Northrop Grumman Corporation (NOC) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Northrop Grumman's Third Quarter 2015 Conference Call. Today's call is being recorded. My name is Kaitlin and I will be your operator today. At this time, all participants are in listen-only mode. I would now like to turn the call over to your host, Mr. Steve Movius, Treasurer and Vice President, Investor Relations. Mr. Movius, please proceed. Stephen C. Movius - Treasurer & Vice President-Investor Relations: Thanks, Kaitlin, and welcome to Northrop Grumman's third quarter 2015 conference call. Before we start, please understand the matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor provisions of Federal Securities laws. Forward-looking statements involve risk and uncertainties, which are detailed in today's earnings release and our SEC filings. These risk factors may cause actual company results to differ materially. Matters discussed on today's call may also include non-GAAP financial measures that are reconciled in today's earnings release, which is posted to our website. On the call today are Wes Bush, our Chairman, CEO and President; and Ken Bedingfield, our CFO. At this time, I'd like to turn the call over to Wes. Wesley G. Bush - Chairman, President & Chief Executive Officer: Thanks, Steve. Good afternoon, everyone, and thanks for joining us. I want to start our call today by expressing how proud we are that the Air Force has chosen to partner with Northrop Grumman on our nation's new Stealth Bomber. Our selection continues a 35-year partnership that has provided the world's most advanced long range strike systems. As the company that developed and delivered the B-2 Spirit Stealth Bomber, we look forward to providing the Air Force a highly capable and affordable next generation bomber. Our nation urgently needs this capability to maintain military superiority and power projection for decades to come. The Air Force has made the right decision. Our team has the resources in place to successfully execute this important program and we are ready to get to work. I want to thank our team across the company that have worked so hard on this program for so many years. This team is fully committed to building the next bomber for our nation and they are truly an exceptional group of individuals. I know that many of you have questions about the program. Given the classified nature of the program, we will not be answering questions about it on our call today. The Air Force released a set of information regarding the program yesterday when it announced its decision. We will not be in a position today to provide any more information than has been released by the Air Force. So in our Q&A session, we will decline to address the program in any more detail. This win also validates that we are successfully positioning Northrop Grumman for innovation and affordability in support of our customers' missions. Part of that positioning for the future is the organizational realignment we announced earlier this month. We announced a realignment of our businesses into three sectors effective January 1, 2016. Our new structure is aimed at better focusing our innovation and affordability efforts to provide our customers enhanced mission capability at a reduced cost. By more effectively aligning and aggregating our product and services businesses, we are enabling greater synergy in the way we operate and we are enhancing our ability to develop, produce, sustain and upgrade our products over their lifecycle. The majority of our Information Systems portfolio focuses on sophisticated systems architecture and engineering including both advanced software and hardware capabilities. These elements will be combined with our Electronic Systems portfolio to create a more integrated platform to support development of new capabilities for our military and intelligence customers around the globe. Kathy Warden, currently President of Information Systems, will lead the new Mission Systems sector. The services elements of Information Systems will be combined with Technical Services to create a new sector, Technology Services. Over the years, we have deemphasized commodity-based services and we focused our existing TS sector on lifecycle support and modernization of systems and platforms as well as advanced training. The IS services portfolio will complement this work, as it also focuses on advanced support and services. Technology Services will better integrate the breadth of our capabilities to enable us to provide differentiated and value-added offerings to the U.S. and to our allies. Chris Jones, currently President of Technical Services, will lead our Technology Services sector. Tom Vice will continue to lead Aerospace Systems. Tom and the AF team have a tremendous set of current programs and new opportunities. Gloria Flach will become Northrop Grumman's Chief Operating Officer with responsibility for operational excellence and risk management and our corporate-wide activities for programs, engineering, global supply chain and quality. Gloria, Kathy, Tom and Chris will all continue to report to me. I'd like to address some of the speculation that this realignment is perhaps aimed at separating our services businesses. It is not. We've demonstrated that we actively manage our portfolio and we continually evaluate our portfolio to assess value creation opportunities. We have over the last several years reshaped the content of our service offerings to reposition us at the higher end of the market. Our margin rates show that those efforts have been successful. The reorganization of our services business is intended to strengthen this capability within our company. So we're happy with our portfolio today and look forward to the work that Chris and his expanded team will do to further improve our position. Looking at third quarter results, our team delivered another solid performance. Third quarter EPS increased 22%, reflecting strong operating income and the benefit of share repurchases. Share repurchases continue to be an integral part of our capital deployment strategy. In May of 2013, we announced a goal of retiring 25% of our then outstanding shares by the end of 2015. I'm pleased to report that we have achieved that goal shortly after the end of the quarter. We completed the planned repurchases at an average price of approximately $125 per share. Since initiating share repurchases in 2003, we have reduced our share count by about 50% at an average price of approximately $75. Our capital deployment strategy, with share repurchases being a significant component, has successfully created shareholder value. During the quarter, our board approved a new $4 billion share repurchase authorization. At the end of the third quarter, $4.6 billion remained on our share repurchase authority. With this new authorization, share repurchase will continue to be an important element our strategy, but we do not intend to announce a new target for share count reduction. In 2013, we took the approach of announcing a specific target because we were going to the debt markets to support achievement of that target. Going forward, we will return to our prior approach of assessing our repurchases from time-to-time in the context of our capital deployment strategy, which has not changed. That strategy is to invest in our businesses, manage our balance sheet and return cash to shareholders through a competitive dividend and share repurchases. Our first priority, of course, continues to be investing in our business. We have increased our IRAD and capital spending to support our customers' needs for innovation and affordability. We also have greater visibility into a more favorable opportunity set ahead of us. We believe our portfolio is well aligned for long-term profitable growth. The global environment of continually expanding and evolving security threats drives an urgent need on the part of our customers for innovative and affordable technologies. We are investing to support their missions and we are encouraged by the news that the administration and congressional leadership have reached the two-year budget deal that provides some stability for federal budgeting and helps to minimize the threat of a government shutdown or a debt-ceiling showdown. This type of action is needed to provide stability and to support our customers' ability to plan for and properly execute our nation's security strategy. We hope that Congress quickly implements this agreement as we are rapidly approaching a debt-ceiling deadline and the CR we are working under expires on December 11. In summary, it was a solid quarter. Based on year-to-date results, we now expect 2015 sales between $23.6 billion and $23.8 billion. We are increasing earnings per share guidance to between $9.70 and $9.80. And we are refining our cash from operations guidance to approximately $2.6 billion and we expect free cash flow of approximately $2 billion. So now, I'll turn the call over to Ken for a more detailed discussion of our third quarter results and our guidance. Ken? Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Thanks, Wes. I want to thank the team for a job well done and also congratulate our team on the LRS-B win. It was another good quarter. Overall, we continue to perform well with sales comparable to last year's third quarter and strong margin rates. Earnings per share grew 22%, driven by strong performance and a 10% decline in weighted average share count. I would note that our third quarter results do not reflect the impact of the tax methods change we discussed on last quarter's call and previously expected to occur in the third quarter. The IRS notified us of their acceptance of the change this month and those impacts will occur in the fourth quarter. Turning to sector results. We had strong performance across the board. Aerospace Systems sales for the quarter and year-to-date are up about 1% and reflect higher F-35 and E-2D production volume as well as higher volume for our unmanned programs. These increases were partially offset by declines in a number of other programs, the largest of which was the F/A-18, as deliveries on this program continue to ramp down. Aerospace third quarter and year-to-date operating income and margin rates are lower than last year due to one-time items in last year's third quarter which added about $90 million of operating income. You recall that last year's AS operating income included $75 million for settlements and also benefited from lower CAS pension cost due to the HATFA legislation. Based on year-to-date results, we expect full year Aerospace sales of approximately $10 billion, the high end of our prior guidance, and we continue to expect a margin rate of about 12%. Moving to Electronic Systems, third quarter sales increased 2% and on a year-to-date basis are comparable to last year. Third quarter operating income was consistent with last year. The slight decline in operating margin rate is due to the HATFA driven reduction of last year's pension cost, which increased margin rates in last year's third quarter. Although year-to-date operating income is somewhat lower than last year due to the mix of mature production and cost-type development work, operating margin rate continues to be strong. We expect full year ES sales of approximately $6.9 billion, the high end of our prior range, and we continue to expect ES operating margin rate in a low to mid 15% range. Information Systems third quarter and year-to-date sales were down about 3%, consistent with our expectations. Third quarter operating margin rate was comparable to the prior year period. The sector continues to perform very well and is maintaining strong operating income and margin rates. Based on year-to-date performance, we expect IS sales of approximately $6 billion, the midpoint of our prior guidance range, and we now expect an operating margin rate of approximately 10%. Technical Services third quarter sales rose 1% and year-to-date sales are up 3%. Third quarter operating income was comparable to last year, with a decline in operating margin rate due in part to lower income from an unconsolidated joint venture. For the year, we continue to expect sales of about $2.8 billion with a margin rate of approximately 9%. Turning to consolidated results. Segment operating margin rate was 12.1% in the quarter, and 12.4% year-to-date. Operating margin rate for the quarter was 13.3% and 13.4% year-to-date. Operating income and margin rates for both periods reflect lower segment operating income offset by higher net FAS/CAS pension adjustment and lower unallocated corporate expense. The increase in net FAS/CAS is driven by the impact of HATFA legislation last year. As I mentioned earlier, third quarter corporate unallocated expense does not include the impact of the tax methods change which will now increase fourth quarter unallocated corporate expense for state taxes by approximately $45 million. In addition to this state tax item, when we complete our state tax reporting process later this year, we expect it to result in a lower future state effective tax rate. This would reduce our state deferred tax asset by between $15 million and $40 million with $25 million being the most likely. This amount will flow through corporate unallocated. Based on these tax items, and our historical pattern of higher unallocated at the end of the year, we expect 2015 unallocated corporate expense of approximately $200 million. As a result of the methods change approved by the IRS this month, we expect our fourth quarter tax rate will move above the statutory rate due to lower deductions for domestic production activities. For the year, we expect an effective tax rate of approximately 31.5%, absent an R&D tax credit extension for 2015. We continue to expect a weighted average diluted share count of approximately 192 million for the full year. Looking at our EPS guidance for the year, we now expect EPS between $9.70 and $9.80. The higher range reflects strong year-to-date performance offset by the additional state tax impacts on unallocated corporate expense. Turning to cash. Before discretionary pension contributions, year-to-date cash from operations totaled $854 million and free cash flow totaled $520 million. Year-to-date cash is lower than last year due to timing of program collections. We now expect cash from operations of approximately $2.6 billion and free cash flow of approximately $2 billion. This considers $600 million in capital spending versus our prior estimate of $700 million. Just a quick update on pension items. Based on the demographics update completed in the third quarter, we are increasing our net FAS/CAS pension adjustment to income of approximately $335 million. Net plan asset returns through the end of last week were a bit above 1%. However, assuming 2015 plan asset returns of zero and a 4.5% discount rate for 2016, we would expect net FAS/CAS pension income of approximately $240 million versus our prior 2016 estimate of $475 million. Under these assumptions, FAS essentially doubles to about $600 million and our CAS estimate increases by about $75 million to $840 million. Our prior estimate was based on our actual 2015 discount rate and expected plan asset returns of 8%. We have a couple of months to go before we finalize our assumptions but further for your modeling purposes, a 100 basis point change in return on assets impacts FAS expense by approximately $50 million and a 25 basis point change in our discount rate impacts FAS by about $70 million. Steve, I think we're ready for Q&A. Stephen C. Movius - Treasurer & Vice President-Investor Relations: Thanks, Ken. As a courtesy, each participant should limit themselves to a single one-part question and return to the queue for additional questions. Kaitlin?

