Good day, ladies and gentlemen, and welcome to North Gremlins' 4th Quarter and Year End 2020 Conference Call. Today's call is being recorded. My name is Shelby, and I'll be your operator today. River. At this time, all participants are in a listen only mode.
Republic. I would now like to turn the call over to your host, Mr. Todd Ernst, Treasurer and Vice President, Investor Relations. Mr. Ernst, please proceed.
Brookshire. Thanks, Shelby. Welcome to Northrop Grumman's 4th quarter and full year 2020 conference call. We'll refer to a PowerPoint presentation that is posted on our IR America's web page this morning. Before we start, matters discussed on today's call, including guidance and the outlook for 2021 and beyond, Republic.
Reflect the company's judgment based on information available at the time of this call. They constitute forward looking statements pursuant to Safe Harbor provisions of federal securities laws. Horizon. Forward looking statements include risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results America.
Matters discussed on today's call will include non GAAP financial measures that are reconciled in our earnings release and supplemental PowerPoint presentation. Ridge. Our GAAP results reflect the mark to market method of accounting for our pension and other postretirement benefits. Our references to adjusted earnings River and adjusted earnings per share on today's call, we'll refer to earnings and EPS adjusted for mark to market impact. Republic.
We also refer to adjusted free cash flow defined as operating cash flow, less capital expenditures and plus the proceeds of the sale of equipment to a customer and the after tax impact Risk and Growth of discretionary pension contributions. These are non GAAP measures defined in our earnings release. Our 2021 guidance Republic. On the call today are Kathy Warden, our Chairman, CEO and President Rick and Dave Capper, our CFO. At this time, I'd like to turn the call over to Kathy.
Kathy?
Thank you, Todd. Good morning, everyone. Thanks for joining us today. I want to congratulate the Northrop Grumman team for delivering outstanding 2020 results. I applaud our employees' support for one another, Recovery, our customers and our communities in the face of 2020's multiple challenges.
Together with our suppliers and partners, America. We operated through the pandemic, executed well on our programs, maintained superior performance on critical global security missions America and 1 program that strengthen our foundation for the future. We began 2020 operating in a new sector structure, Recovery, which further aligns our unique capabilities in space, missiles, advanced weapons, mission systems and aeronautics. Ridge. This alignment enables the capture of additional revenue synergies, particularly in Space and Advanced Weapons, as well as continued identification Retail Products of Operating Synergies.
Our 2020 results are tangible evidence that our strategy is creating value. Ridge. We had exceptionally strong 4th quarter operational performance. And for the full year, we had strong bookings, Ridge. Exceeded the high end of our guidance range for sales, EPS and adjusted free cash flow and delivered strong segment operating income Horizon Capital Markets through continued focus on performance and operating efficiencies.
For the 3rd consecutive America. We achieved a book to bill greater than 1. New awards in 2020 totaled nearly $53,000,000,000 River, 1.4x sale. And total backlog increased 25% to $81,000,000,000 River. Sales rose 9% to $36,800,000,000 and segment operating margin rate was 11.4%.
River. Adjusted EPS increased 11.5 percent to $23.65 and adjusted free cash flow increased 18% Recovery and Company. All four sectors captured important new awards, posted higher sales and operating income and sustained strong operating margin rates. As expected, our Space business Horizon. In its new configuration led growth in backlog and sales.
2020 results demonstrate Space Horizon Systems' growing ability to drive the development of innovative and affordable offerings for our national security, civil and commercial customers. Republic. We booked new business in each of these three markets, more than doubled Space Systems backlog and increased sales by 18%. Republic. In addition to $9,000,000,000 of restricted space awards, we were awarded GBSD, the most recent addition to our diverse portfolio of multi Wide Decade Multibillion Dollar Franchise Program.
Looking ahead, we expect space systems will continue to be our fastest growing sector Republic, based on GBSD and the planned recapitalization of our nation's space assets. The funding for space based capabilities increased 6% Republic in the U. S. DoD FY 2021 budget with growth expected to continue. At Aeronautics Earth Systems.
We booked solid awards, including $6,000,000,000 for restricted programs and substantial awards for F-thirty 5, Richmond, Triton, E-2D and Global Hawk. AS sales significantly exceeded our revenue guidance, principally due to an equipment sale to a restricted Rimini customer in the 4th quarter. We continue to perform well on large franchise programs like F-thirty 5, Republic E-2D and B-twenty 1. Our F-thirty five Integrated Assembly line received Aviation Week's Laureate Award Racine for revolutionizing military aircraft production through human ingenuity and advanced digital technology. Republic.
And as you may have read, the U. S. Air Force recently disclosed that the production of the 2nd B-twenty 1 stealth bomber is underway Republic and that the first rater is expected to roll out and fly in 2022. The team is making tremendous progress and our partnership with the Air Force is Red Cross. We are pleased with the maturity of the hardware and software, including recent flight testing on a surrogate test bed.
River. Air Force leaders say these efforts along with the team's modern approach to digital engineering give them a lot of confidence about the program's path to first flight. Republic. I share this confidence and our team looks forward to delivering the affordable and highly capable next generation bomber our nation requires. Republic.
