Wesley Bush - Chief Executive Officer, President, Member of Corporate Policy Council and Director Paul Gregory - Vice President of Investor Relations James Palmer - Chief Financial Officer, Member of Corporate Policy Council and Corporate Vice President

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets Douglas Harned - Bernstein Research Howard Rubel - Jefferies & Company, Inc. Jonathan Raviv George Shapiro - Citi Joseph Nadol - JP Morgan Chase & Co Samuel Pearlstein - Wells Fargo Securities, LLC Myles Walton - Deutsche Bank AG Troy Lahr - Stifel, Nicolaus & Co., Inc. David Strauss - UBS Investment Bank

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year-End Financial Results Conference Call. My name is Michael, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Paul Gregory, Vice President of Investor Relations. Please proceed.

Thank you, Michael. Welcome and good morning. Today is Northrop Grumman's Fourth Quarter 2010 Conference Call. We provided supplemental information in the form of a PowerPoint presentation that you can access at www.northropgrumman.com. Before we start, please understand that matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor provisions of Federal Security laws. Forward-looking statements involve risks and uncertainties, which are detailed in today's press release and our SEC filings and may cause actual company results to differ materially. During today's call, we'll discuss fourth quarter and full year 2010 results and our guidance for 2011 continuing operations after the anticipated spin-off of Shipbuilding, which pending final board approval we expect to complete this year. In the event of a spin-off, Shipbuilding results will be reported as discontinued operations. And as an independent company, Shipbuilding will have its own capital structure, corporate infrastructure and associated expenses, tax rates and operating practices and policies, all of which could cause their financial outlook and results to be different from any guidance that we would provide for them as an integrated segment of Northrop Grumman. So for these reasons, our 2011 guidance excludes Shipbuilding. During today's call, we will refer to non-GAAP measures which are defined and reconciled in our earnings release and the supporting materials posted on our website. On the call today are our CEO and President, Wes Bush; and our Chief Financial Officer, Jim Palmer. Please go to Slide 3 and at this point, I'd like to turn the call over to Wes.

