Northrop Grumman (NOC)
Q4 2012 Earnings Call
January 30, 2013 11:30 am ET
Stephen C. Movius - Chief Financial Officer and Sector Vice President of Finance and Business Operations
Wesley G. Bush - Chairman, Chief Executive Officer, President and Member of Corporate Policy Council
James F. Palmer - Chief Financial Officer and Corporate Vice President
Jason M. Gursky - Citigroup Inc, Research Division
Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division
Carter Copeland - Barclays Capital, Research Division
Cai Von Rumohr - Cowen and Company, LLC, Research Division
Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division
Robert Stallard - RBC Capital Markets, LLC, Research Division
Myles A. Walton - Deutsche Bank AG, Research Division
David E. Strauss - UBS Investment Bank, Research Division
Yair Reiner - Oppenheimer & Co. Inc., Research Division
Joseph B. Nadol - JP Morgan Chase & Co, Research Division
Howard A. Rubel - Jefferies & Company, Inc., Research Division
Previous Statements by NOC
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Stephen C. Movius
Thanks, Frances, and welcome to Northrop Grumman's fourth quarter and year end 2012 conference call. We provided supplemental information in the form of a PowerPoint presentation that you can access at www.northropgrumman.com. Before we start, please understand that matters discussed on today's calls constitute forward-looking statements, pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties which are detailed in today's press release and our SEC filings. These risk factors may cause actual company results to differ materially.
On the call today are our Chairman, CEO and President, Wes Bush; and our CFO, Jim Palmer. At this time, I'd like to turn the call over to Wes.
Wesley G. Bush
Thanks, Steve. Good morning, everyone, and thanks for joining us. We had a very strong finish to the year with outstanding fourth quarter and full year results. We met or exceeded guidance for every metric, and I want to congratulate our employees on a job well done. Fourth quarter earnings per share increased 2% to $2.14; and for the full year, earnings per share rose 5% to $7.81.
On a pension-adjusted basis EPS increased 11% in the fourth quarter to $2.06, and 15% for the year to $7.47. Our financial results demonstrate the positive impact of superior program performance driven by cost reductions, affordability initiatives, innovation and portfolio shaping across our 4 businesses.
The strength of our sector's operating performance, coupled with continued share repurchases, more than offset lower sales, higher pension expense and higher effective tax rates. Cash generation was also strong. For the year, before the impact of pension prefunding, we generated cash from operations of $2.8 billion and free cash flow of $2.5 billion. On a reported basis, free cash flow of $2.3 billion represents a free cash flow yield of 14.3% and net income conversion of 117%. We deployed that cash by repurchasing 20.9 million shares of our common stock for $1.3 billion, reducing weighted average shares outstanding by 10%. We also paid dividends of $535 million and made a $300 million discretionary pension contribution.
Through share repurchases and dividends, we returned more than $1.8 billion in cash to our shareholders or approximately 80% of 2012 reported free cash flow. We captured new awards of $26.5 billion during the year for a book-to-bill of 1.05. Total backlog increased 3% to $40.8 billion and funded backlog increased more than 10% to $25.7 billion.
I'm very proud of the performance improvement accomplished by our team. Achieving these improvements has required tough but necessary actions. To put our improvement into perspective, since the end of 2009, sales from our continuing operations have declined about 9% due in part to portfolio shaping. During that same period, our focus on performance has generated a 20% increase in absolute segment operating income, and a 300 basis points expansion in segment operating margin rate or more than a 30% improvement.
As a result of this improvement, in combination with effective cash deployment, EPS from continuing operations have grown by a compound annual growth rate of 20%. While superior program performance and portfolio shaping drove much of the improvement, we've also significantly reduced our cost structure. Over the last 4 years, we've reduced our headcount by approximately 17%, and we've reduced our facilities footprint by approximately 12%. As we improved operating income and margin rate, we maintained robust free cash flow and free cash flow conversion.
We also monetized assets to create value for shareholders. Over just the past 3 years, we've generated free cash flow of $7 billion, including the $1.4 billion contribution from the HII spinoff. More than 90% of that cash has been distributed to our shareholders, $4.8 billion to repurchase shares and another $1.6 billion for dividends. In addition, we increased the dividend in each of these 3 years.
Looking ahead, I can't recall a time of greater uncertainty regarding customer funding levels or government fiscal policy. We continue to operate under a 6-month continuing resolution that expires on March 27, and there is the potential for sequestration on March 1. In addition, other issues such as the debt ceiling raise the possibility of a potential government shutdown.
Our nation needs a balanced strategic approached to our fiscal challenges. Blind, indiscriminate budget-cutting is not the answer, but that is exactly what sequestration would entail. We urge Congress to work to avoid the destructive economic impacts, particularly in terms of government and private employment, and the impacts to our national security that would result from a sequester, a prolonged restricted continuing resolution or a government shutdown.