In AS, our advanced technologies and integration expertise are well aligned to meet the requirements of next generation systems. America. Our programs are performing well, and we're focused on near term opportunities to drive operational efficiencies and margin rate expansion. Republic. Defense Systems results were also strong and reflect growth in core capabilities like C2, Advanced Weapons Systems America and Sustainment and Modernization.
Earlier this month, the U. S. Army authorized our IBCS system Republic of North America. We are pleased to be in the early stages of the year. We are pleased to be in the early stages of the year.
We are pleased to see the progress we made in the quarter and
we are pleased to see the progress we made in the quarter. Republic. This is a critical next step in moving IBCS closer to future deployment for the U. S. Army and Poland, and it demonstrates the continuing success Republic of our C2 approach.
We look forward to competing for the U. S. Army full rate production contract, which we expect will be awarded late this year. Republic. In addition, we continue to pursue additional international opportunities for IBCS as we demonstrate how that architecture Rock and Support Joint All Domain Command and Control.
Mission Systems leadership in networked America's Open Architecture Mission Systems continues to be a competitive differentiator as demonstrated by program milestones and new business awards. Republic. MS recently conducted a successful demonstration as part of the Air Force's Joint All Domain Command and Control effort, also known as SHOTC-two. Republic. Our gateway technology enabled F-thirty five, F-twenty two and other platforms to share data across multiple paths Republic for the first time.
We expect to continue providing the underlying technology needed to enable the department's chassis to vision. Republic. And this month, MS was chosen by the Air Force to be the sole provider of the F-sixteen electronic warfare suite, Ridge, which will equip as many as 450 F-16s, replacing several legacy systems with a modern digital solution. River. This work has a potential value of $2,500,000,000 In addition to next generation capabilities for F-thirty five and F-sixteen, Republic.
MS is on the team Japan selected as their FX integration support partner. Our team brings proven experience Horizon and 5th Generation Technologies to ensure FX capabilities and interoperability to strengthen the Japan U. S. Alliance. Republic.
We look forward to working with Mitsubishi Heavy Industries, the FX prime contractor. With its deep portfolio of sensor technology and integration expertise, Republic. MS is enabling the modernization of weapon systems with the latest digital technology that provides our customers the capability to detect and defeat Republic's Advanced Adversaries in the Electronics Spectrum, providing the foundation for profitable growth. Republic's portfolio remains well aligned with the National Defense Strategy and supports critical modernization efforts underway to address evolving threats. Republic.
As you are aware, the Congress passed the 2021 National Defense Authorization and approved appropriations of approximately $740,000,000,000 Recovery Defense Spending. Northrop Grumman programs were well supported in the budget, and we continue to have a robust opportunity set, Republic, including next generation interceptor, 3 dealer, the upcoming F-thirty 5 block buy and multiple restricted opportunities. Ridge. Our success in growing the business and expanding earnings is delivering cash to support our capital deployment strategy. Republic.
2020 cash from operations totaled $4,900,000,000 before a $750,000,000 discretionary pension contribution. America. And adjusted free cash flow totaled approximately $3,700,000,000 or about $22 per share. Our strong liquidity Recovery. Enabled robust investment in our business, strengthening of our balance sheet, a 17th consecutive Rock's annual dividend increase and $490,000,000 in share repurchases in 2020.
America. As we begin 2021 with $5,000,000,000 of cash on hand at year end and expected net proceeds of approximately 2 point Ridge and North America. From the divestiture of our IT Services business, we have the resources and flexibility to take aggressive value creating actions. Republic. These include robust investment for growth, continuing strengthening of our balance sheet and the return of cash America shareholders through share repurchases and dividends.
Today, we announced that our Board has approved a $3,000,000,000 increase in our America's share repurchase authority, raising the total outstanding authorization to $5,800,000,000 We expect to use more than $3,000,000,000 Ridge for 2021 share repurchases. And beyond 2021, we expect share repurchase will continue to be a high priority use of our discretionary free cash flow, Republic. While we also continue to maintain a strong balance sheet and strengthen our platform for growth through disciplined investment
America and selected M and A.
Turning to guidance, which now includes the pending IT Services divestiture. Ridge. The 2021 outlook reflects organic sales growth and segment margin rate expansion. We expect sales between $35,100,000,000 Republic and $35,500,000,000 with a segment operating margin rate of 11.5% to 11.7%. Republic.
We now expect adjusted EPS, excluding the gain on sale and one time transaction related costs, to range between $23.15 Retail and $23.65 and adjusted free cash flow of $3,000,000,000 to $3,300,000,000 Republic. While delivering financial results is a primary company focus, we are very proud of our ESG record and earned high marks in many environmental and America's Social Ranking. We achieved the Leadership A- CDP Ranking for Environmental Sustainability for the 9th consecutive America. And we earned a place in the Dow Jones Sustainability Index North America for the 5th consecutive year. Recruitment, Inc.
