Executives
Wes Bush – Chairman, Chief Executive Officer, President
Jim Palmer – Chief Financial Officer
Analysts
Northrop Grumman Corporation (NOC) Company Conference Presentation December 4, 2013 9:00 AM ET
Moderator
Okay, moving on to Session No. 2, it is indeed a pleasure to welcome Northrop Grumman this morning. We’re pleased to have Wes Bush, Chairman, CEO and President of the company, as well as Jim Palmer, CFO. We’ve got the IR team, Steve and Denny here with us as well. And with that, I’d like to hand it over to Wes for some opening remarks. Thank you.
Wes Bush
All right, thanks Rob. I thought I’d start with some remarks this morning (indiscernible) majority of the time for Q&A. Let me start by saying—just to remind everyone that both Jim and I are probably going to be making forward statements that contain risks and uncertainties, and these risks and uncertainties may cause our actual company results to differ (indiscernible) refer to our SEC filings for an understanding (indiscernible)—and it wasn’t amplified, but you witnessed it – good.
All right. Let me just start by reminding everyone of the strategy that we’ve been executing as a company. I think it’s important to have that context as we’re talking about where we see things going as we’re moving forward. We’re continuing to execute a strategy that’s focused first on performance, making sure that we’re delivering and performing both for our customers and for our shareholders. We’re also very focused on effective cash deployment and I think the work that we’ve been doing over these last several years with regard to cash deployment is something that is working very well for our company. Thirdly, portfolio alignment, making sure that our businesses are aligned with the vector that we see for our customer community going forward and also aligned with our view of where we can actually create value in our enterprise.
So if we look at how we’ve been doing year-to-date, I think our results reflect the benefits of staying focused on this approach. Through the first nine months of the year, our sales had declined by about 1%, which I think is reasonably good performance in light of the declining federal budgets and the fact that this was the first year of the sequester. Our four businesses generated a segment operating margin rate of 12.5%, which is a 20 basis point improvement over where were last year at the same time. Our year-to-date earnings per share increased by about 10%. Cash from operations and free cash flow before pension contributions were also strong at $1.6 billion and $1.5 billion respectively.
Our sales trend reflects the strong performance of our long cycle businesses, aerospace systems and electronic systems. Year-to-date, aerospace systems’ top line is up 3% and electronic systems sales are 2% higher. Revenue pressure, though, in our short cycle business – information systems and technical services – is more than offsetting the more positive top line trends that we’re seeing in aerospace and electronics. But all four businesses are performing very well and generating very solid margin rates.
I would also characterize our year-to-date cash performance as strong. Before pension contributions, our nine months net income conversion is about 100%, which I think is a good measure of the quality of the earnings that we’re generating in the company. Cash on the balance sheet at the end of the third quarter was approximately $5 billion. That cash balance reflects our positive operating cash trends as well as the $2 billion of new net debt that we issued in May. We’ve been very consistent in deploying our cash. Year-to-date we’ve used approximately $1.7 billion to repurchase shares of our stock, which reduced our weighted shares outstanding by about 7%. In May, we increased our quarterly dividend by 11% and year-to-date we’ve paid shareholder dividends of more than $400 million. So in total, we’ve distributed about $2.1 billion to our shareholders or more than 140% of free cash flow before pension contributions.
I know, Rob, we’re going to spend a fair amount of time, I suspect, talking about the budget environment. It’s pretty clear, I think, to all of us that today’s budget issues are creating real challenges, both for our industry and of course for our government customer community. Ultimately, that’s compounding our country’s difficulty in addressing the modern global threat environment that we all see out there. As a management team, we’ve had to prepare for short-term uncertainties as well as managing for the long term. I think it’s an important perspective to keep in front of us that we have to make sure that we’re doing the right things for the long term as well.