Your first question comes from line of Myles Walton with Deutsche Bank.

Thanks, good afternoon. Congratulations on... Wesley G. Bush - Chairman, President & Chief Executive Officer: Thank you, Myles Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Hey, Myles.

...those contracts. Wes, on the reorganization, can you talk to the financial side, the logic of if there is cost savings and if there is cost to do it, and also any go-to-market strategy that's also underlying the reorganization? Wesley G. Bush - Chairman, President & Chief Executive Officer: Sure. Yeah. The go-to-market strategy I think is the most important part of this, so I'll address it first. As we've looked at the vector that we see our customer needs traveling along and we project forward on that vector, it's pretty clear that we're going to continue to see a convergence of capabilities that are needed in all of the solutions that our customers are going to be requesting or requiring. I think it's a sort of a natural vector of technology, if you will. So we want to make sure that as we think about our internal structure, there isn't anything that is in anyway inhibiting, of course as a first priority, addressing those technology opportunities and capabilities. But more importantly, we really want to make sure the structure that we have actually enables our company to be in a great position for creating those future offerings. And that's really the underlying strategy here and it's offerings both in terms of the products themselves as well as the service offerings, which are increasingly complex because of the nature of the capabilities that are being fielded. So that's the underlying strategy around the reorganization. It better integrates and aligns our capabilities in the directions that we see our customer community going for the long-term. And I will tell you it's generated a lot of excitement within our company. I think our employees have been seeing this vector and are delighted to see the opportunity to take a fresh look at how we are coming together as an enterprise to ensure that we are very, very well positioned for the future. The second part of it, I'll let Ken address in a bit more detail. Let me just say at a top level, generally, in our industry, our cost savings translate into affordability advantages over the long-term. But Ken, let me ask you to comment specifically on this situation. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Yeah. Myles, appreciate the question. And we certainly do expect that the realignment will result in cost savings over the longer term. I will remind that we don't give guidance on 2016 or beyond at this point and we will give 2016 guidance in January. And at that point, we should be able to further address longer term impacts. But we do not expect a material impact on cost for 2015, and I will say that any cost impact is reflected in our guidance. Stephen C. Movius - Treasurer & Vice President-Investor Relations: Kaitlin, next question?

Your next question comes from the line of Jason Gursky with Citi.

Hello, everyone. Good afternoon and congratulations. Wesley G. Bush - Chairman, President & Chief Executive Officer: Thank you, Jason. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Thank you.