Thanks, Paul. Good morning, everyone, and thank you for joining us. On our call today, we'll discuss our 2010 highlights and our outlook and priorities for 2011. We're very pleased with fourth quarter and full year results. Operating income and cash flow were particularly strong and demonstrated substantial performance improvement. We continue to build a track record of strong financial performance while addressing our customers' expectations for affordable, high-quality products and services. We generated these outstanding results while undertaking several strategic initiatives. These include the anticipated Shipbuilding spin-off, the Gulf Coast consolidation, debt restructuring to reduce future interest expense and extend maturities and ongoing streamlining activities across our company, including the efforts related to our corporate office relocation to the Washington D.C. area. We also restructured our incentive compensation plans to drive behaviors that are consistent with our focus on performance and supportive of our customers' affordability and efficiency initiatives. Our fourth quarter earnings per share from continuing operations increased 7% to $1.27, despite a $231 million charge for our debt tender offer. For the year, earnings per share from continuing operations increased 39% to $6.77. Our emphasis on performance improvement is reflected in strong operating results from all our sectors demonstrated by a 90 basis point improvement in segment operating margin rate, lower pension expense in taxes and the favorable impact of our share repurchase program. For both the quarter and the year, higher segment operating income and higher segment operating margin rate drove EPS growth. We view these metrics as key measures of our operational performance, and we showed substantial improvement in the quarter and the year. Cash from operations and free cash flow were outstanding for the quarter and the year. Results for both measures exceeded the upper end of our prior guidance. Before discretionary pension contributions, net of taxes, 2010 cash from operations totaled $3.1 billion and free cash flow totaled $2.3 billion. For the year, our conversion of net earnings to free cash flow before the after-tax effect of discretionary pension contributions was 111%. Our strong cash flow, along with the proceeds of the tax sale, allowed us to return a substantial amount of cash to shareholders through share repurchases and dividends. In 2010, we repurchased 19.7 million shares for approximately $1.2 billion. At year-end, approximately $1.8 billion remained on our share repurchase authorization. We also raised our quarterly dividend by 9.3% last May, our seventh consecutive annual increase, and paid shareholders $545 million in dividends in 2010. At year-end, total backlog was more than $64 billion. Fourth quarter new awards totaled $9.2 billion. And for the year, new awards totaled $30 billion. Aerospace Systems ended the year with a total backlog of $21 billion and Shipbuilding backlog at the end of 2010 was $17 billion. Both of these platform businesses ended the year with several large awards pending. Our shorter cycle businesses, Electronic Systems, Information Systems and Technical Services have stabled to improve backlogs versus year-end 2009. Electronic Systems begins 2011 with a total backlog of more than $10 billion. Information Systems backlog grew by 20% in 2010 to $10.6 billion and continues to be very well positioned to address high-priority missions in C4ISR, cyber security and large complex federal IT systems. And Technical Services begins the year with a backlog of more than $5 billion. These three business also have substantial revenue opportunity under ID/IQ awards which are not reflected in total backlog. Turning to operational highlights in the fourth quarter, in Aerospace, we continue to see strong demand for our manned aircraft and unmanned systems. The F/A-18 continues to have an excellent long-term production opportunities including the multiyear contract the Congress recently approved, the additional production Secretary Gates [Secretary Robert Gates] outlined last month and potential international sales. The Global Hawk program continues to perform very well and achieved its critical milestone for IOT&E [initial operational test and evaluation] completion, and we expect a full rate production decision this spring. The first Block 40 recently completed envelope expansion flight-testing and is undergoing integration of the first development MP-RTIP [Multi-Platform Radar Technology Insertion Program] sensor for ground and flight-testing. This radar, developed by our Electronic Systems team, demonstrated unprecedented capability in recent test-bed evaluations, meeting or exceeding customer requirements. I would also note that several FMS [Flight Management System] customers are interested in Global Hawk, which could yield savings for the U.S. Air Force and Navy programs by reducing recurring production and support costs. We continue to focus on driving affordability on the air vehicle and sensor cost on Global Hawk. Also in Aerospace, the Long Endurance Multi-Intelligence Vehicle recently completed its critical design review for the first of three planned airships. LEMV has three major milestones in the next 10 months including Hull Inflation in the spring, first flight this summer and long endurance flight final acceptance just before year's end. LEMV is scheduled to participate in an army joint military utility assessment in an operational environment in early 2012. And I also wanted to note that the Navy's X-47B, our UCAS-D aircraft, successfully completed its first flight at Edwards Air Force Base last Friday. This is a critical step in the program and moves us closer to meeting the demonstration objectives of a tail-less, fighter-sized unmanned aircraft to safely take off from and land on the deck of a U.S. Navy aircraft carrier. Electronic Systems was awarded a $486 million firm-fixed-price modification to an ID/IQ contract for the procurement of litening pods and related equipment. ES also delivered to the Navy our number 2,000 production Viper laser which provides the jamming energy for a LAIRCM [Large Aircraft Infrared Countermeasures] system. Also during the quarter, Information Systems won a role on the CDC's [Centers for Disease Control and Prevention] $5 billion ID/IQ contract to provide information management and technology services. IS also won a role on the new Social Security Administration Information Systems support contract. This is a $2.8 billion, seven-year ID/IQ contract to provide information technology solutions to the Social Security Administration. At Shipbuilding, performance continues to improve, both revenue and margin performance during the quarter and the year were solid and consistent with the guidance we provided when we announced the Gulf Coast consolidation. Two weeks ago, DDG 110, the William P. Lawrence, successfully completed super trials and is on track for delivery this quarter. The eighth submarine of the Virginia class, the California, was christened at Newport News. And Shipbuilding received a $480 million fixed-price incentive contract from the U.S. Coast Guard for construction of a fourth National Security Cutter. While the final decision remains subject to board approval, we took several important steps toward completing the anticipated spin-off of Shipbuilding and an amendment to Form-10, scheduled to be filed this week, includes audited, stand-alone Shipbuilding financials for 2010. In Technical Services, we're focused on driving performance by improving the profile of this business portfolio. Our 2009 logistics awards made a significant contribution toward an improved business mix. Our strategy for this sector calls for a greater focus on the integrated logistics and modernization market while deemphasizing lower margin-based sustainment work. As a result, early in 2011, we made a strategic decision to reduce our participation in the Nevada Test Site joint venture. This will impact our 2011 top line by nearly $600 million. But, as we've said in the past, we're not focused on scale as a major value driver for the company. And this decision reflects that perspective. Now I'd like to discuss our 2011 outlook and priorities. We continue to position our businesses to create value in a challenging-budget environment. This means actively shaping our portfolio to better align with the needs of our customers and continually addressing and improving our cost structure, operational execution and productivity. Our highest priorities are building on the performance improvements we delivered in 2010 while continuing to strengthen our culture of performance across our entire organization. These objectives drive our strategy, our decision and our compensation plans. We are proactively responding to budget challenges by streamlining our businesses, reshaping our portfolio and reducing our footprint and cost. A key element of our performance culture has been aligning our cost structure with our customers' affordability and efficiency objectives. Now with respect to our customers' budgets, it's likely that we may operate under a continuing resolution for FY 2011 until at least March 4. The administration is expected to share more details of this proposed FY 2012 budget next week, which would be the first step in a long and dynamic process. Based on the budget information Secretary Gates provided last month, it appears that in the aggregate, Northrop Grumman programs will be well supported. This reflects our alignment with critical areas of national security investment such as unmanned systems, cyber security, C4ISR and logistics. In addition, we are well positioned for future long-range strike opportunities and uniquely positioned as a major subcontractor on both the F/A-18 and the F-35 Joint Strike Fighter. While we believe we are well aligned with our customers' priorities, clearly we need to be prepared for a continued pressure on the DoD investment accounts as the government searches for ways to reduce deficits. Creating shareholder value in this environment means that we must continue to be absolutely focused on our key priorities, building on our performance improvements, effectively deploying our cash and optimizing our portfolio for the future. Our 2011 guidance reflects these priorities. For 2011, excluding Shipbuilding, we expect stable revenue, sustained, solid performance in segment operating margin, improved total operating margin rates due to the effective management of our pension plan assets and liabilities and continued strong cash generation. So now, I'll turn the call over to Jim for a more detailed discussion of results and guidance. Jim?

