Steve Movius - Corporate Vice President and Treasurer, VP Investor Relations Wes Bush - Chairman and CEO Kenneth L. Bedingfield - Corporate VP and CFO Kathy J. Warden - President and COO

Sam Pearlstein - Wells Fargo Carter Copeland - Melius Research Seth M. Seifman - J.P. Morgan Securities Robert Stallard - Vertical Research Partners Matthew McConnell - RBC Capital Markets Peter Arment - Robert W. Baird Douglas Harned - Bernstein Cai von Rumohr - Cowen & Company George Shapiro - Shapiro Research Pete Skibitski - Drexel Hamilton

Good day, ladies and gentlemen, and welcome to Northrop Grumman's Fourth Quarter and Year-End 2017 Conference Call. Today's call is being recorded. My name is Dahana and I will be your operator today. At this time, all participants are in listen-only mode. [Operator Instructions] I would now like to turn the call over to your host, Mr. Steve Movius, Treasurer and Vice President, Investor Relations. Mr. Movius, please proceed.

Thanks, Dahana, and welcome to Northrop Grumman's fourth quarter and year-end 2017 conference call. Supplemental information in the form of a PowerPoint presentation is available on our Web-site. Before we start, please understand that matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, which are detailed in today's press release and our SEC filings. These risks and uncertainties may cause actual Company results to differ materially. Matters discussed on today's call may also include non-GAAP financial measures that are reconciled in our earnings release and supplemental PowerPoint presentation. I would also note that as of January 1, we adopted the new revenue recognition and pension accounting standards, and today's earnings release contains pro forma schedules that present comparable prior period information recapped to reflect the adoption of these new standards. On the call today are Wes Bush, our Chairman and CEO; Kathy Warden, our President and Chief Operating Officer; and Ken Bedingfield, our CFO. At this time, I'd like to turn the call over to Wes.