So we continue to focus on delivering affordable and innovative products and services to our customers and solid financial returns for our shareholders. It’s clear to all of us that with the declining defense budgets, the pressure on the top line and the backlog that we’re seeing and the substantial reductions that are necessary across our industry and the cost structure, this is going to continue to be a strong focus. This is an area where Northrop Grumman has been doing a lot over the last few years to get ready, both in terms of the headcount reductions that we’ve implemented across our enterprise as well as the facility consolidations that we’ve made, and of course the affordability actions that we’ve taken on essentially all of our programs in our portfolio. We think this is going to be important not only in continuing to serve our customers well but it’s also going to be important in terms of our ability to continue to generate strong earnings and cash flow performance.
So there is certainly a lot of uncertainty out there, and as I said, I’m sure we’re going to talk about that some more, but we’re focused on the things that we can control – how well we’re performing on our programs, how well we’re generating earnings and converting those earnings into cash, and how well we’re deploying that cash to create value over time. I think that keeping our eye on that ball and keeping that focus on our strategy is going to enable us to continue to deliver solid results.
So with that, Rob, why don’t we turn it over to Q&A?
Question and Answer Session
Moderator
Okay, I’m going to start with the first question that you were expecting, which is let’s talk—and I’ll make it general so that you can cover it in any way that you see fit. What’s going on a couple hundred miles south of us? And understanding—we had a few of your peers here yesterday, so we know it’s a highly uncertain environment, but what do you think is happening? How do you think this discussion plays out as we approach the next in a series of infinite milestones?
Wes Bush
Mm-hmm, yes, it’s been quite a process, hasn’t it? I would say I think there are good intentions on both sides. On the positive side, I will tell you that I see a growing recognition of very negative impacts of the sequester. I think the military services have been doing an outstanding job of putting a spotlight on the impact on readiness that we’re already seeing. I think from a longer term perspective, the growing dialogue around what this really means to our nation’s ability to deliver technological superiority for the long term is beginning to get some attention.
But all of that being said, while I see that recognition beginning to emerge, I find it difficult to be optimistic about a different outcome in the near term than what we’ve seen over the last number of years, quite frankly. We do need a different outcome, no doubt about it, and as we get further and further into this sequester, I think as anyone that’s paying attention to what’s going on across many different aspects of our society can see, this is a bad thing for our country, so we need a different outcome. But the political capacity to get to something with a different vector here in the near term, as I said, it’s hard to be optimistic based on what we’ve seen over the last couple of years.
So from our own company perspective, we’re preparing for the sequester to be in place and for that to continue forward. I think it’s important that our planning be on that basis, that we be ready for that so that we can serve our customers and do the right things for our shareholders with that expectation. I’d clearly like to see a different outcome, but I’m not pinning much hope on it right now.
Moderator
Well that being the case, you mentioned earlier – and Jim, maybe you can get in on this one – margins. You guys have had exceptional performance. I’m looking at your income statement here over the last several years. Since 2009, segment margins have progressively improved. You’ve had aggressive cost cutting. You recognized a while back, I think really the first ones to talk about there would be revenue pressure, and in a subsequent question I’m going to ask you about that strategy that way, something we’ve talked about in the past.
But can you talk a little bit more about your strong margin performance, your ability to continue to execute, and where margins go if—can you hold this cost structure when things return to normal?
Jim Palmer
Rob, a number of the changes that we have made, for example shrinking the number of operating sectors from six to four, putting a cap on or limiting the defined benefit pension plan, all of those things are going to be sustained in whatever environment we have on a go-forward basis. So yes, we’re going to get the benefit of those changes on a go-forward basis.
Yes, we’ve had a significant improvement in margins over the last four years, a lot of hard work frankly in terms of taking the cost out, trying to make decisions about what programs, what contracts really add value for us where we can get returns, and then making those hard decisions around cost structure. But more importantly, it really comes down to managing your contracts. Having a good understanding of risks and opportunities in the work that you’re doing, identifying them up front because if you know what your risks are, you can help manage those risks so that you can take the actions to minimize those risks, and hopefully harvest opportunities.
So it’s really a combination of cost management, thinking carefully about the portfolio, and then doing what you said you were going do. Whenever we bid a contract, we make decisions about our cost structure, about the work that—the difficulty of the work that’s going to be performed, and ultimately that’s the acid test – doing what you said you were going to do.
