Myles Walton: Kathy, could you comment a bit on relative growth rates at a minimum for the segments next year? And just playing off the space backlog, which continues to expand pretty wildly, maybe just dig in a little bit deeper as to how the complexion of that backlog might play out on hopefully a margin expansion profile from here?
Kathy Warden: Yes, Myles. So as we have been saying all year long, we expect space growth to moderate as we go into next year, still be our fastest-growing segment, but the growth profile across the four businesses will be more similar next year, more tightly clustered, if you will, around that growth rate we’re projecting for the enterprise at 4% to 5%. DS and MS will likely be around that profile in the mid-single-digit range, although I will say DS this year is experiencing some upward pressure on growth due to the demand that we spoke about, particularly globally for air and missile defense and weapon systems. If that continues, that would continue to push DS’ growth expectations even higher into 2024. And then AS will still be in growth territory, but as we’ve talked about, it will be modest growth into 2024.
So that gives you a sense of the relative order that we see. And for Space, in particular, while we have approximately doubled that business in the last five years, so it’s been just on a tremendous growth tier. We are very focused now on the performance of that backlog and ensuring that we can, as you said, deliver the margin expansion, and that is still very much our pathway in 2024.
Myles Walton: And can you just clarify on the underlying margins, EACs were still negative within space. Is there — and we’ve seen that for now five quarters. Are there programs you could point to, to say, okay, these are running off and that’s why we’re going to have this margin expansion profile?
David Keffer: Myles, this is Dave. On that one, there has not been any one or two particular programs driving the majority of the negative EAC adjustments you’re referring to over the last year plus. It’s broader. And to Kathy’s earlier point, there has been so much backlog expansion that there are so many new programs in our space business over these last few years, examples of really strong market share gains. And it’s been across a number of those programs that we’ve seen EAC pressure given the newness of those development programs. And so I wouldn’t characterize them as falling off anytime soon. If anything, we see opportunities for a number of programs in our Space business to transition to more mature phases of those programs, including production phases over the next couple of years, which is important to the broader margin expansion opportunity point that Kathy described.
So I think what we see here is an opportunity for margin growth as we see the continued stabilization of the macro factors that have really been underlying industry-wide pressures over the past couple of years and the continued maturity of those programs over those same couple of years coming up.
Operator: Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed.
Kristine Liwag: Kathy, on the Stand in Attack Weapon win, some of your competitors indicated that the risk/reward profile wasn’t as strong in this particular program. Can you provide more color on your competitive edge and how this pursuit drives with the risk tolerance you’ve demonstrated elsewhere, like on the decision not to bid on NGAD as a prime?
Kathy Warden: Yes. Thank you. So in my comments, I alluded to the fact that AARGM is a product line that we have. We’ve talked about the base AARGM product, the AARGM-ER, or extended range, and now the SAW award and with each of those products are building off of a mature technical baseline. As I’ve talked about our approach to thinking about fixed price, I have often said fixed price is appropriate where it’s either a commercial item or an item that has reached a design maturity and been risk reduced to where we know what it will take to deliver that product. Because of the maturity of AARGM and us having a product line that met the Air Force requirements for SOL to bring forward, we are able to reduce cost schedule and, of course, have better risk management.
That allows us to have the risk tolerance then to bid fixed price. And I recognize that in competition, there are many factors, but when a company has invested and gotten the mature product line, there is a natural advantage that comes with that. And that’s the situation we found ourselves in with SAW in that specific competition.
Kristine Liwag: I had a follow-up question on the B-21. Does the current budget standoff in D.C. impacts flight testing or the timing of the LRIP award?
Kathy Warden: No, it does not. As we look at the timing of the LRIP award, as Dave said, we still expect that to happen this year. And as we have talked about before, first flight is a milestone that the Air Force is looking to achieve before they make that award, and we are on track still anticipating first flight this year.
Operator: Our next question comes from Robert Stallard with Vertical. You may proceed.
Robert Stallard: Kathy, I just wanted to follow up on your budget commentary at the start of the call. I’m wondering if you’re putting any contingency plans in place in case we get arbitrary DoD budget cuts as a result of this craziness in Congress.
Kathy Warden: So Rob, we have looked — it would be irresponsible of us not to run some numbers and look at where we might have risk. And as I mentioned in my commentary, we are working with our customers to navigate any budget challenges that they see, either as a result of not getting appropriations passed in a timely fashion in accordance with the Fiscal Responsibility Act requirements or even as they look into 2025 and the pressures that they have there with a minimal top line growth rate. But we are not seeing any significant risks to our portfolio at this time, but we will continue to monitor that as such as discussions progress. We’re just very pleased to see that the House Speaker and we should expect to begin to see those bills moving through Congress now.
Robert Stallard: Yes. And then as a follow-up, you mentioned the strong demand on the defense export market at the moment. I was wondering if there could be any capital deployment opportunities there, either Northrop Grumman acquiring companies overseas or making other investments.
Kathy Warden: We are already making capital investments that support that growing demand in missile defense and armaments. And so as we have talked about our CapEx investments over the last several years and planning forward into 2024, those do support our international product lines. We are not seeing a significant increase that we would anticipate in that demand signal yet. We are monitoring it both through the supplemental, but we’ve already baked in a good bit of product line growth that we’ve accounted for in our CapEx planning over the next several years. And so at this point in time, I don’t see that providing more upward pressure on CapEx.
Operator: Our next question comes from Cai von Rumohr with TD Cowen. You may proceed.
Cai Von Rumohr: Yes. So to go back to Doug’s question, I mean, you’re looking for basically flat margins next year. And kind of in recent quarters, Kathy, you’ve made the point about the opportunity for space margins to go up. Certainly, if I look at defense, basically with more munitions moving up, I think you’ve made the point that there should be some opportunity there. You’ve brought the target down for MS this year, which would suggest an easier base of comparison for next year. I think you’ve talked about Aero as being roughly flat. But as you look at your portfolio, is there opportunity for those margins to move up next year? And if so, which of the sectors that have the greatest opportunity for margin improvement and which are the ones that perhaps face greatest risk that margins would be flat to down?
Kathy Warden: Yes. I like the way you’re thinking. It’s exactly the challenge that me and the team are discussing amongst ourselves is to how we do drive margin improvements next year. And in the Q2 call, I laid out for our investors what that path is and the key factors associated with improvement. And let me just touch on each of those and then I can tie it also to where the segments see the greatest opportunity. For macroeconomic factors, I’ve talked about those already on the call. We are seeing inflation be a bit secure than we had hoped at this point in time. We are incorporating that into our forward estimate, but it is impacting our ability to return to higher levels of profitability factor. Productivity is another area where we are working to improve productivity, not just within our company, but our supply chain.