I just have a bigger picture question. One of the things that we heard from the Secretary of the Air Force last night in the press conference was the idea of open architectures and mission packages that can be competed. So I know you're not going to talk about Long-Range Strike, but I was wondering if you could talk about those comments in general, as it impacts the industry. What's DoD trying to do with all of this and what risks and opportunities does this present for industry and more specifically Northrop? Wesley G. Bush - Chairman, President & Chief Executive Officer: We're excited about the vector that the Air Force is taking on open mission systems and open architecture in general. And in fact, Northrop Grumman for many years has been strong proponent of that architectural strategy. And primarily because we see it as an important avenue for the insertion of technology over the lifecycle of any system, be it a platform or any other system actually that our customers are procuring. When you have an open architecture, and think about it in terms of some of the capabilities we all purchase on the commercial marketplace. In the cases where there really is an open architecture, it's much easier to get the apps you need. It's easier to do the upgrades that you need and, over time, it makes the capability that you initially acquire sustainable for a much longer period of time. So it becomes really an avenue for innovation and creates new engines of innovation within the defense community. And I think we're all excited about that because we know that we need those avenues of innovation to ensure that we maintain long-term technological superiority. So I think this is all integrated into the broader strategic thrust that we see taking place with our DoD customer and, quite frankly, with our intelligence community customers as well, that we need to make sure that we're doing the right things today with respect to the fundamental way that we're building things, so that we can take full advantage of this very rapid pace of technology progression, take full advantage of that in our security systems as we go forward. So we are strong proponents of it. It keeps us all on our toes because it takes off the table a lot of what historically had been proprietary systems that sort of locked one contractor into a particular configuration for a longer period of time. It creates a more ongoing competitive environment. But I think that's healthy. I think it's healthy for our industry. I think it's healthy for technology innovation, and I think it's really healthy for national security.

Your next question comes from the line of Doug Harned with Sanford Bernstein. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Doug. Doug Stuart Harned - Sanford C. Bernstein & Co. LLC: Hi. I'm going to ask a very similar question to one I asked last quarter, which over the last few years and you just talked about it. You've completed the repurchase of 25% of your shares and that's been one of the great things that Northrop Grumman's done. But as we look at the balance sheet today, the cash on hand dropped below $2 billion a quarter ago and now it's down below $1.3 billion. Just trying to picture how this plays out in the future. What is the level of cash that you'd like to have on hand in general? And does this impact at all the way you think about share repurchases in the future? Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Thanks, Doug, for the question. I would say that we have been burning down our cash balance as we've been executing on the repurchase program. And we have had some delays in cash collections in the first three quarters of 2015. We've historically had a significant chunk of our cash collections coming in the fourth quarter of the year and we see that trend coming again this year. So I think you'll see that we will build up additional cash balances between now and at the end of the year. We certainly like to maintain enough cash on the balance sheet for liquidity purposes and I probably won't throw a number as to what that is, but I believe we'll be strong generators of cash going forward. I believe we'll generate a fair amount of cash in the fourth quarter and I think, as Wes mentioned earlier, you can think of us as sticking with the same strategy in terms of deployment of cash and in particularly investing in the business, maintaining the balance sheet, and then returning excess cash through a competitive dividends and through share repurchases, and that doesn't change. Wesley G. Bush - Chairman, President & Chief Executive Officer: Yeah. I think Ken said it well. I mean the focus for us, number one, is generating cash. And so we're very focused on that across the enterprise. And secondly, being really smart on how we deploy it. And we think a component of being really smart is to make sure that we've got good cash return to our shareholders as part of the broader (25:25) equation.

Your next question in queue comes from Noah Poponak with Goldman Sachs. Noah Poponak - Goldman Sachs & Co.: Hi. Good afternoon, everyone. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Noah. Noah Poponak - Goldman Sachs & Co.: Congrats on the big win yesterday; we were happy for you. Wesley G. Bush - Chairman, President & Chief Executive Officer: Thank you. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Thank you very much. Noah Poponak - Goldman Sachs & Co.: Any initial thoughts you'd be willing to provide on the direction of 2016 revenue and the segment EBIT margin compared to the current year? Kenneth L. Bedingfield - Chief Financial Officer & Vice President: No, I would say that again we are updating our guidance today for 2015, for the full year of 2015, and we're not going to give guidance on 2016 until January. Noah Poponak - Goldman Sachs & Co.: Okay. Ken, are you able to elaborate on where your underrunning the CapEx plan and any directional comments on what the trajectory looks like on a multi-year period? Kenneth L. Bedingfield - Chief Financial Officer & Vice President: I don't think I would be able to comment on particularly where the CapEx is lower. I would say it's just been lower across the board. And in terms of longer term, again we don't give guidance past 2015, but I will say and I think we've said in the past that we expect our CapEx to stay elevated for a number of years, and that continues to be our plan. That being said, we do also expect to generate a lot of cash in the coming years as well.

Your next question comes from the line of Robert Stallard with RBC Capital.

Thanks so much. Good morning. Wesley G. Bush - Chairman, President & Chief Executive Officer: Good morning, afternoon, or whichever time you think it is there.

Afternoon; sorry. It is afternoon. Wes, congratulations again on the win. (27:34) Wesley G. Bush - Chairman, President & Chief Executive Officer: Thank you. Thanks very much.