Wes Bush
You know, Rob, let me put a little bit of a fine point on a couple of the comments that Jim had. We have moved aggressively on our cost structure, and if I roll the clock back to just a few years ago, our headcount is down about 19%. We are working and have been working very aggressively on our footprint reduction. We announced earlier this year a series of consolidation moves within the company to further reduce our footprint. That costs some money to do that, and we’re going to see that in terms of our capital expenditures over the next couple of years.
I think those are really, really important perspectives on what we’ve been doing to improve our performance, but the most important perspective one we probably don’t talk enough about, which is actual program performance, making sure that we are actually executing more efficiently and more effectively on every single one of our programs across our portfolio. So that discipline of program execution as we go forward is one that we expect to continue to grow on.
We get a lot of questions about can you continue to cut costs and get the benefit of cutting costs, and of course you’re never done in working on the cost equation and we are absolutely committed to addressing the affordability issues. But it’s really the program execution that drives the performance in our company.
Moderator
You know, it’s interesting – in the prior session, which was with a completely different kind of company, commercial aerospace primarily, we talked about the airlines changing the way they do business with a different kind of focus on cost structure for the first time ever in their 50, 60-year history, at least in jet operations. When I think about this industry and I go back to the 90’s, to the last time we had a downturn and you guys were both there – we talked a little bit about this before – we did see a correction in margins, I think on average of about 400 basis points, 12-ish to 8-ish kind of thing, not specific to Northrop but across the industry, so correct me if it’s a little bit off. What was happening then that’s not happening now for those folks out there in the room and on the phone that are worried about the eventuality of margins collapsing?
Jim Palmer
Rob, as I think back to that time period, clearly we had a significant decline in the budget, but we also had at that time a period where we had a number of fixed price development contracts. And so yes, there were margins that were eroded as we went through that decline, but I think it was probably more a recognition of inherent risk in those fixed price development contracts than the situation with the budget itself. I think it was really much more the fixed price development contracts that matured, if you will, the risks were realized during that period of time as opposed to anything else.
Moderator
And so extending that or extrapolating from that, is the idea that there’s a different approach to that today and it’s managed much more tightly?
Jim Palmer
Today, we’re not in that environment. Largely, we’re not in that environment.
Wes Bush
Jim put his finger on the fixed price development. I would say during the 90’s, reflecting on it, there were a whole series of acquisition alternatives that were attempted. Most of them ended badly. What I see today in the department is a very strong focus on how to acquire things as intelligently as possible, given the budget environment, and a recognition that risk on a program can’t just simply be transferred to one side of the equation or the other. Obviously there has to be a sharing of risk between the customer community and the contractor community.
So I don’t see sort of the—I don’t want to sound too negative about everything in the 90’s, but I don’t see so many of the crazy ideas floating around that were demonstrated during that period of time did just simply not work.
Moderator
Tony – question from the field? There’s a mic coming, Tony. Not that you need it, but.
Tony
Wes, would you please elaborate on how you were managing for the long term?
Wes Bush
Yes, you know the perspective, and Rob pointed out that both Jim and I have been through this process before, I think the perspective that’s really important to keep out in front of us is we’re going through some tough times right now. The world around us hasn’t gotten any safer. The reality is our nation is going to need a strong military and a strong industrial base to deal with those challenges, and that means we need to be investing to make sure that over the long term, we’re going to be able to continue to deliver the technological superiority that our nation requires.
So with that in mind, I know that we are and quite frankly I think most of the companies in our industry are putting a lot of effort into thinking about our investments. How are we investing to make sure that we’re going to be there for our customers and deliver the capabilities that are needed?
Investments have a couple of important aspects to them. One, obviously, is they keep our technology moving forward in an era where the pace of technology advancement around the globe is accelerating, and if the U.S. doesn’t stay ahead of that I think we really put ourselves at risk. The other part of the importance of investing in our enterprise is our ability to attract and retain talent.
