Operator: Good day, ladies and gentlemen, and welcome to the Northrop Grumman First Quarter 2013 Conference Call. My name is Cheverly and I will be your operator today. At this time, all participants are in a listen-only mode.
I would now like to turn the call over to your host Mr. Steve Movius, Vice President of Investor Relations. Mr. Movius please proceed.
Steve Movius - VP, IR: Thanks, Emily. Welcome to Northrop Grumman's first quarter 2013 conference call. We do not have PowerPoint presentation for the first quarter. however we are posting an updated company overview that provides supplemental information on our four sectors. You can access our new Company overview at www.northropgrumman.com.
Before we start, please understand that matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor provisions of Federal Securities Laws. Forward-looking statements involve risks and uncertainties, which are detailed in today's press release and our SEC filings. These risk factors may cause actual Company results to differ materially.
On the call today are Wes Bush, our Chairman, CEO and President; and Jim Palmer, our CFO. At this time, I'd like to turn the call over to Wes.
Wes Bush - Chairman, President and CEO: Thanks, Steve. Good afternoon everyone. Thanks for joining us. Our first quarter performance demonstrates that our team's focus on affordability, cost competitiveness and program performance continues to generate solid results. This was another good quarter and I am very proud of the track record that our team has built.
Despite slightly lower sales first quarter earnings per share increased 4% to $2.03 the combination of strong operating performance from all four of our businesses and share repurchases drove this quarter's EPS growth.
Our first quarter sales declined by approximately $100 million or 1.5%. Sales for our short cycle businesses, Information Systems and Technical Services declined by approximately $200 million which was partially offset by $100 million sales increase at Aerospace Systems our longest cycle business. Jim will discuss trends within each sector, but generally speaking top line pressure in our short cycle business reflects federal budget turmoil continuing in-theatre force reductions and our own portfolio shaping actions. Information Systems was most impacted by the pervasive budget uncertainty in the first quarter and the restrictive nature of the continuing resolution that expires on March 27.
Segment operating margin rate was strong at 12.3% and we reduced our year-over-year weighted average shares outstanding by 7%. During the quarter, we repurchased 6.5 million shares of our stock for approximately $431 million. At the end of the first quarter, approximately 1 billion remained on our share repurchase authorization.
First quarter cash from operations improved year-over-year, and free cash flow improved by approximately $150 million. We ended the quarter with a total backlog of $39.4 billion, which reflects new awards of $4.7 billion, or 77% book-to-bill. First quarter book to book-to-bill was impacted by our customers' reluctance or inability to award contracts for task orders.
Sequestration and the restricted CR were significant overhangs. And most major contract negotiations are taking longer due to the numerous issues our customers have to address in today's environment. During the quarter, we announced several actions to ensure further alignment, but our customers need for increasing affordability, innovation and cost competitiveness.
We are establishing Aerospace Design Centers of Excellence in Florida, California and New York for manned and unmanned aircraft and electronic attack. We are also establishing two Aircraft Integration Centers of Excellence in Palmdale, California and St. Augustine, Florida. These actions are aimed at focusing and leveraging capabilities in our key areas of manned aircraft and unmanned systems.
Taking a center of excellence approach will allow us to preserve knowledge and critical skills across the changing program base. We are continuing to close and consolidate numerous facilities across the Company. These actions are aimed at improving our cost competitiveness by reducing our facilities footprint and leveraging enterprise-wide capacity in the most efficient and cost-effective manner.
Looking ahead, we now have a fiscal year 2013 appropriations bill in place. Sequestration of course is now an affect and our customers are in the process of making the programmatic decisions necessary to comply with the reduced budget levels. I'd also note that the President has submitted a fiscal year 2014 budget. The Administration's budget does not include sequestration, highlighting the importance of continuing to adequately fund our national security efforts.
However, if Congress does not take legislative action to avoid the continuation of sequestration, approximately $50 billion in additional spending reductions will be required in FY 2014. In addition to these budget considerations, Secretary Hegel's review of national defense strategy is expected at the end of May. This review may inform additional programmatic decisions, as well as the upcoming quadrennial defense review. All of this is creating a high degree of turmoil, as our customers navigate these budget crosscurrents.
We share the concerns of our Pentagon leadership that damage to national security maybe irreversible under a prolonged sequestration. With few exceptions, we were pleased to see the President's fiscal year 2014 budget supported many of our largest programs. Funding for the E-2D Advanced Hawkeye was increased 25%. 21 EA-18G Growlers were requested at roughly double last year's funding. F-35 units were maintained in space programs like SBIRS, Advanced EHF and the James Webb Space Telescope were sufficiently funded.
We believe it is important that the budget provides $13 billion for cyber-related activities. The Department of Defense designated cybersecurity is a key investment area and increase funding in this area by more than 20% to $4.7 billion. We were also pleased the budget continues to support Global Hawk Block 30 and Block 40 operations for the air force.
