Northrop Grumman Corporation (NOC)

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Northrop Grumman (NOC)

Q2 2011 Earnings Call

July 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.

Heidi Wood - Morgan Stanley

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

Samuel Pearlstein - Wells Fargo Securities, LLC

Jason Gursky - Citigroup Inc

Myles Walton - Deutsche Bank AG

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Northrop Grumman's Second Quarter Earnings Conference Call. My name is Crystal, and I will be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes.

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 very much, Crystal. Good morning, everyone and welcome to Northrop Grumman's Second Quarter of 2011 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 Securities laws. Forward-looking statements involve risks and uncertainties which are detailed in today's press release and our SEC filings and include a new risk factor related to the resolution of the issues regarding the U.S. government's debt ceiling. These factors may cause actual company results to differ materially.

During today's call, we'll discuss second quarter 2011 results and our financial guidance for 2011 for continuing operations.

On the call today are our CEO, Wes Bush, and our CFO, Jim Palmer.

With that, lets go to Slide 3. And at this time, I'd like to turn the call over to Wes.

Wesley Bush

All right. Thanks, paul. Good morning, everyone thanks for joining us.

Our second quarter results demonstrate that our strategy of driving shareholder value through performance, portfolio optimization and effective cash deployment continues to generate EPS growth. Despite a challenging top line environment, we had exceptional margin rate performance for the quarter. After adjusting last year's second quarter results for the $0.98 per share tax benefit, our earnings per share from continuing operations increased 24% to $1.81 from $1.46. The primary EPS growth drivers were continued performance improvement in our businesses, higher pension income and a lower share count.

Our businesses generated a 12% segment operating margin rate. Total operating margin rate increased to 12.8%, primarily reflecting performance improvements and higher pension income. In May, we executed a $1 billion accelerated share repurchase which immediately reduced our outstanding share count by 15.6 million shares. And along with the dividend increase we also announced in May, demonstrates our continued commitment to creating shareholder value through returning cash to our shareholders.

We now expect our 2011 EPS from continuing operations to range between $6.75 and $6.90. The increase in 2011 EPS guidance contemplates our strong year-to-date results and performance improvement for both segment operating margin and total operating margin rates. The new range represents double-digit, year-over-year EPS growth after adjusting for one-time items in 2010 such as the tax benefit and the impact of our debt tender.

Cash performance for the quarter and year-to-date continues to support our guidance. Through 6 months, cash from continuing operations, before discretionary pension contributions, totaled $490 million, 21% higher than last year. And as we've stated on previous calls, we expect cash generation to be weighted toward the second half of the year which has been our historical pattern.

Turning to sales, 3 primary factors impacted the quarter. Fragile uncertainties impacting our customers, the announced force reductions in Iraq and Afghanistan and our own portfolio shaping decisions that were anticipated in our guidance.

So let me briefly discuss all 3 of these.

First, overall budget pressures and the decline in government and defense outlays. The 6-month continuing resolution, as well as continued uncertainties surrounding the debt ceiling and future defense budgets, caused our customers to move more slowly and spend more conservatively. We did not see the recovery in spending that one might have expected with the end of the continuing resolution and the passage of the fiscal year 2011 budget. In this environment, new awards are moving to the right, and is also taking a bit longer to get continuing business under contract.

In addition to budget pressures, we are beginning to see the impact of the announced troop drawdowns in Iraq and Afghanistan primarily in Electronic Systems for ID/IQ contracts such as the vehicular intercommunication systems that are used by the Army.

And finally, sales do reflect our strategic portfolio shaping, which includes the previously announced reduction in our Nevada Test Site joint venture participation, which we announced earlier this year, as well as the sale of our San Diego County outsourcing contract back in May. While these 2 actions reduced second quarter sales by approximately $160 million, they also supported this quarter's performance improvement and segment margin rate expansion.

So based on year-to-date results and our outlook for the rest of the year, we now expect 2011 sales of approximately $27 billion. Looking forward, we continue to believe that we are well aligned with our customers investment priorities in Unmanned Systems, Cybersecurity, C4ISR and Logistics. We believe that these areas will continue to be well supported in future budgets as they are critical to the most pressing national security missions. We expect that once the current state of budget disarray is resolved and future projects are clarified, our customer spending behavior should begin to normalize. However, the environment continues to be very dynamic and it may take some time before there is more clarity in DoD strategy and its program level planning.

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