Northrop Grumman Corp. (NOC)
Citi’s 2023 Global Industrial Tech and Mobility Conference
February 22, 2023 08:50 AM ET
Company Participants
Kathy Warden - CEO
Conference Call Participants
Jason Gursky - Citi
Presentation
Jason Gursky
Okay. I think we have started the clock. I'd like to welcome everybody back to Citi's Industrials Conference down here in Miami. My name is Jason Gursky. I'm the firm's aerospace & defense analyst. And I have the pleasure today of hosting Kathy Warden, the Chief Executive Officer of Northrop Grumman. Kathy is going to start with a few opening remarks, read the important things, I guess. And then we'll get into a Q&A session. At some point, I may open it up to the floor for questions towards the tail end of completely neglected topic. Don't be shy. Kathy?
Kathy Warden
Thanks, Jason. Good morning, everyone. Glad to have you with us today. I do want to do a few housekeeping things. So before we get started, I'd like to note that today's discussion is likely to include forward-looking statements, and those statements are inclusive of risks and uncertainties. For more information about them, you can reference our materials in the SEC filings. We may also discuss non-GAAP financial measures, and you can find more information and a reconciliation of those to our GAAP financials in our most recent earnings release also on our website.
Jason Gursky
Okay. That's the important stuff.
Kathy Warden
That is important stuff. So Jason, before we get started, perhaps I can provide a little context and then I'll turn it over to you for some questions. As we closed out 2022, I am extremely proud of how our team performed during a period of growth for our company. We delivered 3% sales growth in 2022. We had over 1 book-to-bill 1.07. And when you look at our 4-year trailing book-to-bill, it's 1.2. So really strong period of backlog growth for the company that positions us with good momentum in the fourth quarter of '22 to come into '23 and raise our outlook for sales growth of 4% to 5% for this year.
Now that's not to say we are still experiencing some headwinds, both from a tight labor market as well as inflationary pressures and supply chain disruption, and I'm sure we'll talk about those factors more as we go through the discussion today. We do expect, as we saw those impacting in the fourth quarter, those to continue into the early part of this year, in particular, with progressive improvement throughout the year. But those challenges are ones that we are working every day to mitigate, and we are seeing improvements in several of those trend lines, particularly around labor, which I'm sure we'll talk about more today as well.
The important focus for us continues to be on performance and investing in our business so that we can have both the capability and the capacity that our customers need for their increasing demand. We saw 10% budget increase in the U.S. Department of Defense budget last year. So a strong foundation upon which we can grow as we look forward. And finally, we are committed to returning capital to shareholders. We've committed to 100% of our free cash flow being returned to shareholders. We accomplished that last year and are committed to doing more than 100% again in 2023, and we can talk some more about that.
So I'll turn it over to you because I know you have a long list of questions if you'd like to get.
Question-and-Answer Session
Q - Jason Gursky
Yes. Great. Thanks. I appreciate it. Why don't we start with a big picture question about your customers? We're all aware of the strategic doctrine of the United States, and the emphasis on some of the longer-term programs that you're a part of, which I think puts Northrop in a pretty unique position with the visibility that you all have. We just had Huntington in the session before. And I know you've talked in the past that you'd love a 30-year ship building plan for the rest of your business as well. But you guys have got a pretty good level of visibility yourselves. But maybe we could talk a little bit more about some of the less formal or more informal conversations you're having with your customers today and kind of what's on their minds, what's concerning them, particularly in light of what's happened here over the last year and maybe bring that back to how Northrop thinks about its business.
Kathy Warden
We certainly are talking to customers and feeling their sense of urgency in fielding new capabilities. As you noted, we're involved in all 3 legs of the strategic deterrent triad. And as the prime on 2 legs, B-21 and Sentinel, we are working with our customers to deliver on those schedules knowing how important that capability is to deter aggression and actors around the globe.
But we also are hearing far more discussion on capacity. And the Russian invasion of Ukraine certainly led to a review of our weapons portfolio to understand where we needed to invest as a company. But broadly, this is happening across the industry to support not only the re-stockpiling of current weapons, but what that portfolio needs to look like going forward.
