We're delighted to have, I think it's our 45th A&D Conference. As many of you know, we used to do it in New York, but we decided to move to D.C. so that Mohammad can come to the mountain as opposed to vice versa. We're delighted to kick off with Northrop Grumman, and we have from Northrop, Dave Keffer, CFO. Dave's gonna make a couple of comments, and then we're gonna have a discussion. David.
Thanks, Cai. Good morning, everyone. Good to see everyone down here in northern Virginia, where we call home. Couple of quick statements I need to make up front. First, we're going to make some forward-looking statements today, and those statements involve risks and uncertainties. Information about these risks and uncertainties can be found in our SEC filings. We may also discuss certain non-GAAP financial measures, and you can find a reconciliation of those measures to GAAP measures within our most recent earnings release. Okay. With that, let me just provide a quick overview, and then happy to jump into questions, Cai. I'm sure many of you saw our recent results for Q4 in 2022 in aggregate. Certainly, we were proud of the year that we delivered in 2022, and we're excited about the year we're kicking off in 2023.
Just a couple of quick metrics there. In 2022, we delivered another year of book-to-bill over 1.0, this time at 1.07. Trailing 4-year book-to-bill is about 1.2, and you can see the underlying backlog growth that is supporting what we see as really industry-leading growth rates for us over the last 2 years, and now in the 2023 outlook as well. In the face of the macro pressures in 2022, we delivered 3% organic growth. We're projecting an acceleration to 4%-5% growth in 2023. A good portion of that is also driven by the careful alignment we have with our customers and their budget priorities these days.
Of course, recapitalization of the nuclear triad is a source of a number of our largest franchise programs, but there are many areas of our business that are showing growth because of close alignment with budget priorities. I'd put our whole national security space business high on that list. Certainly, domestically and internationally, we see opportunities for growth that we can talk more about today. In our weapons business and munitions business, some of the work we're doing around battle management and command and control. These areas are all very well aligned with the threat environment we see today, which continues to drive budget growth in 2023, and we expect the president's budget request for 2024 to show growth as well. I mentioned macro forces.
We can talk more about those as we go today. Certainly, we overcame a number of those to deliver headcount growth. 7% increase in our overall company headcount in 2022, which I think is just a phenomenal figure in the hiring environment we were facing, particularly in the first half of the year. Good momentum then into this year. We were able to deliver a year of earnings per share in excess of our guidance as we started the year, even well above the high end, and free cash flow in the range that we started the year with. We're deploying that cash productively already.
We generated another $2 billion through a bond offering early in February, a portion of which is to pay down debt due this coming summer, a portion of which is also to provide us additional flexibility throughout the year. To that end, we engaged in an accelerated share repurchase already of $500 million in February. On track to return over 100% of our free cash flow this year to our shareholders. We're excited about 2023. Certainly growth acceleration very much underway, and strong bottom line and free cash flow performance as a result. We've projected over 20% growth in our free cash flows over the next three years, with continued shareholder-friendly deployment plans for that cash. With that, why don't I hand it over to you, Cai? I'm happy to jump into questions.
Thank you very much. You mentioned you're coming off a 1.07 book-to-bill. That was better than you expected. I think you were looking for about 1 going into the year. What are the potential key bookings drivers we have for this year? You know, could book-to-bill again be over 1?
I guess I can't for a second straight year say it's impossible for it to exceed one, only to see it exceed one when all is said and done. That's certainly the pattern we had in 2022. We see fewer of the multi-year procurements this year that would lead to large unexpected bookings or even projected bookings this year that would again have the book-to-bill above one. We think this is a year where timing-wise across our portfolio, there are fewer of those multi-year buys, and as a result, we'll see a book-to-bill slightly below one.
That's not, though, representative of a decline in demand. On the contrary, there are, as I mentioned earlier, parts of our business that are showing really significant growth in demand. We look at bookings and book-to-bill over a multi-year period because of these kind of timing issues in expansion of our backlog. It's that 3- and 4-year backlog growth that we're continuing to target. Again, 1.2 over the last 4 years, that's a lofty level. Certainly keeping that number well above 1 is our objective going forward, and we think that'll lead to healthy growth.
