Northrop Grumman Corporation (NOC)

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Northrop Grumman (NOC)

Q1 2011 Earnings Call

April 27, 2011 11:30 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

Robert Stallard - RBC Capital Markets, LLC

Cai Von Rumohr - Cowen and Company, LLC

Howard Rubel - Jefferies & Company, Inc.

Joseph Nadol - JP Morgan Chase & Co

Douglas Harned - Sanford C. Bernstein & Co., Inc.

Robert Spingarn - Crédit Suisse AG

Jason Gursky - Citigroup Inc

Samuel Pearlstein - Wells Fargo Securities, LLC

Myles Walton - Deutsche Bank AG

David Strauss - UBS Investment Bank

Presentation

Operator

Good day and welcome to the First Quarter 2011 Northrop Grumman Earnings Teleconference. [Operator Instructions] I'll now turn the presentation over to your host, Vice President of Investor Relations, Mr. Paul Gregory. Sir, you may proceed.

Paul Gregory

Great, thank you, Candace. Good morning, and welcome to Northrop Grumman's First Quarter 2011 Conference Call. We've 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 securities 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 first quarter 2011 results and our 2011 guidance for continuing operations. Our first quarter results and our 2011 guidance reflect the spin-off of our Shipbuilding business, Huntington Ingalls Industries on March 31. Shipbuilding results for the first quarter are reported as discontinued operations in the press release and this quarter's 10-Q filing. Our results for discontinued operations may not reflect Huntington Ingalls' results of operations or financial condition as an independent publicly owned company.

On the call today are our CEO and President, Wes Bush; and our Chief Financial Officer, Jim Palmer.

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

Wesley Bush

Thanks, Paul. So good morning, everyone. Thanks for joining us. On today's call, we'll discuss first quarter highlights and our outlook for the rest of the year.

First quarter financial results were strong, and we're off to a solid start for the year. We completed the spin-off of Huntington Ingalls Industries to Northrop Grumman's shareholders on March 31. Our shareholders received 1 share of HII for every 6 years in Northrop Grumman. Along with providing greater investor choice, we believe that the separation of the businesses supports value creation for the shareholders, customers and the employees of both companies.

Today, we also announced that we are raising our dividend and increasing our outstanding share repurchase authorization to $4 billion, which includes committing the $1.4 billion spin-off contribution to share repurchases. This approach means that the full value of the Shipbuilding business will be transferred to our shareholders.

I want to acknowledge the hard work of everyone involved in successfully executing the spin-off. I also want to thank Mike Petters, the CEO of Huntington Ingalls, and his team for their contributions to Northrop Grumman. And finally, I'd like to thank the Navy for their constructive engagement throughout the spin-off process.

Northrop Grumman is now much more sharply focused on our core markets. Integrated C4ISR, Cybersecurity, Unmanned Systems and Logistics. Our 4 sectors are well-positioned and have tremendous opportunities for collaboration synergy. As a management team, we are looking forward to maximizing our opportunities in these markets.

While we believe the company's portfolio is well aligned with our customers' priorities, we always look for opportunities to improve performance and alignment, including continued portfolio shaping. As a management team, we are also focused on improving our execution and cost competitiveness, while maintaining flexibility in a rapidly changing environment. Our priority is to position Northrop Grumman for success in an increasingly competitive environment.

Turning to financial highlights for the quarter on Slide 4. Earnings per share from continuing operations rose 25% to $1.67. On a consolidated basis, our segment operating margin rate expanded by 50 basis points. Our leadership team continues to focus on sustaining and building on the substantial performance improvement we achieved in 2010. All 4 sectors delivered higher operating income, and each of the sectors is building a track record of consistent execution.

Operating income increased 19%, reflecting higher pension income, stronger segment operating income and lower corporate expenses. Our year-over-year sales variance was primarily driven by the decision to reduce our participation in the Nevada National Security Site joint venture. Excluding this change, first quarter sales would've been relatively comparable to last year. So our top line has been fairly resilient, despite operating under the continuing resolutions for the last 6 months.

Our experience is that the series of CRs, held up new contracts and also negatively influenced customer willingness to spend on some existing contracts and programs in order to preserve funds should the CR have continued.

Sales for Aerospace Systems were slightly higher in the quarter due to increased volume for manned aircraft, Unmanned Systems and restricted programs, which more than offset declines in civil space programs. Aerospace Systems ended the quarter with a $20 billion backlog and continues to have several large pending awards, including LRIP 4 [low-rate initial production Lot 4] for the F-35 and the latest multiyear for the F/A-18.

Sales for Electronic Systems and Information Systems, our shorter cycle businesses, were more impacted by acquisition delays caused by domestic and international budget uncertainties. And at Technical Services, the sales decline was solely the result of our strategic decision to reduce our participation in the Nevada National Securities Site joint venture. That decision also reduced our backlog by $1.7 billion.

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