Good day, ladies and gentlemen, and welcome to the Northrop Grumman's Fourth Quarter and Year End 2016 Conference Call. Today's call is being recorded. My name is Robin 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. Steve Movius, Treasurer and Vice President, Investor Relations. Mr. Movius, please proceed.

Thanks, Robin, and welcome to Northrop Grumman's fourth quarter and year end 2016 conference call. Supplemental information, in the form of PowerPoint presentation, is available on our website. Before we start, please understand that matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties which are detailed in today's press release and our SEC filings. These risk factors may cause actual company results to differ materially. Matters discussed on today's call may also include non-GAAP financial measures that are reconciled in our earnings release and supplemental PowerPoint presentation. 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.

Well, thanks, Steve. Hello everyone, and thanks for joining us. I want to start today by congratulating the entire Northrop Grumman team on 2016’s achievements. We again demonstrated strong performance across the company and continued to create value for our shareholders, customers and for our employees. It was an outstanding year for Northrop Grumman. As we strengthen the foundation for long-term profitable growth, it’s really encouraging to see that our team remains focused on sustainable performance. In 2016, all three of our sectors posted higher sales while growing or maintaining strong operating income, and generating solid cash flow. 2016 sales rose 4% and we achieved a strong 12% segment operating margin rate and 13% total operating margin rate. Earnings per share for the year increased 17%, to $12.19 driven by both performance and a lower average share count. Cash generation was also strong. Cash from operations totaled $2.8 billion and after investing in our businesses, free cash flow was approximately $1.9 billion. During the year, we returned $2.2 billion to our shareholders through share repurchases and dividends. This includes repurchasing 7.3 million shares for $1.5 billion which help reduce our weighted average diluted share count by approximately 6%. At year end, $2.7 billion remained on our share repurchase authorization. We increased our dividend by 12.5%, our 13th consecutive increase and we paid $640 million in dividends to our shareholders and our total shareholder return for 2016 was more than 25%. Our capital deployment strategy continues to call for investing in the business, managing the balance sheet, and returning cash to shareholders through share repurchases and dividends. Investing in the business is our first priority. 2016 investments included capital expenditures of $920 million. Our capital spending reflects increased programmatic requirements and supports our continued focus on cost reduction, affordability and investments…

Thanks, Wes, and good afternoon everyone. I’ll add my thanks to our team for their outstanding efforts this year. Today I’ll provide a little more detail on our 2016 results, and our 2017 outlook. We are very pleased with our 2016 sales of $24.5 billion and our strong operating income and cash generation driven by all three sectors. Turning to the sectors, Aerospace System sales were up 20% for the quarter and 9% for the year. Manned Aircraft was the primary driver of sales growth as we ramped up on restricted work as well as higher volume on the E-2D and F-35 programs. Aerospace Systems’ 2016 operating margin rate was 11.4%. This reflected 40 basis points for a gain from the sale of a property in the fourth quarter, which we had contemplated in our guidance. For 2017, we expect AS revenue in the low to mid-$11 billion, due to growth on restricted programs and Triton, which together more than offset declines in non-restricted space and the NATO AGS program. We expect F-35 volume will be comparable to 2016. Just a reminder that the F-35 will continue to be on units-of-delivery accounting in 2017 before adoption of the new revenue recognition standard in 2018. We expect the AS operating margin rate to be approximately 11% driven by the changing contract mix to more development contracts. 2017 AS margin rate guidance also reflects a B-21 booking rate approach that we believe is appropriate for the early stages of this incentive-based development contract. As a reminder, we will review our booking rate overtime as we work to retire risk and realize incentive fee milestones. In 2017, cost-type development work is growing at a faster rate than higher margin production work. This growing mix differential will persist until the F-35 and other production…

Thanks, Ken. As we open the line for Q&A, I would like each participant to limit themselves to a single one part question, so we can hopefully get everybody who wants to have a question to ask it. Robin?

[Operator Instructions] Your first question comes from the line of Carter Copeland with Barclays.

Hey, good morning, gentlemen.

Hi, Carter.

Hey Carter.