Thanks, Steve. Hello everyone. Thanks for joining us. Before we discuss our 2017 financial results, I'd like to comment on our capital deployment plans in light of the improvements that we expect to net income and cash flows resulting from the Tax Cuts and Jobs Act that was passed in December along with the benefits of our outstanding pension plan performance. Ken is going to cover our detailed guidance a little later in the call, but the bottom line is that these improvements will enable us to take several actions, as intended by the tax legislation, that support our economy and the long-term interest of our shareholders, customers and employees. These actions are all well aligned with our long-standing capital deployment strategy. We saw three important opportunities as we analyzed the implications of these improvements. First, it's important that our employees receive an economic benefit from this legislation and from our Company's performance. We've elected to provide our employees an annual additional contribution to their retirement accounts, an amount each year based on our competitiveness and our overall Company performance. For 2018, the contribution amount can be up to $1,000 per employee if we perform well. All employees, except senior management, participating in our annual incentive plan will be eligible for this new benefit. This approach is well aligned with our performance culture and our performance-based compensation philosophy. Second, we're focused on making capital investments in our Company that will drive our growth over the long term, support affordability for our customers, and of course generate solid returns. Investing in our Company continues to be the highest priority of our capital deployment strategy. These investments benefit our customers through enhancing our ability to serve them and also enhance our business opportunities and enable us to grow and provide more opportunities for our employees. Last year, our capital expenditures were approximately $900 million. We are increasing that investment to approximately $1 billion this year. And third, we have a long-standing policy of paying our shareholders a competitive dividend based on a payout ratio tied to pension-adjusted net income. With the growth in net income and reflecting this policy, we announced this morning an off-cycle dividend increase of 10%. As you know, our normal annual dividend assessment occurs each May and we expect to return to that cycle in May of this year. Let me focus now on our financial results. 2017 was another strong year for our Company and for our shareholders, and I want to express my appreciation to our team for their continuing focus on performance. We delivered solid financial results and our total shareholder return was approximately 34%. We returned more than $1 billion to our shareholders, while continuing our strong level of internal investment. We also took a major step to broaden our portfolio for the future with the pending acquisition of Orbital ATK. We continue to be very positive regarding the benefits to our customer community and all of our stakeholders of bringing our two companies together. As our fourth quarter and full-year financial results demonstrate, our strategy for long-term profitable growth is gaining momentum and generating results. I'm very pleased that our team remains focused on sustaining top performance. All three of our businesses posted strong sales, higher operating income dollars, and robust cash generation. 2017 sales rose 5% and segment operating income increased about 1%, reflecting an increase in percentage of early-phase development work. Our segment operating margin rate was 11.5%, total operating income grew 3%, and our total operating margin rate was 12.8%. 2017 earnings per share were $11.47 and cash from operations totaled $2.6 billion. Before tax reform impacts, net earnings grew 6% and earnings per share increased 9% to $13.28. We had a very strong finish to the year in terms of cash. You'll recall that last quarter we indicated that we would consider pre-funding our pension plans if tax reform was enacted. With the passage of the Tax Cuts and Jobs Act in December and the lowering of the corporate tax rate to 21% starting in 2018, we made a $500 million pre-tax discretionary contribution to our pension plans in late December. 2017 cash from operations before that contribution increased to $2.9 billion, which supported our capital expenditures of approximately $900 million and resulted in 2017 free cash flow before the contribution of more than $2 billion. Our capital deployment strategy has not changed, and calls for investing in our business, managing the balance sheet, and returning cash to our shareholders. Tax reform enhances our ability to generate cash, further supporting this strategy. We continue to strengthen our portfolio through robust R&D, capital spending, and investing in our theme. We're focused on near-term debt reduction and returning cash to shareholders through dividends and share repurchases. With respect to dividends going forward, we continue to target a payout ratio of 30% to 40% of pension-adjusted net earnings. Share repurchases remain an important value creation tool for our Company. We are however continuing to pause our share repurchase program during the Orbital ATK transaction process. Free cash flow in 2018 is expected to grow to $2.0 billion to $2.3 billion, which includes continued robust investment in our business. As I mentioned earlier, we expect 2018 capital expenditures to increase to approximately $1 billion as we expand our workforce, ramp up on large new programs, and pursue new business opportunities. Our 2018 guidance calls for continued top line and earnings growth, supported by strong operating performance from all three businesses. For 2018, we expect sales of approximately $27 billion and diluted earnings per share of $15 to $15.25. Ken will provide more detail on our 2018 guidance. As we establish our guidance for the year, we should remind everyone of the risk to our guidance associated with continuing resolutions and prolonged government shutdowns. As we address critical national security challenges and our military faces readiness issues and rapid advances by our near peers, it's more important than ever that our nation returns to a more timely and productive budget process. Continuing resolutions have damaged our military's readiness and eroded our modernization efforts. Industry stands ready to invest and innovate from next-generation technologies and capabilities but our Department of Defense customer struggle to efficiently plan and execute our national defense investment strategy in the face of perpetual continuing resolutions. In summary, 2017 was another strong year for the Company and for our shareholders, and we feel we are well-positioned to continue creating value for our shareholders, our customers and our employees in 2018 and beyond. As we move forward in 2018, I am delighted to have Kathy Warden as our President and Chief Operating Officer. Our operating businesses report to Kathy, including the new sector that will be established after the pending Orbital ATK transaction closes. Kathy will lead the integration of our two companies. So, now, I'll turn the call over to Kathy for an update on the pending Orbital ATK acquisition as well as some operational highlights. Kathy? Kathy J. Warden: Thanks, Wes, and good afternoon everyone. As we reported last quarter, we currently expect the Orbital ATK transaction to close in the first half of this year. In late November, Orbital ATK shareholders overwhelmingly approved the terms of the transaction. The FTC is reviewing the proposed transaction in the U.S. in consultation with the DoD and we notified the European Commission on January 18 under the simplified procedure notice. As we prepare for integration, we are making good progress in our plans to combine our two outstanding companies after close. We believe that after the transaction has completed, our collective set of market-leading technologies and products, along with very compatible innovation-focused cultures, will enable us to better serve our customers' current and emerging needs. Our companies' common legacies and well-known reputation for innovation have inspired the name for the new fourth sector, Northrop Grumman Innovation Systems. This name reflects the heritage of both Orbital ATK and Northrop Grumman and highlight both companies' essential character, creative workforces, product and process innovations, agile operations, and cutting-edge technologies. Blake Larson, Orbital ATK's Chief Operating Officer, will lead Innovation Systems. In addition, Scott Lehr, Mike Kahn, and Frank Culbertson, will each continue in their existing leadership roles within the Flight, Defense and Space Systems organizations respectively. Maintaining this leadership team will ensure operational continuity and facilitate the integration of our two companies. We believe our combination represents a powerful opportunity to better serve customers through accelerated innovations applied to new product development and enhancement of our current offerings. Turning to our sector highlights for the year, each of our sectors captured business and achieved program milestones that position us for the long term. At Aerospace Systems, the Air Force awarded us a three-year $328 million contract to execute the technology maturation and risk reduction phase of a Ground Based Strategic Deterrent, our nation's next-generation