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

Robert Stallard - RBC Capital Markets, LLC Cai Von Rumohr - Cowen and Company, LLC Howard Rubel - Jefferies & Company, Inc. Heidi Wood - Morgan Stanley Douglas Harned - Sanford C. Bernstein & Co., Inc. Samuel Pearlstein - Wells Fargo Securities, LLC Jason Gursky - Citigroup Inc Myles Walton - Deutsche Bank AG

Good day, ladies and gentlemen, and welcome to the Northrop Grumman's Second Quarter Earnings Conference Call. My name is Crystal, and I will be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Paul Gregory, Vice President of Investor Relations. Please proceed, sir.

Great. Thank you very much, Crystal. Good morning, everyone and welcome to Northrop Grumman's Second Quarter of 2011 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 Securities laws. Forward-looking statements involve risks and uncertainties which are detailed in today's press release and our SEC filings and include a new risk factor related to the resolution of the issues regarding the U.S. government's debt ceiling. These risk factors may cause actual company results to differ materially. During today's call, we'll discuss second quarter 2011 results and our financial guidance for 2011 for continuing operations. On the call today are our CEO, Wes Bush, and our CFO, Jim Palmer. With that, let’s go to Slide 3. And at this time, I'd like to turn the call over to Wes.

All right. Thanks, Paul. Good morning, everyone. Thanks for joining us. Our second quarter results demonstrate that our strategy of driving shareholder value through performance, portfolio optimization and effective cash deployment continues to generate EPS growth. Despite a challenging top line environment, we had exceptional margin rate performance for the quarter. After adjusting last year's second quarter results for the $0.98 per share tax benefit, our earnings per share from continuing operations increased 24% to $1.81 from $1.46. The primary EPS growth drivers were continued performance improvement in our businesses, higher pension income and a lower share count. Our businesses generated a 12% segment operating margin rate. Total operating margin rate increased to 12.8%, primarily reflecting performance improvements and higher pension income. In May, we executed a $1 billion accelerated share repurchase, which immediately reduced our outstanding share count by 15.6 million shares. And along with the dividend increase we also announced in May, demonstrates our continued commitment to creating shareholder value through returning cash to our shareholders. We now expect our 2011 EPS from continuing operations to range between $6.75 and $6.90. The increase in 2011 EPS guidance contemplates our strong year-to-date results and performance improvement for both segment operating margin and total operating margin rates. The new range represents double-digit, year-over-year EPS growth after adjusting for one-time items in 2010 such as the tax benefit and the impact of our debt tender. Cash performance for the quarter and year-to-date continues to support our guidance. Through 6 months, cash from continuing operations, before discretionary pension contributions, totaled $490 million, 21% higher than last year. And as we've stated on previous calls, we expect cash generation to be weighted toward the second half of the year which has been our historical pattern. Turning to sales, 3 primary factors impacted the quarter. Budget uncertainties impacting our customers, the announced force reductions in Iraq and Afghanistan and our own portfolio shaping decisions that were anticipated in our guidance. So let me briefly discuss all 3 of these. First, overall budget pressures and the decline in government and defense outlays. The 6-month continuing resolution, as well as continued uncertainties surrounding the debt ceiling and future defense budgets, caused our customers to move more slowly and spend more conservatively. We did not see the recovery in spending that one might have expected with the end of the continuing resolution and the passage of the fiscal year 2011 budget. In this environment, new awards are moving to the right, and it's also taking a bit longer to get continuing business under contract. In addition to budget pressures, we are beginning to see the impact of the announced troop drawdowns in Iraq and Afghanistan primarily in Electronic Systems for ID/IQ contracts, such as the vehicular intercommunication systems that are used by the Army. And finally, sales do reflect our strategic portfolio shaping, which includes the previously announced reduction in our Nevada Test Site joint venture participation, which we announced earlier this year, as well as the sale of our San Diego County outsourcing contract back in May. While these 2 actions reduced second quarter sales by approximately $160 million, they also supported this quarter's performance improvement and segment margin rate expansion. So based on year-to-date results and our outlook for the rest of the year, we now expect 2011 sales of approximately $27 billion. Looking forward, we continue to believe that we are well aligned with our customers investment priorities in Unmanned Systems, Cybersecurity, C4ISR and Logistics. We believe that these areas will continue to be well supported in future budgets as they are critical to the most pressing national security missions. We expect that