Northrop Grumman Corporation (NOC) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Northrop Grumman's First Quarter 2015 Conference Call. Today's call is being recorded. My name is Kaitlin and I will be your conference 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 first quarter 2015 conference call. 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 might also include non-GAAP financial measures that are reconciled in today's earning release. We will be posting updated company and sector overviews that provide supplemental information on Northrop Grumman and our four sectors. You can access our updated company overview and the sector overviews on our Investor Relations webpage. 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. We're off to a good start in 2015. Our team generated solid operating results, and I want to thank our employees for their continued focus on execution. We generated earnings per share of $2.41 comparable to last year after adjusting for the $0.23 non-recurring tax benefit in the first quarter of 2014. These results reflect solid operational performance and the effectiveness of our cash deployment strategy. Sales rose 2% and reflect higher revenue at Aerospace, Electronic Systems and Technical Services. During the quarter, growth on existing and new domestic programs and double-digit international sales growth more than offset declines in mature production programs like the F/A-18. Sales for the quarter also benefited from a few more working days in this year's first quarter. In the first quarter, we repurchased 5.3 million shares for $859 million. In total, we distributed nearly $1 billion to shareholders this quarter through share repurchases and dividends. As of March 31, we've repurchased 47.5 million shares or nearly 80% toward our goal of retiring 60 million shares by the end of this year, market conditions permitting. Before our $500 million pension contribution, cash from operations was a use of $329 million, an improvement over last year's first quarter. After capital spending of $117 million, our pension-adjusted free cash flow was a use of $446 million. The first quarter is typically our lowest in terms of cash generation. We continue to expect healthy cash for the year, and we are maintaining our full-year guidance for cash from operations and free cash flow. Total backlog increased to $38.4 billion, a modest increase from year-end and a 6% increase from total backlog at the end of last year's first quarter. Net new awards totaled $6.1 billion, and we had a solid 1.03 book-to-bill for the quarter. Electronic Systems had a book-to-bill of 1.17 and Technical Services had a book-to-bill of 1.90. You'll recall that on last quarter's call, we mentioned a large international award that Technical Services booked at the beginning of the year. Electronic Systems received an award to supply our SABR radar to Taiwan, received long-lead material awards for F-35 lots 9 and 10 and won the contract to develop SEWIP Block 3, the next-generation electronic warfare upgrade for U.S. Navy surface ships. During the quarter, Aerospace Systems received awards for E-2D and restricted space programs. And Information Systems received awards for additional restricted cyber work, and we won the recompete for the follow-on to our IDENT program in the UK. We continue to see healthy demand for our products and services, and we have a robust global opportunity set for all four of our businesses. International opportunities for Aerospace Systems include Global Hawk and Triton for sublimations. We are underway on Global Hawk for Korea. Japan selected Global Hawk and included it in their budget. And Global Hawk made its international air show debut at the Avalon Air Show in Victoria, Australia. Japan also selected the E-2D and included it in their budget. And we are realizing international sales opportunities for F-35 and for Electronic Systems' SABR radar. Information Systems' C4ISR and cyber capabilities and Technical Services' logistics and modernization offerings are also attractive to our international customers. We are competing for U.S. programs like long-range strike, common infrared countermeasures and long-range discrimination radar to name a few. And we are ramping up on production programs like the F-35 and E-2D. In unmanned, we continue to expand autonomous technology with our X-47B unmanned combat air system. In addition to being the only unmanned vehicle to autonomously perform aircraft carrier takeoffs and landings, last week, the U.S. Navy successfully demonstrated fully autonomous aerial refueling with the X-47B, marking the first time an unmanned aircraft has refueled in-flight. In combination these achievements are a major step forward in unmanned autonomy with potential for both manned and unmanned aircraft applications. Autonomous launch, recovery and refueling have the potential for reducing operational costs in the future. We're proud to have again made aeronautic history and we congratulate the X-47B on another major accomplishment. The fiscal year 2016 budget process is underway in Congress, and we're pleased that there is a growing recognition of the need to support national to support national security in the budget. At the same time, we are concerned about the long term implications of the discretionary budget constraints imposed by the Budget Control Act. We continue to support the perspective put forward by the Administration that a return to the sequester levels and certainly the sequester mechanism would have a negative impact on our country. Congress is now negotiating a joint budget resolution. But we remain cautious on the budget process and customer spending later in the year. If a budget isn't passed, we expect we will begin fiscal year 2016 with a continuing resolution and sequestration may be triggered again next January. Based on first quarter results and our outlook for the remainder of the year, we are increasing our earnings per share guidance to a range of $9.40 to $9.60 from our prior range of $9.20 to $9.50. We are maintaining our sales guidance of $23.4 billion to $23.8 billion and our outlook for cash from operations and free cash flow is unchanged. So now I'll turn the call over to Ken for a more detailed discussion of our results and our guidance. Ken?

