Northrop Grumman Corporation (NOC)

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Northrop Grumman (NOC)

Q3 2010 Earnings Call

October 27, 2010 10:30 am ET

Executives

James Palmer - Chief Financial Officer and Corporate Vice President

Wesley Bush - Chief Executive Officer, President, Member of Corporate Policy Council and Director

Paul Gregory - Vice President of Investor Relations

Analysts

Cai Von Rumohr - Cowen and Company, LLC

Jason Gursky - Citigroup

Douglas Harned - Bernstein Research

Howard Rubel - Jefferies & Company, Inc.

Joseph Nadol - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Samuel Pearlstein - Wells Fargo Securities, LLC

Myles Walton - Deutsche Bank AG

Troy Lahr - Stifel, Nicolaus & Co., Inc.

David Strauss - UBS Investment Bank

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Northrop Grumman Third Quarter 2010 Earnings Conference Call. My name is Jennifer, and I'll be your operator for today. [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.

Paul Gregory

Great. Thank you very much, Jennifer, and good morning, everyone, and welcome to Northrop Grumman's Third Quarter 2010 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 the 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 third quarter 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.

On the call today are our CEO and President, Wes Bush; and our Chief Financial Officer, Jim Palmer. And with that, we're ready to start. Wes?

Wesley Bush

Thank you, Paul. Good morning, everyone, and thank you for joining us. This morning, I'll discuss our third quarter results, operational highlights and our outlook for the remainder of 2010. We are very pleased with our third quarter results. They demonstrate that across the entire enterprise, our team is focused on driving sustainable performance improvement.

Our efforts are generating positive results across our business, which is reflected in this quarter's double-digit EPS growth. Financial highlights for the quarter include 4% sales growth and a 14% increase in segment operating income.

Third quarter segment operating margin rate improved 80 basis points to 9.8%, which is the primary indicator of performance improvement at the sectors. Operating income also increased substantially reflecting the operational improvements and lower pension expense. In addition to operational improvements, during the quarter, we repurchased approximately 3 million shares of our common stock, bringing this year's repurchases to 17.8 million shares or approximately $1.1 billion.

Based on our performance for the first nine months of the year, we now expect 2010 earnings to range between $6.85 and $7 per share. We also have a strong quarter for cash. Cash from operations before discretionary pension contributions totaled more than $1 billion, and free cash flow, also before discretionary pension contributions, totaled approximately $850 million. Based on year-to-date results and again, before discretionary pension contributions, we continue to expect cash from operations of $2.3 billion to $2.8 billion and free cash flow of $1.5 billion to $2 billion.

Through the first nine months, our pension contributions totaled $390 million. Jim will provide more detail on cash and pension trends later in the call.

At the end of the third quarter, total backlog was $64.6 billion, which reflects new awards of $7.4 billion in the quarter. The decline in backlog through the end of the third quarter is principally driven by Aerospace and Shipbuilding, our two large primarily platform businesses, where awards are typically large and occur periodically. In Electronics, Information Systems and Technical Services, our shorter-cycle businesses, the backlog trends are generally positive. Several major Aerospace and Shipbuilding awards are pending. And as these awards are finalized in the coming months, we expect an improvement in our book-to-bill rate. A prolonged period of continuing resolution could delay some awards, however.

Turning to sector highlights. Aerospace sales increased 7%. Operating income increased more than 14%, and margin rate improved 70 basis points to 11.2%. Sales trends in Aerospace continue to reflect higher volume for manned and unmanned aircraft platforms, which was partially offset by lower sales for missile defense and civil space programs. We achieved several milestones in the Global Hawk program this quarter. In addition to supporting in-theater operations 24 hours a day, seven days a week, Global Hawk recently achieved 35,000 combat hours and two Global Hawks were deployed to new overseas locations. One to Sigonella Naval Air Station in Italy and the other to the Pacific Command at Andersen Air Force Base in Guam. Overall, the system continues to perform very well, and the program is on track for achieving its critical initial operational test and evaluation milestone, which we expect will lead a full rate production decision next spring.

Global Hawk affordability continues to be a key priority that we are working jointly with our customer. The air vehicle production costs has continued to decline across each production line. And for the payloads, we are utilizing combined buys and an economic order quantity approach to reduce cost.

As platform configurations continue to mature and affordability initiatives are implemented, we expect air vehicle and sensor costs will continue to decline. Driving production efficiencies is an ongoing focus for Aerospace Systems, not only for Global Hawk but for all of our key programs, including the F-35 and the F/A-18.

Read the rest of this transcript for free on seekingalpha.com