ICBM system. We look forward to competing for the final downselect on this important program. On the Manned Aircraft side, AS delivered 74 F-35 units, an increase of 13 units over 2016, and we are well-positioned to ramp up further in 2018. On the E-2D program, we are in full production and completed the first flight of Japan's E-2D Advanced Hawkeye, and we are in discussions with the Navy regarding the next multi-year E-2D contract. In Autonomous Systems, we delivered the first operational MQ-4C Triton to the Navy in November and we signed LRIP 1-3 as we continue to ramp up on this important ISR program. Australia continues to make progress toward procuring Triton as their maritime ISR platform, and on Global Hawk we are working towards delivery of Lot 11 for the U.S. Air Force and NATO AGS, and we continue to work on delivering Global Hawk capability to both Korea and Japan. At Mission Systems, we continue to increase production rates on Sensors and Processing programs. We ramped up significantly on our F-35 sensor program, delivering 90 radars, which was double the number of units we delivered in 2016 and we achieved a significant milestone of delivering the 300th F-35 radar in November. MS delivered 78 DAS systems and 88 CNI systems this year, approximately 30% more than prior year deliveries. And we also continued to ramp up on SABR production for our U.S. and international customers. At Technology Services, we won the Army's $750 million Special Electronic Mission Aircraft program to provide contractor lifecycle services for the Army's fixed-wing ISR fleet. The award includes a base year contract and eight option years extending to 2027. The Army also selected TS to compete for more than $500 million in task orders to operate Army training centers across the country. And for international customers, Australia awarded us the sustainment contract for Air Force C-27J Spartan transport, and training work for the Saudi Arabia Ministry of National Guard continues to expand through our joint venture. Looking ahead, the substantial investments that we are making, both organic and through our pending acquisition, demonstrate our confidence that we will bring the right technologies and capabilities to address our customers' urgent need for affordable, technologically superior national security solutions in response to a rapidly evolving threat environment. Global national security needs are expanding at a rapid rate and we are investing to address those needs. Now, I'll turn the call over to Ken for a more detailed discussion of our financials. Kenneth L. Bedingfield: Thanks, Kathy, and good afternoon everyone. I'll add my thanks to our team for their efforts this year, particularly in the area of fourth quarter cash generation, which was really outstanding. Before the discretionary pension contribution, the team brought in $1.9 billion in cash from operations in the fourth quarter, which was $400 million more than we generated in the fourth quarter of 2016, so kudos to everyone who contributed to that outcome. Today I'll spend a few minutes on 2017 results, but devote most of my commentary to our 2018 guidance where we have a few additional moving parts due to the pending transaction as well as changes in revenue recognition and pension accounting. As I go through our 2018 sector guidance, year-over-year revenue growth will be under the new standard for 2018 versus today's reported 2017 results. I would also note that our guidance does not include Orbital ATK and guidance only includes six months of interest related to the debt issued last October for the acquisition. We will update our guidance after the transaction closes, which as Kathy mentioned, we currently expect in the first half of this year. Turning to sector results, Aerospace Systems sales were up 5% for the quarter. 2017 sales were approximately $12 billion, a 10% increase. While restricted activities at Manned Aircraft drove a substantial amount of the year-over-year increase, all three AS business areas, Manned, Autonomous, and Space, posted higher year-over-year revenue. Aerospace Systems 2017 operating income grew 2% and operating margin rate was 10.5%, lower than last year due to the changing contract mix as we continue to ramp up on early-phase development programs. In addition, 2016 operating income benefited from a $45 million gain on a property sale in last year's fourth quarter. For 2018, we expect AS to grow at the top line at a high single-digit rate to the high $12 billion range. Growth in restricted activities will continue to be a major driver of revenue growth, along with continued ramp-up on the F-35 program. We expect 2018 operating margin at AS will be in the low to mid 10% range. For 2018, cost-type early-phase development work continues to grow at a faster rate than higher-margin production work, although we are seeing good growth in the production programs like F-35. Turning to Mission Systems, sales rose more than 4% for the year, operating income rose nearly 1%, and operating margin rate was 12.8%. Sensors and Processing was the biggest growth driver for the sector, up more than 10% due to higher volume for F-35 sensors, electro-optical/infrared self-protection and targeting programs, and communications programs, as well as the SABR radar. For 2018, we expect sales to grow to the mid to high $11 billion range with an operating margin of approximately 13%. Primary revenue growth drivers include continued ramp-up on combat avionics and communications programs, including F-35 sensors, SABR radar, and infrared countermeasures. With respect to F-35 volume across the Company, I would note that it is expected to grow to approximately 9% to 10% of total expected 2018 revenue. Now let me turn to Technology Services. Technology Services 2017 sales were slightly lower than the prior year at approximately $4.8 billion. 2017 operating income grew more than 2% and TS ended the year with a strong 11% operating margin rate. For 2018, we expect Technology Services sales will be in the mid $4 billion range, with an operating margin rate of approximately 10%. Lower 2018 revenue is primarily due to expected declines in the KC-10 and JRDC programs. Lower revenue for these programs is being partially offset by growth in other programs. As we roll all that up, we expect sales of approximately $27 billion with a segment operating margin rate in the low to mid 11% range, reflecting a portfolio that continues to have a higher percentage of early-phase development work in its contract mix. We expect our total operating margin rate will be approximately 12%, reflecting the new pension accounting presentation. As you are aware, starting in 2018, we are required to divide FAS into two pieces. FAS service expense of $400 million is reflected in operating income, while $485 million of FAS non-service income is moved below the operating profit line and reflected in earnings before interest and taxes. This change in presentation reduces our estimated 2018 operating income margin rate by approximately 180 basis points compared to the prior presentation standard. Slide 6 in our PowerPoint presentation provides a bridge to 2018 guidance under the new accounting standard. Our 2018 FAS assumptions are based on a 3.68% discount rate and 8% expected long-term rate of return on plan assets and reflect our 2017 net plan asset returns of more than 16%. Slide 7 and 8 in our PowerPoint deck summarize our pension estimates for years 2018 through 2020, and Slide 9 summarizes 2019 sensitivities to changes in assumptions. In aggregate, on a GAAP basis, the year-end funded status of our plans was 85% versus 80% at the end of last year. Our qualified plans also remained well-funded at 89% versus 84% at the end of last year. Holding all current assumptions constant, our required contributions remain minimal for the next few years, at $87 million in 2018, approximately $100 million in 2019, and approximately $200 million in 2020. Beyond 2020, we continue to expect required funding will be lower than CAS recoveries. We expect 2018 unallocated corporate expense of approximately $250 million, which contemplates about $50 million of Orbital ATK transaction expenses, in addition to $200 million of ongoing expense consistent with prior year's guidance. I'd also note that our guidance contemplates net interest expense of approximately $390 million, which is comprised of $300 million for our pre-Orbital ATK debt and around $90 million or six months of net interest expense on the $8.25 billion of net interest expense to align carrying cost with our current expectation regarding timing of the close of the transaction. After the close, we will update our financial guidance. Turning to tax, we now expect an effective tax rate of approximately 19.5% in 2018. Our 2018 earnings per share guidance of $15 to $15.25 assumes no change to our weighted average diluted share count. Just a few comments on cash in 2018; we expect free cash flow will range between $2 billion and $2.3 billion after capital spending of approximately $1 billion, and approximately $150 million for incremental interest and unallowable costs related to the Orbital ATK transaction. These 2018 items largely offset this year's cash tax reform benefit. We also expect our cash generation will be heavily weighted toward the second half of the year, as is our typical pattern. In summary, we had an outstanding year in [2018] [ph] and we look forward to continued strong performance from our team in 2018. I think we're ready for Q&A. Steve?