Thanks, Wes. I also want to thank the team for a job well done. It was a solid quarter. Sales were higher, due in part to four additional working days in this year's first quarter. We generated strong segment operating income, awards totaled $6.1 billion and cash used during the first quarter was consistent with our historical pattern, although slightly better than last year. Turning to sector results. Aerospace Systems sales rose 3%, driven by double digit growth for unmanned programs and high-single digit growth in the space business. Volume was higher across a number of unmanned programs including NATO AGS and Global Hawk. Activity is ramping up on Global Hawk for Korea and Lot 11 for the U.S. Air Force. Growth in our space business reflects higher activity for restricted programs. These increases were partially offset by lower manned military aircraft sales, primarily due to fewer F/A-18 deliveries as that program continues to ramp down. Aerospace operating income and margin rate were strong relative to guidance for the year. First quarter operating margin rate of 12.6% reflects the timing of performance adjustments across our portfolio. For the year we expect AS will have a margin rate in the high 11% range on revenue of $9.8 billion to $10 billion, no change from prior guidance. Electronic Systems' first quarter sales increased 2%. The increase was driven by higher volume for space sensors, marine systems and tactical sensors, partially offset by declining volume for combat avionics. ES' operating income and margin rate reflect the changing business mix, which includes lower volume on mature fixed-price production programs like combat avionics. And higher volume for cost type development programs. As our portfolio evolves, we expect to continue to generate a strong, but somewhat lower margin than we've seen over the past few years. For the year we expect ES sales of $6.7 billion to $6.9 billion with an operating margin rate in the low- to mid-15% range, no change from prior guidance. Information Systems' first quarter sales were comparable to last year's first quarter and include higher volume for programs in ISR, integrated air and missile defense, communications and cyber. These increases were offset by lower volume for C2 and civil programs, including impacts from in-theatre troop drawdowns and lower volume on the CANES program. IS first quarter operating income rose 2% and operating margin increased to 10.5%. The quarter-over-quarter improvement is primarily due to improved performance resulting from risk retirements associated with program completions. Information Systems is off to a good start for the year, but as we look at the rest of the year, our guidance does contemplate some continued U.S. Defense budget risk. We expect short cycle customer spending may be cautious in the second half of the year due to budget uncertainty, particularly if we are operating under another continuing resolution in the fourth quarter. For the year, we expect sales of $5.9 billion to $6.1 billion with a margin rate in the mid- to high-9% range, no change from prior guidance. Moving to Technical Services, higher international and intercompany sales generated a 10% sales increase in the quarter. Higher international volume reflects the Ministry of National Guard Training Support award received at the beginning of the year as well as a full quarter of revenue from our IDS acquisition in Australia. Operating income for the quarter was unchanged. The lower margin rate reflects the fact that last year's first quarter included higher income from an unconsolidated joint venture. Excluding that item, operating margin rate was consistent with last year. For TS, we expect sales of $2.7 billion and $2.8 billion with a margin rate of approximately 9%, again, no change from prior guidance. The 2015 outlook for TS reflects lower volume for the ICBM, CNTPO and other logistics and modernization programs, which will be partially offset by growth in international. On a consolidated basis, first quarter segment operating margin rate was 12.3% which includes a higher level of research and development spending, which you'll see reflected in our G&A expense for the quarter. We take a total cost structure approach to our business, and we are managing this cost within our existing rate structure. This quarter's results support our guidance of a segment margin rate of approximately 12% for this year. Our total operating margin rate declines to 13.1% and reflects lower segments operating income, lower net FAS/CAS pension adjustment and higher unallocated corporate expense. This quarter's net FAS/CAS pension adjustment is higher than the guidance we provided on our fourth quarter call, primarily due to the $500 million discretionary pension contribution we made in the quarter which reduces FAS expense for the year. Our updated estimate for net FAS/CAS pension adjustment is $320 million versus our prior guidance of $290 million. You will recall that in early February we issued $600 million, 3.85%, 30 year notes. The proceeds of which were used to fund that contribution. The contribution generated a non-recurring increase to state deferred tax expense on our pension liability which is the primary driver of the quarter's higher unallocated corporate expense. One final note on pension, as is our standard practice, we will finalize our demographic survey in the third quarter and those results may impact that $320 million net FAS/CAS estimate. A quick note on taxes. Our first quarter effective tax rate increased to 31.3% from 26.3%. Last year year's first quarter rate included a benefit related to the partial resolution of the IRS examination of our 2007 to 2009 tax returns. I would also note that the first quarter tax rate was considered in our 32.5% tax rate guidance for the year. Looking at our EPS guidance for the year, we expect EPS between $9.40 and $9.60. The higher range reflects first quarter performance, the lower FAS expense resulting from the pension contribution, as well as our expectation that our weighted average share count would have climbed by about 9% versus prior guidance of an 8% decrease. Turning to cash, cash from operations was a use of $329 million in the quarter before the after-tax impact of the voluntary pension contribution. Cash used during the quarter was principally driven by changes in trade working capital. This is typically the case during the first quarter of the year, and we are seeing the same trend this year. Free cash flow before pension pre-funding was a use of $446 million, slightly better than last year despite an increase in capital expenditures to $117 million in the quarter. We continue to expect cash from operations of $2.4 billion to $2.7 billion before the impact of the after-tax pension pre-funding. This also results in free cash flow of $1.7 billion to $2 billion after expected capital spending of $700 million for the year, no change from prior guidance. In conclusion, it was a solid quarter and a very good start to the year. With that, I'll turn the call over to Steve for Q&A. Stephen C. Movius - Treasurer & Vice President-Investor Relations: Thanks, Ken. As we open up the call for Q&A, I would again ask each participant to limit themselves to a single question, and if you have any more questions, to get back in the queue. So, Kaitlin, can you open it up?