Just a question on the Aerospace growth in the quarter, just to clarify the disclosure, were the increases in manned E-2 and F-35 contributors in that order, and if we were to think about the lead times you've referenced before on the F-35 relative to Lockheed, they are talking about a 40% increase in deliveries next year. Is that the kind of order of magnitude of increase you saw in the quarter on that program? Just trying to figure out, it's a lot of revenue delta, almost $500 million in the quarter. How should we think about that splitting between those pieces? Thank you.

Sure Carter. I’ll just comment, I guess that, in terms of the magnitude of revenue growth in the fourth quarter at AS restricted was clearly the largest driver of the growth and with the E2 and F-35 following at from a military aircraft perspective and certainly nice contribution from autonomous systems with Triton and Global Hawk as well. Specifically, on F-35, I would say that, I’ll just remind you that our accounting model is different from Lockheed. So I would not necessarily look at their change and project it to what you see for us. We are looking at from an AS perspective as well as MS remaining on a unit-of-delivery basis for one more year. We are working our way through for the most part production on lots that were relatively consistent in terms of number of units and the units-of-delivery increase as we see increases in the quantities for 9 and 10 and going forward will, would on a units-of-delivery basis flow through in 2018 although by that point will be on to the new rev rec standard, we'll be on to cost-to-cost of Lockheed and I think that’s when you’ll really see us start to ramp from an F-35 perspective.

Yes. I am really just looking at the units that they are calling out. They had said 66 deliveries versus 46 or 47, I think. So, if you are on units-of-delivery that would imply that the F-35, given the lead times you've previously referenced would have been greater than the growth rate you saw in the segment. I was just trying to clarify if that still made sense from a units-of-delivery standpoint.

Yes, just keep in mind; our units are when we deliver it to them versus their units when they deliver it to the air force. So we are well ahead of them in terms of the units-of-delivery. I don’t have the exact numbers in front of me in terms of what units were delivered this year versus last year. There was a slight uptick, but I’ll remind you that we’ve been driving the price down as well as we’ve been moving through lot-by-lot negotiations. Certainly happy to have you follow up with Steve on any more details.

Great. Thanks.

Your next question comes from the line of Peter Arment from Baird.

Yes, good afternoon, Wes, Ken, Steve.

Hey.

Wes, I guess, my question is really around, I guess, the budgets and kind of overall. Lot of focus on the readiness of the new administration, but a lot of people don't always tag Northrop Grumman as kind of being the readiness play. Just maybe give your high level thoughts on just if there is any impact to you or how you are viewing that.

So, just in terms of the broader budget view, clearly readiness is a heck of a problem right now. The silliness of the sequester, the Budget Control Act, however you want to reference it has gone on way too long and with this, it clearly needs to get fixed. It’s impacting both readiness and the ability of the nation to recapitalize our military force structure. And to answer your question correctly, we do benefit from the budgets on readiness while that may not be the way lot of folks think about us. We do a lot of that type of work across the company and so, we are supporting our customers in a very broad way on the readiness side. But I think it’s important to continue to emphasize the need to deal both with the readiness side and with the recapitalization side. We have such an aging infrastructure from a national security perspective that we have to get on with it. And I am just delighted to see with the new administration and in particular General Mattis, and others who are taking a strong lead and communicating the imperatives from a national security perspective are strong support for getting this done as well as the support that we are seeing forward on the hill.

Appreciate the color. Thank you.

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

Thanks very much and good morning everyone.

Hi, Seth.

Hi. Ken, I wonder if you could talk a little bit more about some of the margin drivers in the guidance? I guess if you look at Aerospace and you highlighted some of the mix headwinds there, but, if you take out the gain that you had in the fourth quarter, it looks like you could be keeping Aerospace margins fairly flat next year and you guys actually usually have a little room for upside. And so, potentially, even a bit higher with those headwinds. Whereas in Technology Services, I would have thought maybe with exiting a lower margin contract maybe some opportunity to stay flatter or be up and then it looks like Mission Systems is where there actually is a little bit of headwind on an underlying basis. So, maybe if you could just talk qualitatively about those?

