Northrop Grumman Corp. (NYSE: NOC) Second Quarter 2022 Earnings Conference Call July 28, 2022 9:00 a. m. m. ET
Participating companies
Todd Ernst – Treasurer and Vice President of Investor Relations
Kathy Warden – President, CEO and President
Dave Keffer – Chief Financial Officer
Conference Call Participants
Mariana Pérez – Bank of America
Richard Safran – Port Research
Doug Harned – Bernstein
Cai von Rumohr – Cowen
Kristine Liwag – Morgan Stanley
Robert Stallard – Vertical Search
Sheila Kahyaoglu – Jefferies
David Strauss – Barclays
Seth Seifman – JPMorgan
Noah Poponak – Goldman Sachs
Robert Spingarn – Melius Research
Operator
Good morning, gentlemen, and welcome to Northrop Grumman’s 2022 quarter convention call. Today’s call is recorded. My call is Victor and I will be your operator today.
[Operator Instructions]
I would now like to speak with your host, Mr. Todd Ernst, Treasurer and Vice President of Investor Relations. Ernst, please continue.
Todd Ernst
Thank you, Victor and good morning everyone, and welcome to Northrop Grumman’s 2022 quarterly moment convention call. We will refer to a PowerPoint presentation posted on our RI website this morning.
Before we begin, the issues addressed in today’s call, adding forecasts for 2022 and beyond, adding our perspective reflect the company’s judgment based on the data that was held at the time of that call. They constitute forward-looking statements in accordance with the port’s provisions of the federal securities laws. The forward-looking statements involve dangers and uncertainties noted in today’s press release and in our SEC filings. These dangers and uncertainties would possibly cause the actual effects of the company to differ materially. -GAAP monetary measures that are reconciled with our GAAP effects in our earnings release.
Today’s call Kathy Warden, our President, CEO and President; and David Keffer, our chief financial officer. At this time, I would like to call Kathy. Kathy?
kathy guardian
Thank you Todd. Hello and thank you for joining us.
I would like to begin today’s call by highlighting the James Webb Space Telescope and the incredible photographs released just a few weeks ago. more than 2 decades. In addition to leading the industry team, we designed and built the deployable parasol, provided the spacecraft, developed the Observatory subsystems, and incorporated the entire system. The cutting-edge generation we have created and the photographs that The Captures will motivate the next generation of innovators and scientists and we believe this will be one of Webb’s many legacies. Webb illustrates the defining characteristic of our business strategy to expand and produce cutting-edge technology responses to meet our clients’ toughest challenges.
This strategy differentiates us and aligns our portfolio with the priorities of our clients. And as a result, we have strengthened our position in the market. As a reminder, the four precedence spaces of our strategy are technological leadership, the sustainable and successful expansion of our business. , maintaining a laser on functionality and deploying capital to create value. This strategy continues to bear fruit.
In the current quarter, we saw strong demand across our business with a request-to-turnover ratio of 1. 48, driven through rewards for the F-35, GEM 63 and limited programs. All of our businesses posted an order-turnover of more than 1 per quarter, resulting in a sequential build-up of 6% in our order book to $80 billion. Given this expanded order book and our continued alignment with visitor budgets and priorities, we are even more confident that we can drive our earnings in 2023 from the low to single digits we are targeting this year.
During the quarter, we encountered some demanding situations similar to the broader macroeconomic environment, adding a tight hard work market and supply chain delays that affected the sales schedule. However, we are pleased with the progress our team continues to make in addressing the demanding hiring situations and trends took a step forward in the current quarter, laying the foundation for sales expansion in the current part of the year.
As our business grows, we remain focused on functionality and charge relief across the enterprise. This continued approach contributed to another quarter of strong margin functionality. to date. Dave will momentarily cover more main points about our quarterly effects and updating our forecasts, however, first, I would like to mention some highlights of the quarter. The generation that evolved for James Webb is an example of Northrop Grumman’s generation. innovation.
Another example is how we use generation to produce innovative and affordable responses for our consumers. To this end, we are investing in virtual design functions and production facilities. Working closely with our consumers, we are virtually transforming the way we design. , verify and manufacture the next generation of systems. And you’ve heard that our consumers recognize the results. Device learning and agile principles.
And as we announced this quarter, we are also investing in the factories of the future, adding our production facility in West Virginia, which will incorporate the newest in virtual production, automation and modular construction sales. Once it is consistent with the year 2024, this facility will help the production of up to six hundred attack missiles consistent with the year, optimizing quality and reducing the load and cycle time, as well as the capacity of the construction weapons supply chain. tactics for our customers.
In recent years, we have taken a company-wide position in mission-driven spaces that align with our clients’ priorities. These are spaces where we see the opportunity to leverage our technological knowledge, domain expertise and core functions across our business.