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

Good afternoon. It's actually Jon Raviv, on for Jason. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Jon.

Wes, I was just wondering if you could talk a little bit about the growth outlook. Obviously, this quarter seemed to be – had some nice upside here. How do you think it trends going forward, what surprised this quarter and where could you see things going over the course of the year and into next? Wesley G. Bush - Chairman, President & Chief Executive Officer: Well, we maintained our sales guidance for the year, I would say almost despite all the ups and downs that we see out there. I would say that this is a period of time where we do see a nice set of opportunities for our company, both domestically and internationally. I mentioned some of those in my prepared remarks. But when I think about what we're seeing – let me start with international, around the globe on unmanned infrastructure, our unmanned systems as well as our manned systems and more broadly, I would say, interest in the C4ISR capabilities that our company has to offer, I do see a nice continuingly positive trajectory for our international activities. As I mentioned in my earlier remarks, I also see some really good domestic opportunities, long-range strike. I mentioned the Kirkham program at ES is also a really interesting program for us as is LRDR. So, we have our guidance out there for the year. We obviously are addressing a lot of opportunities. But on the domestic front, I would also caution and I've mentioned this in my remarks as well, continue to caution about the budget environment. We need to work our way through this, see where we really end up as a country with respect to how we're going to be investing in defense and security on a go-forward basis. While I've been pleased that there is a growing recognition of the importance to appropriately fund defense and security, I am concerned about the budget process. And I think it's going to be a bit more time this year before we have any clarity as to how that's going to resolve.

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

Thanks. Morning – actually, afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hey, Myles.

You went through kind of a laundry list of opportunity set, but you didn't mention T-X, and I think you guys are kind of – got a horse in that race – it sounds like it's a home-grown horse. Could you talk about that opportunity? And then just a clarification, in terms of mix between fixed pricing/cost plus at the company level, the last couple of years, you've been running with a pretty favorable mix, 47% versus kind of used to be 40% fixed price. Are we trending back towards the kind of 40% fixed price over the next few years? Wesley G. Bush - Chairman, President & Chief Executive Officer: All right. Well, let me hit both of those. On T-X, yes, that is a very important opportunity for us. Timing on that one is out a little bit relative to some of the others that I mentioned. But we believe we're going to have a very competitive opportunity on T-X. We see the development of the requirements that the Air Force has been going through to be very positive relative to the nature of the offering that we're putting forward. We're developing some really good partnering approaches in the program. So, it is an important opportunity for us. And we're certainly going to be very focused on this. With respect to the mix equation, as I've said before – and we saw some of this already in ES this quarter. We are delighted to be winning new program opportunities on our company. And we know, we all know that when we win these new opportunities, they start out cost plus. And that inevitably pushes that mix equation, Myles, that you're asking about back in the direction that it can have some near-term impacts on our margin rates. We're seeing that right now at ES. But this is exactly what we want to have happen. We want to be successful in capturing these new opportunities. And as we all know, over time those turn into production and that's clearly the longer-term margin opportunity.

Wes, maybe I'll just add that we've seen a pretty tight band in terms of our mix of fixed price and cost plus for the last few years. It is down a couple of percentage points this quarter and as Wes mentioned, particularly at Electronic Systems as we see some development opportunities there. But we do have a number of programs where production is ramping up, so it could be that we see that start to come back in the next or I'd say in the not too distant future. As we look at F-35 ramping, we look at E-2D and then... Wesley G. Bush - Chairman, President & Chief Executive Officer: Mostly our international programs, our production oriented programs.

Right. And as Triton moves out of development into production in the near future as well.