...talk about detail. But I was wondering looking say more broadly if you thought that this may lead to some rejiggering of the industrial base in military aerospace, and whether you might be interested in participating in that. Wesley G. Bush - Chairman, President & Chief Executive Officer: It's always hard to project how the vector of the industrial base will go over time. As I've said before, I do not believe that we are in a situation that perhaps we were in in the 1990s where single program decisions can cause precipitous actions by any of the players in the industrial base. We are today in a very different configuration because of the consolidation that occurred through the 1990s and the early part of the last decade. So I think that some of the commentary or speculation out there is perhaps rooted in an old way of thinking about our industry. We're in a very different place today. So I wouldn't be particularly focused on single event triggers. But that said, we're in a industry like every other industry that continues to shape, continues to change and, over time, I think it's really important that the industry itself figures out what is the best way of providing its products and services to its customer community. So I think that's the context for thinking about the world on a go forward basis, nothing is every stagnant. To think that it is would be putting your head in the ground. And it's important that the context of how to best serve the customers is front and center and, of course, the context of shareholder value. So, those are the considerations I think that will come into play as we continue to look at the future. Another really important avenue of thinking in that regard, though, to some of the earlier questions which I thought were really good questions goes to what's the vector of technology and what are the customer needs going to be. And as we are participants in a very high-technology industry here in aerospace and defense, the vector of technology has a lot to do with what the shape of the industry should look like just as it does in every other technology-driven industry, which is increasingly so many industries around the globe today. So, simply a view that things will continue to shape and change and it's important that companies that have a bright view of their future, like we do, think about that broadly and are proactive in that that regard.

Your next question in queue comes from George Shapiro with Shapiro Research.

Yes. Good morning. I wanted to get two quick ones. Wes, on the reorganization, you had operated with four sectors and no COO, now we got three sectors and a COO. Should I conclude anything about how long you intend to stay around as CEO from that announcement? Wesley G. Bush - Chairman, President & Chief Executive Officer: George, let me say this. I am excited about our new organizational structure. We constantly evaluate our organization and I think you've seen over the course of my tenure that we've made a number of organizational changes. And we make those adjustments from time to time based on the approach we think's going to enhance our overall performance for our shareholders, our customers and our employees. And as we looked at this transition into a three-sector configuration, it became apparent to me that having a COO could be really helpful, particularly given the number of opportunities that we're looking at as we go forward. And that thought was also enhanced by the fact that we have such an exceptional leader in the person of Gloria to take on the role. So I am just excited as I can be about having Gloria come and join our team here at the corporate office to play such an integral role in helping us to move forward. Your question went to a little bit, I think, in regards to was there any implication there about me and my role. Let me just say this, I am so honored to have the privilege of working with the amazing people in this company. And that is something that I just absolutely enjoy thoroughly. So no one should read anything into the organizational changes that we announced with respect to my future plans. It's again from our perspective collectively, this organizational approach is the approach, we all collectively believe really positions us best to perform, because that's our number one priority in our company is to execute and perform. And also to be able to effectively realize the opportunities that we see both here in the U.S. and around the globe. So we're all excited about moving into this new operating structure and really excited about the future opportunities it represents for our company.

Next question comes from the line of Seth Seifman with JPMorgan.

Thanks very much. Good morning. Ken, you talked a little bit about delays in cash collection. I wonder if you could elaborate on that a little more, and if it's just kind of a timing issue, or we've heard that from another company as well, and whether it represents a different way of thinking on the part of your customer? Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Thanks for the question, Seth. I would say that, for the most part, we're dealing with a timing issue in terms of cash. We've had some protracted negotiations that have taken a little bit longer to get closed. And we have seen some changes in cash terms from our customers and that's having a little bit of an impact in terms of delaying the cash flow on some of our programs. But I would say for the most part, it's really driven by just some protracted negotiations and a few things that have moved out to the right on us. We continue to believe that our full year guidance for both cash from ops and free cash flow is where it will end up. So, I think, we'll make it back in the fourth quarter.

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

Good afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hey, David.

Just one clarification question, I guess, for our modeling purposes and then I have another question. Will the LRS-B program be reported within Aerospace Systems on a go forward basis? Wesley G. Bush - Chairman, President & Chief Executive Officer: Yeah. So, I think I can safely say that Aerospace will report LRS-B when it finds itself in our numbers.

Okay. Thanks. And then, beyond that, just think about Aerospace Systems going forward, can you just talk about maybe from a revenue perspective and a margin perspective the kind of transition that's going on there with F/A-18 coming down, F-35 ramping up, E-2D ramping up, kind of where are we in that transition both from a revenue and margin perspective? Thanks. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: So, David, again, not giving guidance beyond 2015, but I will say that a lot of moving parts in the company and certainly a lot of moving parts at AS. You mentioned some of the things, F/A-18, yes, is coming down, F-35, E-2D ramping up. Some international opportunities starting to ramp as well. So a lot moving parts. Some of it is more mature production, some of it is developmental. And I would say that we always strive to perform and deliver higher margins and I think you'll see us continue to do that, but I wouldn't want to give you a specific number for sales or margin beyond 2015.

Your next question comes from the line of Howard Rubel with Jefferies.