So in every area of the Northrop Grumman portfolio, we have been doing strategic reviews around options for acceleration and ways to invest to position for growth and demand. And I do believe that, that has led to the stronger competitive win rate that we have had because we are investing in technologies that are positioning us with differentiated solutions. But then we also are investing in capacity in areas that the government is increasing demand, and we can stand ready to fill that demand.
Now with that said, we have increased our investment to 7% as a percentage of revenue going into R&D and CapEx, that's higher than it normally is for our company. We're committed to doing about 7.5% this year, but it is positioned against that backlog growth that I mentioned with strong return on that investment as we look forward to the demand signals that we are hearing from our customers.
Jason Gursky
That raises an interesting question at least from my perspective. So CapEx and R&D are on the rise. It sounds like for a good reason, and then you've got -- it sounds to me, contracts set against those investments. Are you hearing from the customer that it would be wise for the industrial base to begin making the investments ahead of contracts being issued because they say that the demand is going to be there? I just want to kind of understand what the dialogue is like with the customer at this point.
Kathy Warden
Yes. Our customers don't necessarily dictate the timing of investments. They want capabilities. And we know as a company that we have to invest in those capabilities before competition so that we have a risk-reduced solution to offer to the government. And so we are choosing proactively to do that, particularly as I talk about competition that we are positioning to win. We don't generally build out capacity until we've won until our solution is selected and then that's where we start to lay in the CapEx so that we are facilitized and have the appropriate tooling to execute or even accelerate if that's what the customer is interested in.
So we think very disciplined about when we place those investments and having a stronger signal than just a commitment that budget will be spent. So the signal that budget will be spent on our solution before we lay in significant amounts of capital expenditure. Government understands that. And it's why they're working to do more multiyear contracts, better long-term plans that they call the fight that will lay out for at least 5 years, what their purchasing plans are.
Jason Gursky
Right. And you mentioned the fight up, we do have a budget that's going to get released here a couple of weeks from tomorrow, I believe. Anything that you're going to be paying attention to, in particular, is that budget gets released?
Kathy Warden
We are expecting to see continued strong alignment to the National Defense Strategy, and that allows us to have good predictability around major program line items. So B-21 and Sentinel for us are key, and those have been well funded in prior budgets. We expect that to continue this year.
We also look at where there are significant changes. So are the movements away from legacy platforms. We've seen some of that in the past. We are not anticipating that in the Northrop Grumman portfolio as we come into this budget, we see our portfolio is very well aligned with the priorities as outlined in the National Defense Strategy and those are expected to continue to be supportive this year.
The other thing that we are focused on is understanding and unpacking what the future into Ukraine will look like, but also what position on Taiwan and potential aid to Taiwan will look like there is some of that included in the budget. We expect that over time to increase. And as we are pursuing international sales, getting a read from the department on what they plan to allow for export, but also what that demand signal ultimately looks like the size of those weapon systems procurements in particular. So those are things we'll be looking for in this budget.
Jason Gursky
And what kinds of capabilities and programs or products do you think are going to be in demand to support Ukraine and Taiwan. Obviously, Taiwan's an Island. So you can imagine things that will be focused on the air and the sea and then in Ukraine, we've got a ground war going on. So maybe just talk a little bit about what specifically you think is going to be getting some plus-ups from a demand perspective?
Kathy Warden
Well, first and foremost, the strategic deterrence of our nation is the bed stone of making conflict less likely. And so that's always going to be the first strategic tool that our decision-makers turn to. And so I think we're going to still see very strong support for the nuclear triad.
Then capabilities that would allow the U.S. to engage in great power conflict are also necessary. These are not things that we are going to provide to our allies, but they are capabilities that we need if we found ourselves in a position to directly engage. Then, of course, is the priority around supporting our allies in Ukraine is clearly one where we had outlined the aid to the country, and that will continue, I suspect, for the foreseeable future and yet there are a limited set of capabilities that are being exported to Ukraine.