Our high-altitude Long-Endurance Unmanned franchise continues to be well-positioned in both the domestic and international markets. Growth in our domestic efforts will be driven by the Navy's Trident program and on the international front, we're ramping up on NATO AGS, and continuing our efforts on Germany's EURO HAWK.
Turning to our financial outlook for the remainder of the year we're confirming the guidance we provided in January. We now have an Appropriations Bill in place. We have received some specific sequestration related program directives.
To-date these are not large amounts in the aggregate, and they are being offset by more positive trends in other areas. So without additional definitive action on specific programs our prior guidance represents our current estimate of this year's financial results.
Although we recognize uncertainty remains regarding the implementation of sequestration. While we are not yet able to determine all program-specific impacts. We expect the reduced FY 2013 budget levels will result in lower 2013 awards and the related impacts to company revenues, earnings and cash flows likely will trail to reduced awards.
We continue to expect sales of approximately $24 billion EPS of $6.85 to $7.15, cash from operations of $2.1 billion to $2.4 billion and free cash flow of $1.7 billion to $2 billion before discretionary pension contributions.
So now I'll turn the call over to Jim for a more detailed discussion of results and guidance. Jim?
James F. Palmer - Corporate VP and CFO: Thanks Wes. And good afternoon, ladies and gentlemen. My comments will focus on the first quarter results and of course our 2013 guidance. As Wes said another very solid quarter. Our employees continue to focus on performance and execution in a very difficult and demanding environment and I want to add my congratulations to our team for a job very well done.
Turning to the sectors, Aerospace Systems sales increased 4%, or about $100 million. The single largest driver was the higher F-35 volume. You might recall that the F-35 program transitioned to the units of delivery accounting method beginning with LRIP 5. We delivered the first LRIP 5 units in last year's third quarter. In this quarter, first quarter of 2013, we had 10 LRIP 5 deliveries compared with no LRIP 5 deliveries in last year's first quarter. AS also had higher unmanned revenues this quarter as the NATO AGS and Fire Scout programs ramp up. These positive trends were partially offset by a decline in space programs. I view AS first quarter operating margin rate of 10.9% as supportive of our low-to-mid 11% guidance for the year and we continue to expect sales of approximately $9.7 billion for the year at AS.
Turning to Electronic Systems, first quarter sales were comparable to last year. In-theatre force tempo reduced infrared countermeasures and laser systems revenues by about $40 million. Program completions in combat avionics and maritime systems reduced revenues by about another $16 million. These impacts were essentially offset by high volumes for international and space programs.
Operating income on an absolute basis was down 3%, but margin rate was again outstanding at 17.2%. You will recall that in last year's first quarter, we noted that ES has an unusually high level of net favorable adjustments particularly in combat avionics. Net favorable adjustments at ES declined by $62 million this quarter, but were partially offset by the reversal of a $26 million non-programmatic risk reserve.
The remainder of the improvement reflects higher overall margin rates resulting in part from last year's performance improvements. Obviously, it's early in the year and most of this year's risk and opportunities are still ahead of us, but I expect that there may be some modest upside to the current guidance for ES sales and margin rate.
Information Systems, first quarter sales declined by 9% with the single largest item in that decline being the $25 million transfer of intercompany efforts to our enterprise shared services organization, so for that item, sales declined by about 8% due to lower volume across a broad number of programs. No single program accounted for material amount of the total decline.
Operating income declined as a result of lower sales and a lower level of net favorable adjustments than in the prior year. Although our margin rate declined, it was still strong at 10.2%. And at this point in the year, we are maintaining our sales guidance of approximately $6.7 billion with an operating margin rate in the mid to high 9%, although there is likely some modest downside sales risk with the uncertain impacts of sequestration on this short-cycle business.
Moving to the tactical services, first quarter sales declined by 4%, operating income declined by 7%, portfolio shaping impacted sales by about $30 million and lower ICBM and KC-10 volume impacted sales by about another $40 million. These declines were partially offset by higher volumes for new programs awarded in 2012.
Operating income reflects lower sales and an operating margin rate comparable to prior year. We continue to expect sales of about $2.7 billion with a mid-to-high 8% margin rate.
First quarter segment operating margin rate on an overall basis, was 12.3% compared to 12.7% in last year's first quarter. This reflects a $91 million decline in net favorable adjustments in the quarter, about two-thirds of that change was at Electronic Systems, but as I noted earlier that was partially offset by the $26 million reserve reversal.
The remaining performance improvement reflects as I said earlier, the higher booking rates across our portfolio resulting from at least in part last year's, EAC adjustments.
I would also note that we had a lower tax rate this quarter. As you are aware the American Taxpayer Relief Act reinstated the research tax credits for 2012 and 2013. So this quarter's lower effective tax rate reflects about $20 million benefit for those credits this quarter. That amount includes the full effect of 2012 credits and one quarter of expected 2013 credits.
Cash from operations improved by about $100 million compared to last year and as I think many of you know, our first quarter cash flow is typically the lowest of the year. As Wes indicated we are maintain our guidance from cash from operations and free cash flow and I would remind you that all those estimates are before the after-tax impact of any discretionary pension contributions and shortly after the quarter end we made a $500 million discretionary contribution to our pension plans. These tax efficient contributions avoid any future funding spikes and continue to be an effective use of our cash.
