Kathy Warden
Chair, Chief Executive Officer and President at Northrop Grumman
Thanks, Todd. Good morning, everyone, and thank you for joining us. As you saw from this morning's earnings release, global demand for Northrop Grumman solutions is driving exceptional growth. In the second quarter, our sales were up 9% with solid contributions from each of our four business segments. Our ability to hire and retain talent and improving supplier deliveries are strengthening our topline. Given our year-to-date sales increase of 7% and an improved outlook, we are increasing our full-year sales guidance range by $400 million. In addition, award volume in the quarter was robust with a book-to-bill ratio of 1.14. As a result, we are increasing our full-year book-to-bill projection to approximately 1.0.
Our $79 billion backlog continues to be more than 2 times our expected 2023 sales, supporting our long-term growth outlook. We delivered solid second quarter earnings per share of $5.34 and we're increasing the lower-end of our full-year guidance range by $0.20. And free-cash flow was healthy in the quarter, more than a $1 billion higher than Q2 of last year, positioning us well for our full-year target.
Turning to the budget environment and starting with the US, we're encouraged by the continued bipartisan support for National Security funding to implement the administration's national defense strategy. The FY'24 budget and recent congressional committee bill prioritize modernization, including areas of strength in our portfolio, such as the Triad, the space domain, information superiority and advanced weapons. We also anticipate continued support for Ukraine and related emergency spending, which would represent even further increased demand.
Global demand for our products also continues to grow as our allies increased defense spending to address evolving threats. We are well-positioned in multiple markets to meet this demand, with programs such as AARGM, IBCS and E-2D, as well as munitions. With a robust backlog and a leading growth outlook, I'd like to now spend a few minutes outlining our path to margin expansion, which is a key element of our earnings and cash flow growth plan.
Our 2023 operating margin dollar guidance is in the range we previously provided. This guidance implies a segment margin rate in the mid 11% range in the second-half of 2023, having delivered a rate of 10.9% in the first-half. We also see an opportunity to increase our year-over-year margin rate in 2024 and get to a 12% target in the longer-term. Achieving this margin improvement is built on three key drivers.
First is the stabilization of temporal macroeconomic factors that have driven higher costs and impacted our supply chain and labor efficiency. Second, is the ongoing implementation of cost management programs across the company that help drive affordability, competitiveness and performance. And third is our business mix, which we see shifting to more international and production contracts as international demand grows and many of our current development programs mature over the next several years.
With regards to the macroeconomic factors, supply chain disruptions rooted in the pandemic and the subsequent labor market tightness have created program delays and cost growth. To reduce this disruption, we're buying ahead of schedule, pursuing second sources where it makes sense and placing more of our people at suppliers to facilitate timely material deliveries. We see signs of progress across our supply chain from these actions. And we are seeing fewer new issues emerge.
We've had exceptional performance in growing our head count since the second-half of 2022, and attrition rates are down to pre-pandemic levels. Our focus now is on optimizing labor efficiency, which is an important driver of profitability. To accelerate the learning curve for our employees, we're leaning forward with innovative training programs and standardizing work construction.
Inflation has been a challenge for our industry as well as others. Cost growth has now begun to moderate. But the last 18 months of inflation continue to have a higher base effect on our costs, especially in labor. If you look at our year end 2021 fixed-price backlog, it was largely price before we began to experience elevated levels of inflation. However, of that backlog, approximately 70% will have been converted into sales by the end of this year. And for new bids, we are factoring higher inflation expectations into our contracts. We're also working to drive additional discipline in our bid approaches, particularly on fixed-price contracts to help protect against these types of dynamics in the future. Overall, we anticipate that these macroeconomic impacts have stabilized and now have largely been incorporated into our margins or risk factors.
The second key driver of margin opportunity is cost management, which benefits both affordability and competitiveness. We are laser-focused on overhead cost reductions. A foundational element of these reductions is our implementation of digital solutions across our business, which will help to drive performance and productivity. For example, we've built a digital ecosystem that focuses on program execution, bringing together employees, customers and partners into an integrated environment so they can seamlessly work together. This accelerates design integration, testing and deployment across programs, helping us to deliver with quality, speed and efficiency. We're increasing the number of programs that are operated in this ecosystem. And today we have over 100 active programs that are doing so.
We're also investing in and advancing the technologies and digital systems in our factories. We're scaling this across the enterprise to drive efficiencies that should benefit all our stakeholders. For example, on the B-21, we we've successfully demonstrated the use of the digital thread tied to advanced manufacturing technology to realize over 15% labor efficiencies in one area of the build. And in June, we launched the expansion of this approach across the whole build process.
We're extending the digital thread into our business operations to deliver further benefits across the company. This includes how we're managing our supply chain, where we've broadly centralized procurement and we're working to leverage our purchasing power to reduce costs. We have over 20,000 suppliers and we've begun securely connecting them into our digital ecosystem. Over the next several years, we expect to have the majority of our supply base fully integrated. This is expected to lower supplier costs and significantly improved freight activity.
The third key area of margin opportunity is our business mix. For several years, we've had one of the highest cost-plus development contract mixes in the industry, reflecting our significant early-stage position on key franchise programs, which will transition to production throughout this decade. This cost-plus mix has been increasing, with our first-half revenue at 55% cost-plus, up from about fifty-fifty last year. Looking forward, we see this shifting towards more fixed-price revenue, rising to approximately 60% of sales by 2027, as a number of large programs in all four of our sectors transition to production.
Production program margins are typically a few points higher than development margin. Some mix-shift can contribute meaningfully to our segment operating margin rate. And we are making good progress on moving programs through development and into production. For example, AARGM-ER completed its fifth consecutive test flight in the second quarter. This program is nearing completion of its development phase and is on track to ramp production volumes next year. And on B-21, we successfully powered on the first flight test aircraft in the quarter, another important milestone in our campaign to achieve first flight and transition to production.
We also expect our international business to grow at a double-digit rate over the next few years, improving our margin opportunity as global sales become a larger percentage of our mix. In the second quarter, we demonstrated our IBCS solution for a potential international customers, reflecting growing demand for this advanced air and missile defense capability. We also signed a memorandum of agreement with Rheinmetall to expand capacity for F-35 center fuselage production in Europe. We expect these three drivers to results in improved affordability, even better performance and higher margins. When combined with the strength of our backlog and increasing global demand, these operating margin improvements should provide the foundation for strong future free cash flow growth.
Now with respect to capital deployment, we're executing a strategy that prioritizes investments to support our business plans and return cash to shareholders. In May, we increased our dividend for the 20th consecutive year by 8%. Year-to-date, we have returned $1.5 billion to shareholders and are on track to meet our goal of returning more than 100% of free cash flow this year. Overall, the global defense budget outlook and our alignment with customer priorities give us confidence in our growth trajectory. We are focused on margin expansion opportunities and converting those to free cash flow growth to deliver value both for our customers and our shareholders.
So with that, I'll hand it over to Dave, who will cover details of the second quarter financial results and updates to our full-year outlook.