Your next question comes from the line of Rich Safran with Buckingham Research.

Hi. Good afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Rich.

Wes, I guess, I just wanted to ask you about your remarks at the beginning of the call on – and your outlook recently for defense spending. I'm sure you're aware several of your peers are talking about FY 2016 spending coming in maybe above the spending caps. Some talked about like some type of another Murray-Ryan deal or something, some such. If we did assume that spending did come in above the caps, just based on what you get, do you think this is going to impact the short cycle under your business or long cycle business? Do you get any sense of where the government priorities will be if there is incremental spending above the caps? Wesley G. Bush - Chairman, President & Chief Executive Officer: Yes, Rich. I appreciate the question. Let me first address the if we assume part. I want to be very careful about that because we have – as I mentioned earlier, we have a long way to go from here to there in terms of getting a real budget outcome that is above the BCA levels. I have optimism in that we are hearing more of the – what I think is the right kind of discussion about the need to relieve the BCA caps quite frankly, both defense and non-defense, to make sure we are not under-investing in our country either from a security perspective, a social perspective or a long-term economic development perspective. But we've got to get there. And I want to be careful about sounding too optimistic about that given the amount of time we still have in front of us to sort this out. But your question had an assumption behind it. If we assume that we end up slightly above the caps. I do think it will help the short-cycle business, as you mentioned, and that there is a fair amount of pent-up need for the capabilities that the shorter cycle businesses provide. And as you know, they took a harder hit in the downturn of spending. And consequently – historically anyway, they tend to more quickly show some recovery. But this is an interesting period of time, as well. The sequester and these BCA caps that we've been operating under have also impacted the nation's ability to actually go and do what we've been needing to do for a long time which is to fix the aging force structure that we have. We are at a point in time where our Air Force is the oldest it's ever been in terms of the age of the aircraft that are in the Air Force. And you can make similar comments for the Navy and for the Army as well. So, there is also a very large pent-up demand for actually buying new things, new capability, whether it's aircraft or ships or whatever it is, because we have been squeezing every ounce we can get out of these old systems. And so, that, I think, is also weighs heavily in the minds of those who are setting spending priorities in the Pentagon that we've got to fix this problem too. And I think it just reinforces the need for Congress to get on with it to address this unnaturally low position relative to a percentage of GDP that we're in in our discretionary spending in our country. So, I actually think getting relief can help both the short cycle and the longer cycle business.

Your next question comes from the line of Robert Stallard with Royal Bank of Canada.

Thanks so much. Good afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Rob.

Hey, Wes. I don't know how much you can answer on this regarding LRS, but there has been some suggestions that whoever wins this, there could be some industry consolidation that occurs subsequently. What's your view on that? Wesley G. Bush - Chairman, President & Chief Executive Officer: Well, I wouldn't even begin to speculate on things like consolidation or how other parties might react to particular outcomes. I would only say with respect to LRS, clearly it's an important program for our country. And consequently, all of those in our industry with the capability to support it are stepping forward to put on the table our very best. We feel good about our heritage in that regard. The B-2 program provides a great capacity within our organization to have a great currency of knowledge and understanding about what's really needed here. And we're doing that. We're working hard to provide the Air Force our very best offering on this. And we'll see with the outcome what it means for how different parties think about it. But I would also caution, LRS is – from our perspective, it's a really great program, it would be a wonderful opportunity. But it would just be one more part of a very diversified portfolio that we have in our corporation. And that, actually, is something I like very much about our portfolio; the breadth of capability that we have and the breadth of our programs. No single program is out there driving us in a direction. I think that our biggest today is 5% or 6%. So, I think that's also a healthy place for us to be for the long term. So, we would eagerly embrace the opportunity to go and execute on LRS for our nation should we be awarded that contract, but I would be careful about making prognostications that that alone has a reshaping impact on the industry.

Your next question comes from the line of Hunter Keay with Wolfe Research.

Hi, everybody. Thanks for taking the question. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Hunter.

So, you're going to hit your $60 million share repo target by this year as you laid out. And sort of help us think about how we should think about modeling that going forward. You've been taking on about 9% of your shares over the last couple of years – I think this year and last year I should say. And the year before it was 8%. How are you going to manage that going forward? Is it going to be maybe to that percentage of share count level or is it going to be on a percentage of free cash flow? How should we think about modeling that when this particular authorization runs out? Thank you.