Thanks, Wes, and good morning, ladies and gentlemen. My comments this morning are going to focus on our 2010 results and the sector trends that underline our 2011 guidance. But before I begin, I'd like to echo Wes' comments regarding last year's performance. From my view, 2010 was a year of very strong performance, a year in which we challenge our team to significantly step up performance, and they did. Not only did we deliver operating margins, but we converted that income into substantial cash flow as well. And we also worked a number of strategic initiatives that will be important in shaping our company for the future. Looking ahead, we expect a relatively stable top line in 2011 with both risks and opportunities depending on defense budget outcomes. We are focused on sustaining our substantial performance improvements while continuing to generate robust cash. Slide 4 summarizes our 2011 guidance which excludes Shipbuilding due to its anticipated spin-off. For 2011, we expect sales from the four sectors of approximately $27.5 billion. To put this into perspective, in 2010, if you exclude Shipbuilding sales, sales would have been about $28 billion. Our guidance assumes that the current continuing resolution has resolved and reflects our reduced participation in the Nevada Test Site joint venture which will reduce sales by nearly $600 million. And finally, it also contemplates exiting some small business lines that aren't meeting our return expectations. We expect sales growth in other areas will partially offset the impact of these strategic decisions. Our four businesses are expected to generate a mid-10% segment operating margin rate, and we expect a total operating margin rate of approximately 11%. Earnings from continuing operations are expected to range between $6.40 and $6.60 per share. We expect cash from continuing operations of $2.3 billion to $2.7 billion before discretionary pension contributions, and free cash flow from continuing operations of $1.7 billion to $2 billion before those discretionary pension contributions. Like 2010, we expect that 2011 cash flow will be weighted towards the second half of the year. Now I'm going to move to Slide 5 which provides more detail on the sectors. Aerospace Systems had a tremendous year in 2010 with a 5% sales increase, a 17% increase in operating income and 120 basis point expansion in margin rate to 11.5%. For 2011, we expect relatively stable Aerospace revenues. We anticipate continued strong demand for our manned, unmanned and restricted program. Strength in these areas is likely to be offset by lower volume for missiles and space programs principally due to the NPOESS [National Polar-orbiting Operational Environmental Satellite System] restructuring. We expect NPOESS to transition to the new Defense Weather Satellite System, reducing 2011 revenues by about $250 million. At year-end, AS backlog was reduced by $1.1 billion for this transition. We expect AS to generate solid margin rate of approximately 11% in 2011. On a year-over-year basis, Electronic Systems had comparable sales in 2010 and increased full year operating income by approximately 6%. Margin rate for 2010 expanded 80 basis points to 13.4% and looking ahead, we expect ES to have relatively stable top line in 2011. Revenue will have a slower start in the first half of the year due to the fewer deliveries of VIS, our vehicular intercommunication systems, delays in international programs and the anticipated completion of the post-automation program. We expect ES to continue to generate a very healthy operating margin rate of approximately 13%. Information Systems also generated strong operating income for the year despite slightly lower sales. As we discussed on previous calls, sales trends in IS reflect the results of our more disciplined approach to new business pursuits. Operating income and margin rate for 2010 reflect an improving quality of new business awards, a better business mix and improved performance on existing programs. 2010 operating income increased 21% and IS had a margin rate of 9%, expanded from the prior year by 170 basis points. For 2011, we expect low single-digit revenue growth with a margin rate of approximately 9%. Moving on to Technical Services. 2010 sales rose 16%. Operating income increased 28% and margin rate expanded 60 basis points to 6.4%. 2010 results for Technical Services reflect the positive impact of our major logistic program wins in 2009, which have contributed to sales growth and it improved business mix. As Wes said in his comments, we are proactively managing our portfolio of businesses. An example of that strategy is our decision to modify our role and participation in the joint venture managing the Nevada Test Site program. Northrop Grumman will no longer have operational control of the joint venture, and we've reduced our ownership stake as well. From an accounting perspective, that means beginning in 2011, we will no longer consolidate the joint venture and its revenues which approached to about $600 million in 2010. Nevada Test Site operating income reflecting our lower ownership percent will continue to be reflected in TS' operating margin. Because of this change, as well as the phase-out of some of the business lines that don't meet our return expectations, we expect sales of approximately $2.5 billion for TS in 2011 with a margin rate improving to approximately 8% from the 6.4% in 2010. So based on all of these sector trends, we expect a total segment operating margin rate in the mid-10% range in 2011 and a total operating margin rate of approximately 11%. Expansion of total OEM includes strong operating performance, a substantial improvement in our net FAS/CAS pension adjustment to approximately $355 million. These positive trends will be partially offset by expenses affected by the Shipbuilding spin-off and the relocation of our corporate office. On Slide 6, I'd like to walk you through how I think about our 2011 earnings per share guidance without Shipbuilding versus our 2010 earnings per share. Beginning with 2010 EPS from continuing operations of $6.77, we exclude Shipbuilding's estimated 2010 EPS contribution of approximately $0.50, which is represented by their 2010 segment operating income of $325 million, adjusted for their net FAS/CAS pension and OPEB expenses, external interest expense and transaction-related expenses, all of it tax-adjusted basis to yield that contribution of about $0.50. The next two adjustments are for the 2010 unusual one-time items related to the $296 million tax benefit in the second quarter and the $231 million debt tender charge in the fourth quarter. After these adjustments, we have underlined 2010 adjusted earnings per share of $5.78. And since our 2011 guidance is for continuing operations, we believe that this is the best starting point to understand 2011 trends and expectations. The major drivers of the improvement in 2011 earnings per share from continuing operations are the improvement in the net FAS/CAS pension adjustment and lower interest expense. These positives are partially offset by slightly higher income tax rate, assumption of about 34% and other items such as corporate relocation expenses and spin-off related expenses. And as I think you would expect, we are working to minimize those costs and their impact as we go forward. We also expect that they will be partially offset by share repurchases and opportunities for operating improvement as we go through the year. That brings us to an overall range of $6.40 to $6.60 per share. And I should add that this guidance reflects a modest assumption for share repurchases throughout the year. The net FAS/CAS pension income of $355 million or $0.77 per share from continuing operations reflects last year's strong investment performance, about 12.5% and a 25 basis point reduction in our discount rate of 5.75% from 6% the prior year and other minor changes to our actuarial assumptions. At year-end, the funded status of our plans was 92% and our mandatory funding contributions or requirements for 2011 is about $60 million. And at this point, we have plans to make discretionary pension contributions of about $500 million in the first half of 2011. So with the positive trends in our operations, the net pension expense improvement, strong cash generation and continued optimization of our portfolio, we remain focused on generating shareholder value. So I think with that introduction, we're ready to turn it over for Q&A.