Named us the top fifty company for diversity, ranking us 15th. And Northrop Grumman was the only aerospace and defense America, a company that earned a place in Equileap's Top 25 Gender Equality Index. In addition, we remain mindful Retail of the role our products and services play around the world. As we continue to consider our portfolio, we have decided to exit by year's end Republic, a legacy Orbital ATK aging and surveillance contract that supports testing of cluster munition components. Republic.
In our endeavors to enable global security and human advancement, we recognize the importance of our environmental, social and governance responsibilities, Rock Rockwell and team for this year's outstanding performance. And particularly, I want to recognize the more than 6,000 employees who will become part of the Peraton team upon closing of our IT Services divestiture for their contributions to Northrop Grumman. Ridge. I'll turn the call over to Dave now for a more detailed discussion of our financial results, guidance and trends. Dave?
River. Okay. Thanks, Kathy, and good morning, everyone. I also want to thank the team for their outstanding performance in the Q4 and the full year. Republic.
I'll spend a few minutes on 2020 results and then discuss our 2021 guidance in more detail, including the planned effects of the IT Services divestiture River and the latest updates to our pension metrics. Beginning with the highlights on Slide 3, we exceeded the high ends of our guidance ranges for revenue, adjusted EPS River and adjusted free cash flow in 2020. Revenue grew 17% in Q4 9% for the full year Republic. As a result of our robust bookings over the last 2 years and our team's strong performance across all four sectors, River. The potential upside in AS sales that we noted last quarter did occur in Q4 as we booked a $444,000,000 equipment sale Recovery and Company.
Revenue growth for the quarter and the year were quite strong, even excluding this unique item, Horizon, especially in light of impacts from the continuing pandemic. As shown on Slide 5, our mark to market adjusted EPS grew 17% Rim from Q4 of 2019 to Q4 of 2020, driven by $0.42 of segment performance as well as $0.35 of net pension cost Republic and $0.21 of tax, interest and other items. Slide 6 shows the full year view. Adjusted EPS grew 11.5% in 2020, Republic, driven again by segment performance and net pension costs with higher net interest expense, partially offset by tax, share count and other items. Referring to sector results on Slide 7, Aeronautics Systems sales rose 24% for the quarter America.
And 9% for the year, largely due to higher levels of restricted activity in both periods. Higher restricted volume reflects in part River. The $444,000,000 of revenue was booked in Q4, along with an immaterial amount of associated margin. River. The cash proceeds from the sale will be spread between 2020, in which we received $205,000,000 Republic.
In 2021, when we expect to receive the remaining $239,000,000 Excluding this item, Republic. Higher volume for manned aircraft programs primarily restricted in the E-2D drove 4th quarter growth in AS. America. For the year, both manned aircraft and autonomous systems contributed to growth with restricted programs, E-2D and Triton being the primary contributors. River.
I'd note that as we've moved through 2020, F-thirty five production volume began to plateau. This is consistent with the lifecycle America. And as a trend, we expect to continue in 2021. Turning to defense systems, Republic. 4th quarter and full year sales increased 2% and 1%, respectively.
Upward trends in both periods reflect higher volume on tactical Rivers and Subsystems, including GMLRS and AARGM ER, as well as certain restricted programs. Rimvision Systems 4th quarter and full year sales rose 10% 7% respectively, Republic with higher sales in all four business areas for both periods. In both the quarter and full year, we had sales growth in airborne sensors and networks, Republic, reflecting higher volume for restricted activities, electronic warfare and F-thirty five programs. Navigation, targeting and survivability sales Horizon, increased principally due to higher volume on targeting programs, including lightning and self protection programs. Rivers.
Cyber and Intelligence Mission Solutions sales increased primarily as a result of higher restricted volume. Maritime Land Systems and Sensors sales increased primarily due to higher volume on land and marine systems. Republic. And finally, as Kathy touched on, Space Systems continued to deliver robust double digit sales growth. Sales increased 31% in the quarter Horizon 18% for the year.
Restricted programs, next gen OPIR, NASA's Artemis programs and GBSD had Republic. And in the Q4, material purchases for the newly awarded extension missions Republic for the commercial resupply service contract contributed to strong growth in our launch in strategic missile areas. Republic. Turning to operating income on Slide 8, AS operating income increased by 10% in the quarter and 2% for the full year. Horizon.
The decline in 4th quarter and full year operating margin rate is primarily a function of the low margin on the equipment sale. River. Excluding that item, AS margin rate would have been 10.7% for the quarter and 10.2% for the year, Horizon Systems. Higher than the guidance of approximately 10% that we gave last quarter. Defense Systems operating income increased 22% in the 4th quarter Horizon and 7% for the full year.
Operating margin rate was 11.2% for both periods, slightly above our guidance of approximately 11 Horizon Systems 4th quarter operating income was slightly lower than the prior year period, which included a $20,000,000 gain on a property sale. Ridge. For the full year, operating income rose 4%. The Q4 MS operating margin rate was 14.2%. Republic.
For the full year, its operating margin rate was 14.5%, consistent with our guidance and demonstrating solid execution Horizon Systems portfolio. Space Systems operating income increased 17% in Q4 Horizon and 12% for the full year. Operating margin rate decreased to 10.1% in the 4th quarter, due in part to a higher America's largest and largest segment of our largest business in the prior year period. For the full year, space operating margin rate was 10.2%, Republic, in line with our guidance of the low 10 percent, in part reflecting a changing business mix, more leveraged to development work. River.