once the current state of budget disarray is resolved and future projects are clarified, our customer spending behavior should begin to normalize. However, the environment continues to be very dynamic and it may take some time before there is more clarity in DoD strategy and its program level planning. So now turning to our operations, last Friday we were awarded a $795-million E2D contract that includes LRIP 3, a plus up on LRIP 2 and longleaf funding for LRIP 4. The contract also provides an option for LRIP 4 production, which we expect will be awarded sometime next year. This is a significant milestone for Northrop and for the Navy as it increases the number of aircraft purchased across multiple production lots. And it results in overall per aircraft cost reductions through economies of scale. Based on this contract, we expect to recover sales on this program in the second half of the year. We also have several large pending awards, including F-35 and the latest multiyear for the F/A-18. Now I'd like to spend a few minutes discussing some of our unmanned programs. Starting with Global Hawk, the program is making very good progress. We've used the Block 30 IOT NE results as a basis for incorporating a number of improvements. Of the 9 primary issues identified in that report, 5 have already been corrected and the program is on track to correct the remainder over the next several months. The Department of Defense has recertified the program and deemed it critical to national defense. The DoD also recommended reducing the number of Block 30 attrition aircraft and using those savings to fund support areas such as sustainment, spares and ground station and communications, to enable the extensive operational use of these systems. In addition, the Global Hawk affordability initiative that Northrop Grumman is driving with the Air Force is making progress in ensuring these systems continue to bring value to our customer. To quote some recent remarks by a senior Air Force official, "Global Hawks are getting the job done today for the war-fighter in the field and will continue to be a key contributor in our intelligence, surveillance and reconnaissance capabilities," end quote. We believe the program is postured for success and should be ready for a full rate production decision. Fire Scout, also, has made tremendous operational advancements in recent months despite some early reports that questioned its ability to support the goal of 300 flight hours per month in Afghanistan. Well, we're happy to report that in June 2011, during its very first full month of operational flying, Fire Scout provided 307 hours of support to ground troops and is on track to meet or exceed 300 hours for July. We also continue to make solid progress on key development programs such as Navy UCAS, LEMV and BAMS and Aerospace Systems is intensely focused on the successful pursuit of new business opportunities, including UCLASS and the long-range strike program. Aerospace Systems is performing well. And despite its sales for the first 6 months of 2011 being down about 4% from last year, we see a stronger second half for the sector and believe its sales will end the year at about the same level as last year. Jim will cover the sector outlooks in a bit more detail in his comments. During the quarter, Electronic Systems' Directional Infrared Countermeasure Systems, or DIRCM, achieved more than 1 million operational hours in service while demonstrating operational availability of more than 99%. ES continues to be a technology leader in non-kinetic products and systems such as those required for advanced electronic warfare. We expect this to be an increasingly important national security capability. Information Systems sales have been impacted by the prevailing budget uncertainty. But they continue to have a robust set of new business opportunities, including the GMB development and sustainment program, the CAINS program and numerous cyber-related opportunities. During this quarter, we also sold the San Diego County IT contract. This decision is consistent with our strategy of exiting lines of business that do not meet our standards of performance. And I might add, this decision was made in collaboration with our customer. Technical Services had a solid quarter. Their results included higher logistics and modernization sales, consistent with our strategy for the sector. Also during the quarter, Technical Services received 1 of 3 awards for the $300 million Headquarters U.S. Air Force Civil Engineer Support Agency ID/IQ contract, and it will compete for cash quarters to support DoD Civil Engineering missions worldwide. In closing, I'd like to reiterate that we continue to position the company for an increasingly competitive and challenging environment in which deficit reduction is becoming a higher priority for our national leadership. Our challenge is to continue to anticipate the needs of our customers, provide affordable, innovative solutions and aggressively address our cost structure, operational execution and our productivity. As we demonstrated this quarter, we can create value in an environment of constrained top line growth by focusing on our key priorities: performance driven by strong execution, optimizing our portfolio and effectively deploying our cash. So now I'd like to turn the call over to Jim for a more detailed discussion of results and our guidance. Jim?