Today, I want to highlight some of them and the similar effects we have noticed so far this year. An example of this is the area of national security. Our clients have made it clear that the area underpins many important missions for our national security. we recognize that we wish to think of the area differently as an evolving disputed field.
Given this, our purpose is to provide space services that come with a combination of exquisite responses in combination with proliferated constellations of satellites in low-Earth orbit, also known as LEO, which together create a more resilient architecture. We have recently noticed the benefits of this approach. For example, after the close of the current quarter, we won a $617 million contract for the SDA tracking layer, which is a LEO constellation of 14 satellites designed to provide global warning, tracking, and guidance of complex missile threats, adding hypersonic missiles. This builds on the SDA shipping layer contract we obtained in February, which is also a LEO constellation of 42 satellites, providing resilience, low latency, and high-volume knowledge delivery in U. S. army missions. U. S. worldwide.
At the most sensitive of that, we set aside an additional $700 million in the second quarter in narrow area rewards and now have $11. 3 billion in narrow area order book. We continue to see the dominance of the national security area as one of the most powerful engines of expansion for our business.
Missile defense and antihypersonics are priority domains in which we leverage the functions and expertise of the entire portfolio. In the current quarter, we were awarded a contract through the Missile Defense Agency to continue the progression of the slid interceptor program. The GPI will play a central role in ensuring that the United States maintains the most reliable and complex missile defense systems capable of overcoming and defeating ever-evolving missile threats. This complements our missile defense modernization paints that are already underway at NGI, HBTS and IBCS. We also helped foreign customers modernize their missile defense systems. For example, last week we delivered the first of 6 production IBCS engagement operations centers for the Polish medium-range air and missile defense system. Our technique for capital deployment is also a vital component of the strategy I have just presented to you.
Our first priority is to invest in the execution of our business strategy. By investing in our factories, virtual design teams and workers who are a key source of our technology leadership, we create long-term sustainable value. We also remain committed to returning at least one hundred percent of the loose money to shareholders this year. In the current quarter, we increased our dividend by 10%, marking our nineteenth consecutive annual increase.
Our new quarterly dividend will be almost double the point we paid in early 2017. We also pay capital to shareholders through percentage buybacks and continue to target at least $1500 million in buybacks this year.
Before Dave makes more important points about our monetary results, I’d like to briefly communicate to you about the advocacy call for the environment. We have noticed a basic shift in the global commitment of resources to defence and national security, particularly in Europe. This year alone, we have noticed that Finland and Sweden are making progress in joining NATO and many European countries have increased or announced their goal of increasing their defence budgets.
The geopolitical environment has highlighted a heightened need for defense and deterrence. In the United States, this has also resulted in strong bipartisanship for defense spending. for additional defense spending increases above the president’s budget. For Northrop Grumman, the request for a basic defense budget for Fiscal Year 23 in the U. S. The U. S. system included key systems such as T21, GBSD, NGI, IBCS, next-generation OPIR, and Triton. And there is an additional investment opportunity for GATOR, E-2D, F-35 and F-18 that we have noticed in the increases proposed through Congress.
But I will point out that, as has been the norm in recent years, there is a maximum probability of starting the fiscal year with a CR, so we expect this in our outlook for 2022. The budget strongly reflects our company’s alignment with our consumers and reinforces my confidence that we are well placed for this environment.
So, with that, I’m going to pass the call on to Dave, and then I’ll have some closing remarks before the Q&A. David?
david kefer
It is ok. Thank you Kathy and good morning everyone. Overall, it was another quarter forged with themes similar to those of the first quarter. Short-term supply-side pressures and a tight hard labor market have persisted, but environmental demand remains strong with exceptional rewards and order book growth. , driven through alignment with our clients’ top priorities, paving the way for long-term success.
We generated $13 billion in new allocations in the current quarter, higher-than-expected volume due to the right competitive wins and the timing of some vital awards, adding the newest F-35 block in our aerospace sector. Our year- The ratio to date is now 1. 22, due to our strong bookings, we now expect the awards volume to be roughly equivalent to full year sales, above our previous projections.
While those new industry measures position us for long-term expansion, our quarterly sales of $8. 8 billion and overall first-party sales were below our expectations as we continue to manage the global supply chain and hard work market challenges. These effects of the first part and existing finishes imply a full-year sales outlook close to the declining end of our third-class range. time of year than in the first, which requires a continuous expansion of the workforce and curtain revenues. room.
Our earnings forecasts are also weighted towards the current part of the year according to the timing of program demand. These factors, along with our developing order book, form the basis for faster earnings expansion in the current part of the year and we look forward to this momentum. continue in 2023.