...very much. Wes, the change that you talk about in the organizational structure can only be done if you also get your customer to work with you and I'm going to use the JSTARS program, if I may, just for a paradigm for half a second. You clearly have a compelling solution from what we can see, you're ahead of schedule on it, you could provide the product tomorrow or one would think come darn near close. It clearly saves the customer a lot of money in operations and improves his capability. In the commercial world, it's a no-brainer what's going to happen. In the world of the Pentagon operations, they talk about better buying power, 4.0 or whatever, which is just a bureaucratic solution. So how do you break through these barriers so that, in fact, you can operate with more speed and agility and deliver both value to your customers, your employees, and your shareholders? Wesley G. Bush - Chairman, President & Chief Executive Officer: Howard, I would just say, as always, your question is very perceptive. The challenge that we collectively face in our defense community is the challenge of sometimes inertia that's driven by the budgetary instability that our customers are having to deal with. I will tell you that when I get out and interact with the seniors in our defense community and the juniors in our defense community that there is an appetite and a strong desire to see new capabilities introduced much more quickly. And this inability to plan that we've been stuck with now for several years is, of course, impacting that in a negative way. So as we think about this repositioning of our company, we are taking the view that, of course, we've got to continue to perform and execute in the framework of the acquisition arena in which we are operating today. So there's nothing about the reorganization that slows our ability in any way, in fact I think it actually helps even in the current acquisition environment that we have today. But we, like others in our industry I would say, are anticipating that things are going to change again. And we see some early indicators of that. The work that's being done in each of the services to think in a different way about how some of the technologies and capabilities can be introduced, it's not at the rate any of us including those in the services would like to see happen, but it's happening. And it's happening in the intelligence community as well. And so as those of us who have been involved in our industry for a long time, can generally forecast a little bit, when you start to see the beginning of the things happening, they're on that vector. And again, we'd all like to push faster if we could and I think generally speed is one of our challenges collectively, but it's going to go in this direction. And we want to make sure that we are out in front of it. We want to make sure that customers are never in a place where they're having to pull us along when it comes to technology and architectures and systems. We want to be in front and helping them and see the future. And that's exactly what the structure is organized around. What I experienced, I think a little bit more directly to your question with respect to the how you do it. I think what you have to do is you actually have to put the new thinking on the table as alternatives. And it has to get introduced early enough into the acquisition process where they're seen as viable alternatives, alternatives that can be pursued with manageable risk. And that's really the challenge that we all have is to get some new thinking on the table, get it matured in a manner that the risk can be understood and be seen as managed and in reality be managed and therefore enable some different acquisition approaches. And I think there's great enthusiasm for this. And hopefully – and this is, I think, the hardest part – hopefully, we'll get to a place in the budgetary environment where we're actually enabled to support our servicemen and women at the speed of technology that increasingly our adversaries are doing now every single day. So I think it's actually a national security imperative that we get this on the right track.

Your next question comes from the line of Cai von Rumohr with Cowen & Company. Cai von Rumohr - Cowen & Co. LLC: Yes. Let me join those, Wes, in congratulating you, a terrific job. Wesley G. Bush - Chairman, President & Chief Executive Officer: Thank you, Cai. Cai von Rumohr - Cowen & Co. LLC: Given that the decision came out yesterday after the markets closed, is it fair for me to assume that it is not included in your guidance for this year? Wesley G. Bush - Chairman, President & Chief Executive Officer: We gave guidance today, not yesterday. So, our guidance today is our guidance. So I would say it that way. But we obviously have had plenty of time to think our way through all of the implications, and that's where we are. Cai von Rumohr - Cowen & Co. LLC: Okay. And so, it is included – I think you mentioned to David that it is included in Aerospace. It would be – if and when everything moves forward, it will be included in Aerospace. Wesley G. Bush - Chairman, President & Chief Executive Officer: Yeah. That's correct. That's the home of the B-2 Spirit Stealth Bomber, that's the right place to put the new one.

Your next question in queue comes from Sam Pearlstein with Wells Fargo.

Good afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: Good afternoon. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Hi, Sam. How are you?

All right. I'm going to try and sneak two in, which was just one, Ken, have you mentioned in the past what the CAS growth looks like into 2017 just so that if we use the new baseline for 2016 to just think about that? And then secondly, just in two of your segments, both Aerospace and Electronics, you're coming in at the high end. So, I'm just trying to think about what you might have, I guess, factored differently. What's coming in forward or is this being pulled from 2016 or is something else coming in a little bit better? Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Okay. Sam, in terms of the CAS growth question, we did – on our prepared remarks earlier, we updated our 2016 CAS estimate and I mentioned $75 million increase for 2016 based on where we see the market today in terms of returns and in terms of discount rate. We are not updating our guidance beyond 2016, but last year, we did have 2015, 2016, and 2017 on our Investor Relations webpage, but we are not updating that at this point in time. In terms of your second question about AS and ES coming in at the high end of the range, I think at this point, it's really just better visibility into what we see the year is going to look like. We've had some risks in the plan that have been burned down. So nine months into the year, I think really it's just about better visibility. We're satisfied with the volume as it's coming in at all of our sectors and looking forward to completing the year and getting ready for 2016.

Your next question in queue comes from Richard Safran with Buckingham.

Hi. Good afternoon. And once again, congratulations. Wesley G. Bush - Chairman, President & Chief Executive Officer: Thanks. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Thank you.