Thanks, Wes, and good morning, ladies and gentlemen. I will begin my comments by providing a little bit more detail on our second quarter results. As I look at the quarter, the highlights were segment operating margin rate expansion, which largely offset the impact of lower sales, higher total operating income, as well as margin rate and a 24% increase in underlying earnings per share. We are experiencing some headwind on the top line, and as I analyze the results for the quarter across our businesses, it looks to me about half of the variance last year includes things that we anticipated in our guidance for this year. The Nevada joint venture participation reduction and NPOESS restructuring are examples of those types of items. The remainder of the variance I would attribute to second quarter budget pressure issues which largely impacted Electronic Systems and Information Systems. These budget pressure issues include the lingering impact of the 6-month continuing resolution, as well as announced troop drawdowns, delayed awards and the overall budget uncertainty, as well as customer conservatism that Wes talked about in his comments. Moving to guidance of Slide 4, we now anticipate about a 2% reduction or $500 million in 2011 sales due to the budget pressures and troop drawdown. Clearly, we are operating in a highly dynamic environment, and our full year sales will reflect the evolving budget process in the second half of the year. But I want to go into a little bit more detail on a sector by sector basis. So I'll start with Aerospace Systems, whose second quarter sales reflect the delayed awards for the F-35 and the E-2D programs, which lowered sales by about $150 million, as well as the NPOESS restructuring which represents in an additional $50 million impact in the second quarter. Before these 3 items, AS sales were within 2% of last year. In terms of our outlook for the year, we view the impacts from F-35 and E-2D as timing issues. The finalization of these contracts and a higher volume on several other programs should allow us to recover sales during the third and fourth quarters. So, as Wes said, we continue to expect relatively stable sales for Aerospace Systems in 2011. Aerospace second quarter operating income was roughly comparable to last year as improved program performance across several programs drove the margin rate in Aerospace to 12.8%, compared to 11.8% last year. Margin rate expansion largely offset the impact of lower sales in the quarter. And based on the strength of year-to-date operating income, we now expect Aerospace operating margin rate to be in the mid-11% range for the year. Electronic Systems saw sales decline by nearly 10% due to lower deliveries under ID/IQ contracts for the Aerial com and the Vehicular Intercommunications Systems, or VIS, as driven by the announced drawdown of troops in Iraq and Afghanistan. Lower deliveries produced to programs reduced sales by about $130 million in the quarter. So as I look at sales for ES for the year, we now expect them to range between $7.3 billion and $7.4 billion for the year. Despite the lower sales volume however, operating income increased 8% and margin rate expanded to 15.9% outstanding margin rate. The quarter's improvement reflects some positive adjustments on programs nearing completion in the land of self-protection systems and targeting system areas, as well as improved performance in intelligence, surveillance and reconnaissance programs. A number of these performance improvements are non-recurring, so this quarter's strong margin rate is likely not sustainable. However, based on the first half results, we are raising the expected margin rate for ES to the mid- to high-13% range from approximately 13% previously. In Information Systems, sales declined by 4% for the quarter, primarily due to lower volume on several programs in the Defense Systems part of the business. Operating margin for the quarter was 9.3% compared with 9.7% last year. You might remember that last year included an $18 million benefit related to a subcontractor risk retirement on the New York City Wireless program. So if we exclude that benefit from last year's operating margin rate, the rate would have been 8.8%. This quarter's results included a small pickup from the sale of San Diego County IT Outsourcing contract, but even excluding that pickup, the underlying IS margin rate improved on a quarter-over-quarter basis. Similarly to ES, budget pressures are impacting the IS top line and now, we expect sales of about $8.2 billion for the year. Additionally, a part of this decline is also due to the sale of the San Diego IT contract that we talked about previously. We continue to expect an operating margin rate of about 9% for the IS business for the year. Moving on to Technical Services, second quarter sales reflect our reduced participation in the Nevada National Security site joint venture, which represented sales about $150 million in the last year's second quarter. The change in the joint venture participation more than offset the higher sales for the logistics and services part of the business. Their operating income was comparable to last year and operating margin rate increased 130 basis points principally due to the change in the joint venture participation. So we continue to expect sales of approximately $2.5 billion for TS for the year which largely, again, reflects that reduced participation in the joint venture and as well, contemplates the phaseout of some business lines that aren't meeting their return expectations. And we continue to expect the margin rate MTS to improve to about 8% for the year. So based on the strength of year-to-date results, we are increasing our estimate per segment operating margin rate to about approximately 11% for the mid-10% range and we now expect a total operating margin rate in the mid-11% range for the year. The increase in total operating margin rate contemplates the higher segment operating margin rate, an increase in the net pension adjustments from about $355 million to about $400 million of income. And an assumption of about $200 million for an unallocated corporate expense and potential risk items. The increase in our expected pension income is due to the finalization of our plan demographic analysis that we complete based on the population at the beginning of the year. Turning to cash. Through 6 months, cash provided by continuing operations before discretionary pension contributions improved by 21%. As expected, cash from continuing operations was low for the quarter and we continue to expect cash to be heavily weighted towards the second half of the year as has been our historical practice. As we mentioned last quarter, we did have some substantial cash outflows this quarter, including a $500 million discretionary pension contribution, as well as tax payments totaling about another $500 million. I think I should also, Paul, provide a quick update on our share repurchase program. As Wes mentioned in his comments, we executed a $1 billion ASR program in early May, which immediately reduced our shares outstanding by 15.6 million shares. I would note until the ASR is completed under the terms of the contract, we're restricted from purchasing shares in the open market. As Wes mentioned, we increased our guidance for 2011 EPS from continuing operations to $6.75 to $6.90. The guidance reflects an additional $0.10 for higher pension income, another $0.07 for a lower assumed diluted share counts and netting that pension and share count improvements against the impact of lower sales, that $500 million reduction in guidance for the year results in about a $0.03 to $0.04 improvement from our previous guidance. So the balance of the increase was driven by operating performance improvement in the sectors, or about $0.20 of the improvement, is due to that operating performance. Finally, I should note that our guidance assumes that the national debt ceiling issue is successfully resolved in a timely manner. So in conclusion, second quarter results demonstrate that we remain focused on generating shareholder value through performance, portfolio optimization and effective cash deployment. That concludes my formal remarks, but before we begin, Q&A, I just wanted to mention that today is Paul Gregory's last conference call before he assumes a new role at Northrop Grumman here at the end of the month. I know many of you have enjoyed working with Paul and I want to personally acknowledge his strong contributions to our IR activities over the last 2-plus years. Steve Movius who is currently the CFO of our Information Systems sector, will take over Paul's duties as the VP of IR here at the end of the month. So obviously I wish both of you, Paul and Steve, the very best in your new roles. So at this point, I think we are ready for some Q&A.