I would note that over the last 10 years our average annual planned investment returns have exceed our long-term expected rate of return by well over 100 basis points. That superior investment performance has positively impacted our funded status, reduced future CAS cost, and improved affordability and I believe provides a competitive advantage.
Before we move to Q&A, I just like to add my perspective on 2013 sales guidance. As we said last year or last quarter, our initial 2013 guidance did not assume sequestration and as Wes noted, to-date sequestration related downside sales risk haven't been that significant and it generally been in our short cycle business. I would characterize those reductions as pretty much consistent with our expectations in a declining budget environment. And to-date, the reductions that we have seen had been largely offset by positive trends at Electronic Systems. So, in thinking about this or in any specific program cancellations or terminations, we don't expect fiscal 2014 budget debate are the results of secretary Sagle's strategically review to significantly impact our 2013 sales. So given those assumptions we have maintained our 2013 sales guidance.
Steve, I think at this point we are ready to take any questions.
Steve Movius - VP, IR: Thanks, Jim. I would like each participant to limit themselves to a single one-part question. Also you are welcome to renter the queue if you had additional questions. So, Cheverly, we're ready to begin.
Operator: Howard Rubel, Jefferies LLC.
Howard Rubel - Jefferies LLC: Wes, I want to talk for a second about UAVs and this is a little bit of a fine point, but the FY '13 budget approved the – or supported the Block 30 Global Hawk, and you know the commentary outside of what Congress has appropriated, would say the program has problems and you can see that accordingly in the FY '14 budget. Could you sort of address, I mean obviously some of your commentary did, but could you put a little bit more of a fine point on this if the funding is there then won't you get it?
Wes Bush - Chairman, President and CEO: Howard thanks for the question. Let me just kind of back up and talk about Block 30, a little bit more broadly. We continue to be pleased, and I think the customer continues to be very pleased with the end-theatre performance of the Block 30 systems. They are in very high demand. They are running at a very high utilization rate. The combatant commanders don't seem to be able to get enough of them. So, that's the sort of the operational reality of what's going on with Block 30 today. And we're in this interesting period of time where the nation's having to make some decisions around budgets and the departments are feeling very squeezed on their ability to fit everything in and meet all the demands of both the Congress if you will from a budgetary perspective as well as the operational commanders out there in the theater. So inevitably there are decisions or recommendations put forth for budgetary considerations that the Congress has to debate and make decisions on and Block 30 I think is sort of a classic example of that. In particular it is brand new system and so when you do the calculation on the cost component, brand new systems take a little bit of time to work their operating costs down the curve. Down the operating cost curve and if you are in a budgetary mode where you're trying to squeeze everything in for the next year and you're not all the way down that curve. It's easy to come up with a different conclusion, and so that's where Congress has responsibility to look at things both near-term and long-term and we saw that in this last cycle where Congress took a view of sort of a longer-term given the investment that’s been made in Block 30. So we were very pleased to see the continued support for Block 30 in the actions that Congress took for the 2013, both the authorization and the appropriations process. But at the same time the Air Force has real budget and that's what how the Air Force is having to work their way through. This turns out to be more about the cost of operating and it probably doe in terms of the remaining procurement. If you look at the last of the lots of Block 30 to be spun on contracts that will be lot 11, there is only three more aircraft, in that lot 11. So the budget mat here has to go to what it takes to sustain the system and its operations. And so, that's on us. We have got to work with the Air Force to continue to address the cost of operating Block 30s. We're doing that and we are putting forward some proposals, recommendations for the Air Force to consider, but I think it's simply a reflection of this budget environment that we're in that's forcing a decision space that's perhaps more narrow and we all might want it to be given a longer term perspective of capabilities for the Nation.
Operator: Jason Gursky, Citi Investment Research.
Jason Gursky - Citi Investment Research: Wes, let's dive a little bit deeper on the comment that you made about 2014 and the fact that the impact of sequester is kind of marginal this year, but that we ought to be really focused on with sequesters in 2014 more importantly that revenues and earnings are going to kind of follow the bookings rate. So, it kind of leads logically to your expectations around book-to-bill for this year and how you think that that actually translates into the trajectory as we move out into 2014 keeping in mind that you will of course will be able to continue to draw on the backlog that you already have, but just any more granularity that you can offer on 2014 I think would be helpful for everybody on the call.