Thanks Ken. Dahana, please open the line for Q&A. Dahana, would you please open the line for Q&A?

[Operator Instructions] Your first question comes from the line of Sam Pearlstein.

[Indiscernible] once a year was down 5%, which I was a little surprised. Can you comment on that in terms of any big items that might have shifted out of 2017? And then secondly with regards to the CapEx of $1 billion, when should we expect that to moderate? Does this continue beyond 2018, does it continue to go up from here?

This is Steve Movius. Hopefully we have everybody back on the line. I apologize for the technical difficulties. Ken was addressing a question on backlog and capital expenditures. I think we got through the backlog before the line went dead. So, Ken, can you address the questions on our capital expenditure profile for the next – going forward a little bit? Kenneth L. Bedingfield: Sure, Steve. Thanks. With respect to capital expenditures, investing in the business continues to be the first priority of our capital deployment strategy. Given the benefits of tax reform on our cash flows including accelerated depreciation as well as an opportunity set that we expect will generate long-term shareholder value, we firmly believe we are making good investments for our Company and our shareholders. We continue to expect that capital expenditures will remain elevated in 2018 and 2019 before starting to return to a new normal that reflects a larger business. In terms of our overall cash generation, as we look forward, we expect to continue to generate strong cash flows, further aided by tax reform. Looking at 2018, we do have additional CapEx as well as $100 million to $150 million in costs from incremental interest and transaction cost related to our pending acquisition of Orbital ATK. We also see our CAS pension recoveries moving down a bit based on our strong pension asset performance in 2017. So there is some impact on 2018 cash flow. I'd refer you to the pension slides in our PowerPoint deck for our latest estimates of CAS and our required contributions which we've laid out through 2020. While lower CAS reduces cash flows, it provides a competitive advantage for us as we pursue future opportunities.

Let me add a little bit on to that as well, and Sam, I appreciate you asking the question and I think it's an important item with respect in particular to capital expenditure for us to focus on. And Ken said it exactly right, we have a current approach to this that based on how we see things today sort of plays out. I just want to caveat that a little bit. Should we continue to be extraordinarily successful in capturing business that goes with some capital investment, we're going to reflect that into our plans on a go forward basis, and the focus obviously is making sure we're capturing good business so we can get really good returns. And with the benefits of tax reform, the way we do that math, it makes it quite attractive. So, what Ken went through I think is an important perspective just in terms of our current visibility on it, but I fully expect this team to continue to be exceptionally successful in capturing good new business for us. And if investment comes with that, with great returns, then we will plan and execute on CapEx accordingly.

Your next question comes from the line of Carter Copeland of Melius Research.

Good morning, Wes and Ken, and welcome Kathy. Wes, I don't know if you were ever looking to get into the conference call hosting business but you might have an opportunity.