Sure. Maybe I'll take your question, Seth, sector-by-sector and I'll just start at AS. And from a margin perspective, I really think that as we look at AS, the item that's impacting our margin guidance for 2017 really is about the additional development work that we are taking on. It's really about the changing mix that we are seeing. And as I mentioned in my prepared remarks, we expect that that will have an impact on AS until some of the more mature production programs start to ramp and we expect that – we expect to see that in 2018 and beyond. If you want to think of F-35 and then including international F-35 opportunity and other international opportunities including Global Hawk and other autonomous systems. So AS, I would really characterize as being, again, driven by the mix change with the additional development content. From an MS perspective, I think we've seen strong performance out of that team. I think we're guiding a strong margin rate for MS for 2017. They've also got some mix changes. We've been seeing an additional volume out of their restricted space business in particular. So that will have some impact on MS. But we have seen strong performance out of that sector in 2016. And then from a TS perspective, we do see that TS will have some lower volume out of the KC10 program, which was not a great margin contributor for us. But we are working with TS in terms of reshaping that portfolio a bit and getting it where we want it to be from a 2017 and beyond perspective. We see that having a little bit of impact on margins in 2017, but we look to work with that sector for continued strong performance and I'll say industry-leading performance from that business against its peers.

And Seth, it's Wes. I would just add, Ken did a great job of walking you through kind of the puts and takes in the individual sectors. Just from a broad view, just as we do each year at the beginning of the year, we think hard about the balance of risk and opportunities and the challenge to our team is to manage those risks down and to realize the opportunities. We'll see how we do as we get into this year. I've been pleased with the approach that our team has used over the last number of years to effectively drive on that balance of risk and opportunities. So it's kind of where we are again this year.

Great. Thank you very much.

Thank you, Seth.

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Hey, good afternoon everyone.

Hi, Noah.

Hey, Noah.

So, I guess, my question is, how does a relatively large defense contractor grow revenue 12% organically in a quarter where total DoD investment is flat to slightly down? And then how does that same company that's exiting at a year at 12 step down to 2 when it's a pretty long cycle business a and the comparisons are reasonable in that next year?

Noah, I think as you know it all comes down to programattics and our business in a very real sense is, when we're talking about top line, I think is pest viewed through that lens. It's programattics and its portfolio. And if you look at the combination of AS and MS, together those two sectors are enjoying nice growth and I think we'll continue to he see that as we get into the course of this year. As we talked about last year on a couple of our calls, we are going through a rebalancing of the portfolio in Technology Services. And that rebalancing put some downward pressure on their growth for this year and you have to put that in the overall math of the whole company. So that's really the flavor I would give in that – from the perspective of the top-line is that it's the way the parts come together against the programattics and the portfolio work that we're doing. And again, all of that is aligned around the idea of ensuring that we've got the right portfolio for the longer term that we are going to be best matched into the needs of our customers. So we think we've got that calibrated about right, about where we want it to be.

Wes, I’ll just add that, if you look quarter-over-quarter, Q4 of 2016-to-Q4 of 2015, you will see a 12% increase, but I would just caution you and remind you that fourth quarter of 2015 was our low point in terms of quarterly sales last year and given that we are a long cycle business, I would just think about it with a little more of a longer-term view in terms of where we've been and where we are going and certainly reflecting Wes' comments as we look forward.

Yes, now, that makes sense and is helpful. The TS headwinds make sense, I was just - the segment is about half the size of the other two and even if I go to the mid-4s you are pointing to, it looks like the average of even AS and MS isn't far from the implied growth rate of the total. But that's okay. Can you remind us the - or can you size the headwind from the KC loss that you referred to in TS?

Yes, I think the rough order of magnitude we see that as being about a $250 million revenue headwind for 2017.

Okay. Great. Thank you.

Thanks, Noah.

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

Thanks. Good afternoon.

Good afternoon, Myles.

Hey, Myles.

Wes, your opening remarks, you commented on some of the opportunities that were in the trade space.

Yes.

One of which was T-X obviously. The final RFP come out it sounded like you reviewing it as if you hadn't determined that it was a good business to be bidding into and yet you've obviously clean sheeted your own design. You’ve spent your hard earned cash and effort to develop these prototypes. What is it that's holding you back from thinking you definitely would bid it?

