George Shapiro: Dave, I had one for you. In the operating income discussion in space, you had a big gain, $45 million charge. And you said it was all — the $96 million gain only partially offset the lower EACs. When I look at the K for the year, you had minus $38 million in space versus $134 million last year. So if you kind of just discuss what happened in the quarter and just why such a significant change year-over-year?
David Keffer: Sure. Well, that’s a great question, George. Clearly, that’s an indication of the broader macroeconomic conditions that we in our industry, and frankly, most other industries we’re facing in 2022, and in our business, it impacted the level of net EAC adjustments in really each of our sectors in different ways. And you see it acutely there in space, as you mentioned. A number of those EAC adjustments were in the fourth quarter. And that kind of — the net of all those puts and takes to include the inventory adjustment on a new commercial product line that you mentioned was another downside in Q4. Those were roughly offset by the upside from the land exchange transaction in space. So a number of puts and takes, but when you net it all out, not much overall impact on the space margin rate in Q4 or for the year.
We’re forecasting a rate just above that level that we operated at in ’22 as we now look at ’23. And as I noted earlier, something in the mid-9s is our kind of going forward expectation for ’23 margin rate in space.
George Shapiro: But Dave, it’s still unusual to see negative EACs for the year. So I was just wondering, are there any specifics that you could point to maybe was for the year or just for this quarter?
David Keffer: No single item was a driver of that of much more significance than any other. I think that alone, George, is an indication of the fact that this was more in line with broader macroeconomic pressures as opposed to any performance issue or contract issue in any particular program. This was broader and more widespread, but not significant on any one program in and of itself. And again, I think really just indicative here of the environment we were operating in, in a business with a lot of programs, a lot of new growth in recent years to be excited about.
George Shapiro: Okay. And then just one general one for you, Kathy. I mean, with the better sales growth you’re guiding to in ’23, a result of the budget or new awards won or both? And then also, with 16% sales growth in Q4 and outlay is likely to grow 7% or 8% in ’23 based on the budget investment authority of 15. Why does the growth rate slow that much in ’23? I mean why wouldn’t it be higher than what you’re suggesting?
Kathy Warden: Yes. So as we noted throughout 2022, if we could break loose supplier deliveries and continue to improve labor trends, we could deliver accelerated growth. And fourth quarter exemplified a path to doing just that. As we come into 2023 with that momentum, the same holds, we are confident enough in our sales expectations as we sit here today to raise them above what we had said in October, largely because we are seeing those improvements in labor in particular. And if those trends continue, we would have opportunity to even further accelerate growth in 2024. The budget does not play into this. We had assumed strong budget growth. It, of course, came to fruition in the ’23 budget, and we continue to believe the ’24 President’s budget will also show growth.
Todd Ernst: Norma, we have time for one more question.
Operator: Our next question comes from the line of David Strauss with Barclays.
David Strauss: Great. A lot of discussion on B-21 and EMD and LRIP. Just — how should we think about what happens to AS margins over the next couple of years as I assume EMD flans out or starts to come down where you’ve been taking positive adjustments and LRIP ramps up from here?
David Keffer: David, I’ll start on that one. Our margin rate was particularly high in AS in 2022. That was driven in part by the strong performance on those EMD profit pickups associated with anticipated incentives on that part of the program. We projected a 10% or so level for AS margins in ’23 and expect that, that’s a reasonable kind of planning assumption at this point for ’23. And as we look forward beyond that, a lot of the factors that are working into the ’23 estimate would be those that we’d expect to continue beyond ’23. So of course, we’ll update you over time. You mentioned B-21 EMD program will — a portion of the contract will continue for a number of years on LRIP. We haven’t baked any margin or cash in that part of the program into our multiyear outlook or our ’23 guide. So we think that 10% level is the right way to think about kind of the underlying margin rate in AS in the near term.
David Strauss: Okay. And Kathy, maybe your thoughts on what bookings could look like this year, what you’re anticipating for the book to bill this year?
Kathy Warden: Yes, David. So we had projected book-to-bill to be light in 2022, and it turned out to be 1.07. We are projecting it to be light again in 2023. I’ve noted before, we look at this over a multiyear period. We’ve been running at 1.2 for the last 4 years aggregated across those 4 years. So we still expect to be well over 1 when we think about a 5-year aggregated book-to-bill, but we do expect 2023 to be less than 1.
Todd Ernst: All right. Great. Thanks. Kathy, over to you.
Kathy Warden: So look, 2022 was another year of outstanding performance by the Northrop Grumman team, and I want to thank them. As we reflected on our call today, we’re even more encouraged with the opportunities for continued growth and value creation for our company in 2023 and beyond. So hopefully, that conveyed to you. Thanks again for joining our call today.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