In this environment, certainly, space is an example, kind of a microcosm of this environment where there's great healthy demand, but it could be a year where even our space business shows book-to-bill below one because we're in a period now where we're ramping up on some key development programs, preparing for future production on other programs, and the You know, block buys, that we've had and multi-year procurements that have resulted in very large awards over the last couple of years are now in an execution phase. In some of those cases, we'll also have down selects, over the next couple of years, and we can talk more about those as we go as well. It's overall just a timing year where we anticipate book-to-bill to be a bit below one, but no dearth of opportunities out there.
We're certainly looking across our businesses to have a strong year for growth.
One area, you know, that looks like it has opportunity is defense. I mean, you've expected it to be about flat this year, but, you know, I have to think you're gonna benefit from the Ukraine conflict for IBCS weapons replenishment. Maybe walk us through some of the opportunities you might have in defense on the booking side?
Sure. You've touched on a few of the keys, and I'll elaborate a bit on those. You know, as you're aware, over the last couple of years, we've seen a decline in our defense system sector sales as particularly the more service-oriented side of that portfolio around sustainment and logistics support for air platforms has come down as some of those platforms have been retired. The Joint STARS and Global Hawk fleets among them. Some of that modest decline in that portion of the business will continue in 23 before leveling off. That's offset by growth in some of the areas you mentioned.
IBCS is a portfolio of technologies that integrate previously kind of unintegratable, disparate sensor and shooter systems, both for the U.S. We have a large U.S. Army program of record there, as well as other foreign customers, where Poland is certainly the largest early kind of flagship adopter. There are 10 other countries expressing interest and some of which are very near term. You can imagine that the ability for a foreign country that's seeing an increased threat environment to connect previously disparate radars and other sensor systems to effector systems to, you know, manage their own battle management and missile defense systems is just an incredible upgrade in their capability.
IBCS is a great fit for that over time, and it's a great example of Northrop Grumman software technology leading to better integration of existing platforms and future platforms as well. IBCS is key to the domestic and international growth opportunity. We'll also enter a full rate production phase for the U.S. Army domestic portion of IBCS later this year. On the weapons side, you know, certainly the unfortunate events internationally have led to growth and demand, both domestically and internationally for everything from smaller scale munitions up through larger scale weapons systems, where we are both a prime and a key supplier of propulsion technology.
We began to see that surge in demand signal this time last year and talked about the fact that that was kind of an 18-24 month cycle through which you'd see orders and then sales volume resulting, particularly on the international side. Now as we approach, you know, the 12-month point and get closer to those 18 and 24 month milestones, we're starting to see evidence of orders activity, again, both as a supplier and a prime, and then of the resulting sales growth. You saw some of that even in the fourth quarter, where our defense systems business grew at a double-digit rate. A lot of that was in the weapons portion of that business. We're a critical and growing supplier on programs like GMLRS.
We can perform as a second source alternative on some of the key programs that the U.S. government is re-entering production on. We're actively involved in some of those discussions. There are large weapons programs where we're a prime as well and showing great promise, programs like the Stand-in Attack Weapon SiAW for the U.S. government. When you aggregate all of that, there's a healthy uplift in demand in those portions of the business that's offsetting the modest declines in other portions to lead to a good outlook for DS this year.
Is it fair to assume that this year you're gonna be flat but maybe have some opportunity and then 2024, 2025 things should move north?
Right. We haven't provided multi-year sales guidance, much less for an individual sector, but those are the types of seeds of growth that we'll look to sow this year in the weapons business, and both domestically and internationally, and on the IBCS side to the degree that we can continue to have particularly international growth opportunity materialize there. Those should lead to a good foundation for growth in that business. We'll see, you know, the puts and takes in that business over time, but we're excited about the DS portfolio as a result.