Even with temporary headwinds in the leadership line, our execution remained strong during the quarter. Segment margins were 12. 2%, in line with the highest point in the current quarter last year. Reducing prices and maintaining a laser focus on functionality are key elements of our strategy. These efforts will be vital in an inflationary environment higher than what we have experienced in recent years. It starts by negotiating smart business terms and providing solid program functionality, but it doesn’t end there. This also includes selling the affordability of our fees, a disciplined technique for threat management, and optimizing our charge structure. For example, in the quarter we sold assets in Bethpage, New York and posted a profit of $38 million.
Continuing our current quarter results, diluted earnings consistent with the quarter’s constant percentage were $6. 06, down 6% from last year’s current quarter. net retirement income, contributing to hurdles of $0. 60 compared to the current quarter last year. And while our 17. 7% tax rate is lower than last year, it’s in line with the first quarter and our expectations for 2022.
Let’s move on to the rules for the full year. I’ll start with some updates to our industry estimates. Our space business continues to show fair growth in sales and bookings, adding a record quarter portfolio, demonstrating the diversity of features we bring to market. As a result, we again increase their sales direction to the top diversity of $11 billion. At DS, we are adjusting our full-year expectations to approximately $5 billion due to slower acceleration of some systems, as well as broader staffing challenges.
For the operating margin rate, we are expanding our estimates in AS, DS and MS based on their strong effects since the beginning of the year. These increases are offset by a relief in the space OM rate to about 10% based on a better than expecting good fortune in obtaining new progression programs. And at the corporate level, our year-round guidance levels for sales, segment margin rate, EPS and cash. Within those levels, we lately expect any weakness in sales to be offset through strong margins.
Our earnings consistent with the percentage-consistent outlook have some moving elements. First, our retained commercial prices are now expected to be $210 million, $60 million less than our previous estimates. This is due to favorable fiscal trends in the state and other reduced business expenses. We also expect a slight decrease in net interest expense. These benefits are offset by the unfavorable impact of our marketable securities that we have consistently experienced since the beginning of the year. No further effects on the market price are assumed. in our forecast for the time part of the year.
As we noted in the last quarter with respect to withheld business costs, we continue to expect a one-time increase in state taxes identified in the quarter in which the R Tax Depreciation Act
The seasonality of our receipts and disbursements is such that the part of the time of year generates much higher money flows than the first. Perspectives. Our forecast continues with 2 situations: 1 based on the existing tax law and the situation of deferral based on the receipt of invoice returns made to date.
Then I looked to take a moment to talk about our pension plans. Last quarter, I talked about how while our pension plans contribute to a component of our GAAP earnings, FAS/CAS revenue is not operational and is not operational when compared to the company’s. Desempeño. La slide 11 of our earnings roundup illustrates the GAAP pension headwind we’ve experienced so far this year.
As we look ahead to next year, we expect this headwind to increase due to recent money market volatility. have increased historically. Of course, it’s not just our pension plans that are experiencing those macroeconomic advances. on the OFF-farm FAS retirement line. A slight buildup in expected CAS recoveries would partially offset this headwind of GAAP earnings, however, our required cash contributions would remain very low for years to come and our investment position would remain healthy at over 96%.
So, while the effect on GAAP earnings could be a headwind, from an economic or cash flow perspective, the changes would be slightly favorable. A lot can change in the financial markets over the course of the year, so I’ll be waiting to provide more accurate multi-year projections until later in the year. I would point to the pension sensitivity table we provided in our January earnings log for modeling purposes.
And with that, I’ll call you back, Kathy.
kathy guardian
So, in summary, the call remains physically powerful and we have noticed an exceptional expansion in reserves and order book during the quarter and since the beginning of the year. This call creates momentum that helps our expansion acceleration forecasts for the rest of this year and beyond. In addition, our capital deployment strategy aims to help long-term expansion and create price for our shareholders. We know that the investments we are making today in virtual equipment and long-term factories are already strengthening the functionality of the program and contributing to our performance results.
So I’m incredibly proud of the Northrop Grumman team as we execute our strategy and position the company for long-term success. So with that, we’re in a position for questions and answers.
Q&A session
Operator
[Operator Instructions] Our first will come from the lineage of Ron Epstein from Bank of America.
mariana perez
I’m Mariana Perez Mora for Ron today. So, at work. Most of the industry is under significant pressure due to a tight labor market. And it turns out that he handles those demanding situations better and has even noticed innovations in the middle of the moment. Could you describe and give us some color in what you’re doing to deal with those demanding situations?
kathy guardian
Thank you, Marianne. Surely we saw headwinds from the paintings in the first component of the year. But as we noted in our comments, we’re starting to see those amenities in the last component of the current quarter and even the effects we’re seeing in July so far. And what we’re doing is aggressively the company, executing hiring and retention efforts. This is a comprehensive strategy to let other people know that Northrop Grumman is developing and hiring. And we managed to attract other people to our company. We’ve also taken steps to retain the ability we have and that really started to gain momentum.
