Northrop Grumman Corporation (NOC) Earnings Call Transcript & Summary

Hello, and welcome to the 2021 Annual Meeting of Shareholders of Northrop Grumman Corporation. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Kathy Warden, Chairman and Chief Executive Officer of Northrop Grumman Corporation. Ms. Warden, the floor is yours.

Good morning, everyone. Thank you for joining us today for our Virtual 2021 Annual Meeting of Shareholders. As we did last year, we are holding the 2021 meeting virtually due to the ongoing COVID-19 pandemic and its related public health concerns. We hope everyone on the call this morning is well. I will serve as Chair of this meeting and would now like to call the meeting to order. It is May 19, 08:02 a.m., and the polls for voting are currently open. To vote, click the graph icon located on the information bar on the virtual meeting webcast. Before turning to the business portion of today's meeting, I want to thank those who have worked tirelessly over the last year to keep our nation safe during these challenging times, particularly those on the front line in the health care and first responder communities. I also want to thank our employees, many of whom are also Northrop Grumman shareholders. More than 1 year after the onset of the pandemic, we have adjusted to a new way of working, and we have continued to support our customers, our suppliers and our communities, which has enabled us to deliver outstanding results to our shareholders. Our team's dedication to the mission has allowed us to continue providing critical national security products and services to our customers since the pandemic began in early 2020. We have worked hard, and we will continue to work hard to protect the health, safety and well-being of our employees and to enable them to continue to perform so well. They remain our first priority. Let me turn now to the conduct of our meeting. The conduct of this meeting will be very similar to last year's annual meeting. We have set an agenda and established rules of conduct to help ensure a fair and orderly proceeding that is inclusive and affords our shareholders opportunities to participate. In particular, we've taken steps to ensure that shareholders can ask questions on the proposals, present shareholder proposals that have been included in the proxy statement and view documents relevant to the meeting. Both the agenda and the meeting procedures are available on the virtual meeting website, and I intend to conduct this meeting in accordance with both. We don't expect any technical difficulties today. However, in the unlikely event that we do experience technical challenges, we ask you to refer to our Investor Relations website for updates. If we lose our audio or webcast connection, we have experts on standby to reestablish the connection. However, if we are unable to resume our audio and webcast connection within 15 minutes, we will end the webcast, and we will keep the polls open until 10 a.m. Eastern Daylight Time today. We will declare the polls closed at that time and adjourn the meeting. Under these circumstances, we would then announce the results of the meeting in an SEC filing. I would now like to introduce Don Felsinger, the company's lead independent Director and the other nominees for the Board of Directors, who are here in person today: David Abney, Marianne Brown, Ann Fudge, Bill Hernandez, Maddie Kleiner, Karl Krapek, Gary Roughead, Tom Schoewe, Jim Turley and Mark Welsh. All of the nominees are currently members of the Board of Directors. They have consented to serve if elected, and their names and short bios appear in the proxy statement for the meeting. I would also like to thank our retiring Board member, Bruce Gordon. Bruce has served on the Board since 2008 with extraordinary grace and wisdom. He has consistently shared invaluable guidance and advice with his fellow Board members and the members of management. Bruce's national leadership on issues of diversity, equity and inclusion has contributed immensely to our company's long-term success. Thank you, Bruce. We will miss you. Our Board of Directors fixed March 23, 2021, as the record date for determining the shareholders of record who were entitled to receive notice of and who may vote at this meeting. Computershare Trust Company has been appointed the inspector of election for this meeting; and Jennifer McGarey, Corporate Vice President and Secretary is the secretary for the meeting. Jennifer, please give the secretary's report.

Each shareholder of record as of the record date has been given proper notice of this meeting and has been furnished with a written copy of or is provided electronic access to the proxy statement dated April 2, 2021, a proxy card and the 2020 annual report. Affidavits relating to the mailing and electronic availability of the notice, annual report and proxy statement will be filed with the records of this meeting. The holders of common stock have 1 vote per share. On the record date, there were 160,962,047 common shares outstanding. I'm able to report that the shares represented at this meeting represent a majority of the shares entitled to vote and that a quorum is present.

Thank you, Jennifer. We will now review the matters to be voted on. And I'd like to ask Jennifer to please proceed with the transaction of business.

Before we proceed, there are a few ground rules I'd like to mention. First, according to the company's bylaws, any matters which were to be put to the vote of the shareholders have already been submitted according to the notice requirements and were set forth in the proxy statement. No other matters may be put to a vote at this meeting. If you have not already voted your shares or wish to change your vote, you may do so by clicking on the graph icon on the virtual meeting webcast. Shareholders can also vote by using the voting instructions you previously received with your notice of meeting. [Operator Instructions] Questions should relate to the official business of the meeting and management and shareholder proposals, in particular. This function has been opened since the 12th. Shareholders can continue to submit questions up until the time the relevant proposal is presented. We intend to address shareholder questions when the relevant agenda item is up for consideration. I'll now turn it over to Kathy to introduce the items of business.