Yes, it might be a natural adjacency here.

Yes, exactly. You are the techie. Look, a couple of questions, just quick ones. One, I know you can't provide much detail here but I'm hoping that given the debate around your margin rates, given the sort of increasing opacity that the classified mix provides, you made the comment, Ken, about cost-type development work growing faster than the other. Is there any way you can give us any sort of color about the quantum of the difference there? Is it modestly faster, significantly faster? I know you can't quantify in numerical terms, but anything I think to help to give the market some color around just what you're seeing from the underlying business standpoint that might be helpful to us? Kenneth L. Bedingfield: Sure, Carter. Let me see if I can address that, and then Wes or Kathy can jump in if there's additional comments. I would say that as you look at the business, first of all, if you looked at the straight-up cost-type versus fixed-price mix, you would see it's pretty consistent 2016 to 2017 at about 55/45. But if you peel the onion a little bit further, and it's hard for me to give you too many numbers because much of it is on restricted business, but if you peel it back further, there's clearly within the cost-type portfolio more mature programs that are generating relatively strong development cost-type margins and those that are early-phase programs where we're still working our way through some of the early risk reduction and some of the early engineering phases of those types of programs, and what we're seeing is a relatively robust growth, a pretty rapid growth in those types of programs within that portfolio. And if you were to look specifically at AS, just to pick one of the sectors, you would see in particular there that it is growing at a rapid clip within AS. I don't know that I can put more specifics around it, what I will tell you is that as we've looked at our portfolio, we do have a nice mix of both development and production, we do see that we've got some production opportunity in front of us in terms of starting to generate some of the higher margin on those higher volumes as they work their way through. But right now, those early-phase programs are growing a good bit faster than those production programs.

Yes, Carter, I'd just add a little bit to it. Your remark as to sort of the opacity of the restricted work, just to give a framework here, we're in a world today where the nation's ability to really have technological superiority is going to increasingly depend on the ability of the government to execute more and more of our programs in a restricted manner. It's just the nature of the world today. So, I do anticipate that we're going to just continue to see a bit more growth on the restricted side just as an aggregate fraction of the business. So, we're working hard to be thoughtful about that to give as much insight as we can, but inevitably the programs themselves are not going to lend themselves to giving much transparency in that regard. But one thing I can say as just sort of a broad perspective on it, the development work on restricted programs, because they are typically at the higher end of technology and consequently carry more technological risk, do tend to be more the classic cost-plus development type contracting. It's not universally true but that's sort of a general characteristic of them. And as you know, that type of work comes with a little bit lower margin rate but a lot less risk than some of the other types of development work, and that little bit lower margin rate development is more than offset over time because when you actually get into the production side of things, you do pretty well. So, when we think about the opportunities and we think about it in the context of a likely growing restricted baseline within the Company, there will be that pressure for some period of time, particularly as we are successful in capturing that business. But the payback for our shareholders and for our customers ultimately over the longer term is exceptionally good. So, I know there's a little bit of anxiety out there about what the margin rate might be in AS this quarter or next quarter, and the team is highly motivated to do really well, and that just comes down to good old basic program performance, but when you look at it from a portfolio perspective, we're going to work really hard to capture even more of this business because it is putting us in a good place for the long term.

Wes, just to maybe get at it a different way, you mentioned program performance, so in aggregate the program performance has clearly been strong positive for quite a period of time. If you were to look at the fundamental blocking and tackling of risk identification, retirement milestones, do you see any material difference in the performance of the restricted contracts versus non-restricted, maybe get at it that way?

Kathy, why don't you take that one. Kathy J. Warden: Sure, thanks. Carter, no, we don't see a significant difference as we are ramping up on these early-phase development programs in how we are managing risk and opportunities. Our team is incentivised to identify those risks, manage them over time, seize the opportunities, and that's the same performance characteristic that you've seen from us, it's just the phase of the program that we're talking about has different characteristics based on early-phase versus late-phase development and then of course production. Kenneth L. Bedingfield: And Carter, I'd just remind you that to the extent we had any major program issues or charges, we'd clearly be required to disclose those, and we've had a pretty clean record of not having disclosed program write-downs, and we continue to make sure we're doing our best to perform in that regard.

[Indiscernible] we feel particularly good about work of our team. That's the primary focus in the Company, program execution. Doing well for our customers means doing well for our shareholders. Thanks Carter.

Great. Thank you.

The next question comes from the line of Seth Seifman of J.P. Morgan. Seth M. Seifman: So, two questions; Ken, when you talk about the $2.6 billion or so, I think you said of F-35 revenue in 2018, how would you characterize that level of activity relative to full rate production? And secondly, Wes, when you look at the additional CapEx, I think it makes sense to everybody, surely makes a lot of sense to me, why you're doing it. But when you think about how these incremental returns will show up to shareholders, should we be thinking about more sustained growth in the out years, faster growth in the out years, higher margins in the out years, or some combination of all three? And then when you look at what you and Raytheon and General Dynamics have said this quarter, it's all a lot of additional CapEx. Is there something about this particular defense ramp that we're entering right now that's maybe different in terms of the level of investment required versus even if we go back far to other ramps the level of capital spending?

