiency. So I'd call it a mix on that front.

And Myles, on our talent strategy and specifically the growth that we expect. We hired almost 14,000 people last year. And as you noted, yielded about 7,000 new headcount, and that's largely because attrition has slowed. And we expect that, that will continue into this year. But perhaps with other companies beginning to grow and the labor market tightening that could go up. So we expect to net about the same headcount growth this year, but we're monitoring closely the moving parts of how many hires we need to make with another attrition to get there.

Okay. We'll leave it there. I'll turn it over to Kathy for closing remarks.

Well, thanks, Todd. As you've heard, the year is off to a great start with our new awards. We had robust sales growth and strong margins in the quarter. And I want to recognize that the foundation of executing our strategy is the strength of this team and their outstanding performance. So let me conclude by once again thanking the Northrop Grumman team for their innovation and hard work. So that concludes our call. We look forward to talking to you again next quarter and thanks for joining.

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