Northrop Grumman Corporation (NOC)

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Northrop Grumman Corporation (NOC)

Q4 2009 Earnings Call Transcript

February 4, 2010 10:30 am ET

Executives

Paul Gregory – VP, IR

Wes Bush – CEO and President

Jim Palmer – Corporate VP and CFO

Analysts

David Strauss – UBS

Howard Rubel – Jefferies & Company

Doug Harned – Sanford Bernstein

Robert Spingarn – Credit Suisse

George Shapiro – Access 342

Myles Walton – Oppenheimer

Cai von Rumohr – Cowen And Company

Sam Pearlstein – Wells Fargo Security

Robert Stallard – Macquarie

Operator

Good day, ladies and gentleman and welcome to the Northrop Grumman fourth quarter earnings conference call. My name is Steve and I'll be your operator for today. At this time all participants are in a listen-only mode. Later in the call we will conduct a question-and-answer session. (Operator instructions).

I would now like to turn the conference over to your host for today, Mr. Paul Gregory, Vice President of Investor Relations. Please proceed, sir.

Paul Gregory

Great. Thank you, Steve. Good morning everyone, welcome to Northrop Grumman's fourth quarter 2009 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 call constitute forward-looking statements pursuant to Safe Harbor provisions of Federal Security Laws. Forward-looking statements involve risks and uncertainties, which are detailed in today's press release and our SEC filings and may cause actual company results to differ materially.

During today's call, we'll discuss fourth quarter and full year 2009 results and our guidance for 2010. We'll refer to non-GAAP measures, which are defined and reconciled in our earnings release and the supporting materials posted on our website.

I also want to point out that the divestiture of our advisory services business known as TASC was completed on December 18. On the income statements TASC sales, operating income and the net gain on sale are accounted for as discontinued operations for 2009 and for all periods presented. On the call today are our CEO and President, Wes Bush and our Chief Financial Officer, Jim Palmer.

So, I think we’re ready to go to Slide Three and at this time, I’d like to turn the call over to Wes. Wes?

Wes Bush

Thanks, Paul. Good morning everyone and thanks for joining us. As Paul said, this morning we’ll discuss our fourth quarter and our full year results as well as Northrop Grumman’s outlook for 2010. We had a solid finish to 2009.

Earnings per share totaled $5.21 exceeding our guidance of $5 to 5.15 and we had outstanding cash results. Cash from operations and free cash flow were very strong and when adjusted for discretionary pension contributions and the taxes that we paid on the TASC sale were at the high end of our guidance and comparable to last year’s record levels.

During 2009 we continued to deploy cash to create value for our shareholders. We raised the dividend by 7.5% and we used $1.1 billion to repurchase more than 23 million shares of our stock including 8.4 million shares repurchased in the fourth quarter.

At year end we had $924 million remaining on our share purchase reauthorization. As we previously announced, the most recent increase in the authorization was funded by the net proceeds from the TASC divestiture. Another 2009 highlight is our yearend backlog of more than $69 billion. Total backlog continues to represent more than two years of sales and includes $32 billion of new awards captured in 2009. We’re very pleased that despite delays on several competitions, our book to bill ratio for the year was 96%. We continue to capture high quality competitive contracts.

Turning to results for our businesses, Aerospace Systems continues to perform well. Sales grew 7% for the quarter and 6% for the year. Our unmanned and manned aircraft programs along with our restricted work were the drivers for the quarter and for the year. Volume increases on programs like BAMS, Global Hawk, F-35, F-18 and the B-2 have more than offset declines in some of our missile and space programs. We expect continued strength in both manned and unmanned programs.

During the quarter we received a $300 million contract for five Global Hawks. This fixed price and Santa Fe contract runs through 2011. We also introduced the first Euro Hawk unmanned vehicle, marking the first international configuration of the Global Hawk. Aerospace also continues to improve their margin rates with expansion to 10.5% for the quarter and 10.3% for the year.

Electronic Systems also had a strong quarter in the year. Sales increased 2% for the quarter and 9% for the year was solid margin rates for both periods. During the fourth quarter the Royal Australian Air Force accepted initial delivery of the first two Wedgetail aircraft and we reached agreement on delivery requirements.

Final delivery and full acceptance is expected later this year and delivery of all six aircraft is planned by mid 2011. With Wedgetail development complete and agreement reached on the remaining contract requirements, we believe the financial risk on Wedgetail is behind us. For Information Systems fourth quarter sales were comparable to the prior year and full year sales increased 5%.

Margin rates for the quarter and the year were impacted by state income taxes resulting from the TASC sale and lower performance on the Virginia outsourcing contract know as VITA. These two items offset the positive margin rate trends generated in our intelligence and defense businesses, which now account for about 75% of Information Systems sales. These two profitable growing businesses are very well positioned in their markets, including cybersecurity and C4ISR. They will be the performance drivers for the sector. As a result of strong business captured during the year, IS grew backlog by nearly $480 million or 6% to 8.8 billion.

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