I will also say that Market Place Place situations play a vital role in any company’s ability to rent and retain, and we have noticed that Market Place Place situations begin to relax. You can’t read a newspaper or read an online article those days without seeing a company talking about hiring. freezes or even layoffs. So, this will have an effect on the hard work market and we expect a continued slowdown as a result of that in the current part of the year, leading us to be more confident that the current part will look more like our pre-pandemic experience than what we have experienced in the last 6 to 12 months.
mariana perez
Parfait. Et and then in the chain of origin, how or what kind of equipment do you have to improve your visibility or delivery times? Do you have the option of making long-term agreements in advance or building up inventory to deal with long-term outages?
kathy guardian
Well, we have those teams at our disposal. But what I would say is that I know this week you’ve heard from a lot of manufacturers, adding to their peers in the aerospace and defense industry. That we see longer delivery times, which has an effect on the sales program. And I think it’s the result of many factors, but not least, the availability of hard work that we just talked about, so as we pointed out earlier in the call, we expect the hard work market to melt a bit. being a headwind in the middle of the moment, we don’t think it’s to the same extent as in the first half. And I draw on the fact that we are deeply rooted with our suppliers. We have other people from Northrop Grumman on site with them. So, we think we have a smart master of the curtain delivery schedule for the rest of the year and we’ve incorporated it into our thinking, but of course it’s based on what we know today.
And as we’ve noticed over the past 12 months, the COVID outbreak, fluctuations in component demand, and a variety of minor issues can charge an estimate of source volatility and time. So, our teams handle this well. I feel like we did exceptionally well in the first part. While we were slightly below our own earnings projections for the current quarter, which would be around 24. 5% in the middle of our guidance, this was a very limited estimate of variability in a very challenging market. Therefore, we have very detailed reviews of the timing of curtains. We use mitigation methods on a daily basis and have a concept of what we want to offer at the time of year.
Dave, do you have to add?
david kefer
I think it’s well characterized, Kathy, at the point of the program, in addition to being sure of our ability to provide more in the current part of the year, the timing of the call is also more tilted towards the current part of this year compared to last year, when the timing of the call at the point of the program turned out to be a little more inclined towards the first part of the year. This also contributes to the more powerful year-on-year expansion outlook for the current part. of this year.
Operator
The next one will come from Seaport Global’s Richard Safran line.
ricardo safran
So, I wanted to ask you about the news that the FTC is doing about Orbital. You probably expected that, at least I guess. This was first highlighted when Lockheed was buying Aerojet. So I need to know if you can briefly tell me about the issues that the FTC is focusing on. If you can tell us what could be the diversity of results? And I know it’s a bit complicated even if you can speculate on the impact. Any feedback you give on this will be appreciated.
kathy guardian
Yes. Thank you Rich. Let me start by offering some context on the subject. We announced our goal of obtaining Orbital ATK in 2018 and the Department of Defense and ftc spent many months reviewing the pro-competitive facets of the agreements. of which there are many anti-competitive dangers before approving the deal. And so, during that time, the government knew only one fear and that was about counterfeit rocket engines. So we agreed to a consent order to deal with that fear. beyond four years, we have executed an extensive compliance program and worked intensively with the government in accordance with the terms of the order. Therefore, we have complied and continue to comply with the order. The FTC raised 1 issue. They were investigating a few years ago. But, to our knowledge, this investigation is not over. And we share — this in our 10-K and 10-Q repositories. So you can consult it to know the main points of this specific case.
And now, regarding your question, I know that there have been recent hypotheses about the prestige of this research and about a wide variety of imaginable next steps that the government might try to take. But I will say that we see no merit or precedent for most of those scenarios. And we continue to maintain that we do not believe this case will have a significant negative impact on our society. So I wouldn’t speculate on what the duration will be, because I think it may just be 0 and in fact it’s not significant.
ricardo safran
Well, that helps. As a quick follow-up here. With regard to your comments on the international, I would like to know if you can say a little more about it. Could you talk a little bit about time, how that will translate into — and filter down to P.
david kefer
Thank you Rich. I’m David. Je I’ll take that one. We have won many questions in recent months given the evolution of the global geopolitical scenario related to short-term impact. I think the truth is that in a company with a cycle as long as ours, those things take time to make an impact. And, in fact, we’re in touch with American and foreign consumers who are talking about specific calling spaces; we discuss products like today’s IBCS call. I would say allocation spaces like missile defense or a specific foreign interest, as you might expect. But it will take time for those things to have a monetary impact. Therefore, I would hesitate to allocate in detail what could be in the short term. This is anything, we will keep you informed for years to come as those opportunities become a reality.
Operator
The next comes from Bernstein’s Doug Harned lineage.