But that is not the extent of the full demand signal because our allies, as I said, need to replenish their stockpiles just as the U.S. is. And our allies are looking for capabilities that the U.S. may export to them that they may not export directly to Ukraine. The same is true in the Pacific. As we think about what our allies are going to need going forward, it's very different than what they needed to engage side-by-side with the U.S. in the relatively uncontested domain that we found in the Middle East when we were fighting the Gulf Wars.
So as we look forward at what the international market looks like for the next 20 years, it's very different than the last 20. And we're positioning our portfolio to have things that are exportable, but that are also relevant in that next fight.
Jason Gursky
This is a little bit hot off the presses, but we yesterday or last night, an overnight for us, the Russian has decided to back away from a long-standing construct on nuclear weapons. Can you just talk a little bit about to the extent that you can on the Sentinel program -- it's where all taxpayers here would be kind of interested to know in a world in which we're not necessarily controlling the quantity, kind of what we're getting out of this investment as a country and the capability set that it's going to bring. And this recent news overnight, and I know it's pretty recent news here, but is it going to begin to change the dialogue here in the United States about how we think about the strategic posture of the country?
Kathy Warden
Well, when we think about what has kept relative peers amongst major nuclear capable powers for the last 50-plus years, it has been our nuclear triad. And as we look forward is also the cornerstone of strategic deterrents for the future. So that's what we are getting as citizens.
And by the way, our Allies count on the U.S. providing that for the globe, they don't have the resources to build out that strategic deterrent to the extent that the U.S. has. And so it is really for our Allied partners as well. And as the President has traveled, particularly in Europe, there is a resounding focus from our Allies on the importance of that strategic deterrence.
None of us want to find ourselves moving toward a state of conflict, but in order to do that, we need to project strength. And so that's indeed what these capabilities do. And strength is relative. So as other nations build up their capability and their capacity and you've seen recent reports of China, it's dramatically expanding our capacity for strategic weapons launch, then the U.S. needs to evaluate what their posture needs to be in response.
So I find it very responsible for us as a nation to think about these issues of what is required in national defense spending to keep pace and keep relative stability. And that's exactly what this administration is doing and outlined as the core for their defense spending in the National Defense Strategy where strategic deterrence and working with Allies or front and center.
Jason Gursky
Yes. And maybe you can just provide a little bit of a history lesson to all of us on the -- I don't know if missile count is the right way to talk about this. But clearly, we have reduced the number of missiles that we have in our inventory through these treaty constructs. I don't know how best to ask this question, but I mean, is there -- are we going to be a few years from now talking about the Sentinel program actually seeing upside because what we're seeing here, you just described what's going on in China is do we have enough of these things at this point?
Kathy Warden
We may indeed be talking about the Sentinel program needing to add to the missile count, and we're already talking about that with programs like Next Generation Interceptor, so the defensive aspect because you referenced the new start treaty with Russia pulling out of that treaty, we're the only nuclear power still in it. So it's not much of a treaty. If other nuclear capable countries have said we are not going to abide by that. We are going to build beyond those agreed-upon limits then it puts the U.S. in a position where we need to strategically respond.
Jason Gursky
Great. So I will lose some sleep tonight. That's great.
Kathy Warden
I sleep every night.
Jason Gursky
Great. Well, let's -- I appreciate you engaging in that. That's great. I know that wasn't on our script or scripted questions, but it was hot off the presses here last night. Let's shift back maybe a little bit to Northrop and talk about some of your long-term strategic priorities for the company. I know there's -- you've got a tremendous amount of emphasis on technology and leading with technologies. So I'd be happy to hear where you're kind of focusing some of that spend and the priorities that you have for the company.
But I think maybe the thrust of the question is we're sitting here 3 years from now, is there anything that we're not talking about today that you think we'll be talking about then, given what you're kind of focused on today?
Kathy Warden
I think there are a number of things that we're talking about today, but we'll be talking about much more 3 years from now. We even look much further over the horizon into the 2030s. I do think the threat environment as it's evolving, which is what really drives requirements for our company and our industry will be relatively similar in 2030 as they are today.
So I think we'll see a major shift in geopolitics that changed what those threats are. They will become more advanced. The capacity of for nations is rapidly growing. And so these will be considerations back to urgency in our own capacity. But when I think about what is it that's technologically advancing at a faster rate than we've seen in the past, it's certainly the future of computing.