Thanks, Jim. And Michael, I think we're ready to go to the Q&A portion of the call.

[Operator Instructions] And your first question comes from the line of Troy Lahr of Stifel, Nicolaus. Troy Lahr - Stifel, Nicolaus & Co., Inc.: I'm just wondering if you can talk a little bit about the businesses and the business lines that you're exiting out of. You mentioned that there were some small businesses. Was that all at Technical Services? And Wes, can you maybe just mention how you think about the portfolio and additional reshaping in the 2011 or is the portfolio getting close to where you want it to be?

With respect to the discussion we had on Technical Services, our primary decision there in terms of scale obviously was the decision around the joint venture at the Nevada Test Site. But I will tell you that we've gone through a pretty comprehensive process in Technical Services to look at how we achieve a better business mix with a focus that I would say is more strongly directed towards the modernization and the upgrades part of the Logistics business with a reduced focus on the lower margin sort of base sustainment-type of work. So the Nevada Test Site was the biggest decision, we've made some other smaller decisions in that mix. But it is reflective, I would say, of our thought process that we're using across the company. We've talked a lot about the way we've been thinking about our overall portfolio mix in Information Systems and in particular on the civil side. And I think you saw us over the last year, couple of years actually, make a variety of decisions consistent with the same perspective that we've been applying to TS. Where we really want to focus on the higher quality parts of the business, the places where we have meaningful differentiating capability and where we can generate real value through our participation in those business. Value for both our shareholders and for our customers and for our employees, of course, as well. So I think you should see it more as a trend line of thinking that we've been talking about and the actions that we've already been taking. And going forward, that's a good model for the way we're going to continue to think about our portfolio and the company. We're going to be actively engaged in assessing where we're generating value and where we should perhaps exit or where value might best be generated in the hands of others. And that's a model that I think is serving us well. Troy Lahr - Stifel, Nicolaus & Co., Inc.: You're actively engaged, is that kind of the services businesses or also the products, I mean everything's on the table or is it mostly service-oriented businesses?

With respect to what we were looking at in Technical Services? Troy Lahr - Stifel, Nicolaus & Co., Inc.: No, kind of going forward, you said you're actively engaged in kind of looking. Is that, just at the service businesses or you're actively kind of looking at the portfolios in Aerospace and Electronics also?

We have a continuous process in the company to look at all the elements of the portfolio.

Your next question comes from the line of Doug Harned of Sanford Bernstein. Douglas Harned - Bernstein Research: On ships, you had some very good margin performance in Q4. And can you talk about what drove those margins? How you would contrast the Newport News and Gulf Coast in this? And is this something that is -- are we getting to a point where there is a sustainably higher margin going forward in ships than we've been seeing?

Doug, the way I would characterize it would be to say that there's always performance adjustments in every quarter. We tried to look at all -- we have a handful as you know of major contracts in Shipbuilding. It allows you to look at them on a regular basis to see whether or not you need to make adjustments. There is every quarter adjustments, upwards or downwards, none of them are individually significant enough to require disclosure. So I would characterize it more as the continuous process of looking at our EACs. I've been public about this. I tend not to look at Shipbuilding margins on a quarter basis. I tend to look at the trends over a longer period of time to see whether or not they are making progress. And as we said in our comments that essentially their performance for the year was better than what we thought they would be after we made the decision and the announcement around the Avondale or the consolidation of our Gulf Coast yard. So they continue to make progress. And as we said, a ways to go, but the positive progress is encouraging. And Mike and his team are really focused on making sure they understand the business, the EACs, the cost, and working to improve their operations. Douglas Harned - Bernstein Research: And then as you look forward in this year, can you comment on the timing of when you maybe looking at this happening? And how are you thinking about running the business in the interim, if there are any changes? And then I add on to that, when you look at -- can you describe the Navy views on this and potential issues, if there's environmental questions? How are you looking at this whole spin-off as it fits with the customer and with how you're operating Northrop Grumman in this interim period?