At the total company level, segment operating income increased 8% in Q4 and for the full year, it increased 5% to $4,200,000,000 Horizon Capital Markets with a margin rate of 11.4%. Excluding the equipment sale, segment operating margin rate for 2020 Rimuru. Would have been at the high end of our guidance range of 11.3% to 11.5%. Total operating income for the full year increased to approximately Republic of $4,100,000,000 with an operating margin rate of 11%. Now turning to cash, Ridge.
We had a very strong Q4 as is our typical pattern. For the year, cash from operations before the after tax impact Republic. The discretionary pension contribution was approximately $4,900,000,000 As you saw in our press release, River. Our adjusted free cash flow, which is before the pension contribution and includes the $205,000,000 cash proceeds from the equipment sale, totaled approximately Republic. The equipment sale proceeds are included in adjusted free cash flow because they result from a customer transaction River, and serve as an offset to capital spending booked in prior periods.
In addition, it's important to note Republic. We accelerated over $1,200,000,000 of payments to small and vulnerable suppliers during 2020, and we're continuing that program in 2021 Republic to help our supply chain manage the ongoing impacts of COVID-nineteen. Now for an update on our pension plans, beginning on Slide 9. River. Our 2020 asset returns were approximately 16%, a second straight year of excellent performance, well above our expected long term rate of return.
Republic. Our FAS discount rate declined from 3.39 percent to 2.68 percent, which resulted in a mark to market charge of approximately 1 Rimac. But our net pension liability is lower than it was a year ago, and our funded ratio has increased to 86%, Horizon. Due in part to the $750,000,000 discretionary contribution we made at the end of 2020. We have updated certain FAS pension plan assumptions, Republic, including a reduction in our expected long term rate of return from 8% to 7.5%.
Slide 10 summarizes our pension estimates Horizon Capital Markets for years 2021 through 2023 and Slide 11 summarizes sensitivities to changes to our 2021 assumptions. River. It's important to note that our discretionary pension contribution in December, along with strong recent asset returns, River. Our cash prepayment credit River is approximately $1,900,000,000 as of January 1 this year. Also on the CAS side, Republic.
Our updated assumptions as well as the outstanding asset performance have resulted in lower projected pension cost reimbursement over the next few years. Republic. In 2021, for example, CAS reimbursement of $465,000,000 would be $362,000,000 lower than 2020. River. This results in a modest 2021 revenue growth headwind of less than 1%, higher margin rate performance on certain fixed price programs River and lower operating and free cash flow as less cost flows through our indirect rates.
While this makes our rates more competitive to enable future growth, Republic. The net pension cost reduction including both FAS and CAS is a headwind of approximately $0.45 River to 2021 EPS compared with 2020. The other key factor affecting comparisons between our 2020 results and 2021 outlook River. The IT Services business generated approximately $2,300,000,000 of revenue in 2020 River. With a segment OM rate of 10.5%, which is below company average.
The expected net America. After tax proceeds from the transaction are approximately $2,500,000,000 We expect to book a substantial gain on the sale, Ridge. But neither that gain nor the cost directly associated with the transaction and our related debt retirement are included in our guidance. River. Now looking ahead to 2021, sector guidance is outlined on Slide 13.
Our revenue and segment OM guidance are Republic. We are slightly above the outlook we provided in October adjusting for the IT Services divestiture. Horizon Systems, we expect sales in the mid to high $11,000,000,000 range with a low 10% margin rate. Republic. Excluding the equipment sale from the 2020 results, AS revenue would be flat to up slightly year over year.
Republic. For manned aircraft, restricted activities are expected to be lower, primarily due to the equipment sale and programs like FA-eighteen, Republic. B2 and commercial aerostructures are also expected to decline. Growth demand programs, including E-2D, RiverFront. F-thirty five and JSTARS is expected to partially offset these declines and as well as lower volume in autonomous systems.
Republic. For Defense Systems, we expect sales to be in the mid to high $5,000,000,000 range, reflecting the impact of the IT Services divestiture. River. The effect of the Lake City program and is expected to be partially offset by growth elsewhere in the portfolio. Republic.
We expect the operating margin rate to remain strong in the low 11% range. Mission Systems sales will be reduced River. And operating margin rate will be increased by the IT Services divestiture. As a result, we expect MS sales of approximately $10,000,000,000 River, with a margin rate of approximately 15%. Adjusting for the approximately $525,000,000 of sales going to Veritas, Republic.
At Space Systems, Rim. Sales will be reduced and margin rate will be increased by the IT Services divestiture. As a result, we expect low double digit sales growth Republic, given the expected change in mix. Space Systems sales and margin rate guidance contemplates more early phase development work, Republic, including GBSD and several restricted programs, which is accretive to sales and margin dollars, but slightly dilutive to the margin rate of the portfolio. Republic.