And for a long time, particularly in our mission systems business, but really everything we build now is a computer with wings or a computer that goes to space. And so the future of computing, whether you think about that as AI and ML or what the future state of computing beyond CMOS-based technology will be. We are at the center of that, and we are doing research and development there because it has been the cornerstone of us staying on the leading edge of building these computing-based systems for the U.S. Department of Defense.
I also think space is going to be far more relevant in 2030 than it is today. We are at the beginning of a recapitalization of the space assets we have to modernize them, to make them more resilient, and to leverage those advancements in computing so that now the terranea distance from space, we can do missions that we never could do from space before. So space will be much more relevant as we sit here a few years forward, and we have more of those capabilities deployed.
And then finally, communication is so pervasive in our everyday lives, and we depend on our devices, interconnecting, sharing information, so seamlessly that we don't even realize it's happening. That is not the state of weapon systems in our connectivity. And when I talk about weapons, I'm not just talking about kinetics, I'm talking about everything from surveillance to systems that are part of our military computing base. Those need to work as seamlessly.
And the department often talks about Joint All-Domain Command and Control. But at the core, that is a communications and the command and control set of issues that are based on modern networking and modern computing technologies. And so our company has been building systems that do that. We have them been calling at JADC2. That's a new name for an architecture of connectivity and integration, but we've had systems like BACN like IBCS that do exactly that in communications and command and control, and we are modernizing those systems. And so I believe and I want us to be in a different place in 2026 or 2030 with regard to those technologies. So that's another area we're not seen it.
Jason Gursky
Great. Yes, JADC2 is one of the topics that I wanted to dive a little bit deeper with you on. And then for those that are in the room, I imagine amongst all of you are familiar with it. But at the end of the day, it's -- we've got sensors and we've got shooters, and we need to get those 2 talking to each other as quickly as possible so that in a near peer conflict we can both see and neutralize targets before they can even see us. I think that's the ultimate goal of it all.
You're engaged in some modernization of existing platforms that are kind of been at the core of that. But if we were to kind of step back and think about JADC2 as an overarching initiative, talk a little bit about how Northrop is taking a leadership role in that. There have been some quite a few other companies that talk about wanting to develop maybe some standards that are going to drive some of that communication that you just talked about. But maybe just paint a big picture for us on the JADC2 initiative from your perspective and then exactly how Northrop is planning to play a leadership role in it?
Kathy Warden
Well, as I noted, we see it as the vision supported by an architecture that says we want these assets to be able to exchange data and work together. And then we look at everything we're building and how would we make that happen? Is it lacking communications networks that can allow those platforms to share information, if so, then we go work toward shaping programs of record to do that.
And I use BACN as an example that was the Battlefield Airborne Communications Node that we did in the Gulf War. It was not a program of record. It was accrete. We went to the government with a concept that said, "You have all these assets flying over the same area, having different sensors to be able to tell what's happening on the ground, but you have no way to get that to the platform that perhaps is doing targeting or doing a pickup mission of military transport."
So we built a gateway that flew in the sky that all these assets that couldn't communicate directly with one another could communicate and then share that back out. That was a first instantiation of this vision coming to reality. We need the modern day implementation of that that connects even more assets, that's in an environment that is contested and so we're working toward that as an example.
Similarly, what we're doing in Integrated Air and Missile Defense with our IBCS portfolio is taking ground-based radars and assets of any type, including the F-35, we did a demonstration that we could pass data to it for targeting and destruction of an Integrated Air and Missile Defense, and we could get through the jamming that was happening in a contested environment. These are modern solutions that exemplify the vision and the architecture of JADC2.
And my view is we're not going to have a JADC2 acquisition. It's too big, it's too complex. We're going to have it in bite-sized chunks of programs of record that support the interconnection of assets in the exchanging of data. And so that's what we are pursuing. In every domain, I just gave a land-based main example an air-based domain. We're doing the same in space as we think about connecting assets through space.
Jason Gursky
And in sea, I would imagine as well.