Hunter, let me start off on that one. We do plan to finish our 60 million share repurchase that we announced a few years back now. We are looking, market conditions permitting, to finish that out this year. I will say that we have not made a decision on what we're going to do after that. We've got some upcoming board meetings and that will be something that we discuss with the board on what the future capital deployment looks like. But I will say that we've been repurchasers of our stock since 2003. Since that year we've repurchased I think about 48%, 47% to 48% of our outstanding shares. Can we continue to return capital to our shareholders at the same rate that we have been this quarter and last year? Probably not sustainable over the long term but you can think of us as a company that does return excess cash to shareholders. Wesley G. Bush - Chairman, President & Chief Executive Officer: Yeah. I'll just add a perspective as well. When we think about this, we do take the long-term view of the company. And we take a look at our ability to generate cash and how we best deploy that cash. And we take a very positive view of that. We see ourselves as an enterprise that should be able to generate healthy cash flows as we look into the future. And to Ken's point, if you look at our history, we have been a very proactive returner, if you will, of cash to our shareholders, both in the forms of share repurchase and dividends. So, I think you should think about us in terms of our history. We are a company that tends to continue to act in the way that we have been acting. And I think that's probably the best way of thinking about our future here. And we'll have to figure out the exact rate, as Ken pointed out, as we go forward. But if I turn the clock back to 2013, that was sort of an interesting opportunity for our company. We saw a place in the market where we could go and access the debt market and take advantage of that for our shareholders. And that's what we've been doing. So, that type of thinking on how we look at our overall capital structure and our use of cash proceeds, I think characterizes the nature of the decision-making that we have at the company.

Your next question comes from the line of Doug Harned with Sanford Bernstein. Doug Stuart Harned - Sanford C. Bernstein & Co. LLC: Good afternoon. On Aerospace, you said that the margins were down 80 basis points, and that was due to the less favorable performance. Could you talk about, is this a single-quarter issue or is there a mix change at all here? What's driving your margins and how do you see those playing out over the course of the year?

Doug, I would say that as we look at our performance in the first quarter of 2015 at AS, it was what I would characterize as strong performance for the AS sector, simply stacked up against a quarter in 2014 that was particularly strong. And we continue to think that our margin rate targets for the year at AS, the segment margin rate in the high 11%s continues to be appropriate. I think this is a good solid start to the year at 12.3% – I'm sorry – 12.6% in this quarter at AS. So, we're off to a solid start. As you compare it to 2014, it doesn't compare as favorably as we started off the year, really, really strong last year.

Your next question comes from the line of Carter Copeland with Barclays.

Hey. Good afternoon, Wes, and welcome, Ken.

Thank you.

I will stick to the one-question rule, but I want to have a part A and a part B, and it's with respect to the programmatic commentary you had in the release. And your comments on space and the double-digit growth there, I wonder if you might give us some color with respect to that double-digit rate restricted versus unrestricted, what was – were they both up? And restricted was just up more than the average or were they directionally different? And then secondly, in ES, I wondered if you might give us some color on if there were any specific programs that the combat avionics declines were related to? Thank you.

Carter, just to clarify, at Aerospace, the double-digit increase was at unmanned systems and the largest driver in that, as we mentioned, was NATO and Triton. But the space business, again, it's a healthy business. It's growing in the single-digit range in the quarter, largely driven by restricted. I believe that as we look at the space business, that clearly was the driver for the quarter. In terms of ES, I wouldn't want to get into specifics on a product line basis, but the lower volume at ES is in combat avionics, and I probably wouldn't want to dig any deeper than that.

Your next question comes from the line of Noah Poponak from Goldman Sachs. Noah Poponak - Goldman Sachs & Co.: Hi. Good afternoon, everyone. Wesley G. Bush - Chairman, President & Chief Executive Officer: How are you doing Noah? Stephen C. Movius - Treasurer & Vice President-Investor Relations: Hey, Noah. Noah Poponak - Goldman Sachs & Co.: Doing well. How are you, Wes? Wesley G. Bush - Chairman, President & Chief Executive Officer: Good. Noah Poponak - Goldman Sachs & Co.: Clarification on the share count guidance, the 60 million is net of share creep, correct? And is that off of 241 million that you ended in the first quarter of 2013 with? I think the release back then said 235 million. I guess another way of (33:15) fourth quarter of 2015?

Yeah. No. I would say that the 60 million share is a target repurchase number. As far as creep, I think we try to manage that pretty carefully. But the 60 million does not reflect offsetting creep, but we certainly take a look at that and manage that carefully. Essentially, if you think about it in round numbers, we were around 240 million shares at the time we announced it. We said we were going to reduce it 60 million or we were going to repurchase 60 million of shares, which was about 25% of the then outstanding shares.

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

Thank you very much, Wes. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hey, Howard.

How are you? Wesley G. Bush - Chairman, President & Chief Executive Officer: Good. How are you doing?