Okay. Thank you, Jim, for those kind comments. And with that, Crystal, I think we're ready to move on to questions and answers.

[Operator Instructions] And our first question comes from the line of Myles Walton with Deutsche Bank. Myles Walton - Deutsche Bank AG: The ES margins, Jim, can you size the ESC adjustments in there? Was it about $40 million?

I think that's a little high. The way I look at it, it's about -- I'll call it in a range of $30 million, $31 million. And without that margin rates are probably about mid $14 million for the quarter. Myles Walton - Deutsche Bank AG: Okay. And the back half of the year's assumed rates of 13%, just more on mix. Anything else?

Yes, I'd say so. Myles Walton - Deutsche Bank AG: Okay. And then, Wes, I guess a top little question or I have a little question for you. The incentives that you put in place for the last couple of years have really been focused on the margin of efficiency, the cash conversion and all those things are essentially playing out. The one thing that's been lacking, for purpose probably, has been any type of incentives toward sales growth. I'm curious, sales are coming in light and we're explaining that given the CR and down -- the down draft in operations. But do you think that you should put a carrot out there for sales growth in the future? And would that help the situation at all, or are we just in the realm of moving with wherever the budget growth is?

Well Myles, I appreciate the question because I think it's important to be able to convey how we think about sales in the company. At the beginning of last year, we stood back and thought a little bit about some of the challenges we had experienced over a number of years and really getting the level of performance out of the company that we needed, specifically around margin rate performance. And some of that went to looking carefully at our portfolio and really understanding what was performing and what was not performing. And in doing so, we needed to make some decisions, and we talked about it last year, we talked about it this year at the beginning of the year, that actually we're going to push ourselves down because we wanted to focus on higher quality sales in the organization. We also wanted to focus on sort of the mechanics of how we were putting those sales through the system in terms of how well we're going to negotiating our contracts and, of course, how well we're executing. So those have been sort of underlying perspectives that have made us, I think, sharpen our pencil a bit on which things we're really going to pursue, and also, really focus on how we're executing and negotiating on those. We have not forgotten the importance of sales in our business. I don't want anyone to think that, that is the case. In fact, our long-term incentives that are permeated throughout the organization, RONA, really does require growth for us to be able to capture those long-term incentive returns. So I would tweak your earlier statement a little bit that our sales incentive is more embedded in our long-term than it is in our annual. But we did that for a purpose because wanted to make sure that as we're capturing sales, they're generating long-term benefits to our company that it's not just to move the needle on a sales line that might eventually come back and bite us. So the focus in the company is on growth. That's important to us and that goes to the way that we've been shaping our portfolio. When I talk about portfolio optimization and our focus on unmanned and cyber and C4ISR and logistics, those are the areas that over the longer term and, as I said, it's going to take a little bit of time for our customers to get all this sorted out. But over the longer term, we see those as the areas where our customers are going to make their priority investments. And we think are going to serve the company well. So there's a little bit of reshaping that's been under way that has, as you pointed out, impacted the top line in a number of respects. But we think it's a little bit of the medicine that we needed to get us in the right place for the long term. I would point out, just back to your question on incentives, that our annual incentive plan does include awards. And so those awards are, of course, the seeds, the germination for the sales that we've gained over time. But as you know, there are good sales and bad sales, and we need to be very, very careful that we're not just given our credit for overruns on cost contracts or sales that really are not generating the level of returns that we need to be generating in our business. So I like incentivizing awards, I think that's the right place for us to be. And I like the sales perspective to be more of a long-term perspective because it forces us to think about the long-term actions that we're undertaking when we go after a certain bid. I don't know Jim, anything you'd like to add on that?

Obviously, since you and I were intimately involved in that process, I totally agree. Yes, I would also just point out that as you all know in our business, most of our sales are coming out of our backlog. Incentivizing sales is really reaping the benefit out of the backlog. Incentives around new business capture is really capturing activities that occur in the current year. That's why we've moved to awards versus sales in the annual plan. Myles Walton - Deutsche Bank AG: That's helpful. I'm more curious and think that the strategy has worked. I'm more curious and if -- if and when the pendulum could swing too far. But I'll stick to one question.

Our next question comes from the line of Howard Rubel with Jefferies. Howard Rubel - Jefferies & Company, Inc.: Paul, I don't know where going to -- it's going to be hard to start all over again, but nice job. Just to go back a little bit in terms of business opportunities, how do you -- Wes, this is a larger question also as opposed to the quarter, I mean, and there's 2 parts to it. One is, how do you convince your customer that he's not in the business of making your life more difficult because you've seen changes in contract terms that are unfortunate across a number of places. And then second is, how -- what sort of other opportunities? Could you be a little more specific in terms of things you think about as the second half unfolds?

