Northrop Grumman Corporation (NOC)

NOC 
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Northrop Grumman (NOC)

Q4 2010 Earnings Call

February 09, 2011 10:30 am ET

Executives

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

Paul Gregory - Vice President of Investor Relations

James Palmer - Chief Financial Officer, Member of Corporate Policy Council and Corporate Vice President

Analysts

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

Douglas Harned - Bernstein Research

Howard Rubel - Jefferies & Company, Inc.

Jonathan Raviv

George Shapiro - Citi

Joseph Nadol - JP Morgan Chase & Co

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 Fourth Quarter and Year-End Financial Results Conference Call. My name is Michael, and I will 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

Thank you, Michael. Welcome and good morning. Today is Northrop Grumman's Fourth 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 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 2010 results and our guidance for 2011 continuing operations after the anticipated spin-off of Shipbuilding, which pending final board approval we expect to complete this year. In the event of a spin-off, Shipbuilding results will be reported as discontinued operations. And as an independent company, Shipbuilding will have its own capital structure, corporate infrastructure and associated expenses, tax rates and operating practices and policies, all of which could cause their financial outlook and results to be different from any guidance that we would provide for them as an integrated segment of Northrop Grumman. So for these reasons, our 2011 guidance excludes Shipbuilding.

During today's call, we will 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.

Please go to Slide 3 and at this point, I'd like to turn the call over to Wes.

Wesley Bush

Thanks, Paul. Good morning, everyone, and thank you for joining us. On our call today, we'll discuss our 2010 highlights and our outlook and priorities for 2011.

We're very pleased with fourth quarter and full year results. Operating income and cash flow were particularly strong and demonstrated substantial performance improvement. We continue to build a track record of strong financial performance while addressing our customers' expectations for affordable, high-quality products and services.

We generated these outstanding results while undertaking several strategic initiatives. These include the anticipated Shipbuilding spin-off, the Gulf Coast consolidation, debt restructuring to reduce future interest expense and extend maturities and ongoing streamlining activities across our company, including the efforts related to our corporate office relocation to the Washington D.C. area. We also restructured our incentive compensation plans to drive behaviors that are consistent with our focus on performance and supportive of our customers' affordability and efficiency initiatives.

Our fourth quarter earnings per share from continuing operations increased 7% to $1.27, despite a $231 million charge for our debt tender offer. For the year, earnings per share from continuing operations increased 39% to $6.77. Our emphasis on performance improvement is reflected in strong operating results from all our sectors demonstrated by a 90 basis point improvement in segment operating margin rate, lower pension expense in taxes and the favorable impact of our share repurchase program.

For both the quarter and the year, higher segment operating income and higher segment operating margin rate drove EPS growth. We view these metrics as key measures of our operational performance, and we showed substantial improvement in the quarter and the year. Cash from operations and free cash flow were outstanding for the quarter and the year. Results for both measures exceeded the upper end of our prior guidance.

Before discretionary pension contributions, net of taxes, 2010 cash from operations totaled $3.1 billion and free cash flow totaled $2.3 billion. For the year, our conversion of net earnings to free cash flow before the after-tax effect of discretionary pension contributions was 111%.

Our strong cash flow, along with the proceeds of the tax sale, allowed us to return a substantial amount of cash to shareholders through share repurchases and dividends. In 2010, we repurchased 19.7 million shares for approximately $1.2 billion. At year-end, approximately $1.8 billion remained on our share repurchase authorization. We also raised our quarterly dividend by 9.3% last May, our seventh consecutive annual increase, and paid shareholders $545 million in dividends in 2010.

At year-end, total backlog was more than $64 billion. Fourth quarter new awards totaled $9.2 billion. And for the year, new awards totaled $30 billion. Aerospace Systems ended the year with a total backlog of $21 billion and Shipbuilding backlog at the end of 2010 was $17 billion. Both of these platform businesses ended the year with several large awards pending.

Our shorter cycle businesses, Electronic Systems, Information Systems and Technical Services have stabled to improve backlogs versus year-end 2009. Electronic Systems begins 2011 with a total backlog of more than $10 billion. Information Systems backlog grew by 20% in 2010 to $10.6 billion and continues to be very well positioned to address high-priority missions in C4ISR, cyber security and large complex federal IT systems. And Technical Services begins the year with a backlog of more than $5 billion. These three business also have substantial revenue opportunity under ID/IQ awards which are not reflected in total backlog.

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