Doug Harned
When you take a look at aeronautics, it’s been confusing given that many mature systems have reduced B-21s and F-35s, however, in the current quarter, if we eliminate the gain in land sales, the margins were well below 10%, revenue was low because, well, it turns out that H2 is quite difficult. Can you tell us how you see the path to orientation in H2?
david kefer
Of course, I’m satisfied to deal with this, Doug. In the first quarter we had an unusually high volume of favorable net CAEs in the current quarter, net CARs were light. This is the typical nature of a company like Aeronautics, where there are quarterly fluctuations. But overall, we even have a slightly bigger picture for the year, as we described earlier in the margin rate aspect than we had done before. and towards the global panorama. On the sales side, this net fluctuation in the EAC also has an effect on sales. And I see that it was relatively solid in the first quarter and in the current one. AS is another activity, as we described earlier in our reviews, where we see a higher volume of hardware receipts in the current part of the year than in the first. And so I think, a moderate part of the moment of where we are today and very consistent with the projections that we have. I have been offering for a faith w quarters now.
Doug Harned
Well, as a follow-up, if I move into space, I mean your order book is now $39 billion. I mean it’s a massive order book. And I know you have pretty smart earnings expansion forecasts here. But how do we view the conversion of this order book in terms of time?How do we see this conversion moving to profits over the years here?
david kefer
Of course. We’re, as you mentioned, we’re incredibly pleased with the expansion of the backlog, the volume of awards that we’ve had in area systems like the shipping and tracking layers of the FDA architecture are wonderful examples of the work that we’re doing, literally multi-layered with multiple products supporting multiple project domain names in the civil and homeland security markets. In terms of breaking down that backlog in terms of rewards volume over time, or sales volume over time, this is our fastest growing business and we expect it to continue. be our fastest growing business and not just any business. program, GBSD is notoriously a big contributor to its expansion last year and this year. But the expansion is much broader. So while GBSD grew by around $500 million in our 22 estimates and is expected to show similar expansion in 23, we expect similar volume expansion outside of GBSD going forward. and our GBSD outdoor expansion for this year exceeds GBSD’s expansion in dollars in the area. Therefore, an exceptional expansion at scale, not only in the order book, but also in its conversion to sales.
Operator
Our next comes from the Cowen lineage of Cai von Rumohr.
Cai von Rumohr
So, you and your spouse in MGI have decided on the sliding phase interceptor which is an interceptor, NGI is an interceptor. Is there any cross-reading in terms of having a list that would put you in a better position for NGI if a single seller?And in your opinion, what are the chances of it passing to all sources?
kathy guardian
So, Cai, a very insightful query as ever. And I would say that it is meritorious to carry out several similar missions and understand, therefore, how those systems can be based on a technological base that is not unusual. Since the two are competing, I would possibly say nothing more than that and I’m sure you respect that. To understand what this means more broadly, I would only say that missile defense is a domain of great importance, not only in the United States but also internationally. And as I pointed out in my comments, we’re taking a holistic trading technique to think about the most productive way to leverage Northrop Grumman’s features to take advantage of all those opportunities.
Therefore, we are well placed to comply with the wishes of the government. I believe, however, that there is a balanced view that we want long business days in all of our missile defence programmes. Therefore, I expect there to be some preference for postponing multiple providers for longer, because we see in NGI that the downward trend probably won’t happen until 2025 and, in your opinion, it could expand further or become a single provider. And we think that supports Northrop Grumman’s growth, no matter how much it goes. And we’re just helping the government make the decisions about what is most productive that fits its core trading capacity.
Cai von Rumohr
And now, he has also scored a number of victories that he has alluded to in the LEO area. Can you, looking at this moment for half, there are main opportunities in which we are attentive to competitive offers?
kathy guardian
There are some, basically what we see right now as part of the new awards. And as Dave pointed out, we now expect billing to approach what is an improvement over our forecast at the beginning of the year, as I’ve had more luck in competitive awards like the two I discussed with the FDA that we had planned. new limited rewards within the AS more or less the same in the states. We have a pretty big competitive value that we expect every day in space, it’s in the elegance of $1 billion and then in a lot of small things that are charged to our being waiting for the full year of almost an ebook to load.
Operator
Our next one comes from the line of Kristine Liwag of Morgan Stanley.
kristine liwag
You discussed earlier that there has been a basic shift in U. S. defense spending. Historically, when the economic environment is weaker and other federal budgets emerge, defense budgets are under pressure. And how long do you think the defense will persist?
kathy guardian
Thanks for the question, Kristine. I was in Europe a few weeks ago. And I would say I see a basic shift in popularity that the risk environment is genuine and it is now, right?I think in recent years in Europe there has been a sense that we are running towards a longer-term risk horizon and perhaps the speed of spending on national security and defence would have been adequate in this environment, however the fact that the risk is more imminent is addressed in what you see being planned or committed increases in defence spending in countries. Maximum. European.