Turning to Slide 14, including the IT Services divestiture, our total revenue guidance is $35,100,000,000 to $35,500,000,000 Republic after intersegment eliminations of about $2,000,000,000 We expect a full year segment operating margin rate of 11 point America. Adjusting for the IT Services divestiture and the AS Equipment sale, Ridge. Our organic growth rate would be nearly 4% at the midpoint of this guidance. I would also note that we expect the Q1 to be slightly less than 25% Republic. We expect 2021 total operating margin rate will range between 10.1% 10.3%, Republic, reflecting $465,000,000 for the operating portion of net FASCAS pension benefit and unallocated corporate expense Republic of approximately $550,000,000 which includes $260,000,000 of non cash intangible asset amortization and PP and E step up depreciation Ridge and $290,000,000 of other corporate unallocated items.
Our guidance assumes $560,000,000 of interest expense, Rimini's interest income and an effective tax rate of approximately 17%. I'll remind you that our 2020 reported effective tax rate Republic. Reflected the mark to market expense. On an apples to apples basis with our 2021 guidance, the 2020 tax rate was about 15.8%. River.
Our guidance also assumes the limited business impacts of COVID-nineteen are similar to the second half of twenty twenty. River. Based on all of that, we expect adjusted earnings per share to range between $23.15 $23.65 Republic. Excluding the gain on the IT services sale and one time transaction costs. As shown on Slide 16, this range reflects America's strong performance in 2020, offset by the year 1 dilution of the IT Services divestiture, the lower pension benefit Ridge and the higher tax rate.
Given that we intend to use the majority of the proceeds from the IT Services divestiture to buy back stock, River. Our 2021 EPS outlook anticipates in a reduction in shares outstanding to approximately 162,000,000 shares. River. For 2021, we expect operating cash flow will range between $4,200,000,000 $4,500,000,000 with adjusted free cash flow Republic of $3,000,000,000 to $3,300,000,000 Our estimate of adjusted free cash flow includes the remaining $239,000,000 of proceeds from the equipment sale. Ridge.
As we've discussed on past calls, the payroll tax deferral resulting from the CARES Act is set to begin to unwind this year. The after tax benefit River. It was over $300,000,000 in 2020 and should thus be an outflow of over $150,000,000 in 2021. Ridge. The IT Services business generated approximately $250,000,000 of free cash flow per year and the lower
America. The cash reimbursement that I described a
moment ago should create a year over year cash flow headwind of over $300,000,000 River. We intend to offset a portion of these headwinds through continued outstanding working capital performance. River. As is our typical pattern, we expect our cash flows will be weighted more toward the second half of the year. As Kathy mentioned earlier, Republic.
We're in an excellent position to deploy cash productively in 2021 and beyond. With about $5,000,000,000 in cash at the end of 2020, Republic, the IT Services divestiture proceeds of approximately $2,500,000,000 after the divestiture closes. Ridge. We intend to deploy more than $3,000,000,000 to share repurchases and over $2,000,000,000 to debt retirement in 2021, America, subject to market conditions and timing considerations. Our current guidance presumes the retirement of the $700,000,000 of debt that matures in March Republic and the early retirement of the $1,500,000,000 of debt scheduled to mature in 2022.
Our 2020 2021 debt retirements Republic. Combined with the $750,000,000 pension prefunding totaled $4,000,000,000 toward the strengthening of our balance sheet River. And support our target of returning to a solid investment grade rating of BBB plus Beyond 2021, Ridge. Our discretionary cash can be prioritized toward shareholder returns or M and A, while also maintaining a very strong balance sheet. Republic.
In summary, we expect to continue strong value creation through a combination of growth, performance and robust cash generation, River Capital Allocation. Now I think we're ready for Q and A time.
Star 1 to ask a question. The operator assistance. Your first question is from Seth Seifman of JPMorgan.
Thanks very much and good morning. I wondered just with the divestiture, America. Is the long term plan to sort of maintain defense and mission as kind of 2 Republic segment. And how would we kind of think about the long term growth prospects in defense given that I see IBCS and argum in that segment.
Republic. Thanks, Seth. So when we look at the portfolio of defense systems, as you point out, it is America, consisting of our command and control as well as our offensive and missile systems capabilities. And so Ridge. We view that area as one that will continue to grow.
It's very well aligned with our customers' highest priority areas, both domestically Republic and internationally. And we have made the portfolio decision we have to divest our IT Services business so that we could focus more Republic. On the other hand, Mission Systems, which contains Republic. A significant quantity of open architecture networking capabilities that are really keeping pace with the advancing threat environment Republic. To be able to help our customers compete in the electromagnetic spectrum, those capabilities are also areas that we see well Horizon and Core to Growth.
So we want to keep that team focused on investing and staying at the forefront of technology. River. 2 different areas of focus, but certainly some synergy and those two teams work well together,
America. Your next question is from Carter Copeland of Melius Research.
Hey, thanks and good morning. River. Dave, I wondered if you could just expand a little bit on this AS equipment sale. How should we think about the accounting Republic. Treatment of that, is that something that you sort of booked and shipped in a quarter?
Or is it cost on cost? Or do you recognize the revenue when Ridge. You make the sale. I'm just trying to think about the cost of whatever that was and how we should think about that. Just any clarity on that would be helpful.