Great. The change that you are making seems to be a little bit more of an emphasis on internal development and taking advantage of opportunity. And just as a preface, it seems that if you're managing the business such that there's an incremental to R&D and you're finding offsets, some of that could come about through use of IRAD to pick up might be the difference between a bid and an expected award that you end up receiving. So, I know it's a little bit of a lengthy question, but how do you think about making sure you're tracking this incremental risk? And who do you sort of make sure brings you bad news if, in fact, you do find there is some? Wesley G. Bush - Chairman, President & Chief Executive Officer: Howard, it's a great question, and I very much appreciate you asking it because it is – I think it's indicative of the thinking that we all have to go through as we go through these cyclical processes in our industry. And to the extent that we see meaningful opportunities in front of us – and indeed we do – it is incumbent on us to take the actions to invest, to ensure that we can approach those effectively. We have that responsibility both to our shareholders and to our customers, to make sure that we are making the prudent investments. And we want to be very disciplined in how we make those investments, but the prudent investments to position us well to both capture and, of course, to execute on what we see in front of us. And I'll go back to some of the announcements we made last year and even a little bit earlier with respect to the investments that we've been making in our centers of excellence. We see those as fundamental investments for our long term to really get much of the promised benefit out of the acquisition of the various companies that we did over the years to really consolidate our footprint down, to co-locate our specialists who are working on these different opportunities, and to get the synergy that comes from having them really working these things together, and it takes money to do that. And those are investments that we've been making. With respect to managing the risk on these, we have a multi-faceted approach to doing that. First and foremost, we work hard to create a culture in our company where everyone feels not only the opportunity to put their hand up if they see a risk that we haven't been addressing aggressively. They also feel the responsibility to put their hand up. And so, we have a culture inside the company that is quite transparent in terms of folks at all levels focusing on risk management and also making sure that we are thinking as broadly as we can about both the risk and opportunity side of all of the things that we're taking on. So, in addition to the culture, we also have a very disciplined approach to doing risk management in the enterprise that encompasses management at all levels, making those risk assessments and communicating them forward. And our operating rhythm in the company is essentially based on reviewing both the risk and opportunity framework that we see across each and every one of our businesses. So, it's a baked in part of how we do business and to your question of who do I rely on, I rely on our team, our whole team. It is a core part of the way that we think about running the business, managing the risks. And I would point out because sometimes I am concerned that when I talk so much about risk management people, will hear in there risk aversion. It is not risk aversion. It's risk management. We know that to generate great returns, we've got to take prudent risks but we also know that we have to manage them appropriately. So, it is a key part of how we run our company.

Your next question comes from the line of Cai von Rumohr with Cowen & Company. Cai von Rumohr - Cowen & Co. LLC: Yes. Thank you very much. So, you mentioned that there were four additional workdays in the quarter. Could you give us some numbers in terms of how many workdays you have, each of these four quarters than last year? And in a rough sense, sometimes when you have more working days, you don't necessarily have more shipments. A rough estimate of how much that added year-over-year to your revenues. Thanks.

Thanks for the question, Cai. I would say that in terms of the additional workdays this year over last year's first quarter, we did have four additional workdays. Essentially 66 days versus 62 days. I would point out that we will have 365 days in the year and we'll give up those four workdays on the backend in the fourth quarter. In terms of identifying the amount of sales that came from those four additional workdays, we don't have a system that calculates revenues on a daily basis. I would say that probably had a larger impact on IS and TS as they are more labor-driven, but certainly could have had an impact on AS and ES if certain material receipts came in. But likely higher impacts on the IS and TS business. Again, we don't look at revenues on a daily basis, so I can't give you a precise number.

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

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

I hope you don't mind me asking a two-part question about capital allocation because the first one just – in terms of your decision about whether you continue beyond the 60 million shares, is it dependent on what happens with the outcome of the CR sequester or is it independent? And secondly, I didn't know if you could comment about the cyber business. Just that there's been a couple of transactions like Websense and Fidelis. And just thinking about – is it the type of thing you would have looked at and been interested in but not at those prices? Just anything you can share about that. Wesley G. Bush - Chairman, President & Chief Executive Officer: Yeah. Sam, let me touch on each of these and I'll ask Ken to provide any other commentary that he may have on it. With respect to our future outlook on share repurchases, clearly, budget has an impact on the overall financial state of the company. A difference between the actual budget levels isn't going to necessarily suggest that we turn off all of our ability to return cash to shareholders. It's more a matter of degree. And as I said earlier, we really do look at our approach to share repurchase over a long period of time, and we take a look at our future cash flow projections and see where that puts us and how we think we can best deploy that. With respect to the cyber business, we always are looking at the full set of opportunities. We have, for some time and I see us continuing to do this, been very focused on ensuring that we are first and foremost supporting our U.S. government and, to a lesser extent, some of our international customer governments in cyber. So, that focus of ours that it tends to be on the high end of the cyber capabilities does not lead us down the path typically of looking at some of the properties that have come on to the marketplace that tend to have a little bit more robust component towards the commercial sector. So, I think this is really about portfolio philosophy and where we are focused, and we like our focus on the government side of it. We believe that that is helping us to continue to stay at the forefront of this technology. And as I've said over – actually over the years in this regard, where we find something that appears to have real commercial applicability, our first instinct is to go look to find the right partner, to use whatever capability we have in an approach that has a real channel to market and is operating within a company that's focused on commercial channels to market. We're a company that's focused on serving our government customers both here in the U.S. and around the globe.

