Northrop Grumman Morgan Stanley's 14th Annual Laguna Conference

Kathy, welcome. Thank you, Christine.

It's great to be back with you.

Yes. Let me start too with a couple of disclosures. First, I am likely to make forward-looking statements throughout the conversation, and those have inherent uncertainties and risks. Please refer to our SEC filings, which you can find on the Northrop Grumman website for a full list and discussion of those risks. I just want to start by saying that we are in a very robust demand environment. When Christine and I were together here a year ago, I believe I characterized it as the most robust I had seen in the 20-plus years that I'd been in the industry. As I sit here today, that environment is translating into backlog and awards for our company, not just in the U.S., but with our allies around the globe. We have a record backlog once again.

We continue to build on that backlog with franchise programs like the B-21 and Sentinel as they scale through development and into production. We are also adding market share in munitions as they accelerate, and we grow our footprint on those weapons. We are growing in national security space, which you know is becoming an increasing imperative for the U.S. and allies to not only have situational awareness in space, but to be able to conduct operations there, and that business is also growing double digits. Just a number of catalysts within our company and broad-based growth across all four of our operating segments. We also, as we are shifting from more development work to more production work, seeing tailwinds to margin that come as we mature the products and are able to have the tailwinds of mix that we've talked about before.

International, as it grows, is also providing tailwinds to our margin profile. As we execute the strategy that we have been executing for the last several years, we really are at a point where these catalysts in our business are starting to translate into more value creation through the decade. I would say we are as optimistic as ever about the robust bipartisan support in the U.S. for national security spending, the fact that our programs are supported in the base budget that the president submitted to the U.S. Congress, and that we are also seeing this robust international environment. With that backdrop, I know you want to explore several areas that I've just touched on in our portfolio. I'll turn it back to you, Kristine.

Yes. Our programs are largely supported in the base budget and fully funded there. They aren't split between base and reconciliation like some other areas. We see what is in reconciliation largely as upside to the outlook that we have been providing for the company's growth. As we also look at the base budget and how well our programs are supported, it's an indication of that enduring and sustainable demand signal for those programs that they are included in base. Now, we do believe that there is room for some of the reconciliation and supplemental priorities to be funded in addition to the base budget. But to your point, we think that's unlikely to happen in the near term. Again, having our programs in base will allow us to continue to fully execute those programs on their current profile.

The continuing resolution, of course, both the House and the Senate have agreed to extend funding through continuing resolution in early December. It is unlikely, we believe, that a budget will be passed at that time, so likely that the CR will be further extended. This is something that our industry has become accustomed to. It's not good for national security. We need timely appropriations. It does cost the government more when we have these extended periods of continuing resolution. But at the end of the day, as we look at our programs, we have the funding we need to continue work and believe that's the case even into early next year.

Well, let me start with the B-21. We, of course, earlier this year, came to an agreement with the Air Force to accelerate the rate at which we are building the aircraft, and we are in the process of facilitizing to do that. That then positions the government to consider increasing the overall program of record, meaning how many aircraft they will buy as part of the program. I don't want to get ahead of them. They are conducting that analysis now. I do expect them to share their conclusions with the Congress later this year and of course, with all of us. At the same time, to your point, we are progressing B-21 through development. We have also started low rate initial production on the program, and I'm really pleased with the performance, as is our customer, the U.S. Air Force. They continue to share very positive progress as the program is being tested and meeting its test points, which then positions us to move to producibility, knowing that we have a design in this aircraft that delivers the capability that our Air Force needs.

They also look at this as a multifunctional aircraft. Originally, as part of the triad, it was an aircraft that was designed to meet part of the nuclear triad mission, but it can do so much more. That really is the basis for the Air Force now looking at their whole force structure and seeing the B-21 as a platform that they can use for other missions. We feel that this program of record expansion is a reflection indeed of that long-term demand signal for the platform.

The AF portfolio, our aeronautics segment, is performing exceptionally well on our mature production programs as well. When you asked about the margin profile in that business, while the B-21 is doing well and in alignment with our estimate complete for the program, it is really those other mature production programs that are generating the higher than anticipated margins in the segment this year.