We will now present, address questions on and vote on the items of business set forth in our proxy statement, after which, we will receive the report of the inspector of election on the vote and then adjourn. The first order of business is the election of the 12 directors of the company, each of whom will hold office until the 2022 Annual Meeting of Shareholders or until his or her earlier resignation or removal. The nominees and their bios were listed in the proxy statement. Sheila, are there any questions that have been properly submitted on the first management proposal for us to address?

No, we have no questions to address that are related to this first management proposal.

Thank you. We will then move on to the next item of business. The second item on the agenda is the proposal to approve, on an advisory basis, the compensation of the named executive officers. Sheila, are there any questions on this proposal for us to address?

No, we have no questions to address that are related to the second management proposal, similarly.

Thank you. And we will move on to the next order of business. And the third order -- item on the agenda is the proposal to ratify the appointment of Deloitte & Touche as the independent auditor for the company for the year ending December 31, 2021. And we do have in attendance at this meeting representatives of Deloitte & Touche. Sheila, are there any questions related to this management proposal?

No, we have no questions to address related to this management proposal.

Thank you. And we will move on to the fourth item on the agenda, which is the shareholder proposal that the company assess and report on potential human rights impacts that could result from government's use of our products and services, including in conflict affected areas. We've been told that Sister Pat Daly will be presenting this proposal on behalf of the proponents. [Operator Instructions] And Sister Pat, we're so glad you could join us. Operator, please open the line for Sister Pat to present the proposal.

Sister Pat, your line is open.

Thank you very much. Good morning to all Northrop Grumman shareholders, Board members and employees, especially our colleagues, whom we've been meeting with over the years. My name is Sister Patricia Daly. I'm a Dominican Sister, representing my own congregation, The Sisters of St. Dominic of Caldwell, New Jersey, as well as The Sisters of St. Francis of Philadelphia, and the School Sisters of Notre Dame Cooperative Investment Fund. In this dire moment of excessive violence, we filed the shareholder proposal on human rights impact assessment for second year to assert that there is a moral responsibility for Northrop Grumman to deeply examine how its business model contributes to human rights harms. This proposal received 24% investor support last year, and we again urge all Northrop Grumman shareholders to support Item 4. The nature of Northrop Grumman's core business as a manufacturer of weapon and defense technologies poses serious risk to life, freedom from discrimination, privacy, freedom of movement, asylum and health. The most severe human rights impact linked to the end-use of the high-risk products and services, including in conflict affected areas are irreversible and result in loss of life. This meeting, as we all know, is the occurring amidst the military assaults on Palestinian population in Gaza, where the civilian death toll has climbed to over 200 over the past week, including 60 children, and there is a mounting humanitarian crisis with over 58,000 people, who have been thrown from their homes. Northrop Grumman provides weapon systems to the Israeli military with no restriction on its usage, including Longbow systems for Apache helicopters, hellfire missiles and Sa'ar missile ships. These systems have been used in deadly attacks against Palestinian civilians in Gaza in the past. In a recent letter to the Biden administration, Catholic leaders and scientists expressed concerns about the "devastating humanitarian and ecological consequences of the production and use of nuclear weapons," which are now illegal under international law following the entry into port of the treaty on the proposition of nuclear weapons. Investors also remain concerned about the biometric database Northrop Grumman is developing for the Department of Homeland Security. Holding sensitive biometrics and biographical data of 260 million people presents risk of harm to immigrant communities, privacy rights violations, increased surveillance and further systemic racism. We encourage Northrop Grumman to complete the human rights impact assessment. We'll be looking at your own human rights policy and looking to see how this really does apply to your business model. And we request for the proposal and reduce the company's business activities that cause death and destruction, so that the company may shift its corporate purpose to continue to a more positive vision for society. Thank you.

Thank you, Sister Pat. We appreciate your input, and I assure you that the Board and management continue to share the proponent's commitment to human rights. Our commitment is reflected in our culture, our policies and our practices. And as you know, last year, we enhanced our policies and practices as well as our Board oversight and disclosures in part to reflect the valuable input that we've received from the proponents and other shareholders. But as detailed in the proxy, we do not believe this particular proposal would further enhance the human rights program or serve the interests of our shareholders. Sheila, are there any questions on the shareholder proposal for us to address?

No, we have not received any questions to address that are related to this shareholder proposal.

Thank you. Then we'll go ahead and move on to the fifth item on the agenda, which is the shareholder proposal to move to a 10% ownership threshold for shareholders to request action by written consent. We've been told that John Chevedden will be presenting this proposal. [Operator Instructions] Welcome, and we're glad that you could join us, John. Operator, please open the line for Mr. Chevedden to present his proposal.