So Myles, let me be clear. We have not reached a conclusion on that. My statements were more a reflection of the discipline that we have in our company of really looking at each of these opportunities through the cold, hard lens of what's the RFP really tell you and what will the business case looks like. While it's interesting that we have made some investments along the lines of supporting this program. Investments which by the way tend to have broader applicability. We need to be thoughtful as we are on every single one of these RFP activities. We need to be very thoughtful about, okay, what's it mean going forward. And that's really the business case we look at. And you've seen us make a variety of decisions over the years. Once we see the actual terms and it’s that discipline that I think keeps us in the right place. So that we don't walk ourselves into a decision to do something just because we've being doing it. They all have to be good business opportunities for us. So my remarks were intended to simply reflect that that's where we are in that process having just recently we gotten the final terms of the RFP.

But there was no change in the final versus the prior to in terms of your thinking, this is just the due course of evaluating if it was a good business or not.

That's our process.

Okay. Thanks.

Thank you, Myles.

Your next question comes from the line of Finbar Sheehy from Bernstein Research.

Good morning.

Good morning. Hey, Finbar.

I wonder if you could take us back to TS for a moment. I know you've talked about restructuring that portfolio and even before that the revenues have been down in the last three years, backlog has been declining, margins have been doing pretty well. Are you at a point where you have a sense for what the bottom in revenues is the base from what you are going to be rebuilding after restructuring and when that might happen? And what the starting point for margins would be? And then as you grow it, do you expect to be able to grow margins at the same time? Or would the growth be at lower margin business in the first or in the sense of just because they are starting as new activities?

Sure, sure. Appreciate the question and let me just maybe clarify. I hate to think of what we are working on from a portfolio perspective at TS with the word restructuring. So, I would say more so about aligning the portfolio with where we see our capabilities and the customer needs. As I think about TS, the revenue has been declining. Yes, I would agree with that. But it's been in a declining budgetary environment. We see it continue to decline in 2017 as contemplated in our guidance. But largely driven by again the activities realigning the portfolio, as well as the impact of the KC10 revenues coming out. But also the impact of some decisions that we have made about not pursuing some business that's lower margin and not differentiated. And I think you are seeing that through the higher margin rate that that business delivers as compared to its peers. My thought on the portfolio realignment is we get that through the system largely in 2017 and my expectation is that 2017 – and I am not going to provide sales guidance beyond then, but 2017 would likely be where we'd see the impact of restructuring and we ought to see a different trajectory as we move forward from there.

We are ready for the next question, Robin.

Your next question comes from the line of Sam Pearlstein with Wells Fargo.

Good afternoon.

Good afternoon, Sam.

Just thinking back to the AS margin, I know there was the gain this quarter, but just thinking about a little bit of a decline in 2017. I am just trying to think about as some of that restricted work continues beyond 2017, you mentioned some of the ramp up of the other programs, but F35 converts over to the percentage of completion. So I am just trying to think about the trajectory of AS margins, do you see that staying flat? Going down, going up beyond 2017?

Sam, I wouldn't want to provide any guidance beyond 2017. What I would probably reference you to is, if you think about the comments we made in our prepared remarks, again, we see that our 2017 margin rate is largely impacted by the mix with that mix being more heavily weighted to development. And I think to Wes' point, we look forward to some of that development work transitioning into production and starting to generate the additional margins and additional operating income out of those. But I couldn't comment for you on any specifics on numbers beyond 2017.

And Sam, let me just add, it's Wes, let me just add. One of the things that I wanted to be clear about in my introductory remarks is, we see quite a nice array of new opportunities in front us and we are pursuing quite a few of those. We are making a lot of decisions in the company around how we pursue those and which ones we are pursuing. Nevertheless, our hope is that we are going to be successful on a number of them. And in doing so, we'd be bringing some more development content in. So, this question of mix over time is one that is somewhat dependent on our success and what we capture and when we capture it. And as I've said a number of times, I'll be delighted to be successful with good business cases, capturing a little bit more development mix in this period of time when our nation is working to get the recapitalization initiatives under way. And if that means I've got a little bit more pressure on margin rate for some period of time, I think that's the right thing to do for the long-term of the enterprise. And that's how we are thinking about this decision space in front of us. So, as Ken said, we aren't providing some guidance out into 2018 in part because, we'll have to see where we are successful on some of these new development initiatives and also the rate at which our customers are able to support financially the ramp-ups on production. So those are sort of the variables that are out there that I think go to the question that you're asking.

Okay. That's very helpful. Thank you.

Thank you, Sam.