Right. Last year you did a good job of winning competitive down select. You mentioned not a whole lot this year, but as we look out to 2024, maybe early 2025, there are a number of programs that look like we should reach a decision point, NGI, NGAD, Loyal Wingman. What can you tell us about, you know, what the potential there is and, you know, where you feel good, or what the ones we should watch for and when?
Sure. You've touched on a couple that it's hard to watch for because they'll be in the restricted domain for a while.
Right.
Certainly as some of the services look at next generation air platforms, that creates opportunity for Northrop Grumman, both as a potential prime and as a supplier of key technologies in that overall domain. With regard to specifics around program opportunities, there's a limited amount we can address there. You also touched on a few that we can talk through and NGI is in that category, the Next Generation Interceptor, a critical missile defense capability for our country. We're one of two down selected parties. Later this year, that will reach a preliminary design review phase. We've made great progress and are targeting that PDR for great demonstration of that progress. Obviously there's, you know, continued competition there.
To your point, as we get to the middle of the decade, it looks like we'll know more about the future outlook for NGI. I'd put the SiAW program that I mentioned earlier in that same category. Multiple down selected parties there on the Stand-in Attack Weapon. We think the legacy of great execution we have on the AARGM and AARGM-ER programs give us a great offering around the Stand-in Attack Weapon and a great, you know, prime opportunity in the weapons business. There are a number of others across government, many of which are in our space business, where they're going through important demonstrations of capability today and engineering phases today to reach either next phases of production or down selects in the coming years.
I'd also put the Space Development Agency's Tranche one wins that we had in 2022 in that same category, both for the Transport and Tracking Layers in LEO there. The Tranche 1 volumes are just a small subset of the overall constellations expected over time, and so performing well, delivering on time, on cost to our customers is critical in these Tranche 1 opportunities to earn the right to be a, an awardee in Tranche 2 and beyond. Those two are on our list of opportunities for growth in the coming years.
You mentioned, you know, the good hiring, but maybe give us an update, supply chain, hiring, inflation, what are you seeing?
Sure. That's the trio of macro topics we've been covering in some detail over the last year, and with good reason. It's a unique set of circumstances, particularly around supply chain inflation, factors that we've been addressing as an industry among, you know, most other industries over the past year. I think I'd separate the labor market a bit from those in that while we were talking about that as a pressure on us in the, first several months of 2022 in particular, our performance in gross and net hiring really improved substantially in the second half of 2022.
We ended up adding about 6,500 net hires in 2022, about 7% increase in the company's headcount in a year that across the industry was known as a very difficult year to just to kind of meet demand, much less increase your headcount. We're really proud of the work that's gone in across our business. I think a portion of that is macro-driven, certainly around the technology side of the market. There has been some softness in recent months around, you know, companies laying off, you know, software developers, systems engineers and other capabilities that are in high demand at Northrop Grumman.
I also think the internal capability is important to talk about the culture, the employer of choice, kind of niche in our market that we look to deliver, I think is important here. Having key capabilities rolled out very publicly in 2022, like the first images from the James Webb Space Telescope, for which we were the prime contractor, as well as the rollout of the B-21 Raider. I think these are great examples of ways that our current employee base and new employees alike can kind of coalesce around the criticality of these missions and the uniquenesses of the technologies we're creating. I think all of that leads to an improving labor situation for us over the last year.
That's, that's not the impediment for us, now toward growth that it was a year ago. On the supply chain side, there continue to be, you know, disruptions and perturbations in the supply chain. Certainly, we were able to deliver, great growth in Q4 year-over-year, in part because of, improvements in our, you know, timing and volume of deliveries in the supply chain. I'd hesitate to draw a trend line there and say, okay, these supply chain challenges are behind us. Certainly, they continue to exist. As an industry and certainly, as a company, we're looking to continue to mitigate those pressures. That flows through to the inflation side of the equation as well.
You know, obviously we're tracking inflation indices just as others are, and we're seeing it in real time in our business. Perhaps there's been some, you know, modest improvements in recent months in those indices. We're still working through the process of pricing inflationary factors into all of our programs and gradually getting that, the latest set of macroeconomic conditions factored into all of our contracts. That's a process that we said a year ago would take time, we're making good progress through it certainly every day. You know, I think having half of our business on the cost side and half of it on the fixed price side means there are different impacts on different parts of our business.