You know what: it's not – it's somewhat related to LRS. Wes, last quarter, we talked about things like JSTARS recap, T-X, UCLASS, things like that, et cetera. Given the resource demand for the LRS-B program, I just wanted to know if this win maybe precludes you from bidding on other work near term. What I'm just trying to wonder here is if you think your plate is full with this contract. Any color you could provide on how you're looking at new opportunities now would be helpful. Wesley G. Bush - Chairman, President & Chief Executive Officer: Well, I think it's a really good question and we are a very responsible company in that regard. We take a careful look at our capacity to take on anything that we're bidding and we will never go out and make a bid on something where we have any reservations about our ability to execute. And so we thought a lot about this actually now over the last several years: how do we think broadly about that range of opportunities? And our conclusion is that we do have significant capacity, in large part because of sort of the natural transition that we've seen in development to production. And in fact, I will tell you that one of the concerns on the downside of some of these programs has been that if they slip too long or were delayed too long, what the implications would be not only in our company but in other companies around the inherent design capacity that's such a national asset. So take for example, F-35, we've been very, very active in the overall design activities on F-35 both in our role in the center fuselage as well as our role in sensors and in comms and navigation equipment, and we've been shifting that well into production now. So the design capacity from that activity has been available. Look at E-2D, E-2D in a similar state where we had been rather substantially focused on design activity for some time and we've moved E-2D successfully into production. Triton, we are now going through the test program, so our teams that had been focused on our Triton programs from a design perspective are tailing off on the design side of the activity. So when we go through our portfolio and look at these transitions from design to production, which are great, that's exactly what we want, that's the reason we take these programs on, so we actually produce things. But when we look at that capacity that we have inherent in our company, we see substantial capacity. So we are very interested and very eager to continue to support our customers in pursuit of programs like Joint STARS and the new trainer and UCLASS across the board. And we think it's important that we continue to leverage that very extensive design and manufacturing production capacity that we have in the company to support these activities because we all know when we are operating with our capacity very productively employed, we're going to be operating much more efficiently and that efficiency brings affordability. So, we continue to be very excited about those new opportunities as well.

Your next question is queue comes from Hunter Keay with Wolfe Research.

Hi, thanks for getting me in, appreciate it. Have you guys gotten a chance to have an early read on whether or not some of the language included in the pending budget legislation is going to have an impact on some of the pension assumptions? I know you said that you're not going to talk about 2017 FAS/CAS just yet, that's fine. But just in terms of the language in the budget itself, I believe there's some language relating to pension smoothing. Does that going to impact any of the HATFA legislation or the FAS/CAS timing or anything like that or is this sort of unrelated to how FAS/CAS rolls through for you guys? Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Thanks for the questions, Hunter. I think that – we have looked at that language, there's a couple things in there that would impact us. One being the pension smoothing and the other being the change in the rate that you pay for the – the premiums paid. We don't believe the impact of the premiums is material to us going forward and as far as the pension smoothing, haven't fully analyzed it but I think it's good news and likely results in funding that would be required in the out years moving out another year.

Next question in queue comes from Robert Spingarn with Credit Suisse. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Well, good morning. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Rob. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Hi, Rob. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Guess I should say good afternoon and congratulations. Wesley G. Bush - Chairman, President & Chief Executive Officer: Thanks, Rob. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Wes, I wanted to go back to something you addressed early on in the monologue, which is the services side and your commitment to the business in the context of the realignment. And what I wanted to get at here, we know you've de-commoditized the business, but what are some of your objectives here? Is it more of a revenue, a cross-selling opportunity to drive a higher growth rate in that business as the budget inflects? Or is there at the same time a margin opportunity, does the combination allow you to get to double-digit margins consistently going forward with these two businesses combined? Thanks. Wesley G. Bush - Chairman, President & Chief Executive Officer: That's a good question. Yeah, and let me just say it is primarily a strategy driven decision in that we see this class of service and solution offerings that often go with it on the backend of program deployments when we're thinking about modernization and other activities. We see this as integral to our offerings and the way we do business with our customers. We never want to be in a place where we're unable in some way to support our customers post-delivery, nor do we want to be in a spot where we have customers who are seeking some of these higher end services that ultimately over time translate the thinking into what the next systems will be. We never want to be in a spot where we can't support them. So your question's right on target because it is a really important part of our overall company strategy to be in the high end of the services market. We think it's important for any company that's going to be a full provider to those customers to have that capability and to be active in the marketplace. And as we look at where those service offerings are going as we look into the future, we think it's going to be important to have that breadth of capability that we'll have in our new Technology Services organization that encompasses both the hardware and the software domains. And again, this is thinking about more the integrated offering that we'll be providing. Now, we are going to be constantly challenging the team on their margin rates, because we are participating in that higher end of the marketplace. It's clearly an important focus of this new Technology Services organization to generate the margin rates that we see are attainable in that space. As Ken said earlier, we're not going to guide for our new configuration yet, we'll do that at the beginning of the year. But just as we have challenged all of our businesses to compare themselves to the marketplace that they are strategically positioned in, we'll be doing that with the services part of the portfolio and incentivizing the team to do better than what the market suggests they should be able to do.