Sure. Let me touch that first question first. Our customers' buying behavior has, I think quite frankly, out of necessity in terms of what they're dealing with, then shifting a little bit. A lot more focus on affordability than, perhaps, the value equation, I would say, sometimes. When we're looking at new competition, we're seeing a few more where cost is getting weighted more highly than performance. And so that's something that we are focused on, making sure that our business capture efforts are highly around -- focused around affordability. And quite frankly our continuing program activities are focused on affordability. I mentioned in my earlier remarks the work that we've been doing on Global Hawk on affordability jointly with the Air Force. And I've just been absolutely delighted to see how that's been embraced by both the Air Force and the folks of OSD in terms of working with us on this. They've recognize that it's not just about the contractor coming forward, turning the cost numbers down. It's about how we actually acquire some of these things. And that has been just a tremendous positive working approach to driving affordability in that program. We've really used that as a blueprint and spread it across the company to address just about every major acquisition activity that we have under way to really go back and press on requirements, press on the way that things are getting bought and quite frankly, press on the way we're executing to see if we can't turn those knobs on affordability even further, so that we can help the customer deal with just this intense pressure that they are having to cope with. The other part of the change in buying behavior, if you will, there's been, as you mentioned, the terms and conditions part of it and that one we're just having to take on one-by-one. In just about every case where there's a shift to go from, name it, cost plus to FPI or FP to FFP, we have to have the tough conversations about how you balance that out. Obviously, we can take on risk if we're compensated for it. And that becomes the discussion, and I would say those are sometimes a little bit more difficult discussions than we've had in the past, but that's where it is. And not every case that, does the customer decide that at the end of the day, wants to shift its contract form when faced with the bill for doing that. And so we simply have to be very clear with them early on. I think they have to be clear with us early on about what they're trying to achieve so that we can navigate to a more common place. Your question relating to the outlook in the second half of the year. Let me kind of cut that into a couple of pieces. Both AS, our Aerospace Systems business and Technical Services businesses, we believe, will continue on the track for the annual guidance that we gave at the beginning of the year and Jim went through that in a little bit of detail. And so in AS, in particular, if I focus on that, as you know, we have a very nice portfolio of programs. There were few of those programs that relative to last year, the first half of this year weren't moving quite as quickly, either because of delayed awards or just a slower progress in how the customer was metering us on our activities. We have a pretty good transparency on the profile of that for the second half of the year. And as I mentioned in my remarks and Jim did in his, we've seen net net coming out of the year at AS at about the same as we were last year in total revenue. And that's just the accumulation program by program of what we're doing on production, primarily, in each of those areas. There's a little bit development activity there that makes up some of that difference as well. But it's fairly widely spread across the program base in AS. The other 2 sectors, IS and TS, as Jim indicated in his remarks, in both of those sectors, we have taken our guidance down a little bit for the year, primarily reflecting this slowness that we've seen in the way that the government is procuring things. And IS in particular is a much faster turnaround business so its contracts get rotated on a much more frequent basis, shorter-term contracting activities. And so they have been the most, I would say, impacted by that level of shift in that buying behavior. I don't think we're alone in that. If you look at how others are reporting this quarter in their similar businesses, we're all seeing about the same thing going on. So I don't see any negative differential there. ES is also impacted by that. As you know, ES has a number of ID/IQ vehicles, as well as other vehicles that are shorter duration. So they've been -- experienced that impact and then ES also, has had a little more exposure, particularly, to the Army. And I think if you're familiar, as we've gotten into this announced drawdown, I think the Army has slowed down on buying some of the higher rate items that it had been buying in the past. For example, our vehicular intercommunication systems, and a little bit, we've seen it as well with our Laser Rangefinder business. So those are the factors that drive it for us, but as we look at that profile and think about where we'll come up for the year, we have shifted our guidance a little bit to $27 billion. That's what seems to make sense for us.

Our next question is from the line of Doug Harned with Sanford Bernstein. Douglas Harned - Sanford C. Bernstein & Co., Inc.: I just like to follow on that a little bit more. When you talk about the effect of the continuing resolution and the challenge that you saw on the budget earlier in the year, we seem to be at a point now where the customer, and I would say that in a combined sense, DoD and Congress, in a way, have certain objectives for spending in Defense, yet they're not really getting there. There's a gap because of these budget delays. Is it possible for you to quantify the size of this impact, and if you think that as we roll forward in the year, things get normalized, are we going to see a lot of that flow back, so you'll actually might see a surge in backlogs or revenues? Or is this something that we just may never close? In other words, we'll just muddle along and stay at these lower numbers.