Wes I'll just add on the corporate allocation, I think I would simply say we haven't made a decision on what is beyond the 60 million. I certainly wouldn't want to get ahead of the board, but we do expect to be long-term generators of strong cash flows.

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

Good afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: How are you?

Well, good. Good. Wes, you've obviously been very aggressive about taking floor space out, taking head count down during the downturn. Potentially looking forward, as we get to a point where potentially the budgets start to grow again and potentially, with some of these programs coming through to you, how do you think about floor space, head count as we go forward? I know you're spending heavily on CapEx centers of excellence, but just more broadly kind of how are you thinking about that? Thanks. Wesley G. Bush - Chairman, President & Chief Executive Officer: So, David, on the floor space part of it, I would say that what we were able to do over these last few years was to actually not only reduce floor space but drive efficiency. We've taken a very careful look at how we are populating the floor space we've had in the company and have used the current environment as really the opportunity to take a set of actions that, in hindsight, perhaps we should have taken years ago. But we took those actions to get us into a place where we are more efficiently utilizing the floor space that we have today. As we look at new program opportunities, we will have to look at how we increment, where appropriate or, even in many cases, even better utilize the floor space that we have. So, for every one of these new opportunities, we actually have a strategy that goes with the ability to use the floor space we have as well as, oftentimes, nearby or adjacent floor space. But what I think is nice is when we're looking at those strategies today, we're looking at them through the optic of the efficiencies that we're operating with today versus where we were some years ago. On head count, this is, I would say, oftentimes, the most challenging part of any activity that we take on in the company. The head count that – the employees that we hope to find, the new employees that we got to find in this space, are traditionally some of the most talented individuals in our country and now as we're becoming more international, some of those talented folks in each of the countries where we operate. So, we have to have a continued focus on making sure that we are bringing that talent in and retaining that talent. I will note that even though over the last four years or five years now, our total head count is down about 20%, because of the demographics in our company and in our industry, we've actually been hiring and hiring aggressively through this downturn. In fact, last year we hired just about 5,000 people in our company. So, our hiring machine is running and running well. And as we go forward, we're going to want to make sure that we are continuing to focus on bringing in the very best talent and keeping that talent. So, we've been giving a lot of thought to where this takes us over the next few years. But I think more importantly, we actually have systems operating within the company which I have confidence in producing the results we're going to need as we take on some new opportunities.

Your next question comes from George Shapiro with Shapiro Research.

Yeah. My question is in the Q, you talk about unfavorable adjustments that's almost like double what they were last year. Is that one or two specific programs or just spread around or if you could just provide some more color on it?

Hey, George. Thanks for the question. I would say that the unfavorable adjustments in the quarter are spread across a number of programs with no adjustment being significant. If there were a material adjustment in the quarter, we would disclose what that adjustment was and be discussing with you. So, no major issues, just we're continuing to work through the contracting process.

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

Hi. Good afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: Hi, Pete.

Hello.

Hey, Ken, previously you guys gave a FAS forecast for 2016 and 2017. I'm wondering if the decrease in FAS for this year on the contribution, does that apply – can we extrapolate that to 2016 and 2017 as well or is the math not quite that linear?

The FAS expense benefit that we received this year generally would apply, going forward, in 2016 and 2017. But it depends on a number of other factors including our investment performance for this year, including the discount rate at the end of the year. So, I don't know that it would be fair to take that benefit; essentially we had guided $290 million, now, $320 million. So a $30 million benefit this year, for nine months of the year after we made the contribution. I don't know that it would be fair to take that and simply carry it forward given the multiple assumptions that impact the analysis.