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

Yes, I want to pursue a couple of things. One, Wes, if I look at your earnings guidance that you provided this time last year, it was 990 to 1020 and we all know you did 1219 for the year. Now maybe about half of that was due to tax benefits and stuff that won't recur, but a good part of the rest was due to lower shares and operations. So my question is, what's different this year that we shouldn't assume at least some steady improvement in the EPS, especially, since you look at the Aerospace backlog, it's up 50%. So I would think that per Noah's question, that you'd have faster growth in Aerospace sales than what you're providing.

Yes, George, I do appreciate that question and I appreciate you kind of recounting the success that we had last year in really driving on performance and the outcomes of our approach to capital deployment. And I would just say that, we are a company that really does take a careful look in assessing both, I mentioned this a little bit earlier, assessing both the risk and the opportunities that we see at the start of each year as we look into the year and that's the way we think about our financial equation. And it's also the way that we structure the framework for the team and the work that the team has in front of them across this rather large portfolio of programs that we have to really drive on performance. So how we come out, depends on how well we do on executing. And we have a view of it today that we think is the right balance and that's the basis of our guidance. The right balance between those risks and opportunities. But we sure are going to be working hard as we go through the year to realize opportunities and manage those risks. So we'll have to see how we come out this year. I've been really pleased as I said in my remarks with how the team performed in 2016 and to be honest with the number of years prior to 2016. I think there is a growing execution discipline within the organization. But we have to actually see the outcomes. So that's kind of the framework that we're using and I think it is the right place for us to be at this point in the year. Ken, is there anything you would add to that?

No, I think that was great, Wes. Let me add to it. George, you commented on a couple things, one of which is tax and I agree that tax was a significant contributor to the increased EPS in 2016 versus our initial guide. You referenced shares as well. Actually, think from a share count perspective, we came awfully darn close to what our guide was. So I don't see shares as being – share count as being a significant contributor. But I will remind you as well that corporate unallocated is an area where we had some success in 2016 in reducing our corporate unallocated expenses that included some one-off type items including settlements including some state tax refunds that the benefit of those we saw in 2016 and not clear that they would recur as we look at 2017 and forward.

Let me follow up, how about, Wes, on the sales guide for Aerospace? I mean, you gave for the first time year-over-year backlog up 50% in Aerospace. I mean, is there a way to look at the duration as to how fast that actually rolls into revenues, because on the surface it would seem that the Aerospace sales guide would be low.

Well, George, I would say, we were really pleased with the captures in Aerospace last year. It demonstrated what we've been working to do to really position ourselves from both an innovation and good ideas perspective with our customers as well as from an affordability perspective. And I would say our success in capture last year had as much or more to do with affordability as it did with the inherent technology and capabilities of our offerings. So I was just really pleased to see those outcomes. With respect to this translation of backlog into annual sales, again, there is this wide variability across the programs. We are seeing in Aerospace and actually it's rippling into some other areas a little bit more of a longer cycle view on some of these awards. So I can't give you the exact translation factor. But, I would just say we are going to have to be thoughtful and mindful of how to think about awards translation into annual sales and that's gone into the way that we are thinking about our guidance.

Okay. Thanks very much.

Thank you, George.

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

Hey, good afternoon everyone.

Afternoon, Jason.

Hey, Jason.

Hey, Wes, I was wondering if you wouldn't mind just commenting on recompetes that you face, maybe particularly in the services related businesses and talk about whether when these contracts get recompeted either you're the incumbent or you are challenging to get in on some new businesses not yours. Whether the funding levels have begun to stabilize in those recompletes? Or whether we are continuing to see funding levels decline? And then, secondarily to that, just competitive environment around those recompetes, whether things have changed in any significant way over the last 12 or 18 months? Thanks.