Even on the, on the fixed price side, you know, only a subset of our fixed price work is multi-year in nature, and the majority of that fixed price work is repriced on an annual basis. We're looking to mitigate cost increases wherever we can, drive efficiencies through our programs, work with our customers to mitigate those impacts on a program-by-program, case-by-case basis around the company. It's a key focus for us every day.
You've guided 5% revenue growth this year, and that's up from where you were in October. How should we think about growth accelerating into 2024 and 2025? You've got B-21, GBSD, space, Ukraine impact kicking in. How should we... You know, maybe walk us through what we should be looking for.
Sure. You know, we're really pleased with the level of growth we've delivered over the last couple of years. Again, think of it as industry-leading growth, and again, to your point, accelerating from 3% in 2022 up to the 4%-5% level in 2023. With that said, it seems every time we accelerate it, we're asked why we can't accelerate it even faster. There are a number of forces that will affect the final sales growth figures for 2024 and 2025. Certainly, to your point, the demand for our products, the demand for our capabilities remains very strong. There are opportunities, if macro conditions permit, to continue to accelerate sales growth over time.
We're balancing that in our outlook, and we haven't provided guidance for those years, but we've provided a cash flow outlook for, the multi-year period. We're balancing in our outlook for that multi-year view, the clear demand signal we're getting, both domestically and internationally, with the macro environment, as we've talked about, around continued, you know, disruptions in the supply chain. I think that will be a process that takes time to work through. Labor availability, as I mentioned, has improved, and, you know, we're optimistic that that will continue at current levels. There are also inflationary pressures to work through as well.
Certainly, in terms of the funding environment, you know, we understand the president's budget will involve defense budget growth for 2024, coming off a strong growth year in defense budgets in 2023. It remains to be seen exactly when 2024 budgets will be passed and in what construct, how long we're dealing with a continuing resolution, whether there are any last-minute dynamics around, you know, debt ceiling or overall deficit concerns from one side of the aisle or the other that lead to challenges there. We're trying to take a balanced view of these opportunities and risks and work that into an overall outlook. Certainly, to your point, the demand signals continue to be strong, and we're working the supply side as well.
Let's turn to margins. Your 10-K indicates a possible but not probable loss on the fixed price B-21 LRIP options. Where are you in negotiating LRIP 1 and given your underrunning the ICE estimates on which funding is based, what sort of relief do you think you can get?
It's a question we've been asked often over the last couple of weeks and, uh, it's early to gauge the likely outcome here. But, you know, I think the big picture is important to have in mind. The B-21 is the, contract for which the, uh, the engineering and manufacturing development phase in which we're executing now, and a set of, uh, early fixed price, uh, low-rate initial production options were both awarded in, uh, 2015 originally, and then, uh, subsequently in 2016. And so, uh, the work for these phases was priced, uh, many years ago, and it's at a scale that's different from, uh, other programs as well. So it's unique in our portfolio and having been priced that long ago and being at a meaningful scale.
That's why through the macroeconomic pressures we've seen over the last couple of years, we determined it was appropriate, based on the set of conditions we were looking at in Q4, to note the potential risk there around this initial low-rate initial production phase of the program, given that it is fixed price. With that said, we're working every day to mitigate those pressures, to generate production cost efficiencies, both internally and with our suppliers. Work, you know, with our customer to address ways to mitigate those macroeconomic impacts as well. Over time, I think the important thing here is that this is a critical capability and that the EMD phase has gone exceptionally well.
You hear the comments from leaders, all the way through the Secretary of Defense himself at the rollout ceremony in December about just how critical and unique this capability is across multiple missions. As we look at the threat environment that is to come over the next couple of decades, rolling out this capability and then scaling it up over time is important to our customer set. The way we've, you know, generated the capability and the early testing all indicate that it's going to be a strong and important program for a number of years. We'll work through this initial, you know, low-rate initial production phase as lots begin to be awarded later this year and over the next several years.