Doug, it's Wes, let me touch on that. You had several questions I think embedded in there, the first related to timing. So let me just be very clear. Any final decision regarding the separation of Shipbuilding is something that will go through a board process, so it's subject to final board approval. We had said, and I think it was in July so a couple of quarters ago, that it would take several quarters to get through the process. We are on that track. We're working our way through all of the various things that are involved in executing a spin-off. I would say we're making good progress. This week, as I said in my comments, we do expect to file our latest amendment to the Form 10 registration statement. And this one will include pro forma, audited financial data on the back for 2010. So there were just a series of these things you kind of have to work your way through to execute on a spinout and I feel like we're on a very positive track in that regard. I think you had a question in there about the Navy and some of the particular aspects of the structure of the spinout. I would say that we and the Navy share a very common fundamental objective as we're looking at the potential spinout of Shipbuilding. And that is to make certain that we have a healthy company that has the resources it needs, and I would say both the people and the financial resources that it needs so that it can continue to serve its customers very well, and I would just simply say that we've been actively engaged with the Navy in addressing that objective. It's a common shared objective, as I said. Until we get to the point of executing a spinout, Shipbuilding is part of Northrop Grumman. And we're managing it that way and we'd expect to continue on that path. So I'm not sure if I caught all your questions. Douglas Harned - Bernstein Research: The one other thing I was just curious about which I think relates to your comment on the healthiness of the entity but that is environmental issues with the Avondale exit.

I wouldn't get into the details of any particular aspect of all of the components of what we're looking at. I think we've been pretty robust in going through those in the Form 10 that we've been putting forward. I would just say that in each case, I think we've got a good rational approach to managing our way through all of those individual components.

Your next question comes from the line of David Strauss of UBS. David Strauss - UBS Investment Bank: Wes, could you talk a little bit about what your guidance incorporates with regard to the fiscal '11 budget outcome? Obviously, it's in tremendous flux right now, potential for a full year continued resolution or something different? Can you just give us a sense for what your guidance reflects?

I would just say very simply, our guidance does not contemplate that we're going to have a full year CR. If there were an extended sort of year-long CR, it's just about impossible to predict what would be involved in terms of the decisions that the department may need to make on individual programs. So that's not contemplated in our guidance. We are certainly hopeful that the process is able to get its arms around moving past a CR environment for the defense, but can't obviously predict that outcome. So I appreciate you asking the question because I think we need to provide that clarity that our guidance does not contemplate the full year CR scenario. David Strauss - UBS Investment Bank: As a follow-up, could you give some perspective on your international business? I know most of it resides in ES, but maybe how large it is today and how did it perform overall in 2010 and the outlook for international? How much do you think it could grow in 2011?

Yes, I would categorize it sort of at the top level. And you're right, today, that most of it is in ES. But as we look forward, we see some nice opportunities in both AS and in ES. In AS, just to give you some examples, I would point out the NATO ATS program and more broadly Global Hawk international opportunities that I mentioned in my comments. The E-2 Hawkeye, I think is going to have some nice international opportunities, and Fire Scout, another good example. And then we participate in a substantial way on both F-18 and F-35. So as we look forward, AS has some great opportunities. And ES will continue as well from things like LAIRCM to the whole suite of different radar activities that have been a part of our international business. We expect that that will continue to be a set of opportunities for us going forward. But I would put a little bit of a caveat on that, in that I think we all saw sort of a little bit of a slow down late last year in the pace of some of the international activities. Europe, in particular, obviously had a bit of a slowdown with some of the issues they're dealing with on defense spending when we think about the broader shape of the international marketplace. And obviously we will continue to participate and pursue opportunities in Europe. But I would say our best international opportunities in terms of having an impact on a growth rate are probably going to be more in Asia and some select countries in the Middle East. And so that's where we'll be focusing our efforts. I wouldn't go so far as to give you a prediction on a particular growth rate in international. That's one thing that we've not been doing. We've not been setting some arbitrary target for a growth rate in international. I don't think that's the right way to manage that business when we're driving for value creation not just top line. David Strauss - UBS Investment Bank: Jim, could you maybe talk about working capital in 2011. It looks like there might be a slight drag? And then any kind of initial thoughts on what FAS/CAS could look like in 2012?

Let me do the second one first. 2012 FAS/CAS, we got to obviously qualify that with a bunch of assumptions. But assuming our 8.5% long-term rate of return, no change in discount rates and then all of that kinds of things, what I would look for in terms of FAS/CAS would be about a $50 million increase in FAS cost in 2012, about $100 million increase in CAS in 2012. And probably about a $75 million increase in funding in 2012 as well. The first part of the question, David, was? David Strauss - UBS Investment Bank: Working capital in 2011?

If you look at our guidance on cash flow and just go to the midrange of the guidance, it essentially is neutral working capital. So on either end, there's growth in working capital or a reduction in working capital to get to essentially the two ranges of the cash flow guidance.

Your next question comes from the line of Joe Nadol of JPMorgan. Joseph Nadol - JP Morgan Chase & Co: My question is just around the sales in the fourth quarter and then the outlook. It looks like you came up a little bit light in a couple of the segments and three of the segments and overall for the company in the fourth quarter relative to what you guys had been indicating you were looking for in October. I'm wondering if you could just provide some color there? Was that just timing items or was the CR -- does that have an impact? And as you look to your guidance for 2011 for sales, you're looking for the strongest growth in IS. And that's been sort of an area of arguably particular weakness industry-wide. And I'm wondering what gives you the confidence that you're going to grow more there than any of your other three segments?