It takes several years to translate into needs, plans, and express sales for corporations like ours. I hope that there will be some modulation based on broader economic points and other spending priorities. But I don’t see any other turning point toward a view that defense spending is not a top priority. So, I see it safe enough.
kristine liwag
And as a follow-up, how pressing are your conversations with consumers to deal with the security landscape?And when do you think those call signals can translate into earnings growth?
kathy guardian
Therefore, as I pointed out, despite the urgency, it normally takes at least 18 to 24 months to translate the goal into aspirations for rapid programs, and the visitor does not get to buy x quantity of certain systems in production. And it still takes a little bit longer if it’s something that’s not in production if it’s a progression program. Then it can be 3, 4, five years. So when I think about the landscape in Europe, obviously, now is the time to give recommendations and have concepts about what can meet your higher-priority demands, just as we do with visitors from the US. But I don’t think that has a significant benefit. will affect us or other AMC corporations for the next 18 months. So, I would say it’s rather until 2024 when we expect to have a bigger impact.
Operator
Our next comes from the lineage of Rob Stallard of Vertical.
Robert Stallard
Kathy, I would like to go back to the query I made to you 3 months ago about inflation and fixed-price contracts. I wonder how things have evolved over the last quarter compared to their expectations. What if you make structural adjustments to the way you do business, given that we are in this environment of high inflation?
kathy guardian
Yes, smart question. So I would say that our view today is very much in line with that of the first quarter and, in fact, we are not immune to the effects of inflation. So we’re working with the government to quantify those effects and work with them to mitigate them. And that includes making sure you have adequate investment for government program managers to get the necessary formula for national defense in this inflationary environment. And to that end, we’re pleased to see that Congress is adding investments to offset inflation in its FY23 budget. Certain structural features of our business naturally mitigate some of those effects. Dave talked about the importance of the deal structure. It’s things like our mix of charge plus hard work rather than constant value, the relatively short duration of our constant value contracts allowing us to renegotiate existing terms within 1 or 2 years, and in some cases, indexation clauses of Array that allow us to reassessArray As we review the new deals we enter, we are more competitive by adding those escalation clauses into our contract terms, making sure to align our supplier terms to our popular contract terms as examples of what we do it differently to lessen the impact.
And then we, within our organization, also work to offset the impact. That includes managing supply chain affordability, looking for suppliers the moment we feel suppliers aren’t dealing with affordability, reducing prices in our own overhead spaces, adding the real estate footprint as we point out today, while inflation is something we’re managing day by day, I would say we haven’t noticed a significant impact on our finances so far this year, but we want to remain diligent in making sure it doesn’t become an effect. And we’re tracking a lot if inflation starts to modulate. Our indications would be that this is starting to happen, but we are tracking the data just like you.
Robert Stallard
It is ok. And then just a quick follow-up. There was a report that the Air Force is contemplating flying all of its Global Hawks, I think, in 2027. I think this meets their expectations.
kathy guardian
There has been talk for a while that the Global Hawk franchise would be discontinued over time. And we, yes, expected that. And as you noted, the Block 40s aren’t retired until 2027. So it’s a bit long-term and doesn’t have an effect on the projections we’ve defined for this year or next, but it’s in line with our long term. – Forward expectations.
Operator
Our next Sheila Kahyaoglu from Jefferies.
Sheila Kahyaoglu
Maybe we can communicate about the F-35 program, Kathy. And given the production restart, what effect does this have on Northrop’s speed and prospects?And what are some of the bets and catches?thinking about content adjustments and timelines within Mission compared to AS.
kathy guardian
So, Sheila, remains approximately 10% of our overall annual sales in all facets of our contribution to the program. As we work on our new contract for Masses 15 to 17, we have heeded Lockheed’s call for our factors and still see our outglance for 22 and even 23 intact due to new expectations related to demand. the fastest developing component of our contribution to the programme. And at Mission Systems, we have a combination of progression and production because we helped With Block IV upgrades. We project systems’ earnings to be quite solid due to the accumulation of volume around Block IV.
Sheila Kahyaoglu
Super. Et and then maybe just a follow-up. You had a positive move from IBC, I think, first deliveries in Poland the quarter. Perhaps you can remind us how you extended this program and the timeline for the Army relative to other potential opportunities abroad.
david kefer
Of course. Happy to participate in that, Sheila. In general, you can think of this franchise in the diversity of 1% of sales. But as he pointed out, those are vital domestic and foreign elements of this opportunity today and just as vital foreign opportunities also in the long term. It is true that this is a set of critical projects that our IBCS capability can satisfy by connecting some kind of disconnected sensors and triggers in the past and incorporating new functions into disparate systems that are, in fact, at the center of the set of fashion projects, whether at home and abroad.