Kathy Warden
Yes. And we're working with partners. So we're not doing all those ourselves, right. There's lots of investment commercially going into next-generation technologies, 5G, even looking beyond 5G. So we are partnering with those companies not to replicate the technology, but how do we then apply it into these domains that are relevant to our customers.
Jason Gursky
And has there been some common standards that are going to be used amongst everybody in the industrial base?
Kathy Warden
I think ultimately, there will be. I talk about these intermediaries, if you will. IBCS is middleware software that allows that connection to happen without too much change on the systems that are supplying the data to it same way with BACN because you can't go change all of these platforms, legacy platforms that are in existence that were not built to communicate to one another.
But going forward, to the extent that we can define standards that we build our communication nodes on B-21 too and then block upgrade on F-35 too and the Next Generation Air Dominance platform, they could then be part of this architecture without needing the middleware of a BACN or an IBCS. And so that is indeed the vision, and that's where standards come in.
Jason Gursky
Maybe you've already answered this question, but it's -- we do have the Army, the Navy, and the Air Force all working on different silos of this. And they have some inner connectedness to it all. But how do you think this plays out? Is this -- are we going to go to the Army standard, the Air Force's standard, the Navy standard on this?
Kathy Warden
Well, I think the beauty of industry working across domain is that we can bring forward solutions that -- where technology isn't generally the constraint. It is the agreement that, yes, we want our data coming off of an Air Force platform to be shared into this Army system for Integrated Air and Missile Defense.
But philosophically, I see no pushback on that. There is a desire and a willingness for sharing, and it's just we got to work the details of that through a system, meaning government acquisition that is largely oriented around the Army buys what the Army needs, the Air Force buys what the Air Force needs, and the Navy buys with the Navy needs. And so these systems cut across those assets in ways that take a little more work, but are absolutely being embraced.
Jason Gursky
Right, right. And earlier, you mentioned space is one of the 3 things that we've been talking about more in the future. So maybe we can begin to talk a little bit about that. You mentioned recapitalization of it, but isn't it a little bit more than that? Aren't we adding some new capabilities as well? Maybe you can just talk about some of the big meta trends that are going on in space because I -- I mean, I certainly understand that we're moving away from large exquisite assets that sit in GEO or another orbits to have proliferated LEO constellations. But is it just recapitalization or is it more than that?
Kathy Warden
It's definitely more than that. I mentioned recapitalization, but I also mentioned missions that are done in other domains today that the technology advancements are making possible to happen from space. And so it's both. And when I think about what the space architecture of the future looks like, there will definitely be more proliferated LEO. I don't think though we get to a place where there are no high-value assets that are operating in other orbits -- and it's because there are still physics in terms of where you need to be to do what.
And so as I think about what that architecture is going to look like, we've built a product line that can go from lower cost, proliferated even viewed as attributable assets all the way up to highly capable exquisite assets that you might say. And when I talk to customers, there are some who have pivoted to where they want most of their capability to be in that more affordable proliferated constellation at lower orbit.
But others who say, not so fast, we want to still maintain this capability. So it really is a broad set of requirements as I think about what we would desire to do from space. It is the ultimate unmanned platform. And you hear the services talk about wanting to move to unmanned and those unmanned systems enabling manned platforms. Well, space is the ultimate place to do those missions, if possible, if the physics work and that relies on advancements in computing. Then I think our company is extremely well-positioned to understand because we have the payloads and mission experience that's much deeper than just space. It's supporting all of the domains out of our mission systems sector, and then we obviously have the space expertise sitting in our safe sector.
Same is true in our aeronautic sector coupling and partnering them with our mission system sector allows us to bring these full solutions forward. And I think, innovate better than if we had to go outside to get some of those experts.
Jason Gursky
Is the -- you mentioned different customer sets, some that want to continue on but not -- they're not as quick to move away from the exquisite assets and others that are perfectly fine with the lower cost proliferated LEO. Is it a broad generalization that you might identify who those customers are? Is it more tactical use on the LEO side and intelligence is more akin to the larger exquisite assets?