We are in a fierce battle for talent today. Our company employs more than 30,000 scientists, mathematicians, engineers, and that is a talent base that has a lot of options. It’s also across our enterprise, both on the industry side and the government side, a talent base that has some—I think it’s been called the grey tsunami – has some years of experience under it, and—well, there’s a little bit of grey on all of us at this point. But the reality here is as we go through—even in a downturn environment, as we go through this shift in our talent base, we’re going to be out recruiting aggressively. We have to be successful in capturing real talent into our industry and into the government side of this enterprise.
So continuing to invest has a number of very, very important dimensions, and I think we have to be very strategic about what we’re doing here.
Tony
Could you give us some sense of how your investments during difficult times will (indiscernible) this period?
Wes Bush
Yes, I’d say a couple of perspectives. If you look back over time during the downturns, this is often the time when more innovative technologies have an opportunity to find their way into the products that our customers will acquire a few years from now. If you look back to the 60’s, the advent of military space is a good example of that. The 70’s was really the birthplace of stealth. The 90’s was really the birthplace of networked, cyber—the whole cyber battle domain. So this is, I think, the time where have the opportunity to perhaps invest a little bit more aggressively on some technologies that have a little bit of a different risk profile that give us that opportunity to help change the game again.
Tony
How would you prioritize the areas where you’re working today?
Wes Bush
That’s not something we’re typically very public about.
Jim Palmer
I think it’s also instructive to think about what we announced in the first quarter.
Wes Bush
Mm-hmm, it is.
Jim Palmer
We are consciously making capital investments in the centers of excellence so that we can in the period of a downturn, we are making capital investments to improve our productive capabilities so that when we have the inevitable shift back up, we’re going to be in a better position for the long term.
Wes Bush
Yes. So we announced earlier this year a number of centers of excellence that we are creating within the company. It is helping us consolidate our footprint, but to Jim’s point, it’s requiring some degree of capital investment to put that in place. We think that helps us as well from a competitiveness standpoint, because with those centers of excellence we ought to be able to provide our products and services more affordably.
Moderator
So this actually takes me back to where we were a little while ago when we talked about the capital improvements and the initiatives and so on. We’re in a declining revenue environment. You guys have addressed that head-on and been no worse for wear, frankly, than your peers. But when we think about today’s margin in the overall normal cycle of margins, how should we think about margins when things are good? What’s the potential? Is this cost structure maintainable as business comes back? So it’s a little bit of a repeat of the question earlier, but—
Jim Palmer
Rob, there are so many variables that ultimately affect the company’s overall margins. Frankly, we could have much higher margins if we were all production. If we were all production, we wouldn’t be investing for the future. We wouldn’t have the future opportunities ahead of us. A mix of development, new work and production is more ideal, I think. I think we have a very good mix today. We are continuing to invest for the future, and so on one hand I don’t want to give up the long-term opportunities to maximize margins today.
Moderator
If we get the ALT-POM, so again for background we think there are two versions of the budget out there, long term future year defense plan, the program objective memorandum, just for context, for ’15 to ’19, government fiscal ’15 to ’19. The ALT-POM is expected to be the one that fully reflects sequester if sequester should hold. So under that scenario, how would you expect that mix—so there’s actually a number of questions that are going to come out of this question. One is the programs we should worry about and so on; but Jim, to your point, the ideal mix is one where we have a balanced development cycle with production and so on, and margins that reflect that. But in an ALT-POM environment, what would that mix look like?
Jim Palmer
Really hard to say, obviously, because ultimately the big variable here is program decisions. Today, from my perspective, we really haven’t had to address those program decisions yet, so ultimately if we have sequester continuing for a longer period of time, I an imagine that ultimately those decisions are going to have to be made, and what those decisions are will affect each of us differently.
We’re fortunate in that we have a fairly diverse portfolio. Our largest program is about 5% of revenues – still very important, but our largest program is only about 5% of revenues, so ultimately those individual program decisions of existing contracts or programs and then decisions about what new programs go forward and the pace at which they go forward will ultimately shape a company’s—the industry and the company’s revenue profile over the next number of years.