Joe, I'll take the first part now and have Wes take the second part. I would say sales came in about $100 million less than what I thought it was going to. And our target really impact exactly where it came from. Continuing resolution did have a smaller impact, but it did have an impact. The calendar days also is somewhat of an impact. So I would say little bit lighter than we thought but clearly the continuing resolution had some impact. And then it's hard again to exactly quantify but there were some international awards that we were expecting that just didn't happen in that year and they shifted to the right. So those would be the principal items I would point to.

Let me touch on your question about Information Systems, Joe, because I think that's certainly a good question when you look at the overall environment. What I would point to, though, in reflecting back on the question that Troy asked a little bit earlier, we've been through a process of looking very carefully at where we're going to be competing, how we're going to be competing. And so we've actually put some downward pressure on the IS top line over the last couple of years with our decisions to remove ourselves from the state and local IT outsourcing business in terms of new contract awards and in terms of better focusing in the federal agencies part of our business. And I would also say in both the defense and intelligence sides of IS, we've been perhaps more selective than we had in the past on where we're going to pursue some things. So we've actually put some downward pressure over the last couple of years. What it has caused us to do is we have gone out and pursued new contracts. It has caused us to, I would say, not only be more thoughtful but be more focused and reshape the priorities for our investments in those areas. And over the course of the last year, we actually did pretty well in capturing a number of new activities in IS that aligned with these different, if you will, a little bit different objectives. And based on the successes we had last year and the pipeline that we see this year that aligns on those objectives, we believe we have a very good opportunity to see that what I would call modest growth, not substantial growth, modest growth in our IS portfolio this year. So it's very much aligned with what we've been doing and in some respects, the product of what we've been doing to kind of reposition that business. There are a number of elements of that marketplace that do continue to see some substantial priority in their funding streams. Cyber is a good example of that. The C-4 and the ISR elements of that marketplace also continue to get quite a bit of priority. So I think the projection we have is a reasonable projection. Again, it's a fairly modest growth rate, but it is the most compelling part of the growth rate looking across all four of the businesses that we're giving guidance on. Joseph Nadol - JP Morgan Chase & Co: You have been shutting down or reducing your exposure to some of your lower margin businesses and this Nevada Test Site is the most recent example. It sounds like you have a couple of other things in the works. Could you speak to any metrics in terms of management efficiency or G&A savings, that sort of thing? How much streamlining are you doing of management within the company as you eliminate these perhaps management intensive and very, very low margin sources of revenue?

Joe, you got the right model in the way you're describing the question. We not only look at the individual program. But we look at what it takes to support, from an infrastructure perspective, that line of business as we are kind of relooking at our overall business mix. So for competitive reasons and other reasons, I wouldn't go into details on the exact set of metrics that we look at and rates and the rest of that. But that is the framework that we're using that you can look at an individual program and perhaps convince yourself that you're getting a good return on investment but you have to look at it in total when we're thinking about what it costs us from a management infrastructure standpoint and more broadly the overall corporate infrastructure standpoint to operate some of these businesses. And as we are very focused on the affordability, activities across the company, we're doing a lot of work to streamline in every single one of our sectors. And streamlining generally means taking out costs that converts into both people and program costs. And then of course on top of what we've been doing with the sectors, we are, as an integral part of our transition to Washington, working hard to reduce our overall corporate costs. We're using that as an opportunity to streamline our corporate office and drive efficiency in that process. So this is something that we're doing at corporate level, the sector level in each of the business units and then of course at each of the program levels, and the decisions that we're taking about here with respect to Technical Services are a reflection of that decision making process.

Your next question comes from the line of Sam Pearlstein of Wells Fargo. Samuel Pearlstein - Wells Fargo Securities, LLC: Can you talk a little bit about some of the changes that Secretary Gates has outlined with regards to F-35 given that there's a shift from I guess production into development. I'm wondering do you still benefit from any additional dollars into SDD? And then when you think about your content on F-18, do you net out a little bit more, a little bit worse relative to what your expectations would have been over the next few years?

On your question, Sam, on F-35, as I look at Secretary Gates' announcements and expected impact on us, basically, I see our F-35 revenues over the next couple of years relatively flat, maybe up $100 million over between now and 2013. The second question was on F-18 and expectations. I think for F-18, clearly Secretary Gates' announcement additional production quantities is a positive for us. We hadn't anticipated prior to the announcement. So when I look at all the announcements F-18, F-35, they tend to offset each other. As you pointed out, probably a positive margin impact in the near term because of the production nature of the F-18 versus F-35.

And Sam, this is Wes, to the extent that your question focused around SDD, obviously we are a substantial partner on the program. And absolutely committed to working with Lockheed and the other partners to make sure we have a very successful SDD program. So we are actively engaged. Samuel Pearlstein - Wells Fargo Securities, LLC: I'd stepped off for a just a quick second, so I'm not sure if this was addressed, but, Wes, you've mentioned in several times trying to focus on businesses with adequate returns and yet when I look at 2011 versus 2010, it looks like it's relatively flattish and flattish margin absent the, I guess, the equity income change in TS. And just when you think about the business over the next several years, what is the return profile that Northrop Grumman x ship should be able to generate?

Let me just give you sort of a top-level answer to that and Jim did take us through each of the elements in his remarks earlier. But just from a broad perspective, we made some very good progress last year. As I said in my opening remarks, that the segment operating margin rate level, we moved up by 90 basis points over the course of last year. And I was really pleased to see that progress. We're early in the year obviously for 2011. Our guidance reflects that. But as I also said in my remarks, we're going to continue to drive to build on our success last year in improving our margin rates. So it's still a work in progress. Our guidance reflects kind of a view of where we are, but no letting up on our factor to improve our performance.