Kathy Warden
Yes. I can't really go into too much detail about who's buying what. But when you think about the broad spectrum of needs, you want the platform to fit the need and not the overdesigning, over-engineering for what might be a more specific or tactical mission. So I could affirm what you're saying generally to be true.
Jason Gursky
Yes. Okay. And then one of the reasons I think we have been, as a nation interested in these proliferated LEO constellations is the ability of our near peers to shot down satellites. So how do we deal -- we still putting up large exquisite assets into geostationary orbit I don't know exactly where they are, but what kinds of defensive mechanisms do we have at this point? Is it -- are we relying on ground-based missile defense to shoot something down before it gets up to one of our satellites? How are we going to deal with this?
Kathy Warden
Well, you're taking us into a place where I can't disclose a whole lot. I would just tell you that that's exactly the problem set that we are working on in our classified programs. And you've probably all noticed that if you look at our portfolio deeply, our amount of restricted work has been on the rise in all domains, but particularly true in space because it is a more complicated environment, and we like to keep those capabilities and how we're protecting them well guarded.
Jason Gursky
Yes, understood. Fair enough. One of the -- we do have a bit of a transition going on here for a company like Northrop that does have a lot of rich heritage in deep space missions as we've seen with some of the telescopes here. And some of these exquisite satellites that are in various orbits largely historically, I believe, larger form factor satellites and now we're moving into the smaller form factor proliferated LEO. So you're going from a low volume, high mix to a high volume, low mix kind of environment, at least from the outside, it would seem to be that introduces some level of execution risk.
So can you talk a little bit about the backlog that you have today? How much of it is I don't know, technology that you're dealing with that's like, I don't know, 10 years old because I suspect that things go back a lot further than that. So things that are 10 years old are relatively new for you and just how you're going to manage through this the risk on the execution side as you make this transition?
Kathy Warden
The beauty is the breadth of our company. We have a good bit of experience in the high volume, low mix and product lines that fit that mold. Some of it coming out of the legacy Orbital Sciences and their acquisition of Spectrum Astro, which has been one of the higher capacity producing satellite bus manufacturers in the country for decades. And then, of course, in Mission Systems, we have that expertise on the payload side.
And in our propulsion business, we have that expertise because we've got product lines that support everything from missiles to launch capability in product lines that we have. So when you think about what you need to get a satellite into space and perform a mission, haloed legacy emission systems, that Orbital Sciences legacy in our space business and our Propulsion Business really come together where this is not new.
So being able to produce at rate and being able to integrate it's not either new science or new operating principles for us. It's just bringing it together for new customers and supportive new missions. And that, too, is our bailiwick. And as we look at missions that are moving from an airborne domain, for instance, where we might have that expertise sitting in our aeronautics sector, we have campaigns across the company that bring those people together and they work together in an integrated way. They aren't stuck in their stove pipes of the space segment or the aeronautics or the mission segment.
And we are customer-first in that orientation of being able to bring the power of the whole company to what our customers need. And that's why we've been as successful as we have, not just in winning the work, but executing the work, which, as you know, is equally important.
Jason Gursky
And difficult -- particularly in space is hard.
Kathy Warden
Yes.
Jason Gursky
Let's see, I'm going to ask one more question, and then I'll get to open it to the floor. I do have other questions to ask if you are all shy. But sticking with the space and maybe talk a little bit about NASA -- that's been a pretty exciting place to be over the last several years as the Artemis Mission has gotten started. There always seems to be this tug of war, I guess, between deep space missions and our science missions. Maybe you could just talk a little bit about from your perspective, the state of the world at NASA today. So obviously, over the last several years, been quite a bit of emphasis on deep space.
But we're -- we haven't gotten to the whole politics and budget side of things yet, but the potential for a constrained environment from a budget perspective? And where does NASA historically kind of shake out on the budget side as well? So kind of the overall state of NASA today and the future of it.
Kathy Warden
Well, this is another area where we've seen remarkable stability administration to administration. We've seen 6% increase in NASA budgets last year. I expect to see healthy increases this year, a real enduring commitment to the Artemis mission, which will return a man and put the first woman on the moon, and a fairly aggressive time line to do that. So I do see that, that is a driving force with highly expenditures that are going through NASA into the industrial base to build the capability to do so.