Your next question comes from the line of Pete Skibitski with Drexel Hamilton.

Hi, guys. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Pete. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Hey, Pete.

Just wondered if (52:57) you'd give us your updated cash tax expectations for 2015, and then also maybe your cash pension initial look for 2016? Thanks. Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Pete, I probably wouldn't want to give the cash tax number. It's not a number that we guide to. I will say that we do expect our 2015 effective tax rate at 31.5%. I will say that the methods change that we implemented this year is something we did in order to lower our cash taxes. And we see that as helping us on that perspective and I think you'll see the number when we get to the end of the year.

Your next question in queue comes from Joseph DeNardi with Stifel. Joseph DeNardi - Stifel, Nicolaus & Co., Inc.: Thanks. Good afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hey, Joe. Joseph DeNardi - Stifel, Nicolaus & Co., Inc.: Wes, I'm wondering if you could just talk a little bit about the focus on the international business just in terms of what the pipeline looks over the next 12 months, maybe remind us how much of the business right now is international? What the bookings have been year-to-date and maybe how much of the backlog is international? Just some more color there would be helpful? Wesley G. Bush - Chairman, President & Chief Executive Officer: Yeah. That continues to be a really important part of our – not only our business today, but our future in our company. And I've mentioned on some of our calls in the past the importance of international to us is a core element of our strategy. Today, it's right around 15% for 2015. And as we think about the opportunity set that's out there, I think I've mentioned many of these in the past, we're especially excited about the growth vector that we see in Aerospace Systems internationally both our unmanned systems, Global Hawk, and then over time Triton being the standouts there, but also with some of our manned platforms and in particular, E-2D. So if I look at – let me go back to the unmanned for just a moment, as we look forward, we're excited about the opportunity in Japan on Global Hawk and Australia continues to be very, very interested and positive on Triton. We are seeing some increasing interest in Triton from our European allies. So, we believe there is a very good trajectory internationally in our unmanned business. And E-2D Japan is probably the first up with respect to our international opportunity set on E-2D and I think that's going to be a really important part of it. So, we like the growth trajectory, the potential that we see for AS internationally. We also see really good opportunities around the globe in what we now call our ES and IS businesses which are going to be coming together into our new Mission Systems business at the beginning of next year. With respect to the Electronics component of that, I think you're familiar with many of the things that we've been doing with radars around the globe. And when we're looking at the F-16 fleet in particular, the SABR radar capability that we now are moving out with several parties already. We are seeing continuing growth in the interest in that. With respect to our current Information Systems business, we also see a lot of opportunities whether we're talking about C4I or some of the air defense capabilities that IS has. TS is also very active internationally and we have a long-standing global footprint in our Technical Services business and we see opportunities for growth there, both in the Middle East and Asia-Pacific that we're pursing quite aggressively. So, this is a really important part of our business, an important part of the way that we are working to create our future. And I've been delighted with the focus that we've been able to achieve across the company in finding the right avenues for growth internationally. Stephen C. Movius - Treasurer & Vice President-Investor Relations: Hey, Kaitlin. I think we're going to do one more.

Your next question in queue comes from George Shapiro with Shapiro Research.

Yes, I was just wanting, Ken, there was a big drop in EACs in both Aerospace and Electronics, now does that have to do with the gain last year? Maybe you could explain a little bit further? Kenneth L. Bedingfield - Chief Financial Officer & Vice President: Thanks for the question, George. I will say that we've been working to get more of our EAC adjustments into what we kind of refer to as our baseline. So, as EAC adjustments occur, they get into your run rate margin. And so we've seen some of that. Our baseline margin rate without EAC adjustments has been going up, which I think is a positive thing. And in terms of the comparison from last year to this year, I would say I don't think there is anything particularly significant. It's just timing of items that hit in last year and items this year as well as the increased baseline earnings. We look at our business really in terms of our operating margin and operating margin rate and not with respect to what our EAC adjustments are. Just thinking back to the comparison, I guess the biggest impact last year to this year in terms of EAC adjustments would be the HATFA legislation last year that resulted in reduced pension expense for our sectors last year and therefore higher earnings and those EAC adjustments occurred in third quarter. But other than that, I think it's just timing across the sector and continued good performance in our baseline EAC margins. Stephen C. Movius - Treasurer & Vice President-Investor Relations: At this time, I'd like to turn the call over to Wes for closing comments. Wesley G. Bush - Chairman, President & Chief Executive Officer: All right. Thanks, Steve. I just wanted to wrap up by saying I'm very proud of how our team is performing. I think this quarter demonstrates another good quarter of very solid performance and represents the focus that we have across our enterprise on ensuring that we're doing the right things to continue to drive sustainable performance well into the future. And I'll also wrap up by saying what I said earlier in the call, congrats to our Bomber team, just outstanding, amazing outcome here that we're also so very proud of. We really appreciate all of you joining on to our call today. And thank you for your continuing interest in our company. Thanks, everyone.

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