So I really don’t know how to answer your question specifically, other than those kind of—
Moderator
Well, and I think the natural conclusion here is even if we end up with fewer new starts and more mature, higher profit production mix, that’s really not optimal. In the very long term, that would not be what you want.
Wes Bush
That’s right. No, we would be delighted to have our margins negatively impacted by our success in capturing a lot of new development activity, because that positions us very well for the long term.
Moderator
Right. Before we move into some of the programs—oh, we have a question.
Speaker
I just wanted to expand, Rob, on your question. Thinking about specific programs in ALT-POM, we don’t have enough detail to do that, could you at least speak to do you think it will be a higher mix of R&D or higher mix of procurement? Will ALT-POM allow us to still spend for the future, or will that have to be given up for a few years?
Wes Bush
I’ll give you my rough take on it, just from watching what has been done historically. Inevitably when we get into a tight budget scenario, we have to slow down on production. That tends to happen. None of us like that, and by that I mean our customers don’t like it, we don’t like it because that creates inefficiencies and that makes the unit costs go up. Every time that production rates get slowed down, the unit costs rise and the ultimate total cost the customer pays for the capability goes up. But nevertheless, when you’re having to manage to a fiscal set of constraints, year by year that is a result that inevitably occurs. I do think our customer community is going to try to manage that as effectively as they can because it clearly is a big negative from a longer term cost perspective.
The R&D part of this is the thing I am most concerned about in terms of the decisions that actually get made around the development activities. We have to keep our—collectively across the industry, not just our company, we have to keep our development capability current if we’re going to be in a position where we’re going to be able to ramp back up over time. So impacting the development activities too negatively, I think could have a very substantial long-term impact on the industry.
I know that there’s a lot of discussion going on in the building right now around that. Frank Kendall has been actually quite vocal about his concerns in that regard, and I think there is a lot of effort underway trying to figure out how to maintain the right level of R&D. But in terms of the relevant concerns, I would be most concerned about that.
Moderator
While we’re on the topic—Ross, I’m just going to throw this out and then you go. While we’re on the topic of the ALT-POM, let’s throw in the QDR in the mix and just a little bit how you expect the sequencing to play out here over the next six months or so.
Wes Bush
Yes. Clearly at some point there has to be a convergence between budget and strategy. If there’s not, then we have a meaningless outcome; so unfortunately, the QDR is impacted in reality, whether anyone would want to actually get out and say that. The reality is the QDR is impacted by this great budget uncertainty. We need a strategy that we’re going to be able to execute with whatever the resources are, so I could see the potential for delay. We’ve seen this before. We’ve seen the slowdown in one side or the other of that balanced equation cause the whole process to shift, so I would not be surprised to see the QDR process get negatively impacted by this uncertainty.
Moderator
Okay. Ross?
Ross
Yes, I wanted to dig in a little on cash. You have this intention to take the outstanding shares down 25% by 2015. I think you’re pretty much on the runway of that at the end of Q3, but how do you think about that plan as you look at the share price today of 112 versus low 80’s, where it was in May? How do you compare that to the intention of buying back stock for that plan compared to M&A and increasing the dividend?
Jim Palmer
As Wes said in his opening comments, we’ve been trying to be very thoughtful about our cash deployment strategy, and essentially that is invest in the business first, whether that’s through CAPEX or M&A. So invest in the business, manage the balance sheet, so make sure our debt maturities are well managed, that our pension plans are well funded, and then we want to return excess cash to shareholders, first through a competitive dividend. We look at all of our peers in terms of dividend rates and we think that we have a competitive dividend, and then basically use the share repurchase program as the lever to return excess cash to shareholders. Our philosophy on share repurchases has been not to be market timers per se, but to be generally consistently in the market with pace very based on a number of factors, including stock price. But we make those decisions on a regular basis about the pace and the pattern of our share repurchase program.