Mr. Chevedden, your line is now open.

Well, this is John Chevedden. Can you hear me okay?

Yes.

This is proposal 5, improve our current useless right to act by written consent. Shareholders request that our Board of Directors take the steps necessary to enable 10% of shares to request a record date to initiate written consent. This proposal topic just won majority support at BorgWarner on April 28. Our current version of written consent, like the BorgWarner written consent is useless and would not be used by any group of shareholders in the right mind. If you have voted against this proposal, please consider changing your vote before the polls close in minutes. Why would any group owning 25% of our stock seek to do so little as to get a date on the calendar for management when the same group of shareholders with less effort can compel management to hold a special shareholder meeting on a topic of their choosing. Door #1 is the date on the calendar for management that shareholders can frame and hang on the wall, and door #2 takes less effort and compels management to hold a special shareholder meeting. Thus, door #2, a special shareholder meeting is the clear choice, and our current written consent is thus useless. Clearly, shareholders who were made aware of the uselessness of our current right to act by written consent would not approve it. Yet management claims that shareholders did approve it. This shows how management has abused shareholder engagement by withholding key information on written consent in order for management to claim and got shareholder approval. Management failed to mention that there are no formal -- there is no formal process to remove false texts for management statements next to a shareholder proposal. Thus, management gets the free right to include false statements next to shareholder proposals. However, there is a formal process for management to remove false text from a shareholder proposal that is overseen by the Securities and Exchange Commission. Management made a failed attempt in regard to this proposal. This was done under the leadership of Ms. Madeleine Kleiner, a former hotel executive who chaired the Governance Committee. Ms. Kleiner seems to be the perfect selection as the chair of the governance committee since she was previously a partner in the law firm at Gibson , Dunn and Crutcher which has substantial business in opposing shareholder proposal. I do not understand the role of a hotel executive at an aerospace company. Management talks about a so-called shareholder engagement plan. It's important to point out that such an engagement plan is not transparent, has no independent oversight and depends 100% on whatever honor system management has in reporting the outcome of shareholder engagement. The perverse highlight of the so-called shareholder engagement plan is a special May 12 advertisement against the 2 shareholder proposals on the ballot today. Please vote, yes, improve our current useless shareholders right to act by written consent, proposal 5.

Thank you, Mr. Chevedden. As always, we appreciate your input. And we have long been committed to ensuring that our shareholders have meaningful rights to provide input and to influence the direction of the company and to do so in a way that respects the interests of all shareholders and enhances the company's ability to create long-term value. So we indeed are working towards the forefront of best practices and providing our shareholders the right to act by written consent, to call a special meeting and to nominate directors through proxy access as well as the more informal opportunities we offer to engage with our Board and management. And as you noted, when the company proposed to adopt action by written consent in 2012, almost 80% of our shareholders supported the proposal at the 25% threshold. So we continue to believe that our written consent right is both consistent with industry best practice and provides shareholders the meaningful and appropriate rights that balance and advance the interests of our shareholders. Sheila, are there any questions related to this shareholder proposal?

No, we have not received any questions to address that are related to this shareholder proposal.

Thank you. So this completes the formal business that was scheduled to come before the meeting, except for the voting. Jennifer has voted the shares represented by the proxies that have been given to management before this meeting, and these votes have been tallied by the inspector of election. Any votes that were submitted at this virtual meeting will be included in the final tally once the inspector of election has had an opportunity to verify the shares. The time is 08:22 a.m., and I declare that the polls are now closed. We have received the preliminary results of the meeting from the inspector of election. Jennifer, please provide the voting results.

Based on the preliminary report of the inspector of election, each of the 12 nominees for director received at least 123,742,984 votes and has been elected director of the company until the 2022 Annual Meeting of Shareholders or until his earlier -- his or her earlier resignation or removal. Proposal to approve, on an advisory basis, the compensation of our named executive officers received 122,894,481 votes and has passed. Proposal to ratify the appointment of Deloitte & Touche as the company's auditor for 2021 received 139,652,904 votes and has passed. The shareholder proposal that the company assess and report on potential human rights impacts that could result from government's use of our products and services received 28,413,911 votes and has not passed. The shareholder proposal to move to a 10% ownership threshold for shareholders to request action by written consent received 57,887,707 votes and has not passed. That concludes my report.

Thank you, Jennifer. The Board of Directors very much appreciate and will carefully consider the inputs of our shareholders in our discussions over the coming year. We thank all of you for your attendance today and your continued interest in our company. There being no further business to come before the meeting, I hereby declare the meeting adjourned. This concludes today's webcast.

This concludes the meeting. You may now disconnect.