River. Sure. Thanks, Carter. As we mentioned, relates to a restricted program. So there's a limited amount we can say about that.
River. What I would be able to say is, this is equipment that as we mentioned, was booked in the past as capital expenditure. Republic. We've now sold that equipment to a customer and as appropriate booked both revenue and the Ridge and North America. We have a very strong portion of the cash that we've received in the quarter in our 2020 results, little over half of the cash is to be paid in 2021 and will be River, booked in as part of our cash flow in the 2021 outlook.
From an accounting perspective, it's a somewhat unique item, River. But a customer transaction and with revenue accordingly, River. As we mentioned, minimal profit associated with it, which is why you see the margin impact on AS and the outstanding growth that
Rivers. Your next question is from Sheila Kahyaoglu of Jefferies.
Europe. Good morning, everyone. Thank you for the time. Maybe Kathy for you, just bigger picture, North Europe is one of the only Rock Crimes, where consensus doesn't have any major margin improvement baked in. How do you think about your profit profile of your business, given at least 20% is Ridge and Development or Low Rate Production.
Can you give us a little bit more color? Do you see profit rates improving over the next few years?
Thanks, Sheila. We clearly, this year, have guided some margin rate expansion, and there are a number of factors contributing Rim. 1st and foremost is the strong performance in the operating businesses that we delivered both in 2020 and that we anticipate Horizon. Orienting our business to agility and streamlining, and COVID-nineteen helped to accelerate some of those initiatives in 2020, again, resulting in good Republic. Good rate management and cost reduction and those operating efficiencies we expect to continue as Republic.
We move forward as well. And then finally, as you note, we do have mixed headwinds as we bring in America's Q1 results. And we've challenged the team to look at offsets to that mix pressure America through just strong performance, operating efficiencies and future changes that we might make in the operating Rochester that enable us to continue to find new ways of reducing costs. So those are the areas that Ridge. We are aligned to and as you see in our guide, we were in 2021 able to across
America. Your next question is from David Strauss of Barclays.
Thanks. Good morning.
Ridge.
Hey, Dave, I wanted to ask about free cash flow. I appreciate all the moving pieces there. But it looks like when I America. Net out, the pension side, divestiture side, tax, everything, you're about in the same Republic. As you ended 2020 around $3,000,000,000 but that included a fair amount of working capital, River Capital in 2020.
So are you assuming positive working capital again in 2021 or contribution from working capital in 2021? And Ridge. How sustainable is that looking beyond 2021? Thanks.
Sure. Happy Ridge. To talk through that, I think you named the right kind of non operating or unique drivers from 2020 to 2021 Recovery. Free cash flow, the divestiture, the CAS pension headwind and then the reversal of the payroll tax benefit from 2020. River.
And you're right that when you add those three together, it's greater than the reduction in our outlook from 2020 to 2021. So it does require us to make River Capital Improvements in 2021. The good news there is we believe we're on track to do so. We Republic. We expect to continue to be able to generate working capital improvements really across our businesses.
We have some targeted areas of Rim. Performance improvement that we're driving in 2021 and we'll this is not a point in time effort. This is a long term effort that will remain a focus of the company. So to your question America. And about years thereafter, we will continue to drive efforts around working capital efficiency in 'twenty two and beyond.
River. Your next question is from Jon Raviv of Citi.
Hey, thank you. Some of the questions just sort of thinking forward about organic growth, America. You said the 9% in 2020, you're talking about 4% in 2021. And there's some moving pieces there with the equipment sale, I think. Just this idea of sustaining growth given where your backlog has been, given where your bookings have been, and then whether there's an opportunity to actually accelerate as things like B21, America.
GBSD, AARGM, ICBS, all kind of start to hit their stride.
River. Thanks, John. So as we look at growth this year in 2021 and beyond, we see the opportunity for Republic. Continued growth based not only on our backlog, but also new programs. I outlined some of those in my earlier comments that we see being awarded this year.
Ridge. As budgets appear to be flattening out, our portfolio would have the opportunity for sustained growth through programs like America. It very much will be determined on what Republic. Funding priorities come from the new administration and how those might play out over time. But we can clearly see forward Ridge.
And our projecting another strong year of growth in 2021. And based on the strong support for our programs in France in the 2021 budget are equally optimistic that we have a path to growth beyond this year.
River. Your next question is from Cai von Rumohr of Cowen. Mr. Kaibhyn Rumer, your line is open. Ridge.
We'll go to our next question from Kristine Liwiak of Morgan Stanley.
Hi, good morning, guys. Ridge. Kathy, can you provide more color on your framework of how you think about sustainability? With your planned divestiture of the testing business for cluster munitions, Where do you draw the line? And do you anticipate more divestitures from this initiative?
River. So Christine, when we look through the lens of sustainability at our portfolio, we look at not only what Republic. The capability we're providing, but how it's being used or how we expect the customer to use that capability going forward. Republic and the decision in this case with our small contract related to cluster munitions, it was a surveillance program. It was America.