Yes, those are really good questions. Kenneth L. Bedingfield: I'll take the first part, and before I get to the F-35 question, let me just make a comment. Given the technical challenges we had there for a few minutes, we're going to extend the call past 1 o'clock. So if you're able to stick with us for a few more minutes, we're happy to take questions past the 1 o'clock. But on F-35 specifically, Seth, I would say that think of those sales that we talked about as being roughly two-thirds AS, one-third MS, I would say the vast majority of those sales are essentially at full rate production at this point. We are performing on LRIP programs, but we are facilitized for the production ramp, we are ready to address the additional units Kathy talked about, the increased deliveries we made this year. And so, I would say, we'll likely be in low rate production for a few more lots here. I think the plan is through like LRIP 15 or something about that. But we're essentially in full rate production at this point and we're looking forward to being in a scenario where we get funded, get on contract reasonable times, and we are able to generate along with our partners, as Lockheed has talked about, additional margin that will move into those production lots. And I guess maybe just to comment a little more specifically on the mix, it might be more like 60/40 or 55/45 AS to MS, but that would be the F-35 comment.

And Seth, let me address sort of the broader question you asked about capital, which I think is a really important question just in terms of framing what I see going on in our Company but also what I see going on in our industry right now. There was a period, a long, rather long, incredibly long period of time we were in a declining defense budget environment. It was difficult to reach a conclusion to expand capital when we had limited visibility and the visibility we had generally looked down for a while. So, on one hand there's a little bit of pent-up demand to deal with that period of time, but on the other hand, and I think this is the more important part of it for investors, we foresee just given the nature of the threat environment that we observe around the globe today and the number of dimensions in that threat environment that are evident, we foresee a period of time here in front of us, a rather significant period of time in front of us, where our nation and our allies are going to need to invest in their national security to deal with this, and those investments in many cases are going to be different types of investments and at the national level to ensure technological superiority, and we've got to get back to a place of technological superiority. So, when you're talking about doing that type of thing, you can't just patch up your old facilities and do this incrementally. You have to step back and say, what is the capacity that industry needs to support the customer-strategic objectives here? And it's causing all of us to look carefully at our factories, it's causing us to look at the capacity that we have for our employees to do work in a much higher technology arena than may have otherwise been considered, and it's causing us to add employees. We hired over 8,000 people last year. That's not net, that was our hiring. We have an ongoing wave of retirements across our industry and those were evident in our Company as well, but we netted well over 2,000, pushing into 3,000, people last year and we did the same thing the year before. And this is just a reflection of the fact that our industry is gearing up to support the nation's needs and the needs of our allies. Our investments are not only here in the U.S., they are in other countries around the globe where we're doing business, and our allies depend on us to do the things we need to do from a facility and tooling and capability perspective so that we can support them as well. So, from an investor standpoint, this ought to be seen as good news. This is industry saying, we see a runway of business in front of us, and thereby good returns in front of us if we're doing it smartly, that necessitates these investments and we think it's a smart thing to do. So, it won't all happen tomorrow. That's not the nature of our business. As Ken said earlier, it's a long-cycle business, but it's what we need to do to be well-positioned to support our customers and to enjoy the economic benefits of doing well for our customers for the long term, and that's the way we're thinking about it. Seth M. Seifman: Great. Thanks very much.

Your next question comes from the line of Robert Stallard of Vertical Research.

Just one for me, Wes, regarding the recent tax reform and also what Northrop has been doing on some of its bids over last say 6 to 12 months, you've backed away from a couple of programs because you felt the returns weren't what you'd like them to be if you were to win them. Does tax reform change that and could you be a little bit more aggressive on bidding going forward?

Tax reform helps in terms of things like the returns on the programs that we are working on, the returns on the investments that we're making. It does not generally turn a bad business into a good business. And I hate to be that sort of sharp contrasted approach to describing it, but the things we walked away from [indiscernible] were just bad business deals and there isn't enough juice in any variant of tax reform I've seen to turn a bad business deal into a good business deal. So, I don't have any – if the question is, do we perhaps have a different model of how we're going to look at things going forward on the decisions we make programmatically, if there's something that's right maybe on the margin, yes, that might have an effect, but if it's fundamentally a deal where the balance of risk and return is in the wrong part of the coordinate system, I don't think that will change much of that optic. I do think, and I'm delighted particularly in the context of the last question, that tax reform is doing a really good job of motivating investment in our country, and you can see it in our industry, you can see it in other industries as well, and to the extent that the programmatics line up in the good business part of the coordinate system, investments applied in that direction make even more sense in the context of tax reform. So, to the spirit of your question, I believe that's a very strong positive for us and I am delighted to see broadly how business is responding to this. I think it's the right thing for companies to be doing right now to take these benefits of tax reform, support their employees, and invest in our nation's economy. So I think there's good alignment here.