Wes Bush - Chairman, President and CEO: I think it actually might be helpful just to step back and remind everybody of the mechanics here, because that really turns into the outcomes, so I think we're all trying to sort our way through. The analogy I would use would be, how does the pig move through the snake. Although in this case I wouldn't want to impune the population of pigs by calling them the sequester, so maybe it's the rat moving through a snake or something. It's a delayed effect approach. The sequester reduced the amount of money that Congress allows to be committed by the Department of Defense and by the other federal agencies, so it really starts there. The in-year effect of the sequester is a reduction in the Department's ability to obligate fundamentally. That reduction takes some time to translate into revenue impacts as the department actually has to turn, reduce level appropriations into specific contractual commitments. And then those contractual commitments, once they are made, they play out over the life of the contracts as revenues. So, that creates this delayed effect in realizing the impact on revenues resulting from the sequester. If you kind of stand back and look at the different types of businesses in our Company and in our industry, the shorter cycle businesses will realize this effect the first, of course, because that delay effect is shorter. The longer cycle businesses, we'll see it over a longer period of time. I think as you reflected in your question, awards is really the leading indicator of that effect. As I think I indicated in my remarks, we expect to see the impacts on revenue, earnings and of course cash flows trail that impact on awards over time. As I think Jim mentioned, when we were thinking about our guidance, obviously, we're having to reflect the best knowledge that we have today, that guidance does assume that the sequester does not result in cancelations or terminations of our significant programs. But clearly, there is still uncertainty regarding the ultimate impact of the sequester, particularly as we look at into next year. I think your question went to what should we be thinking about in terms of the effects on awards and book-to-bill. I wish I knew. We have yet to see that, as we go through this year, I think the real test will be – what does the third and fourth quarter of this year look like. So essentially the last quarter of this fiscal year and the first quarter of a new fiscal year that will inform us a lot and certainly will inform us on how 2014 will look and is very likely that this going to negatively impact sales in 2014. I'll say it as clearly as I can in that regard to think that the sequester somehow just dissipates and goes away and doesn't impact the future as putting your head in the sand. So, we expect there will be some continuing impact over time, the magnitude of that impact in 2014 is hard to predict as I indicated we've got a bunch of things in front of us. We have to work our way through the actual implementation of the current sequester we have the debt ceiling issues in front of us over the course of this summer which may or may not impact the outcome for the budgets for next year and how Congress deals with President's budget that was put forward. And we also have in front of us the overall strategy review, that the Secretary Hagel has launched which is standing back to take a broader look at the national strategy in light of the overall budget constraints. So obviously it would be little bit foolish to try and speculate on how that works out for 2014. But in aggregate given the impact of the sequester this year. I think it's fair to project that it will have a negative impact on 2014 revenues.
Operator: Doug Harned, Sanford Bernstein.
Doug Harned - Sanford Bernstein: I wanted to follow on that because when you look at your shorter cycle businesses, particularly on the Information Systems side, your backlogs did come down in Q1 and you've been very clear for some time that this is where you could see more of an effect. But then if we head into sequestration, my assumption would be that there could be some impact in '13 and then in more in '14. When you take apart that business, where are you seeing the most maybe downside in Q1 or the most risk going forward, either in terms of customer, civil defense, intel or business type. Can you characterize that a little bit?
James F. Palmer - Corporate VP and CFO: Doug, this is Jim. As I said in my comments, really declines we saw this year or this quarter, quarter-over-quarter were across the broad portfolio of programs. I don't know that I would characterize it as necessarily in one particular area or not. Again, I think as we all know, this is the shortest cycle business we have. It's likely to be the first impacted and it's probably also likely to be the first that starts to turn up when there is an upturn.
Wes Bush - Chairman, President and CEO: I do think there are some effects in there that properly flow-through before (others). We know, I think everyone is aware that the O&M budgets are under the most immediate stress, so the components of the IS business that connect to the O&M accounts see it first. The Army budget is also a component of sales in IS, is I think probably even under more pressure from a longer perspective, not necessarily for the quarter, but from a longer perspective. So, if I had to pick apart sort of the customer community drivers, I would say those are more immediate. But the reality is, as Jim said, all of our customers across the board are dealing with this. There was not real flexibility provided to the department with the – post to the sequester, so it's that, kind of as we thought it would be, should this happen, kind of across the board.
Doug Harned - Sanford Bernstein: So, intel, civil agencies, DoD, all sort of the same dynamic?
Wes Bush - Chairman, President and CEO: Yeah. They are all having to deal with this sequestered budget amounts, and they are all dealing with it in somewhat different ways, but ultimately, and I'm not just talking about the quarter, I'm talking about – our kind, our view over the year. We expect to see it manifest kind of across that board.
James F. Palmer - Corporate VP and CFO: Doug, to be real clear here, we really haven't seen that large of impact from sequestration at this point. Largely the declines that we saw were what we – I would characterize as expected based on an overall budget decline environment.
Operator: Joe Nadol, JPMorgan.
Joe Nadol - JPMorgan: Wes, wanted to dig a little more actually into Information Systems and the backlog decline has been noted and your comments about that have been noted. Just bigger picture though, this business is going I should – what I would characterize and maybe disagree, in a direction on Northrop like direction, you guys have been very clear about your pursuit of profitable businesses and we see the margins in that segment, but pricing is getting tougher and barriers to entry are always have been low. How are you thinking about navigating through this environment where really the business is going in a different direction from what you like to do with your businesses.
