Northrop Grumman Corporation (NOC)

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Northrop Grumman (NOC)

Q4 2011 Earnings Call

February 01, 2012 9:30 am ET

Executives

Stephen C. Movius - Chief Financial Officer and Sector Vice President of Finance and Business Operations

Wesley G. Bush - Chairman, Chief Executive Officer, President and Member of Corporate Policy Council

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

Analysts

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Jason M. Gursky - Citigroup Inc, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Northrop Grumman Fourth Quarter Earnings Conference Call. My name is Erin, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Mr. Steve Movius, Vice President of Investor Relations. Please proceed, sir.

Stephen C. Movius

Thank you, Erin, and welcome to Northrop Grumman's fourth quarter and year-end 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. These risk factors may cause actual company results to differ materially.

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

Please go to Slide 3. At this time, I'd like to turn the call over to Wes.

Wesley G. Bush

Thanks, Steve. Good morning, everyone, and thanks for joining us. I'll start this morning by first reviewing our 2011 results, then I'll address our outlook for 2012. Fourth quarter and full year results for 2011 were outstanding. They demonstrate that our focus on performance, portfolio alignment and effective cash deployment continues to create value. Despite the challenging top line environment, we delivered strong results by nearly every measure. Segment and total operating margin, earnings per share, cash from operations and free cash flow all were higher than our 2010 results. Our team continues to build on our strong record of program execution and performance, which is essential to meeting our customer needs for affordable, high-quality products and services.

I'm very proud of how our team has come together these last several years to really drive performance improvements in our business. Achieving these improvements has required some tough decisions across our company, but these efforts have positioned us to be successful well into the future.

Turning to our results, fourth quarter earnings from continuing operations more than doubled to $2.09 per share, and for the year, earnings per share from continuing operations increased 17%, to $7.41.

Segment operating income rose in both periods. For the quarter, segment margin rate increased 100 basis points, to 11.9%. And for 2011, segment margin rate expanded 90 basis points, to 11.6%. Pension adjusted operating income also increased for both periods. And for 2011, our total operating margin rate, adjusted for net FAS/CAS pension, expanded 90 basis points over 2010, to 10.9%.

Cash from operations and free cash flow were outstanding for both the quarter and the year. Before discretionary pension contributions, 2011 cash from operations totaled nearly $3 billion and free cash flow totaled $2.5 billion. For the year, conversion of earnings from continuing operations to free cash flow, before the effect of discretionary pension contributions, was 120%. Our strong cash flow and the $1.4 billion Huntington Ingalls spin-off contribution allowed us to return substantial cash to our shareholders through share repurchases and dividends. In total, we spent $2.3 billion to repurchase more than 40 million shares, and at year-end, approximately $1.7 billion remained on our share repurchase authorization.

We also raised our quarterly dividend by 6.4% last May, our eighth consecutive annual increase. And we paid our shareholders $543 million in dividends in 2011. Through share repurchases and dividends, we returned cash of $2.8 billion to our shareholders in 2011, 150% of our free cash flow from continuing operations. And through the Huntington Ingalls spin-off, we distributed an additional $1.8 billion of equity value to our shareholders.

During the quarter, new business awards totaled $7.1 billion, a book-to-bill ratio of 109%. For the year, new business awards totaled $25.3 billion, a book-to-bill ratio of 96%. We ended the year with a total backlog of nearly $40 billion.

Looking ahead, we remain focused on aligning our cost structure with our customer's affordability and efficiency objectives. Actions to date to support affordability have included consolidating business units across the enterprise, reducing overhead in our operating businesses, restructuring our debt to reduce interest expense, streamlining our corporate office and redesigning our benefit plans.

Looking ahead for this year, we expect 2012 earnings per share from continuing operations of $6.40 to $6.70. Our 2012 guidance calls for sales of $24.7 billion to $25.4 billion, double-digit segment and total operating margin rates, cash from operations of $2.3 billion to $2.6 billion and free cash flow of $1.8 billion to $2.1 billion.

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