Also important to note that over time, not only will we have the expectation of full rate production, which is yet to be priced, but also any modernization work and sustainment work that would typically go along with a program like this. That's the big picture. You know, again, we'll be updating, you know, folks as we have new information in the coming quarters.
It's a fixed price option. In theory, you don't negotiate on the price. However, you make the point that, you know, nobody expected this kind of inflation when you signed the contract, and the ICE estimates are above where the funding is. How does it work? I mean, I assume you go to the government, and you say, "Gosh, we didn't expect inflation. You didn't." How do you go about getting relief on, you know, something that was out of everyone's control? Can you?
I agree these are unique circumstances. As a result, you know, I don't think there is a playbook for government or industry to manage through situations like this, and we're, you know, addressing it in real time. As I mentioned, our focus is really on executing well on the program, performing as efficiently as we can, and then we'll, you know, work with the customer to, you know, address any impacts that they deem appropriate. But it would be, you know, preliminary for me to try to, you know, project exactly how those discussions might go. It is a restricted program, so there's a limited amount we can say in general.
I think broadly speaking, as an industry, we're working with our customers to address what is a unique macroeconomic environment that we faced over the last couple of years and make sure there are, you know, equitable outcomes as a result. Broadly speaking, we have, you know, good partnerships with our customers to address in reasonable ways, those factors. They affect every contract differently, whether it's a cost-type incentive fee or award fee program, or in this case, a fixed price phase of a program. You know, and it differs in every case, and we'll work through it in this case.
You know, looking at the budget, the FYDP, it looks like LRIP is basically five years, about $19 billion, give or take. You know, it looks like this would get to about $4 billion a year roughly, and gotta be a big portion of your aeronautical revenue, say, you know, close to 30%. If the margins are lower, let's say they're near breakeven, even if they're black, I mean, it would look like this would be highly dilutive to aeronautical margins. Is there a way you can really offset that to stabilize those margins?
Sure. A few points I'd make there. One is, you know, we're talking about budget numbers and those are both multi-year budgets when you talk about a production phase like this.
Mm-hmm.
There are, you know, government dollars, not just contractor dollars included in the production costs that, you know, you're looking at there. To your earlier point, those are based on government cost estimates and not contractor prices. So a lot of factors would lead to, you know, disconnects in just trying to identify a single budget year and associating that with sales in that year. I think that's important context. With that said, lower profitability on the LRIP phase would of course, you know, be an influence on Aeronautics margins and on enterprise margins overall. I think, you know, in terms of offsets within Aeronautics, you know, we're gonna look to continue to drive really strong performance over the next few years.
We've gone through phases of economic disruption on a number of programs over the last couple of years and really across our business, but within Aeronautics in particular. Over the next couple of years, we'll look to continue to generate efficiencies. The labor market and supply chain, you know, should both be in continually improving conditions over the next few years. This, the kinda broader environment should lead to opportunities for more efficiency. Certainly, we're also looking to manage costs as efficiently as we can within Aeronautics. I think it's an example where, you know, we have a much larger company than just any one sector. We have four sectors, all of, you know, generally comparable size.
At the scale of the overall company, there will be parts of the business at any given time that are facing margin pressure or cash upside or sales growth or contraction. Across the entirety of the company, we see great opportunity to both grow sales and grow earnings and cash flow over the next few years. I talked about the set of conditions on the cash flow side in particular that should lead to a healthy environment for growth, not just over the next couple of years, but really into the second half of the decade. To look at any one particular program, I think misses some of the broader point. You know, we'll look to address individual, you know, programs and sector challenges and opportunities alike.
I think in aggregate, we're upbeat about the growth profile that we see for the company as a whole.
Got it. One of the things, you know, in your Q4 release is that it looks like there's now an indicated uptrend in CAS recovery, which is basically helps your cash flow. CAS also is basically part of your overhead in terms of calculating sector margins. What kind of pressure does that put on the sector margins? Although I know all in it's-
Sure.