Wes Bush - Chairman, President and CEO: Our approach to that and we've been at this now for a few years NIS has been to step away from the components of that space that are going in the directions that you described. And so part of what you've seen in terms of our top line NIS have been very focused decisions about where we're just not going to be in that part of the market and an as I said we've been at that for a while, I think you can see the benefit of that thinking in terms of our operating margin rate. Because we've been able to continue to generate good margins in this space by being much more selective in the parts of it where we compete. So if I pull that thread a bit (indiscernible) has probably more hardware in it than I think most people realize. If you look at the work that we do for the Department of Defense in the communications arena where with NIS, we're building the CNI avionics for the joint strike fighter. If you look at actually much of the work that we do for the army that is hardware in content. Those parts of the business certainly require a lot more engineering content they require intellectual property investment and create positions for us that are not just sort of commodity IT business frame work that is often seen in the space characterized by IS. If you look at the broader systems work that we do that is generally characterized by and also a lot of engineering content whether we are building large command-and-control systems and missile defense is sort of a classic example of the work that we do in IS in that regard. Those areas are classes of businesses that when you compare what's in our IS sector to other companies, other companies sometimes put that in something that we call electronics or missile defense or some other nomenclature for the title of the business. So, I am not as concerned about what we're seeing in the more commodity part of, what I would sort of call, the IT services businesses out there, because that's a relatively small part of our business. We do have some of that and we've made decisions to keep pieces of it where it connects to the higher value sort of longer investment perspective components of the business. So I do wonder sometimes if we are doing ourselves a disservice by calling it Information Systems, but quite frankly, in terms of what it actually does, it provides Information Systems to our customer community and I don't want to re-label it just from putting a different banner on it from a street perspective. I want to make sure that our team understands their charter and what they are out there that do, but the overall vector for that business I think is good over the longer period of time. Clearly, as I said, it is a shorter cycle business, most parts of it are, and so we'll see some of those effects sooner. But when I think about this for the long-term, I like what I see. I like what we're doing and I think it's going to continue to be important part of our Company.
Operator: Robert Spingarn, Credit Suisse.
Robert Spingarn - Credit Suisse: Wes, just on the back end of that question, and then I have another one. Could you characterize, maybe give us a ratio in that business. So what you'd call price-sensitive to less price sensitive?
Wes Bush - Chairman, President and CEO: Let me ask Steve to do that. Steve Movius. Steve, as most of you know was formerly the CFO of our IS business and I think has a good framework for describing that.
Steve Movius - VP, IR: Information Systems, you really look at it in a couple of pieces. One would be kind of services piece with a lot of, what I will call, high-end engineering content – contracts where we've been with the customer for often times very extended periods of time, quite a bit of that with restricted customers and I would say, the most of our competition in that space are folks that are kind of the tier 1 folks that you know pretty well. On the system side, that's about 60% of our business and again that's by and large very few of the IT competitors in that space, again mostly the tier 1 guys where you have to have significant capabilities to be able to compete effectively and where the customers value proposition is more on what you are delivering to them versus particularly a lower hourly rate so to speak, you might think about in service as well. So I hope that helps.
Robert Spingarn - Credit Suisse: No, it certainly does. Then just Wes, if I go quickly to another direction. One of your peer companies talked a bit about non-defense adjacencies in a recent earnings call. Could you talk a little bit about where some of your opportunities are, and then to any extent that you might be further contemplating portfolio shaping?
Wes Bush - Chairman, President and CEO: My perspective on adjacencies is it's a perspective that any healthy company should always be looking at its portfolio of capabilities and figuring out how to create value. I think the experience of our industry suggest that the longer you have to stretch out your tape measure to measure how adjacent it is, the less likely it is that you are going to really create value. So, you have to be very thoughtful both around the real, the practical application of the technology and a company's ability to understand and navigate the channels to market. It turns out channels-to-market is every bit as important as the product that you think you have. So our experience, generally has been that there is more value to be gained by partnering effectively with other companies that simply have those channels to market and understand the economics and that consumer if you will, demands that are in those spaces. So I would say there is a value creation opportunity out there for the broader use of technology, you just have to be very thoughtful about how you pursue that and the degree to which you focus the resources of a company in that direction versus sticking to your (knitting).
Robert Spingarn - Credit Suisse: But you wouldn't characterize it as a driver of your forward strategy?
Wes Bush - Chairman, President and CEO: Now I would not is for an opportunity space that I would say that we look at, and that comes and goes over time depending on where those technologies might actually connect. If you turn back the clock to the latter part of 90s there was a rapid growth in the telecom spaces that needed a class of technologies that derived from the defense industry. So a number of companies ours included were able to navigate that and create some meaningful value during that time through some very thoughtful approaches to partnering with other companies to leverage that technology. So it's a little bit dependent on what else is going on in the economy and where the needs are and that's really the I would say the way we think about it we're mindful of it we look at it, but it's not the primary motivator of our strategy obviously. We're a global security company we keep that in mind.
Operator: Sam Pearlstein, Wells Fargo.