We did expect that when we made the announcement in May that there would be a favorable stock price reaction. We’ve seen that. We continued to buy, and we’ll be reporting on a quarterly basis on the pact at which we’re executing to that 60 million share repurchase that we announced, essentially 25% of 60 million shares, so we’ll be reporting on a quarterly basis where we are against that goal.
Wes Bush
Ross, if underlying your question was a concern about whether or not we’ve changed our goal, we have not.
Moderator
Okay, let’s dive into a few programs with some of the time that we have left. So you’re known for unmanned, you’re heavily invested in unmanned solutions both in the Air Force and with the Navy. If we think about this ALT-POM, which I think again would reflect the worst case scenario – sequester stays at the levels, the $550 billion over 10 years, et cetera – what is the risk to programs like BAMS, Triton, UCLASS, et cetera?
Wes Bush
Yes, I think all programs have some risk. As we were saying earlier, whether that risk is in the pace of development or the pace of production, it would be foolish to think that any program can necessarily escape from this. In particular, if the mechanism of the sequester is held, which is the peanut butter spread approach in the sequester, then it inevitably has a broad impact.
But if I look beyond just this next year or two years in this process, I remain convinced that unmanned, that we are just at the beginning of what we’re going to see from this class of technology. We’re seeing our customer community in the broadest context continue to recognize the benefits to the force structure of unmanned capability. There continues to be a lot of technology development opportunity associated with unmanned. The success we had over the course of the summer in landing the unmanned UCLASS on an aircraft carrier, I think was a great demonstration of the continued progression of this technology. I think it’s going to be important that the United States stay out ahead of this, and backing off on that is not something that I’m seeing and the dialogue that I’m hearing within the department and more broadly in the national security arena. So I think we’re going to continue to see this as a very important part of the force structure going forward.
Moderator
And I assume that you’re committed to maintaining your leadership position in unmanned.
Wes Bush
Yes, this is an area where our company has been fortunate in having a very strong leadership position, and we continue to invest very substantially in this area.
Moderator
Do you see the competition catching on here? Going back 10 years ago, there were one or two guys out there, you being one of them. Now everybody’s got some kind of unmanned capability.
Wes Bush
I think it’s like most of this class of technology – as it becomes more prevalent and even more important in its application, I think it is a technology that certainly other companies are investing in and becoming interested in. I think an important question in front of us is on the policy side of this, the view that the U.S. takes towards export and how that will motivate some of our allies to invest in this technology if they are unable to access what we are doing. So we’ve seen obviously some good progress in that thinking within the DoD. We need to see a similar amount of progress in that in the other parts of the government that engage on export. The approval to export Global Hawk to Korea that was cleared through Congress at the end of last year, I think is an important step forward in that regard.
Moderator
Let’s stay on that topic a little bit and talk about your international trajectory. Obviously you access it. You just talked about one means, and then the other of course is F35. But can we expand on that a little, talk about some of the other opportunities, and how you see your percentage of international revenue profiling as we go forward?
Wes Bush
Yes, I’ll only give just a top level comment and then Jim can talk about some of the individual perspective. I mentioned the unmanned capability, and I think that’s going to be a very important area over time. But if we look across our portfolio, both in our aerospace business and in our electronics business, we see a growing number of opportunities. Historically, electronics has been our biggest international business in the company, roughly 25% of sales from electronics international this year. But as we look forward with aerospace, with programs like the E2D and of course with unmanned, I think we see some very meaningful opportunities in that regard.
It’s not to say that our other two businesses are limited in some way. If we think about what we do in information systems, the work that we do in battle management, command and control, and in cyber security, there’s a number of international opportunities as well. This year, Jim, we’re at about 10% international, and we think we have the opportunity to grow that as we go forward.
Moderator
Okay, okay. What do you think about as your most critical—I don’t know if must win is the right way to say this, but important among the following. I’m going to just name some programs. We’ll start with LRSB, J-STARS replacement, TX, 3D radar, programs—you know, that’s on the Air Force side, and then on the Navy side, BAMS, UCLASS, et cetera. Where do you—
Wes Bush
All. I’m not going to let anybody off the hook in our company. Yes, we are very, very focused on that full set of programs, and we see tremendous opportunity.