We recognize that even supporting America. Our area like cluster munitions for investors is of concern because safe removal implies that at one point Republic. There was an embracing of the use of these products. And so when we look at our portfolio, we are going to continue to America. We recognize we support our government and our allies in the important work of Republic.
Enabling our troops to do their work, but at the same time, be thoughtful about potential human rights implications America and how these technologies may be used in the future and provide equal consideration to safeguards associated with them. Ridge. In answer to your question, I don't expect there to be significant change in our portfolio as a result. We already have a portfolio America, where we have looked through that lens in making decisions about where we invest and what work we undertake. This was just one small contract that came to us through the acquisition, and Republic.
And we've made a decision to stop performing in that area.
Your next question is from Ron Epstein of Bank of America.
River. Yes.
Hey, good morning.
Kathy, can
you speak to the B2 defensive management Horizon Systems. And is that nearing completion? I mean, how where does that program stand in the big picture visavis B21 starting to get Ramp up a little bit. How should we think about that?
Well, taking a step back from the defensive management system, which Republic, which is completing this year. We are looking at modernization of the V2 so that it can stay in service America through the successful transition and replacement of B-twenty one, which as you know, doesn't happen and it doesn't start to happen until later in the decade. America. And so B2 modernization as a broader program will continue, but the DMS program is one that is
America. Your next question is from Myles Walton of UBS.
River. Thanks. Good morning. Kathy, I was wondering, competition is always changing and there's new competitors entering all the Horizonte. But I'm curious with the confluence between Palantir now at $70,000,000,000 and an administration America.
Geared towards inserting new technology commercial based companies into the landscape of competition. Ridge. Is it evolving quickly or is the market just thinking it's evolving quickly in terms of the competitive landscape?
Ridge. We certainly see new entrants coming into the space. And in the case of Palantir, they've been in the space Retail. We bring understanding of mission. We bring technology in our own right in areas like artificial intelligence, machine learning.
We have a business that Recovery and Learn because the technology is moving so rapidly and it's what's creating these new market entrants. There's room for more Rivers. We have a number of players in the industrial base and good ideas to build upon one another. So the partnering strategy that we have Works to embrace those small companies and bring them into an ecosystem along with us to solve our customers' problems at scale. Republic.
I've talked in the past about pitch days that we've been doing in certain areas. We've done artificial intelligence. We've done autonomy to name a few. Republic. And we have hundreds of companies that are participating in these engagements with us to talk about how we might together
Rim. Your next question is from Doug Harnett of Bernstein.
River. Thank you. Good morning. We've seen a kind of history on recent history in government IT Republic. Where scale has been very important.
We saw it with Leidos. We've seen it with GDIT. When you made the decision to make the sale of some of your IT businesses to Peraton. Can you talk about how you're thinking about this in terms of scale? It appears that You didn't really sell any national security related capabilities, but how do you do the trade off?
I know you know this business really well. So how do you think about
Republic. The business that we divested Republic. It does have national security work, Doug. It's across a broad spectrum of customers, including federal civilian as well as Department of Defense Ridge Intelligence Community. And we packaged our IT Services business together, as you note, across 3 different businesses, Ridge because this is an area that we are going to be less focused on and we wanted to get that business into the hands of an organization that wants to invest America and to build scale.
And I agree with your assertion that in the IT Services business, scale is an advantage. America. And Veritas has the vision that you see playing out even most recently with their announcement to acquire Perspecta America and put all of these businesses together. So we are confident that they are the right owner for this business, that they have a vision for it, that they have a commitment to invest
Republic. Your next question is from Robert Stallard of Vertical Research.
Thanks so much. Good morning.
Good morning.
Kathy, quick question for you. The administration seems to have put Middle East arms sales on hold for now. Republic. I was wondering if there could be any implications for you, particularly if you have any exposure on the offensive side?
Ridge. We have a small piece of work that was in consideration, had not yet been approved. America. And so it is not work that was approved and is put on hold as you've read about the F-thirty 5, for instance. Ridge.
What we do anticipate is an extensive evaluation of everything that was in the pipeline, which will include some of our work. And of course, Republic. As you well know, we're embedded in the up 35% as well, but I'm talking about some of the arms sales that we would have been Republic and that are particularly related to our weapons business, which was the genesis of your question. It was small. It was related to Oregon.
And it is something that does not have a material impact on our plans, but we do expect that those will all be reviewed. And America. We, along with you, will learn what this administration's view on those exports will be.
Your next question is from Robert Spingarn of Credit Suisse.
Hey, good morning. Kathy, I'm hoping I can ask on this because the Air Force Republic. Already talked about it, but on B-twenty one, Will Roper, the outgoing Air Force acquisition chief made some pretty positive comments recently with respect Republic, indicating that even though it's now going to be mid-twenty 2, it's going to be of a production ready aircraft rather than a prototype. Republic. And then you can move pretty quickly into low rate and then full production.
Since that's out there, I wanted to see if you could talk about Republic. The margin profile and the margin opportunity here given that this aircraft is so far along.
River. So I can't speak specifically about the margin profile or the specific timeline of transition from one phase to another. Republic. What you picked up on from Doctor. Roper and there was also a piece that was Republic.