Sam Pearlstein - Wells Fargo: I had a question which is, if I just look at your net favorable adjustments, and I back those out, it still looks like margins were up kind of 30 basis points from December and about 90 versus last year. So, I guess the first question is really what do you attribute that real change in performance to as to why the underlying earnings still seems to be better? And then should we use this, call it, $225 million of favorable adjustments as the likely number for the future quarters this year?
James F. Palmer - Corporate VP and CFO: Sam, I hadn't done your math, but as I noted, earnings adjustments are down this quarter. I would think to a more if you will normal level. Last year admittedly was – had very favorable positive adjustments. Didn't think they would be able to be sustained at that level. Ultimately the margin rates for the four sectors in the Company reflected in our overall guidance, I feel comfortable with that. Clearly, we're going to push the organization to do better. Part of the improvement as I noted in margin rate is the result of the actions that we've taken over time that allowed us to harvest the benefit on our existing backlog of contracts. We'll realize that benefit over the life of that backlog set of contracts, and on go-forward basis we're negotiating new contracts, reflecting the current cost at that point in time.
Operator: Bill Loomis, Stifel.
William Loomis - Stifel Nicolaus: Thanks for giving the detail on the services, just kind of staying along that theme, you talked about the impact of sequestration early thought and then, you know, but I look at the guidance for the year on both looking at the two separate Technical Services and then IS. So on Technical Services, we look at the guidance for full-year, it was down, it actually was down 4% but it applies to other quarters, that's down 13% to 14%, can you just talk about what the main drivers causing those lower year-over-year comparisons, and on the other side with IS, given the full year guidance, it looks like it's going to be relatively stable throughout the other remaining three quarter. Yet, you know you talked about how sequestration would impact the shorter cycle side, so is there thing that are happening positively on the IS side to kind of offset that later in the year?
James F. Palmer - Corporate VP and CFO: In terms of guidance, you might imagine in this environment, we looked at a whole number of – whole bunch of possible scenarios that have different sales levels for all of the different organizations. And as I do that, look at all those potentials, as I said, I come back to an answer that tells me that our overall guidance is supportive of what may, what I would expect to happen for the year. Yeah there is going to be some variation among the sectors as we go through the year and get a better clarification around whether or not there is going to be specific programs affected by sequestration. The timing of when those occur will have an impact on this year's sales. But again on an overall basis, I feel good about the overall guidance. I would point that TS for example, there are some programmatic effects that occurred this year. The ICBM program will be down on year-over-year basis. Just as part of that programmatic change in the program and that has been reflected in our thoughts about overall guidance at the beginning of the year for the TS environment as well as the total company.
Wes Bush - Chairman, President and CEO: Bill, it's Wes. I'd just add to what Jim had to say on this. Just one other little piece to think about and I think this is kind of a broader market perspective. Our customers are clearly feeling the most intensity of the pressure in the near term around the O&M part of the budget. And purposefully the appropriations process tried to relieve a little bit of that that they went through, but any of the businesses that are tightly connected to the O&M part of the budget when we think through all of the factors that Jim just described that’s a factor that really weighs into our thought process. If you think about what's going on at DOD itself they paid for their civilian workforce out of that O&M budget and they are talking still about having the furloughs in folks. And when we are down to that level of furloughing and impacting readiness and we've heard the Secretary of the Air Force talk about, awful effects of having to stand down training flights. When we are having to make those kinds of decisions as a nation relative to the impacts of the sequester. It really makes that part of the budget risk factor stand up for us and makes us even more sensitive to potential decisions our customers might have to make in light of the things that are weighing on them already. I just think it's important to keep in mind what our customers are having to work their way through in light of this somewhat ridiculous budget situation.
Operator: Robert Stallard, Royal Bank of Canada.
Robert Stallard - Royal Bank of Canada: Wes, I just have a follow on from what you just said about the state of play so to speak. Customers clearly got a lot pressures at the moment. I was wondering if you are seeing any of that cascading down to you on may be the price or terms of contract situation as obviously they could save some money I guess by the defense industry booking lower margins.
Wes Bush - Chairman, President and CEO: The way I would characterize that is things are taking are longer to get done and I think part of that's just a reflection of the turmoil that our customers are having to deal with and there is always a natural inclination to try and push back on the margin rates and other aspects of contracts. Our approach to that has been, and I don't think we are alone in this. When you are looking at a total cost picture, the place to go to save the money is the 90%, not 10% -- the 90% of cost, not the 10% of your – whatever the right percentages are on a particular contract. So our approach has been to very aggressively go after cost. Cost from a cost structure standpoint and cost from a programmatic standpoint. I think in the places where we're able to demonstrate to our customer community that we are making progress in that regard. I think that helps this overall discussion immensely. In the areas where the customers aren't satisfied with progress on that, then yes, there is a tougher discussion around what is the appropriate fee or incentive structure to help motivate improvements in overall cost. So, yes, I would say there's more intensity around that, but to-date, I think we've been in a position where we've been able to work with our customer community to get to outcomes that we view as fare.