And what I see in the future is that says as an environment for the first time is really going to open up for commercial application. And in order to do that, we need an understanding of space. We need to press the science associated with operating, not just traveling to, but living in space, and that's core of the NASA mission. And if we are to get the economic benefit that space has to offer in every industry, not just for the purposes of science and exploration, the government has a role to play. So I think that's enduring.
Jason Gursky
Okay. Great. Is there anybody that has a burning question from the floor? Okay. I don't see anybody quick to raise their hand, so I'll go on to the next one.
And I think it might be interesting to talk about the B-21 and the Sentinel and just a little bit more detail. You've obviously are going to get a lot of questions in your one-on-ones about the new 21. So I don't -- and you guys have both you and David has spoken extensively about those programs. So I don't want to really rehash what's already been discussed. But I think it would be nice to get an understanding from the outside what kinds of milestones are ahead of us that you will be talking about so that we just have a kind of an understanding about how you're going to be reporting out on this over the next several years?
Kathy Warden
Yes. Well, and I'll start with the program is performing very well, and we're so proud of the work the team is doing, both the Air Force and the Northrop Grumman team and our partners. And so this overhang of what the macroeconomic environment has meant potentially to future profitability as we execute the LRIP options I know is on the forefront of everyone's mind.
But as we zoom back and take a look at the fact that this is a very long-term program, over 30 years. And as we look at the success that we've had together on the engineering, manufacturing and development phase of the program, and we look forward to a long full rate production run on this program to support the 100 units that are part of the program of record and potentially more as the Air Force talks about it, this is a great program.
We do have unforeseen macroeconomic conditions that we could not have known about in 2015, and the government didn't open up for economic price adjustments in this area the way they have in some other areas like shipbuilding. And so we are now looking at how can we mitigate these factors as we are ready to move into low-rate initial production. And the factors are ones you know. We've talked about openly. You see them in your everyday life in terms of labor rate increases, inflationary pressures on goods and materials.
But what I will say is that we have not even yet been awarded the first of these LRIP lots. This is all out into the future. So it's all about assumptions that we can make. And I don't know about any of you, but my predictions over the last few years about the labor market inflation have not been crystal bullish. They've been challenged. It's been a very volatile period. So we are making assumptions, but we are working very hard to mitigate those impacts and get our arms around ways that we can address them. We have time ahead of us.
When I look at what we have in front of us, we are expecting to get the first of those LRIP options on contract this year, and we also are expecting to move into first flight this year, which is a big programmatic milestone. So those are some things that you can look to that will gives them more clarity on at least what that first production lot looks like and that we remain on schedule to move into production.
Jason Gursky
Okay. Great. And what about milestones on the Sentinel program things you'd be talking about in the next peers?
Kathy Warden
Right. So there, we're building hardware. We're moving toward a critical design review that we expect to happen. And that is based on maturing the technical components of this very broad weapon system where we're not only building the missile. We're refurbishing the silos, and we are building a new command-and-launch system. So it's often thought is you're just going to go off and build a bunch of missiles. That is not the case. This is a massive and complex effort that we are working with the Air Force on and many other government partners, including the EPA around permitting for these sites and the work that we will do there, construction partners, including the Army or engineers.
So this is a massive government effort as well as the portion of the program that we're executing. And we are diligently burning down technical risk. We have static test fire for the program scheduled next week. So every couple of weeks, we have milestones that we're meeting on that program toward technical maturity that will allow us to sign off on that critical -- the government to sign off on that critical design review.
Jason Gursky
Yes. Great. We're out of time, and I didn't get a chance to ask you about the balloons and all that kind of stuff. I'll have to do that in the one-on-one.
Kathy Warden
I'd love to. Maybe be even sooner.
Jason Gursky
Yes. Thank you very much for joining us today.
Kathy Warden
Thank you.
Jason Gursky
Really appreciate it.
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Northrop Grumman Corp. (NOC) Presents at Citi's 2023 Global Industrial Tech and Mobility Conference (Transcript)