Doug, this is Jim. We have a chart in our posted material that reconciles the change in guidance. And basically 2 items, just call it CR or delays or budget pressures, the bigger item, $300 million; and then drawdowns. Our assumption, frankly, is that as we go into the 2012 budget year, we're going to end up in another CR. And so there is just a slowness or molasses in the system, if you would characterize it that way, because of the real uncertainty of what budgets are going to be. That's just taking longer to get stuff done. It will be helpful once we ultimately get beyond the debt ceiling conversations, get into a 2012 budget, whatever it is, certainty is better than uncertainty. But right where we're seeing this hesitancy to act in some cases because of the need or the potential need, perceived need to maybe save a few dollars for just in case, our budget is less than I'd anticipated. Douglas Harned - Sanford C. Bernstein & Co., Inc.: Well, and this -- I mean, it seems that as you've said have a stronger effect on the shorter cycle businesses, particularly Information Systems. And it struck me when you look at the margins that you've been able to deliver in the first 2 quarters there, which have been quite good, yet your guidance is only for 9% for the year, is that conservatism related to these issues, or do you expect something unit, in the business unit itself to change over time ?

I really don't expect anything to change in the business unit in the next 6 months or so, but I think it's also fair to say that the level of uncertainty that we are faced with, given those 2, what's going to happen with the budget, when are we going to get the debt ceiling issues resolved, all of those uncertainties are clearly greater than what we've dealt with over the last couple of years at this point in time. Well, I don't know if that's conservatism or whatever, but yes. Douglas Harned - Sanford C. Bernstein & Co., Inc.: No. I understand. I mean, that's helpful.

Yes, Doug. It's Wes, let me just add. I do see in our interactions with our investment community, a desire to kind of get obviously, to get to the other side of this thing so that they have a better clarity around what their budgets are going to be and they can kind of get on with things. But until we kind of get to that place, I think we're going to see them continue, out of necessity, to hold back just a little bit to be able to sort through what this is all going to mean. As you know, with the arrival of our new secretary of defense Panetta and with the intersection of this budget challenge, the Pentagon is going through this mini QDR, they're calling it, to try and sort through how they really think about the military strategy and intersect that with their best understanding, as they can, of the budget realities. And I do think that there is some just sort of holdback in the system kind of waiting to see how that all sorts out. And you can hardly blame them. That's a very rational response to the situation. But I do see once we get through this, and I think it's going to take some time, as Jim pointed out, we're probably going to see another continuing resolution this year. I hope it's not as long as last year, but it's likely, given the challenges that everyone is facing up on the Hill, I think it's going to take a little bit of time. So if you detect us being a little bit conservative, it's because we're kind of seeing the dynamics of both the Hill community and the customer community with respect to what they're facing over the near-term. I do believe we're going to get to a point of more clarity around the budget here in the not-too-distant future which will enable the Pentagon to sort through its strategy. And we feel strongly when we come through that, the places where we're focused are going to be the places where priorities are being placed on investment. But if we're talking about the next few quarters here, I think we just need to recognize that this uncertainty can translate into where we are.

Our next question comes from the line of Cai Von Rumohr with Cowen and Company. Cai Von Rumohr - Cowen and Company, LLC: So you're moving your headquarters to the East Coast. Presumably, that will give you some cost savings. Could you tell us how much and could you tell us, in light of this more difficult environment, are you considering more dramatic headcount reductions like Lockheed did and more portfolio shaping moves in response to the current environment? And if so, can you give us any color on kind of how you think about that issue?

I would just say that we are aggressively working the cost equation in our company on every dimension. We obviously are, and I've mentioned this one in some of our prior calls, we're taking our corporate office size down about 25%, just in terms of headcount, just to quantify it a little bit as we're making the move. We are, and we have already made a number of reductions in headcount, primarily indirect headcount, across all of our sectors in the business. And we got out, I think, a little bit in front of that to make sure that we were doing the right things for an affordability equation over the last 2 years. But we're continuing to press on affordability very comprehensively. Some of that goes to our cost structure, in both organizational structure and our embedded cost. Some of that goes to the way we're managing our supply chain. And a lot of that goes to how we construct the offerings that we're putting forward to our customer community. We are a very innovative company and I would say historically, we've used that innovation to discriminate ourselves in terms of capability. We're going to continue to do that and one thing we're not going to do as we're cutting costs, we're not going to take the heart out of our investments for the future. But we are looking to redirect some of that innovation more towards affordability, not just capability. And I think that will help our positioning over time and I think it will help our customers as we bring forward ideas that will help deliver much of this capability for lower cost. So sometimes that's a difficult thing to get your head around because you become accustomed to a certain way of doing business. But comprehensively across the board, in our businesses, we are executing our business that way. I mentioned earlier Global Hawk, I think that's a good model. It's not a perfect model because it's not exactly the same set of issues as we see in other areas, but I think in terms of a model for how to work with the customer to really go after cost, it's a good lesson learned that we are applying broadly in the company. Cai Von Rumohr - Cowen and Company, LLC: And to the second part of the question at portfolio shaping. Is that getting increasing interest on your part?