That's great. Thanks Wes.

Your next question comes from the line of Matt McConnell of RBC Capital Markets.

Could you share an update on the Orbital ATK close? I know you've said first half, but any other clarity there, and what are key milestones that are left? And then maybe related to that, when you think you could resume the buyback? Is there a certain leverage threshold or any other catalyst that could drive the buyback resumption?

Kathy, why don't you talk about Orbital? I know you referenced a lot of these in your remarks. Kathy J. Warden: I did, and so, we still see it closing in the first half of this year, really nothing to add to that other than my comments about where we are in the regulatory process. We have filed on January 18th in the short form process in the EU and we continue to work through the FTC process in the U.S. Kenneth L. Bedingfield: And Matt, with respect to your question on share repurchase, we wouldn't see ourselves getting back into the market until after the close of transaction, and in fact end of the first window after – first open window after close.

As I remarked earlier, Matt, this share repurchase we see as an important element of our value creation strategy. Obviously all these other things we're doing have an influence on the timing, but over the longer term it's part of our overall capital deployment strategy as it has been for about as long as I can remember. So, it's something that we'll get back onto when the time is right.

All right, great, thanks.

Your next question comes from the line of Peter Arment of Baird.

Maybe just quickly on the CR, this is obviously something you've been dealing with for seven some odd years plus, but can you give us an update, if we don't see a deal here in February, the impacts you see, and are several of your programs exempt where you'd still be able to see additional increases? Thanks.

Yes, you said it right. It's been a number of odd years that we're having to deal with these things. In this year in particular, here we are on our fourth CR, we're about a quarter away through the fiscal year, and as challenging as this might be on the industry side, the real pain here, and I mean pain with a capital 'P', is on our customer side. This business is just really, really tough on them and they – fortunately for our nation and for our allies around the globe, we have a military that figures out how to get things done, but it's just not right that they are put in this position. So, we are all doing what we can to support our customers. I think that's the main thing to take away from the industry perspective with respect to the CR. And whether or not individual programs will be impacted kind of depends on the nature of how the customer approaches Congress on things like anomalies or other aspects, other tools they might have, but I think there's just a growing recognition not only on the helm but across our country that this has gotten to the ridiculous point, and we've got to get it solved. And I might add one other aspect to this that I think is really important for people to understand. It's not simply enough to pass the appropriation. We still have the Budget Control Act in effect. So, Congress has to both pass an appropriation as well as deal with getting these crazy constraints off the table. And I just want to keep that out there because sometimes as we're struggling through CRs and the media is focused on the probability of a shutdown and the rest, there may be some who would think, okay, all we got to do is get the appropriation done, and that would be a mistake to think that. We got to get the appropriations done and we got to get these caps removed so that we can be doing the right things from a national security perspective.

Appreciate that. Thanks.

Your next question comes from the line of Doug Harned of Bernstein.

I have got a philosophical question about tax reform. Obviously it's a very important thing, you described the benefits and a lot of people are getting benefits from this, but this industry is somewhat unique in that in the sense the customer is giving the tax benefit but also in a sense has the power to take it away as the customer. And we've heard a range of views on it when you look long-term, and on one side we've heard some say that this is a windfall that defense companies will receive in perpetuity because the FAR uses operating margins, not after-tax margins, it doesn't change very often, and the government wants to make the industrial base healthier; but the other side is that it's been a highly profitable industry and the benefit will likely go away over time because the Pentagon is well aware of the benefit and a lot of people don't have a high appetite for higher defense profits without a clear mechanism to ensure the added cash goes to investment; would suggest that you could see changes made to FAR, you could see contracts move to lower levels of pricing within FAR ranges that sort of incorporate the knowledge about the after-tax benefits. How do you see this playing out, which direction do you see this going over the next few years?

Doug, let me give you my take on that because we could all hypothesize that we could see a lot of changes in the regulatory manner that might sort of wipe out the benefits of tax reform. All I can say is, industry is going to be very responsive on the positive side or the negative side. I just talked about tax reform being a strong motivator for the increased capital investments that we're making and our ability to continue strong R&D investments. Should there be a view that regulation is ought to change to take some of that benefit away, I think it would be self-defeating for our customer community, because it ultimately would discourage us from investing on their behalf, it would discourage us from the type of things that we need to be doing to support their capacity and technology needs for the long term. We are a business and we have to make decisions in that context. So, I'm sure there were maybe some folks who might look at this through a very narrow lens and read some bad conclusions, but hopefully those with a broader view of economic realities will see this the way it's intended, which is tax reform is intended to help grow our economy, and to do that we've all got to step up and make investments and get things done the right way. And if the incentives for doing that get flipped over the other direction, the behaviors will flip over the other direction. So, I really think it's that clear. So, while as I said there may be some who look at this through a narrow optic and don't really understand the broader views, I certainly hope and would proceed with the team that we've got at the Pentagon at the senior level that a more strategic view would stay in place. And this goes by the way as well to folks on the Hill. There was a lot of support on the Hill for making sure that we're doing the right things for defense, including encouraging investment, and tax reform is a big part of that. So, we can always get caught up in the possibilities of what might happen, but as always, industry will react one way or the other, and right now I'm pleased to see industry reacting in a positive way and driving investment.