Your next question comes from the line of Howard Rubel of Jefferies. Howard Rubel - Jefferies & Company, Inc.: Wes, one of the things that will affect the successful spin-off of the shipyard, one would think, would be a number of contract closes or completions. And you still have not been able to get the DDG 51 contract done. Could you elaborate not only on that but also discuss how you're dealing with, frankly, the pressures on the top line? I mean if you use one of the example, Global Hawk has had some pressures from the Air Force to lower cost. So could you be a little bit more direct in terms of how you're dealing with these two particular items?

Let me just first touch on the Shipbuilding part of it. And I think we mentioned in our last call, and it continues to be the case, that as we're negotiating for these very large ship programs and the reference to DDG that you made also applies to the LPD contracts that are underway. We've been very open, transparent with the Navy about our whole thinking on the Shipbuilding spin-off assessment that we're doing, and where that might take us. As both Paul and Jim mentioned in their opening remarks, when you go through a process like that, you're going to kind of recreate the cost structure of a new business that's going to be stood up. And that cost structure and the whole operating structure of the business gets reflected in the way the contract has to be negotiated. So I would say that the negotiations have been complicated by the spin process and that has been driving the timeline here a little bit. But we've been actively engaged with the Navy on this. I haven't detected any indication that there's any desire to go a different way, that we simply need to work our way through that process with them. So those things kind of go together. The Navy has been proactive in addressing the long lead issues for those contracts to protect their schedules. So I think that's been wise on the part of the Navy to make sure that we're able to maintain the outcomes for the ultimate users of those systems. So I think we're making some progress there. On the question on Global Hawk, we are working very directly and very closely with the Air Force to address the affordability challenge. And we see this is a very healthy thing for Global Hawk. In fact, I give the Air Force and Ash Carter a lot of credit for putting a spotlight on affordability here because they've identified the program as a very important program for the department. And they want to make sure that, broadly, both the industry and the efforts that are undertaking within the department that all add up together to go to overall affordability, that all of those things are getting addressed in an integrated way to make the system continue to be so successful for the war fighter. So I see this as a good thing if we can talk about it as pressures on the top line, but I think it's healthy in terms of continuing to make the system even more affordable in an environment where there is so much intensity around the budget deficits. So there are pressures on the top line, no doubt about it. I mean we're seeing this kind of across the board because our customers are feeling those pressures. And it's what you'd expect in this environment. And we need to be responsive to that. We need to be out in front of it. And the work that we're doing across our company on cost structure, I think it's helping us to be out in front of it. But we need to continue to be good partners with our customers to make sure that together we can get the right capabilities to our war fighters in a way that the nation can afford. Howard Rubel - Jefferies & Company, Inc.: Just as a follow-up, there was a $27 million gain it looked like in the quarter. And I know that, my guess is it probably had to do with the Nevada Test Site and there was also a fairly large charge at corporate? Jim, might you just address those two items?

Howard, I wouldn't say a large charge at corporate. But, the Unallowable cost did go up at corporate due to a number of factors such as there was $10 million contribution that we made, for example. Normally at the end of the year, we take a look at all of our costs, make sure that we properly identified the unallowables and so there's some true-up process that goes through there. The other big factor in the increase in the corporate unallowable costs was an increase in deferred state taxes. We mentioned that in the press release. We obviously made a large contribution in the fourth quarter to the pension plan results in a reduction of state taxes payable, allowable state taxes payable. But you have to provide deferred taxes on that contribution. And so in the future, at some point that those will become allowable and will have an offsetting impact then. Essentially, what you saw occurring in the corporate cost in the fourth quarter was the deferred state taxes and the other true-ups of unallowable costs, as well as, as I mentioned, the additional contribution that we made to our charitable trust.

And the other income, I think was the first part of your question, that was several factors that contributed to that not [indiscernible]

And in other income there's, as you know, a myriad of things that run through there. For example, the returns on our non-qualified assets or assets used to fund our non-qualified plans versus the deferred compensation expense. It was probably positive this year, an additional $5 million. There's some foreign currency items. It's just a hodgepodge of different things, Howard.

Your next question comes from the line of Myles Walton of Deutsche Bank. Myles Walton - Deutsche Bank AG: Wes, you talked about the movement incentives this year. And that was probably an enabler to some of the bigger muscle moves. But now that the portfolio is kind of more or less closer to where you want it, would you anticipate moving some of those metrics back towards growth versus efficiency or the metrics you have and the incentives you have essentially the same incentives you'd use for the current portfolio?

We're going through a process of finalizing those incentives with our board. But I would tell you that the perspective remains largely the same as last year. We believe there is the best opportunity to create value for our shareholders, our customers and our employees, by focusing on the performance improvements and continuing to work on the portfolio side of these things and of course being intelligent and thoughtful about the way that we are deploying the cash that we're generating. And I think our incentive structure is largely aligned with that. Each year, we look at making some tweaks to it just to continue to best align with the environment and the opportunities that we see. But I like what we've got, I think it's working well for us. So it would seem that we probably want to see more continuity in that than change. Myles Walton - Deutsche Bank AG: And I guess just a cleanup question from the guidance relative to where the street was looking, if you would include ships in the 2011 guidance, would it have been roughly $0.75 incremental to the range? I know the slide you have says $0.50 for 2010 but that would have included the charge. Just kind of benchmark if there's anything else I'm missing there?