Therefore, we are looking for it to be a franchise in development. We are satisfied with next year’s competitive costs. There deserves to be some expansion in the current component of the year in the program. And again, it’s imperative – to have a component of our Defense Systems franchise.
Operator
Our next one comes from the line of David Strauss from Barclays.
david strauss
Kathy, I think on the last call, you backed up the existing consensus earnings estimate for 2023, which I think is about $38 billion. Is this still the right way to think about next year’s earnings trajectory?And it would seem that you would get there quite a bit in the expansion of B-21 and GBSD. So, do you guess, what the rest of the portfolio will look like next year, ex B-21 and GBSD, in terms of expansion?
kathy guardian
So we still think we can increase our expansion rate next year to the mid-single-digit range, which is how consensus is developing. And so I would say. And the environment call is strong, as I pointed out during the call. Therefore, this would provide favorable winds. However, I warn you just as I reflect on this as we prepare to provide you with insights and trends in October, when we provide more main points on whether the demanding supply-side situations we face this year are real. Mitigate the entire time of the year as to what it looks like in 2023 and, in fact, we can generate higher earnings growth this year, if not for supply-side constraints. So, it’s not really a matter of demand.
And, in his opinion, the budgets are strong enough that we have a more accelerated expansion until 2023, but we want to be able to achieve that expansion with hard work and materials. So, we’re doing very strict tracking and we’re going to have a greater concept of what it looks like in October so that we can give you trend knowledge through 2023.
david strauss
It is ok. And Dave, thanks for the color on the board. Obviously with you, a lot of mobile portions with market value and all that. 23 instead of 22. I mean, they’re based on more stuff today, I mean, can you help us on anything?Are we looking as a headwind for a few hundred million dollars between $23 and $22 million?
david kefer
Thank you for raising this factor for follow-up. We noticed during the call that we drew your attention on the slide about the sensitivity of pensions that we offer so much in January. So, to give you an idea of the approximate effect of an accumulation or reduction in a rate of reduction or a point of retreat in assets of a certain degree. The accumulation in the rate of reduction is the maximum significant effect we would see on FAS/CAS earnings if the year ended today, we have noticed more than 100, perhaps even about two hundred basic accumulation problems in the reduction rate since the beginning of the year. And so, as we noted in this sensitivity slide, both one and the 25 basic issues can have an impact on the market price of at least $1 billion at the end of the year and a very broad impact on FAS/CAS earnings going forward.
Again, those are non-operating GAAP earnings amounts. They are not money engines. On the contrary, as we have noted, AQHI refunds are expected to increase slightly. So, from an economic point of view, there is a little merit there. From a GAAP earnings perspective, it would draw your attention to the rate of reduction sensitivities. and back to assets. And of course, we’re going to see where the market moves in the next 6 months to give you a more definitive concept of the FAS/CAS ’23 outlook.
Operator
Our next one will come from JPMorgan’s SETH Seifman lineage.
Seth Seifman
Maybe just to keep everyone glued, I’ll do a follow-up consultation about the pension. And Dave, I wonder if you can communicate about a review and conceptually, we’ve noticed that Lockheed and its benefit plan explained and are offloading much of their duty on the insurance companies. You still have DB. no is huge I think the service charge this year will be less than $400 million. But when you think about what you need to do in the long run, which makes the most sense for Northrop, especially as a government contractor and with the framework of eligible positions, what do you need to do in the long run?
david kefer
Of course. Thank you Seth. Je, therefore, specify some details. First, we have had exceptional returns on our retirement assets over all the old periods, over the last 20 years, well above market return expectations. We are proud of the price this has generated and the benefits it represents for corporate and government clients. Therefore, today we are very well funded. We are talking about a 96% capitalization point that fluctuates day by day, based on market movements. in a slightly larger capitalization scenario today than we were even on the first day of this year, given that adjustments in the interest rate environment were offset by adjustments in asset declines that would be expected. Therefore, there are many moving parts below the surface.
But overall, we don’t feel the pressing desire to replace our long-term strategy today. This has been a price for the company, for the participants and for the government. And so this is something we’ll continue to compare over time. But at this point, we are satisfied with the returns on assets over a long era of time, satisfied with the prestige of the resulting investment, and will continue to keep you informed if there are any adjustments along the way.