We've been doing a lot of portfolio shaping. You might remember we divested TASC, you might remember that we spent out Shipbuilding, you might remember we decided to exit the State and Local IT Outsourcing business overtime...

Sold the EOS business ...

And then we sold the EOS business, earlier this year we announced the reshaping of our Technical Services portfolio. So you might can tell we kind of like portfolio shaping. There's a lot that we've been doing, we think it can create a lot of value. And I think any healthy company is always carefully examining its portfolio to make sure that we're really focused on the right things for the future. I'm not going to try and get up in front of it with any predictions on other things we might be doing. I would just point to our behavior over the past couple of years and characterize that as indicative of the way we think about value creation.

Cai, I would add that as we think about portfolio potentials, we tend to look at how well is the business performing, how well is the market performing, and how well are we positioned in the market to help us make decisions about whether or not that piece of the business is something that is really going to fit with our business on a go forward basis.

Our next question comes from the line of Heidi Wood with Morgan Stanley. Heidi Wood - Morgan Stanley: Paul, in addition to congratulations on your new horizons. Wes, congratulations on adding a new title of Chairman of the Board, as well as CEO now. That was nice to see. I'm going to gear my questions away from the domestic environment which you can't influence in and I'd like to -- Wes have you talk about the initiatives of expanding into the Northrop's growth overseas? I happen to see you in a UAE defense article. So it's clearly, you've got focus there. Can you tell us about what you're doing there?

Yes, absolutely. And let me characterize the international environment broadly as well so that there is kind of a good perspective on this. There are a number of areas around the globe, they're cutting back defense spending. And we have to be mindful of that when we think about our strategies and how we're positioning. There are other areas around the globe that not only are investing in defense but are kind of reshaping their priorities. And as we look at some of that reshaping that's going on, we are seeing a move into some of the areas where we do have, I would say, more discriminating capabilities. As I mentioned on some of our prior calls, one of the key factors in this for us is exportability. And I have welcomed those to have others in our industry, really welcomed the work that this administration is doing to stand back and take, I think, a more sensible approach to thinking about how we manage defense exports in our country. That has enabled us and others, I would say in our industry, to start having a little bit more expansive discussions with some of our allied partners around the globe on the potential for exporting some of our more modern capabilities. And I just point Unmanned as an example of that. As we've been thinking about the needs of our partners -- and what's interesting to me about this is if you go over into the field of operation, our partners are using these systems all the time, side-by-side with us. And so recognizing that reality, as we're thinking about export, I think is very important. But if I think about Unmanned for just a moment, we're seeing a growing interest in Global Hawk around the globe. And Fire Scout is another area of substantial interest. And that those areas of interest are both, I would characterize it in the Middle East, and throughout our partners, our allies in Asia, the Pacific rim. So that's an example. And we're continuing to focus our International business to Electronic Systems and IS and a little bit through TS as well. But I would say, perhaps, an interesting change to reflect on is what we're seeing in Aerospace Systems, primarily with Unmanned, but also the Manned systems, the E-2D program and, of course, we're big players on FA-18 and Joint Strike Fighter. So this will be a little bit lumpy around the globe but just because the customers are all different around the globe. Every country has its own set of priorities. But I would say compared to where we were just a few years ago, we're seeing a lot more forward-looking opportunity at Aerospace Systems than we have been seeing. Heidi Wood - Morgan Stanley: Just as a follow up, Wes, can you talk about M&A and your assessment as to whether you're seeing some attractive properties that might get dislodged and available for sale, given the budget outlook?

Well, I would say most of what we've seen came onto the market of late has had an extraordinarily high multiple attached to it. But we do look. We're going to be very disciplined about how we approach this. It's important for us to look, it's important for us be engaged in assessing what's out there in the market so that if there are opportunities to create value, we're going to be addressing those opportunities. But I think you will see us being disciplined.

Our next question comes from the line of Robert Stallard with Royal Bank of Canada. Robert Stallard - RBC Capital Markets, LLC: Jim, I thought I'd ask you on the OCO side of things. You noticed you had a bit of a knock in the quarter from the troop drawdown. I was wondering if you could size what you think your exposure might be to op tempo in military operations as of today? And whether you see any other business lines that could have pressures going forward from here?

In terms of OCO exposure, actually, we're not that large. But Electronic Systems, in addition to OCO, does have some, as we said, sales to the army itself in the regular budgets. We have some exposure there, if you want to characterize it that way. I think what we're seeing is more on the OCO side at this point. But -- and as what we have said in the past, it's relatively nominal probably that drawdown we're seeing in our guidance is much of our-OCO type activities. Robert Stallard - RBC Capital Markets, LLC: So what this done in 2011? We know obviously, the military is still busy in Afghanistan. How much more do you think there is left to go?

Our guidance for the year is that -- the $200 million drawdown.