Robert Stallard - Royal Bank of Canada: Maybe just a fine point on that. Are you seeing the customer potentially trying to transfer more risk in the contract that you sign up to as a way of perhaps saving some money going forward?
Wes Bush - Chairman, President and CEO: Each time we get into a discussion around an acquisition approach, the ultimate manifestation of that risk is contract type. And, there is, I would say you know more intensity around what should be fixed price, what should be fixed price incentive versus cost plus, and I would say we were seeing a little bit of a tilt, I think almost an over correction tilt in the direction of fixed price or fixed price incentives overall. If you look at the communication that Frank Kendall has been putting out and I would say all of these service acquisition executives have been working on. I think there is a growing recognition that might have gone a little bit too far and that there are really something that the department really wants to be cost plus or perhaps FBI, they were getting pushed toward FFP. So, I think there is a natural pendulum sort of cycle that we see in this and my sense is there is a little bit of correction occurring right now. But, the pressures of the budget environment do cause individual program offices to have to rethink that and figure it out how they actually do their budgeting from a total cost, not just with putting on contract, but also their margin or their risk assessment. So, it's a bigger – I would say a bigger part of the dialog, bigger part of the discussion, but again that's on us as well, that's on to the industry and our company in particular to be very clear about what that risk balance is.
Operator: Cai von Rumohr, Cowen & Company.
Cai von Rumohr - Cowen & Company: So, a general question, you know Secretary Hegel has sort of emphasized priority on cyber. Your handout suggest that cyber is about little under $2 billion out of IS' revenues. Everyone defines cyber business differently. Could you tell us when you talk of your cyber solutions what do you have in that number and what are its prospects for growth and profitability this year and next.
Wes Bush - Chairman, President and CEO: Let me just say sort of broadly. I agree with you everybody defines cyber somewhat differently it is one of these fields that’s rapidly emerging and as we all began to realize and by the way, include our customer community. The tentacles of cyber and the necessity of connecting it so intimately to other components of a structure. I don't think there is going to be an exact precise definition that everybody can look to and say, that's an airplane and that’s cyber. I think it's going to be one of these things where we are going to have to build our way into a common understanding of it. So as we have worked our definition of it, it has emerged over time sort of initial view that was all about maybe defense and offense in the network domain. To now include situational awareness more broadly in network domain. And then beyond that, it became clear that we needed to embed cyber capabilities into platforms and other systems that we're selling obviously embedded component of it. Then I would say even beyond that there is a growing recognition of cyber as an integral component or perhaps the right words for basically the broader category of (non-connecting) capability that is inclusive of things that may have historically been (indiscernible) on. So where we are thoughtful in how we look at each piece, and how we describe it, but I think what you're seeing from us is more a reflection of the way that we would characterize the components of our portfolio that match to our customers emerging definition of cyber. And as that definition continues to change, we are going to try and keep up with it and actually help influence the perspectives on those tentacles of cyber. So, I apologize if that's not a precise definition for you, but it is a reflection of an evolving field, and a field whose tentacles are increasingly intertwined in just about every other component of the defense architecture. So, given that, to the second part of your question of growth, I mentioned in my comments that we were pleased to see the amount of funding that is evident in the President's budget for what I would say is more traditional cyber. The definition of defense, offence and situational awareness, but there are components of the President's budget associated with the other parts of the defense infrastructure that are reflective of the need to embed cyber in those as well. So, it's probably not going to help from a modeling perspective, what I just said, but I think from an understanding perspective it's important to recognize that this is going to be a moving target for a while, which I think emphasizes its importance.
Cai von Rumohr - Cowen & Company: I think the question really was, how fast is it growing? I mean, it's a priority, but is it growing or is it relatively stable until some event in the future?
Wes Bush - Chairman, President and CEO: It's growing. It's growing rapidly and trying to put a number on it would have to pin down lead current state definition on any particular day. But it's double-digit growth.
Operator: Carter Copeland, Barclays
Carter Copeland - Barclays Capital: Just since we made it this far in the call and haven't talked about one of two topics that are so near and dear to your hear Jim, in capital deployment and pension, I figured out at least knock one of them out. The guidance explicitly states, you are not considering a debt ceiling breach government shutdown scenario, but obviously that's a risk you got to think about, sort of tail risk you got to think in your planning. When you think about, your stance on capital deployment, share repurchase, as we get closer to that, should we expect to see some conservatism and, how you manage the balance sheet and how you think about share repurchase or is that – are you in a position where you think you can continue the way you have in the past despite that risk?
James F. Palmer - Corporate VP and CFO: Carter, I characterize our approach here is to be mindful of all the risk that are inherent in our business and then to plan for the possibilities that they all may occur at the same time to be balanced if you will across. We don't guide on a quarterly basis, obviously on share repurchases. We’ve talked about our plan for the year. I really don't see a change in that plan at this point in time. I think we're on pace to do that, and at the same time we're mindful of the potential risk around debt ceiling situation here in the summer and feel comfortable that we're able to deal with that as well.
Carter Copeland - Barclays Capital: Since its Q1, I'll save the pension question for next quarter.