Well, thanks for the question and let me kind of give a flavor of it and Ken can perhaps give a little more color or details to it. But your question actually - particularly because you directed it towards Technology Services, goes to a lot of what we are thinking our way through on this portfolio reshaping. In the areas where we see a good, sustainable differentiated business for the long-term, we are happy to engage in the recompetes if they are well funded, if we see that the customer commitment to them to be something that merits, the natural investment you put into a recompete. There have been a few over the last couple years and there is likely to be some on a go-forward basis where we see a recompete really as a transition opportunity for us to help the customer transition to another party. I've said this before and we're serious about it. We will never leave a customer in the lurch. If they have invested in us a responsibility to get something done, we are going to get it done and if it means doing it for a bit longer than we might have otherwise liked, we'll keep doing it until they are ready to make a transition. But the recompetes tend to offer those opportunities for those transitions and we look very carefully at each one of them, both in terms of as you mentioned the funding and the funding stability that goes into it, as wells as what we read to be the customers’ view of its need for a differentiated capability. So that's kind of the flavor of how we think about it. Ken, would you want to offer some more color on that.

Yes, that's great. Thanks, Wes. And Jason, I would just say that, as we look at our recompete exposure for 2017, we don't see it as material to our results one way or the other successful or unsuccessful on those recompetes and actually the largest recompete opportunity that we see is at Mission Systems and that would be what you might be familiar with as the JRDC program and we've been the prime on that for a number of years. There are some other recompetes at MS and a few at TS. But I would tell you that again, we don't see it as being significant in terms of our financial results for 2017.

Great. Thanks.

Your next question comes from the line of Cai von Rumohr with Cowen and Company.

Yes, thank you very much. So, impressive cash flow guidance for 2017, given the very heavy level of CapEx. Can you give us some more color on how you can get there, given that high level of CapEx? And then looking forward, you had indicated that we are going to have some more high level CapEx looking forward. About how long do we stay at this elevated level? And can you sustain the cash flow over this period?

So let me - I'll start, Cai. First of all, thanks for your comment and question. From a cash flow perspective, as we look at 2017, we do see it as being a strong year of cash generation. We are going to generate significant cash from operations. We are going to spend about $900 million on capital expenditures as we look to continue to invest in the business, investing in profitable growth, investing in affordability and competitiveness, all of which Wes mentioned. I'll maybe mention that from a cash perspective, we have built a little bit of working capital over the last few years. I think as an industry, you've seen that as a theme or a trend. We look at as we are growing the business, actually the ability to manage working capital to a relatively flat outcome for 2017. Again, while we are growing the top-line, so we see some ability to manage that perspective, the working capital. We'll also just mention that we do have the CAS recoveries that we are seeing that are generally equal to or just a little bit greater than the CapEx. We are expending in the year, so this is kind of a nice mix there of the recoveries on the pension and investing in the business for future growth.

And Cai, to your question about sort of the outlook on, so I mentioned in my remarks that we see these elevated levels for another couple years. I’ll also go back to what I said in response to an earlier question, if it turns out that we are successful on a number of other new programs, depending on the magnitude of those programs and the related investments. We would enjoy that success and it could have some implications on CapEx even beyond the couple years. But we are just going to have to wait and see how all that works out.

Thank you.

Thanks.

Your next question comes from the line of Robert Spingarn with Credit Suisse.

Good morning or good afternoon, I should say.

Hey, Rob.

Hey, Rob.

Hey guys. I wanted to talk about this concept of – I see this dichotomy forming over contract type at DoD between low cost and best value. And I just noted, Wes, in your comments earlier on the T-X RFP and on the withdrawal of one of the teams yesterday, if that isn't starting to turn into a bit of a low cost shootout and if that might be – sounds like that just might be less appealing especially as you go here and you are working through some other contracts, that will eventually allow your Aerospace margins to rise as we get into production. Is that something that you see? And if that's the case, how do we think about J stars in that – from that framework? Is that a best value or a low cost type of opportunity?

Yes, Rob, it's a really good question and I think an important one in the environment that we are in and so let me give a framework that I see right now. And I think our customers actually being thoughtful in how they are approaching this. There are some things that our customers’ going to want to buy where there isn't that much differentiation in the type of outcome of the product. And in those cases, it appears they are making what seems like a reasonably good decision to really focus on the cost and to drive for the lowest cost answer they can get. And in some instances that might be interesting to us, if we think we've got a particular architectural approach or engineering approach that positions an end-product in a very low cost part of the coordinate system, then we might look at that and see what the returns look like. If it's a situation where it's just low cost because that's what the customer really cares about and we don't see a whole lot of differentiation across the spectrum, those are probably less interesting opportunities for us. So if you look at the – I won't go contract-by-contract in terms of the opportunities that are out there, because we are in a competitive state right now and would not want to say too much about each and every one of them. But there are others where our customer is transmitting the message in their RFP and in other ways that while cost is always critically important, they see a little bit of a trade space between cost and performance and value. And those tend to be a little bit more interesting. So, we look at each and every one of these and do a very detailed diagnostic and we look at it in the – through the lens, through what I would call a non-advocate lens within our company to ensure that we are not kidding ourselves about what the real investment and cost would look like and then we call it. And sometimes it takes a little longer to call it based on the information that we need to get to a high quality decision. But we are looking at the way the customer is communicating around its view of the business deal and what's important to them to make sure that our offerings really line up the right way in a very competitive environment.