The next question comes from the line of Jason Gursky with Citi. Jason Gursky - Citigroup Inc: Just 2 quick follow-up questions to things that have been asked earlier. You did go out of the way, this time, to quantify what you're describing as Army or OCO-related things in the Ops tempo. So I think it would be helpful for us all to know if you have the ability to quantify what's remaining if the OCO went to 0 over the next couple of years, what that might mean for you. And then secondly, just on Cai's question with regard to some of the actions that we've seen in other companies. Can you describe, for us, where your headcount sits today relative to where it did 5 years ago? It's gotten a little bit lost in light of the HII spending. It'd be just a good metric for us to all follow to get a sense of how much kind of cost actions might be left at Northrop at this point.

I think we're going to have Paul or Steve get back to you with any of those details.

And we generally don't do a sort of detailed accounting on headcount because it's a little bit -- in many of respects, not as meaningful as we shipped on some programs from what's internal to what external. And so I'd be reluctant to point to headcount as a measure of the action. You have to have to think a little bit more perceptive approach to looking at that. But obviously, our headcount is down. But I would just caution, Jason, as you're looking to what other companies are doing, we could go out tomorrow and announce a big headcount reduction, but that just might mean that we shifted cost someplace else. And so you have to look at the total cost for it for that to be a meaningful discussion.

But to try to put some of this into perspective, we did, 2 years ago combined 4 sectors into 2.

Absolutely.

In the process of doing that we reduced our cost about a couple of hundred million dollars in each of those combined sectors.

Right.

I do agree that headcount is not the right measure. You can simply outsource activities or subcontract the activities. But headcount is down. Jason Gursky - Citigroup Inc: Okay. Maybe a better way then to ask that question is, as you look at it on the pipeline over the next several years, are margin rate sustainable at this point? And what do you have under your control to be able to sustain them?

As I've said a couple of times recently, I believe our long-term margin rate guidance, that we talked about through each of the 4 sectors are sustainable over the long term.

Our next question is from the line of Sam Pearlstein with Wells Fargo. Samuel Pearlstein - Wells Fargo Securities, LLC: Jim, I just wanted to go back on the comment you made about pension. I guess, one is, can you repeat, I guess, why it's running higher than expected and what you're outlook is for this year? And then if you couple how performance looks, year-to-date, plus this $500 million contribution, how are you thinking about FAS/CAS as we go into next year at this point relative to this year?

Okay. So at the beginning of the year, given those headcount reductions that we just talked about, from combining the sector operations, I had a concern that our demographics that went into our initial estimate of FAS/CAS would be light. And so, I essentially hedged what was our pension income for potential demographic changes. We've now have completed our update, the demographics headcount, age of the population, years of service, all of that kind of stuff. And as it turns out, there were some changes in demographics but there were other impacts that offset it. So the estimate for the FAS/CAS pension difference for the year is $400 million. Previously, I had an estimate of $355 million. It is essentially finalized in the demographics. In terms of pension sensitivities, we've talked about these in the past but probably needs -- I do need to update them for the impact of the Shipbuilding spends. So let me just go through those real quick. For every 25 basis points change in the discount rate, either upwards or downwards, that's about a $65 million impact to that FAS/CAS difference on a go-forward basis. Likewise, our investment returns for every hundred basis points difference between our long-term rate of return assumption, which as you guys know is 8.5%. So if we were 7.5% or we were at 9.5% of that 100 basis points, I'd say $35 million impact to net pension costs on a go-forward basis. Frankly at this point, it's way too early to try to call what 2012 was going to be. As you know we don't set the discount rate until December 31. I don't even look at what the discount rate would be today because it's meaningless. I do look at that sensitivity that we've talked about. And Sam, I think those with that sensitivity, you have a perspective on where this could go for next year.

And can I just ask one other question. In terms of the buyback activity that you had and the agreement for May, since some of that actual buyback would occur and move into the third quarter, is there any sort of an assumption we should be using about what the ultimate settlement is in Q3?

It really is dependent upon actual purchases over time compared to the initial purchase price that was established which was an average cost of $64.17 through June. You'll see this in the Q when you get to Q. We're at an average cost of $65.02, as I recall. So at this point in time, if we just bought the rest of the shares at that $65.02, we owe on settlement, we would owe about $20 million or about 286,000 shares of stock. We have the ability, the option to sell in either cash or in stock, and obviously, we'll make those decisions once the program is completed. Probably in the third quarter sometime here.

I think, Crystal, that would wrap up our Q&A as we have used up our hour here. So we'd like to thank everyone for their participation. And, Wes?

Yes. Just again, thanks for joining us on the call today. As we go forward, we're going to continue our strategic focus on making sure that we are driving performance with outstanding execution in our company. As we talked about today, shaping our portfolio continues to be an important part of our strategy, and of course, our capital deployment strategy, returning cash to shareholders, is also critical to our overall approach to driving EPS improvements over time. So thanks, everyone, for your interest in our company. Thanks again for joining us today. Goodbye.

Ladies and gentlemen, that does conclude today's conference. Thank you so much for your participation. You may now disconnect and have a great day.