I think the best way to think about it is $0.50 for 2010. We're not providing 2011 guidance for Shipbuilding. And I think your expectation, our expectation was that Shipbuilding was on a slow improvement trend and should have been some improvement in '11. Leave it at that. Myles Walton - Deutsche Bank AG: And just to clarify, there's no assumption of any proceeds from a potential spin and any transaction dividend that could come from that included in the guidance, is that right?

We've not made any decisions with respect to any of those things. And so it would not be appropriate for us to include that in our guidance.

Your next question comes from the line of George Shapiro of Access 342. George Shapiro - Citi: I just wanted to follow up on that because some of the stuff that's been coming out from the rating agencies have you with a $1.5 billion of debt or 3.5x debt to EBITDA level at ships. I just wanted to kind of get your comment on the rationale for that and maybe a little further color on it.

We're on the early stages, George, of all of this process on standing up Shipbuilding as a standalone entity. Obviously part of that process is to talk to the rating agencies about a range of scenarios. And I think what you're seeing is some of that input there. And as Wes said, we're in the process of making hay right now, I don't think we should comment on exactly where we think that's going to end up because we're not there yet. George Shapiro - Citi: Wes, in the Nevada Test Site program, several years ago when you won that contract, the thinking was it would make somewhat better margins than it turned out to do which obviously has lead you to take the action you have. So kind of what did you learn from the thinking process that you had when you bid on this program versus where you are now?

I would say, George, at the time that we bid it, there was a concern about our scale in the Technical Services arena. And the thought that having that volume in Technical Services would be helpful to the overall capacity of that organization to grow. If you look at the numbers over the years, we've done a great job of growing TS. And as we've gone through that growth cycle, it's been important that we not just rest on assumptions we made in the past but that we continue to relook at how we're actually creating value. And as we've had more and more success on the logistics part of the business, the modernization programs, the sustainment programs, and the business has really grown, I would say substantially, with respect to those program opportunities. It's been important that we continue to reshape the way that that mix looks and make the decisions that -- we walked through a little bit earlier with Joe on what is really driving value. And do we have elements of that mix that are consuming more infrastructure costs than they're really providing in terms of the payback and returns. So it's, I would say, a continuous process, not so much that the thinking at the time was necessarily an error. We were in a different place. And as we have matured that business, we have matured our thinking. And it's a reflection of that evolution of where we see the future opportunities to create value in Technical Services. I really give a lot of credit to our team in Technical Services over the course of this past six months in particular in taking a very aggressive proactive approach to thinking about the value creation in that business. It's always hard on any business when you say maybe we actually get better by getting a little bit smaller on the top line. That's not a natural thing for most businesses to think their way through. And the teams across the company have been very, I would say, forward leaning and thinking about that value creation opportunity. So this isn't just something that's coming from the corporate office with an edict of we got to get out of that business or we got to get out of some other business. It is the product of the team that is really aligning I think quite well around the notion of making sure we're doing the right thing for the long term for our company and our shareholders and customers. And they're bringing forward a lot of these types of concepts to help us do a better job in creating value. So I very much appreciate what our team is doing there. George Shapiro - Citi: Wes, so if you try to -- you've obviously looked at all your revenues at this point. Could you provide some rough number as to how many dollars might be out there that you think at this point are kind of under-earning or in the same boat of not really fitting with what you want to do at this point?

George, I want more out of all of them.

We are really -- essentially used up our hour. We do have some management time constraints today. We have more people in the queue. We'll try to go in for a couple of more minutes but we may not be able to get all the way through the queue due to some of these time constraints we have. So let's continue, Michael, with a couple of more questions.

Your next question comes from the line of Peter Skibitski of SunTrust. Peter Skibitski - SunTrust Robinson Humphrey Capital Markets: Just wondering, when you talked about your 2011 top line guidance, you mentioned some risks and opportunities. Could you shoot out for us a few of the opportunities there that outperformed?

One of the opportunities is the F-18 with Secretary Gates' recent announcement and it's not clear to me, at least at this point, exactly whether that is a 2011 impact or 2012. That would be an example. And Wes mentioned that some of the opportunities that we see, that we're pursuing on an international basis, my experience frankly is those things take a long time to bring home. But once when you do bring them home, they start immediately. But predicting exactly when they're going to come home is very difficult. Peter Skibitski - SunTrust Robinson Humphrey Capital Markets: Can you just tell us what your net interest assumption is for 2011?

$220 million.

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

It's actually John Raviv here for Jason. Just a question, I think on the third quarter call you mentioned OpEx costs stuck at Northrop parent following the spin. I think you talked about something in the range of $0.20 EPS over 12 to 18 months. I just wonder if you could have an update to that number?

Nothing's really change, John, in my perspective there.

I think with that we're going to conclude the call. Wes, you want to say before we...

Again, just thanks, everyone, for joining us today. We appreciate your continuing interest in our company. As I said in my prepared remarks, we are very focused on continuing to drive improvements in our performance to make sure that we are actively and effectively managing our portfolio and capabilities. And of course continue to be focused on both our generation of cash and our deployment of cash to create value. Thanks again, everyone.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.