But Wes, as an earlier question that touched on this, because if you think of a program, a proposal, and let's say the DoD decided to make the margin less at an operating level, but it you or others looked at that and on an after-cash basis, on an ROIC basis, that program now made sense to invest in, wouldn't you expect that people might be willing to accept a slightly lower operating margin if the all-in cash return was still there?

No, that's what I would – maybe I didn't do a good job of describing it, but I would call that a decision on the margin, not to use the exact margin term you were using, but those are sort of incremental decisions. And if you're down to the point where on a bid you are scratching to get an incremental amount of margin, you're probably not doing the right things in terms of your architecture or your cost structure. So I would actually argue there are other things you ought to be thinking about doing to get your returns there than relying on the increment from tax reform. That's not the place we found ourselves in, in some of these major bid decisions that we've looked at, and I won't go through them over the last years, but a number of them for those who did take the business on, a little bit of change in the tax rate would not have made a difference in their – whether or not they made or lost money. And so, I'd be careful about just looking at this as sort of a narrow impact on the decision space. It's more about the way some of these bids are fundamentally architected.

Okay, great. Thank you.

Your next question comes from the line of Cai von Rumohr of Cowen & Company.

So, your guide for 2018 has AS up approximately $1 billion, and kind of as I look at my model, the two big drivers are the black work and F-35, and given that F-35 at AS was not up as much as it was in MS, it would look like it's got some catch-up. So, in my model, F-35 and the black work grow at approximately comparable levels, and you said that F-35 probably has some more margin upside going forward. And if I put those two thoughts together, I would think that the margins at AS this year would be, comp would be flat, and yet you have them down somewhat. What am I just missing in all of that? Kathy J. Warden: So, I'll start, Cai, and then ask Ken to add on. But you are right, the restricted work and the F-35 work are two major drivers to the AS growth next year. As Ken was alluding, we saw significant ramp during the course of 2017. We still have some of that ahead of us on F-35 in 2018. We are completing LRIP 10 and beginning to work LRIP 11. So we still have some growth toward full rate production there at AS. And so, those two drivers, both contribute to being at lower margin rate than we will realize once we hit full rate production. So, in the case of restricted, it's early-phase development work and in the case of F-35 we are marching our way up the curve toward those full rate production margins.

Thank you very much.

Your next question comes from the line of George Shapiro of Shapiro Research.

So just following up on Cai's question, the implication to me would be that we get into 2019 that the margin probably goes up, so that this year would mark the low point for the margin. Would that be a correct assumption?

George, as you know, we won't guide for 2019, but all I would say for all of our businesses is, we continue to use an incentive system that motivates the businesses to grow operating margin over time, and I've found over the years our team is quite responsive to those incentives. So, we'll see how things work out, but right now we can only guide for 2018. Kenneth L. Bedingfield: And Wes, I would just reference to your earlier comment that we certainly continue to pursue other development work including GBSD and on the downselect and next-gen Joint STARS and some others, and as we are or to the extent we are successful on those, we certainly could see some mix pressure that would further resolve from that beyond 2018.

Yes, absolutely.

So, Dahana, I think we can take one more question.

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

Wes, I'd love to hear your thoughts about the [new management] [ph] strategy that was revealed recently, and of course we had a leak of the Nuclear Posture Review as well and they are talking about a lot of specific modernization areas that are needed, was wondering if you saw Northrop's capabilities kind of line up well with those lanes, were you surprised by anything, and does it kind of support or reinforce your decision that you made on OA?

I would say just broadly, Pete, this is what we've been getting ready for, for a long time. We're ready to support the strategy that's laid out. Our capabilities are in incredibly tight alignment with where we see the nation going as reflected in those strategies. And I am really excited about the Orbital ATK acquisition and the merger of our two companies. I think we're going to be able to help our customer. It's a very pro-competitive pulling together here of the companies' complementary capabilities, and I think it's just highly supportive and highly aligned with what I see as the team in the Pentagon, and more broadly the national security team, has pulled together with these strategies. So, I'm looking forward to us being able to help a lot.

This concludes the Q&A. Wes, any final comments?

Just to wrap up again, thanking our team for their incredibly great work in 2017. We keep raising the bar here in our Company on performance and I'm just delighted to see how our team embraces the opportunity to excel. So, thanks everyone for joining us on the call today and thanks for your continuing interest in our Company.

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