It’s kind of an interesting perspective – we spend a lot of time talking about the negative side of this equation with the sequester and the budget environment, I think because we have to. We all have to be very mindful of this. But the reality is if you look out over the next five years or so, every single one of the services, primarily the Air Force and the Navy but even to some extent the Army, has recognized that it’s going to have to make some meaningful changes in its force structure if it’s going to be able to serve our nation’s security interests. And whether all of those programs will materialize over time, hard to tell right now. Clearly there are going to have be decisions on pace and the sequencing of these things, but if you just kind of turn the clock back and look back over the last 20 years, we’ve really not made major investments in our strategic force structure. Particularly over the last decade, we were having to be so focused on dealing with the theaters of operation around the world where our military services have been engaged, that it’s actually prevented as much progress in dealing with the strategic force structure.
As we think about this shift to Asia Pacific but also think about what we really need to be doing in other parts of the world, I think the Air Force has been very clear in terms of its priorities with joint striker fighter, the tanker and LRS, as well as some of the ISR systems. The Navy too has been very clear about its need to upgrade its force structure, so there are some very meaningful opportunities on the horizon and we intend to be very competitive in those.
Moderator
And just on that note, for context, we’re seeing a lot of pressure on the Army, the Marine Corps with regard to force structure. Your exposure there is relatively small as a company, so Jim, could you refresh everybody on your revenue there?
Jim Palmer
I think it’s around 8%. (Indiscernible).
Moderator
On the Army side?
Wes Bush
Army side.
Moderator
Yes, predominantly Air Force and Navy. On long range strike, we know it’s a delicate subject and there’s not a lot to be said, but your competition just changed a little bit, and I’m sure you’ve known about that for a while – we haven’t. How does it change things to go up against the team of Lockheed and Boeing?
Wes Bush
Where are you going to compete? That’s about all I’ll say.
Moderator
But does that—again, two companies, maybe they have distinct capabilities that they now bring to bear. Maybe at the very least, you can talk about your heritage on the bomber side and what you bring to the table.
Wes Bush
Yes, we’ve been at this for a long time. Obviously, we are the builder of the B2 bomber and had been not only maintaining it but continuing to upgrade that over time. I think that’s an important qualification that we bring to the party, but ultimately this is going to be about meeting the customer’s needs, and the customer’s been doing a lot of work on defining what it wants, defining the budget parameters that go with this, and it’s an opportunity, I think, for both teams to bring some innovative thinking to this and see what works the best.
Moderator
Not knowing what the limit in on what can be said about this, I’ll just—
Jim Palmer
We’re just about at it.
Moderator
We’re probably very close, yes. I’ll throw this out anyway; you can do what you want with it.
Wes Bush
All right.
Moderator
Is this a tanker-like situation with the structure, and—you know, because we’ve been through a few things here where we’ve done it multiple times on prior major programs. Are there lessons to be taken from the tanker procurement process and the current structure of that to be applied here?
Wes Bush
From what I can tell so far, I would say the customer is being very thoughtful about that. Obviously we’re not at the end of that game yet. We haven’t seen what the final terms and all will look like, and we’ll all make disciplined business decisions on that basis.
Moderator
Okay, one more and then I’ll see if anybody else has—oh, Ross has got one.
Ross
Based on (indiscernible).
Moderator
Oh, that was my question. We’re thinking alike.
Ross
(Indiscernible)
Wes Bush
Yes. It’s still in what I would call a protest mode, getting resolved, so we generally just do not comment on those things.
Moderator
Okay. Well, it looks like it puts you back in the game again.
Wes Bush
We’ll see.
Moderator
Okay, do we have any other final questions from the field? Well, with that I’d like to thank Wes and Jim for spending time with us.
Wes Bush
Thank you, Rob. All right. Thanks everyone.
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