Based on an interview with Randy Walden on the B-twenty one is the confidence that the customer has in the Republic. And the ability to manufacture this aircraft and have a Route capability at first flight that is more mature than previous aircraft development programs. And we're doing that through a number of ways, America. The digital engineering and the digital thread that we have on the program, the testing of hardware and software on a surrogate test bed Horizon, as well as the interface with the end user, the pilots who will fly this aircraft have all helped to really mature Republic. The production ready articles that will be tested in those initial phases Republic and should significantly reduce rework, which is in itself schedule, certainty Recovery and reduced costs.
So that's what we expect based on the progress that we're making at this
Ridge. Your next question is from Peter Arment of Baird.
Yes. Good morning, Kathy and Dave. Kathy, maybe just a question on kind of Republic. The CapEx profile you expect over not only this year, but next. I mean CapEx was up 12% in absolute dollars in Republic.
2020 and also your internal R and D dollars were up 13% on an absolute basis. How should we think about both of those America. And just in the context that of all the program wins that you've had and just the success on the overall portfolio. Thanks.
River. Sure. Peter, it's Dave. I'll address that one. As you mentioned, the 2020 CapEx figure was around $1,400,000,000 and America.
And that's a comparable level to what we've projected into 2021, the netting effect then being the Republic. The equipment sale we talked about earlier, which also closed through that investing sections on a net basis, it's actually a bit below our prior guidance for America. Beyond 2021, the trend that we've talked about over time remains our intention where Republic. The CapEx as a percentage of revenue should decline. We see opportunities Republic.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Our next question comes from the line of Republic. Overall investment than has been required over the last few years and into 2021. So no change to that long term approach. Republic. The same would apply on the R and D side.
We've been investing amply in the business, close to 3% of revenue over the River. Recent past and into the near future, and we'll continue to invest in those differentiating technologies and capabilities.
Your next question is from George Shapiro of Shapiro Research.
Yes. Republic. I wanted to know, is the GBSD supposed to add about $1,000,000,000 of revenues this year, America. Kathy, like you had suggested on the Q3 call.
So George, we had said nearly $1,000,000,000 It's America. A little less, I would think more in the $800,000,000 to $900,000,000 of incremental revenue.
Your next question is from Hunter Keay of Wolfe Research.
Good morning. It's actually Mike Mogheri on for Hunter. River. Dave, you mentioned mid single digit organic growth at Mission Systems. So within that organic portion, what are just
Horizon. Sure. I'll be happy to kick that one off and America. Kathy may want to jump in as well. The MS portfolio, as we've talked about over time, is difficult to pin down to any 1 or 2 key drivers in a given year.
Republic. Like most years, we have a lot of programs with opportunities for growth across the MS portfolio. Certainly, the radar capabilities, targeting capabilities, cyber Road. Security capabilities are key growth areas there. We've talked about a couple of the key potential new business opportunities Republic, like 3 dealers and others in the MS portfolio.
So, a nice breadth of opportunities across MS Republic. Similar to 2020 when we had growth across all four of its business areas. River. So absent the divestiture in 'twenty one, another solid year projected ahead. Kathy, anything you would add to that around the inventory?
No, no summary.
Okay. Your next question is a follow-up from Jon Raviv of Citi.
Thanks for taking the follow-up. Just following on the sales question that I had. Any headwinds to watch out for? I know there's, for example, a distributed aperture system cut over at some point in F-thirty 5. Is there sort of anything else that we should just be cognizant of going forward?
I can talk a bit about that. We mentioned the River. Approximately 4% organic growth figure when you remove the divestiture as you compare 2020 to 2021. River. So 4% organic growth, that's even with the CAS pension headwind that we mentioned earlier, which is just under 1%.
River. That also includes the impact of Lake City, which is just over 1% of revenue as it came to a strong conclusion in Ridge 2020. Those are the 2 most significant items, and I wouldn't call your attention to any one particular area of recompete exposure looking forward Republic. Either. In aggregate, we feel really good about the program backlog and don't have anything approaching that 1% headwind level other than those that we've mentioned.
We have time for one more question.
We had Cai von Rumohr of Cowen return to the queue.
River. Yes. Thanks so much. So great year in bookings in 2020. If we adjust Your year end 2020 backlog to exclude the Northrop IT business that you're selling, Republic.
Do you look for backlog growth in 2021? And what are the key drivers there? What are the new
Republic. So Kate, we do expect Ridge. Good day, ladies and gentlemen, and welcome to North River, NGI 3 dealer. It also includes bookings on key programs like F-thirty 5, the next block Republic. So it's spread across the portfolio in each of our sectors.
We expect to have solid All right. So thank you for hanging with us. We tried to get through as many of your questions as possible given How much we had to cover today. Again, I want to thank the Northrop Grumman team for another outstanding year. We performed extremely well in the midst Ridge.
And we're well positioned for 2021 and beyond due to that strong performance, our continued backlog growth America and the value creating portfolio actions that we've been taking. With our cash on hand and strong cash flows, we're committed to thoughtful deployment of that Capital to create long term value for our shareholders. Thank you all for being with us today, and that concludes our call.
Ridge. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.