Operator: Myles Walton, Deutsche Bank Securities.
Myles Walton - Deutsche Bank Securities: Wes, I'm going to go to the high level on sequestration one more time, and the only thing I'm trying to get out is, for last couple of years 4% organic decline has kind of been I think what you showed 4 or 5. And this year pretty much the whole industry is at 5. And Jim I think qualified that as being more reflective of a general defense spending declining environment. So I am just kind of curious are you feeling better about the industry and your, in particular ability to manage sequestration. Because it seems like they have given you a lot of lead time to see it coming and is it just going to turn out to look like an extension of a down cycle.
James F. Palmer - Corporate VP and CFO: Hard to tell yet. The challenge here obviously that we are all struggling through in '13 is we've got to deal with a full-year sequester in half a year. And so our customers are just really struggling to sort that out and I have to say I admire them for how they are managing their way through this, because it is so challenging. Trying to predict where this goes on '14 or '15 basis is difficult from a variety of perspectives that I enumerated before trying to predict how the FY '14 budget process will work out trying to predict the results of the strategy review those are all sort of big challenges. We are managing and I would say broadly across the industry we are managing, because we are having the scale to go with what's happening, and you know it's not what we preferred to do, but it's what we know how to do and we are going to do it and having some lead time on decision-making is always helpful. So we can try and do this in way that is most efficient. But ultimately, as I've said very broadly and I don't want anyone to sort of here that we're relaxed about this because we are not. The impact of the sequester will have long term impacts even if it just gets turned off for '14 and beyond. The fact that we had it this year will have ripple effect. And if it goes on very long, I think just about anyone in our industry would tell you if we are concerned about the impacts on our supply chain and we're concerned about the impacts on our workforce and we are concerned about how long it takes to turn the engines back on when the Nation needs it. And history shows the nation will need it. So I don't want anyone to hear that this is just sort of business as usual, we'll figure it all out and everything will be fine. It's the wrong answer for our country.
Carter Copeland - Barclays Capital: But if you had to make the bet, would '14s decline be an accelerating decline versus '13?
Wes Bush - Chairman, President and CEO: I am not going to speculate. There is so many factors out there I think it would be foolish to speculate.
Operator: George Shapiro, Shapiro Research.
George Shapiro - Shapiro Research LLC.: Two questions actually. Jim, I was wondering if you could quantify at all the potential cash flow impact from what the Pentagon's talked about of switching from milestone payments to progress payments, and also the effects of slowing payments that had been accelerated last year for small business?
James F. Palmer - Corporate VP and CFO: I'll take the second one first. The move away from the so called quick pay methodology that occurred in the first quarter impacted cash flows by, I would estimate, about $100 million, negatively impacted cash flows by about $100 million. In terms of movement from milestone payments to progress payments, George, you'd have to look at broad portfolio of programs. It is, as you know, just a timing question. You do get paid. It's just how quickly do you get paid and so, we continue to work these issues on a program by program basis, contract by contract, if you will with some progress, sometimes not so good, but again I feel good about the overall guidance for cash for the year.
George Shapiro - Shapiro Research LLC.: Then if I might, one of you, Wes, I mean you talked about trying to focus on the 90% of the cost rather than the profit margin. But as you've commented in an uncertain environment that you're in where you don't have the same ability to see ahead like you might have had, I mean, how do you manage getting cost down in that environment, so it doesn't wind up having impact on the margins?
Wes Bush - Chairman, President and CEO: Fundamentally, our biggest lever has been our ability to manage our overhead structure in the Company, and as I have said on earlier calls, we've been on a several year path to reduce headcount and reduce facilities, as well as address other components of that cost structure, including pension that we think it's been necessary to help address that. The next phase of it obviously is programmatic, and every program in our Company is addressing that in some meaningful way and ultimately it depends on the nature of the individual program. So, we look at cost in a total composite. We've had, I would say more flexibility or opportunity in going after the overall cost structure, overhead cost components, but we are being aggressive on it program by program.
James F. Palmer - Corporate VP and CFO: If I may, if you really think about our business, we are a consolidation conglomeration of a bunch of programs or contracts. Much of the cost on any of those contracts are people related cost and supply cost. So the vast majority of our costs is essentially tied to our individual contracts or programs and we can respond based on what happens to those contracts or programs.
James F. Palmer - Corporate VP and CFO: So it takes a lot of disciplined management across the enterprise.
Steve Movius - VP, IR: I want to thank all of you for your interest in our company and this concludes our Q&A session. And I'd like to turn the call over to Wes for final comments.
Wes Bush - Chairman, President and CEO: Thanks Steve. I just like to wrap up today by thanking our employees for all that they are doing to ensure that we continue to support the men and women of our military service and our intelligence communities as they deal with this very challenging budget environment. The sequester does have real negative impacts on these great people who serve our country and its imperative that we all give them our support. So thanks again for all of you the call today, for your continuing interest in our company thanks for joining us.
Operator: Ladies and gentlemen this concludes today's conference call. Thank you for your participation. Good bye.