Your next question comes from Joe DeNardi with Stifel, Nicolaus. Joe W. DeNardi - Stifel, Nicolaus & Co., Inc.: Hey, thanks. Good afternoon. Wesley G. Bush - Chairman, President & Chief Executive Officer: Good afternoon, Joe. Joe W. DeNardi - Stifel, Nicolaus & Co., Inc.: Wes, I'm wondering if you could just provide us an update on F-35 and kind of where you stand, how performance has been recently. I think you said last quarter that margins were below the corporate average. I mean, what's the trajectory on that program? Is it volume that really is what you need to drive margins higher? Wesley G. Bush - Chairman, President & Chief Executive Officer: So, Joe, yes. F-35 continues to go well. We are delighted to see, finally, that we are beginning to come up the production ramp because, ultimately, at the end of the day, coming up the production ramp is what brings the cost down, makes the aircraft more affordable, and enables all of our partners around the globe to actually acquire the quantity that they need for the F-35 to become the cornerstone of their force structure as they envision it to be. As the production ramps up, it is our expectation that the F-35 margins should have the opportunity to improve over time. To your point, yes, they are typically below our average margins on the program, in part because of the place we've been in now for a number of years, of relatively low rate production, and quite frankly, contracting that matches that lower rate of production. But as we move on into real rate, we would expect that that rate and the approach to contracting it should enable us to have margins that are more traditional in terms of production rate margins.

Your next question is a follow-up from Jason Gursky with Citi.

Hey. It's Jon Raviv, again. Thanks so much for allowing the follow-up. Wesley G. Bush - Chairman, President & Chief Executive Officer: Sure, Jon.

Just a question on CapEx. You ran – you underran the first quarter versus $700 million, I suppose, we generally see things ramp up towards the end of the year. So, if you could confirm that as being the case again this year. And then, just kind of looking out farther, should we see some (50:50) $700 million stick around, what do you think is normalized, is it all depending on what you win or you don't win over the next few months and maybe a couple of years, any further color on CapEx would be much appreciated.

Hi there, Jon. Thanks for the question. If I can just talk about the Q1 number, I will say that if you look at our CapEx timing during the year, we do tend to start off a little bit slower as budgets are released. And I will say that last year, as an example, I believe in the first quarter we spent $60 million in CapEx towards a full year number of $560 million. This year, we started out Q1 at $117 million towards what we think is going to be $700 million. So, I think we're still comfortable with our $700 million target for the year. In terms of beyond 2015, I'll tell you that we don't give guidance beyond that point. We have talked about the fact that it will stay – capital is likely to stay elevated from where it was historically for a few more years.

Your next question comes from the line of Neal Dihora with Morningside (sic) [Morningstar] (52:02).

Hey. Thanks for taking my question. Just a follow-up on that F-35 thought process. I think you guys have given out sort of higher than 11% F-stream long-term Aerospace margins, and I'm just wondering if at what point in the production process of the F-35 would it actually be higher or lower. So, is that 11% inclusive of F-35 production or was it before that timing got sort of laid out there? Thanks. Wesley G. Bush - Chairman, President & Chief Executive Officer: Well, Neal let me just be clear. The 11% is a long-term benchmark that we talk about that is reflective of how we see industry performing over a long cycle in the Aerospace sector, just as we've given benchmarks for our other sectors. Our team is performing above that benchmark and is incentivized to perform above that benchmark. So, you can see in the quarter, for example, we're performing better than the 11%, the 12.6% that we reported in this quarter is an example of that. The point that we've been making on the F-35 and because we have F-35 in each of three of our sectors, Aerospace, Electronics and Information Systems. When we look at that in the aggregate and compare it to our aggregate margin rate, that's where we see that offset. So, it isn't so much a sector by sector view. It is more of an aggregate view that the F-35 program isn't quite yet carrying its weight relative to delivering the margins that we have across the company. So, when will we get there? Hard to call. As I said, we are delighted to see the ramp up in the production as we go forward into LRS 9 and 10, but we really need to get to I think probably the place where we're really more routinely operating at this what we would envision to be full rate production before we are able to see the types of margins that we have historically seen in aircraft production programs. Stephen C. Movius - Treasurer & Vice President-Investor Relations: Kaitlin, I think we'll do one more question.

Your next question is a follow-up from Carter Copeland with Barclays.

Hey. Thanks for the follow-up guys. I'm not sure if you said it and I missed it but I wondered if you could comment on what international growth was in the quarter and then I don't know if you disclosed it but what restricted sales were in the quarter year-over-year. Thank you.

Carter, thanks for the question. I don't believe that we generally discuss restricted sales on a quarter-by-quarter basis. And in terms of international I think what I'd be comfortable saying is that we believe full year sales for international are going to be around 15% of our total sales and we're not discussing the quarter-by-quarter impact of that. But we continue to believe 15% of our total sales that we've guided in the range of – for the year, the $23.4 billion to $23.8 billion is about where we see 2015 international. Stephen C. Movius - Treasurer & Vice President-Investor Relations: All right. This concludes our Q&A. So, Wes, final comments? Wesley G. Bush - Chairman, President & Chief Executive Officer: Look, Steve, I'll just wrap-up by again thanking our team for a very strong start to the year. We continue to drive our focus on performance, ensuring our capabilities are aligned with our customers' needs for the long term and executing our cash deployment strategy. Thanks everyone, for joining the call today and for your continuing interest in our company.

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