Thank you for your thoughts on that.

Thanks, Rob.

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

Thanks. Good afternoon.

Hi, David.

I know, you can't say much on your restricted portfolio, getting into specifics there, but could you maybe size it for us as a percentage of sales in 2016? How much it grew and what's embedded in your guidance for 2017, specifically for restricted growth?

David, I'm not sure that I would be able to necessarily provide guidance on what growth or what percentage it makes up specifically for 2017 but I will say that as we look at the 2016 restricted activities as a percentage of total sales, it's in the low 20% range of sales. I will tell you that it is a nicely growing part of our business, very important to us as a company and what we do and what we deliver. But that's probably the extent to which I could get into it for you.

Okay.

And David, I would just add, as our customers look at the environment that we're all operating in today and the need for security, there is a lot of focus on b the restricted side. And I think there is going to continue to be a growing focus on the restricted side and I think it makes sense from a national security perspective.

Thank you.

Thanks, David.

Your next question comes from the line of Robert Stallard from Vertical.

Thanks so much. Good evening.

Hi, Rob.

On the shift in mix, I don't know if you are able to quantify it, but how much is the cost plus portion shifting from 2016 to 2017 based on what you know today?

Rob, thanks for the question. Not sure that I have that exact number in front of me. But I will tell you that we are seeing a marked increase in terms of our cost plus, think of that as largely being a development type work versus our fixed price or production type work and I am thinking that's probably in the range of a 3% shift from the 2016 actuals to 2017 and you can pick up that 2016 number in our 10-K when we file it. We expect to do that early next week. So, probably the best information I can give you at this point.

Robin, I think we'll do one more question.

Okay. I'll pass on then.

Okay, thanks, Rob.

And your final question comes – is a follow-up from Noah Poponak from Goldman Sachs.

Thanks. Hey, Wes, I wanted to ask you, what is the rate of growth in revenue or in EBIT dollars, which everyone is more important to you, I guess, or easier to quantify that you would need to be reasonably certain you would obtain over some multiyear period in the future in order to be willing to double your CapEx for a few years?

Noah, I am not sure I want to actually put that out there. A lot of the way we look at our competitive profile is sort of embedded in the way I would think about answering that question. But let me say one thing and I've said this before. We are not about growing revenue. That's not the thing that motivates our company. We are about growing value. And I think a lot of folks can make bad decisions in the defense industry in particular if they are just looking at things through the optic of the top-line. It's really the ability to capture business that translates into bottom-line growth and most importantly translates into cash generation. So that, you can make good decisions on how you use that cash. And it's - I think an important parameter to keep in front of all of us as we look at the opportunity space that's in front of us. So we are not driving our investment strategy based on revenue growth.

And let me just remind you, Noah, that as we think about capital deployment, we are very focused on the strategy and creating value out of the capital deployment that we do and I'll just remind you that we very clearly recognize that we are investing in the business which is our first priority. It has to be where that is driving more value than another investment that we could make. So, I'd just remind you that we try to be very disciplined in terms of our investments and in terms of how we deploy the precious capital of the company.

Wes, at this point in time final comments?

Okay, thanks, Steve. I'll just wrap up by repeating what I said a bit earlier. The strong year that we had in 2016 really has laid a great foundation for us as we move into the New Year in 2017. And I am just delighted to see the strong focus on performance across our company and it really is that performance that is enabling us to invest in our future and to return cash to our shareholders. So I sincerely appreciate all that our team is doing to enable those outcomes. So with that, thanks everyone for joining us today and thanks for your continuing interest in our company.

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