A plus.
No, it's a great question. It's, interestingly, it's gonna be inverse situation to what we faced 2 years ago, though in smaller numbers this time. A couple years ago, primarily because of strong asset returns as well as some legislative items and otherwise, we had a decline in our CAS pension cost recoveries, that led to a combination of both lower cash flows and as well as a single year, single quarter catch-up in particular on our EACs because of the lower indirect rates, as you mentioned, as we roll out those lower cost projections from pension. We're now in the opposite scenario, where because of a challenging year for asset returns in 2022, our cost projections for CAS pension that we recover from through our rates from our government contracts, is now projected to increase.
We'll have a bit of the inverse scenario where cash flows gradually rise from those related to pension over the next couple of years. And, you know, conversely, we have an impact on the cumulative catch-up on our EACs in the quarter in which we roll out those higher pension costs. That'll be early this year. We talked on our earnings call about rolling those through our rates in the first quarter of the year. We had a $100 million pickup through our EACs in the first quarter of 2021. This is a smaller and more gradual impact, but we've told investors to expect, you know, something on the order of half of that magnitude in the first quarter of 2023.
As we've noted, economically speaking, you know, it has an impact on margins, but economically speaking, it is accretive to cash flow over the next several years. Really over the life of the pension plans, all of this balances out. It just becomes a timing issue, from year to year.
You know, turning to GBSD, you negotiated it later than the B-1. I think you negotiated it in 2020, and you didn't have quite the same kind of competitive environment, but you do have 5 LRIP options. Can you help us understand, are those fixed price, and could those represent a risk given the inflation we've got?
I'm glad you asked about this one, because this is a very different scenario than on B-21. Those low-rate initial production options have not yet been priced on the GBSD program. Independent of their contract type and structure, that negotiation remains ahead of us and will be influenced by the latest macroeconomic conditions and cost projections for production in the coming years as opposed to the past years. We still have an opportunity ahead of us to negotiate those, you know, production units and intend to do so with, you know, the maximum amount of information available to us and the customer at that time. A very different scenario in that way from B-21, where they were priced years ago.
On the press side, Kathy mentioned your transition to digital solutions as a potential offset to inflation. Like, what sort of impact could it have? With the acceleration in big tech layoffs, are you starting to benefit that you're seeing it's a whole lot easier to get folks to join Northrop?
Yeah. I'd stop short of saying it's easy to find, you know, especially cleared software developers, systems engineers. Certainly there is a, you know, a tight market even now for those, you know, highly skilled employees. With that said, I think it is modestly easier than it was 1 year ago, and we've made great strides in that department. Certainly, you know, those continue to be challenging areas for, you know, the market overall, but we've made a lot of improvements. I think some of that is driven by layoffs and hiring freezes in the tech community, to your point. In terms of digital transformation, overall, it is a critical process that we're going through in our business today, and we're kind of in the middle innings, if you will, of that process.
Started a few years ago, continues in earnest and will for a few more years. It's the kind of process you're never completely finished with. For us, it's around the digitization of everywhere from the design through the development and manufacturing, and then sustainment phases of the life cycle of all of our key programs. You can imagine the amount of cost reduction, risk management, risk mitigation, early identification that you get in a digitally enabled program with great underlying data and management of that information and ways of visualizing and conceptualizing that information that didn't exist 5, 10, 20 years ago, and should enable us to be more efficient also in the way we oversee and manage the business.
You know, if that sounds like great opportunity, I think it's because it is, but it's not easy, and it's not overnight. Through the adoption of these tools and processes, there are opportunities for efficiency for us over a period of years, both in the way we bid and execute programs and in the way we manage the business overall. I do think that's an important lever in our ability to manage costs and drive cost efficiencies across the business in a period where we need that efficiency to mitigate inflation to your point.
Talked of, you know, your greater vertical integration than peers, like you make your own semiconductors. What impact could this have on your ability to offset inflation?