Seth Seifman
And then, maybe to go on, just in aerospace, I know you talked earlier about the kind of absence of CAD in the quarter. I think they were a bit negative. I guess if we take a look at the last few quarters. Considering the length of the segment, the EACs in this segment are lightweight compared to others. What systems give you some kind of visibility into this recovery in the coming years?And when we think about how margin expansion in the segment over time, how does the underlying margin framework influence as opposed to EACs?
david kefer
Of course. In general, for a sector like AS, we would expect, in a typical year, to have a healthy underlying OM rate. And in a typical year, we would have some volume of favorable net changes in the EAC. Of course, at all times, we don’t know what systems they would possibly come from, because we have taken into account our dangers and opportunities in our existing EACs and we will have to act well and eliminate the dangers to drive those improvements in the EACs. Therefore, I would be reluctant to point to a specific program that would be a key detail or even less the main driving force of the benefits of CAD over time. But certainly, in our small, unrestricted portfolios, we want to continue to run well, improve the power of each of those systems, and again still have some volume of ABC net inflows in addition to the healthy underlying OM rate of the segment in the enterprise. This is a segment we are proud to operate with. some critical systems and we’re going to glance to continue building on that.
Operator
Our next one comes from the line of Noah Poponak of Goldman Sachs.
Noah Poponak
Why is there such a gap lately between the speed of Defense Department budget spending and Defense Department budget authorization?
kathy guardian
So no, honestly, I don’t know why. I can speculate on some things that might happen. First, as we see supply chain constraints, contracts may simply not require more funding, so it may also be only a matter of time. Another is the work limitations we face. which also confronts the government. So we’ve noticed that an undeniable shortage of other people to do the jobs has affected everything from costs to bill payment schedules, but that would be a hypothesis on my part. I can’t tell you why. What I can tell you is that for Northrop Grumman, we didn’t see that as a thing in the current quarter. As I noted, we had an exceptionally high order to turnover ratio of 1. 48. We found that acquisitions were held up as scheduled and that costs and expenses were in line with our expectations.
Noah Poponak
It is ok. Yes, it’s just a strange dynamic. It’s rare to see an authorization buzz, then be stimulated and improve discussions in the future, and then spending drops to double digits. as you may think, it is imaginable that the visitor knows the problem of his chain of origin. So don’t we cut off the controls as temporarily as they normally would?
kathy guardian
Without lays, we regularly see in existing systems that we tell the government when we achieve a safe spending threshold relative to the budget they have spent and this will incentivize them to provide the next accumulation of investment. It may be that many corporations and systems are lagging behind with their programming expectations. You see that in the effects of the whole industry. So they just didn’t want to do the quarterly expenses. Obviously, this is a trend that we all want to see reversed, because you believe the investment is there.
Operator
The next one will come from Rob Spingarn’s Melius lineage.
Robert Spingarn
At AS, it kept the earnings advisor despite the tension in the first part of the year, as you and Dave noted earlier, but margins are declining slightly. And he talked about catching up on the current part, but I sought to ask him if the manpower to do that is going to be a little more expensive and maybe that’s the margin. And to what extent Palmdale can be just a specific work hotspot, because it turns out that you and Lockheed are in pretty intense festival for talent.
kathy guardian
Let me start with the time part of the question, and then Dave can sign up for the first part. We don’t see Palmdale being more competitive than other task markets. The labor markets throughout the country where we operate are all competitive. Palmdale is no different, however, we have been able to locate the staff we want there to run our program. What we saw most intensely and what we talked about towards the end of last year, that is, how it had an effect on the F-35 line, is the absenteeism that comes and goes with COVID has been a bigger challenge for us. So we have the workforce that we want, but if they’re not as productive because they can’t be there consistently, that creates more disruptions for us. It began to balance. Even with this most recent circular of COVID-related disruptions, we haven’t noticed the same effect in which we’ve taken some mitigation measures.
The other thing that is done in Palmdale is to set up our own education centre so that we can integrate other people into our production systems faster and give them the education they need. This allows us to hire less professional workers. We provide the mandatory skills and this has opened up the group from which we can recruit. So, we don’t just take skills from other people’s production lines and vice versa. things done and we are seeing smart results.
Robert Spingarn
And very useful And alone, sorry, I’m just going to ask at a higher level, if it’s okay.
kathy guardian
To find.
Robert Spingarn
Just wanted to ask you to characterize your positioning for NGAD?
kathy guardian
As we think about sixth-generation aircraft, we are building the first of those for the B-21 and this has given us expertise and classes that we believe we can apply to other sixth-generation aircraft. Therefore, we are positioning ourselves as a competitor. I think our government needs to have a broad commercial base, capable of operationalizing those wonderful opportunities as much as possible. And we have made it clear that we are making an investment and strengthening our own functions and functions in order to compete.
Todd Ernst
I have to leave it there this morning. Kathy, I give you the final comments.
kathy guardian
Thank you, Todd, and thank you all for joining our call today. I need to highlight the ordinary achievements of our team this year and the momentum I feel is building the future. So I hope each of you enjoy the rest of your summer and we look forward to speaking with you in October. Thanks back.
Operator
Ladies and gentlemen, this concludes the convening of today’s convention. Everyone, have a day.