You know, certainly we have some unique capabilities in our boundaries and our ability to produce some of our own chips. In the grand scheme of things, it is niche capability that supports certain of our government contracts with certain unique requirements. It's not the answer to the overall, you know, kind of macro chip question around long-term sources of semiconductors. I stop short of saying it's a game-changing, you know, internal capability in that way. I do think it's exemplary of the uniqueness of the company. We're a technology company first and foremost, and we have depth in technologies.
We're not just a lean kind of integrator of others, tools and techniques, but really have depth in our own internal capabilities, and that leads to unique kind of payloads that get adopted in our overall, you know, space platforms and air platforms. Our mission systems technologies are leading edge and lead to, you know, great opportunities for growth, both in our mission systems business and elsewhere. Having technology depth and understanding, I think is a real help for some of our, you know, niche-ier technology application programs, but also for large kind of franchise flywheel programs as well.
I think, you know, you've talked revenue should be growing the next several years. You've talked about earnings moving up, but you didn't talk about margins. If we look at, you know, the mix is shifting toward GBSD cost plus B-21, LRIP looks like it's probably going to be somewhat below average. Is it fair to say that there's less certainty in terms of the trend in margins than there is in earnings and revenues?
Certainly from a margin rate perspective. You know, we had targeted 12% margin rates at the segment level kind of before the macroeconomic impacts of the last, you know, 12-24 months became so acute. We've had, you know, an easing of segment margins over that period, along with the rest of the industry. I think now the question is, at what point we'll get back to that kind of trajectory and on pace for the 12% target. The underlying business fundamentals are the same. It's just a matter of when we're able to price the broader kind of macroeconomic environment that exists today into our full contract base.
I think there are indications that the macroeconomic factors are improving now, such that, you know, will not, you know, take too many years. The pace of that recovery is what will guide, in many ways, the pace of our margin improvement opportunity. You know, you mentioned GBSD will continue as a cost-type program for the next several years and B-21 and other factors. I'd also say there are a number of other programs that will move from cost-type development work into fixed price production with opportunity for margin expansion as a result. Some of our fixed price work that has been affected by the macroeconomic factors over the last couple of years should provide opportunity for margin stability or even expansion over the next several years.
There's a mix of influences really in this environment where we see net EAC improvements being lower than usual because of the macroeconomic factors as we work them into our, you know, contract pricing across the board. That's the environment we'd expect to see normalize over the next couple of years and lead to that mitigating increase opportunity in our margins. The pace of that is yet to be determined.
Right. Right. Cash flow, you've talked, it doubles by 2025, but clearly that's off a depressed base. You know, of the $1.6 billion midpoint cash lift, it looks... I mean, we just did back of the envelope, looks like about $1 billion of that comes from what I call non-operating section 174 CAS, CAP, CapEx minus depreciation. Is that remaining $600 million over that three-year period, is that conservative or, you know, is that really?
It's our best estimate as we stand today. It's a $200 million of underlying free cash flow expansion in the business or in each of those years. I agree with your broader point, which is some of these kind of unique headwinds over the last couple of years will become tailwinds over the next few years. CAS pension cost declines and now gradual increases again. section 174 R&D tax impacts, which have, of course, been a headwind for the industry and will now be a tailwind for the next 5 years. I'd put our capital intensity on that list as well.
We're in a unique period right now where we're capitalizing this large suite of kind of franchise programs, B-21, GBSD and others on top of all the growth we had in 2022. We talked about programs like the Project Kuiper launch support. We're in a uniquely high capital intensity period right now. That will ease also by the middle of the decade. That leads to underlying growth in the kind of operational and free cash flow trajectory over the next few years. We've only provided 3 years of growth outlook.
When you think about the foundation that creates for the second half of the decade, where you have continued declines in cash taxes around section 174, continued, you know, moderation of capital intensity, and these programs moving to production, creating opportunity for strong cash flow streams, it's a healthy environment for continued growth and free cash flow through the rest of the decade.
Terrific. I see that we're out of time, but that was great. Thank you very much. Really appreciate it.