Northrop Grumman Corporation (NOC)

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Northrop Grumman (NOC)

Q3 2012 Earnings Call

October 24, 2012 11:30 am ET

Executives

Stephen Movius

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

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

Analysts

Myles A. Walton - Deutsche Bank AG, Research Division

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

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

Noah Poponak - Goldman Sachs Group Inc., Research Division

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

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

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

Jason M. Gursky - Citigroup Inc, Research Division

Carter Copeland - Barclays Capital, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

George Shapiro

Presentation

Operator

:

Good day, ladies and gentlemen, and welcome to the Northrop Grumman Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the call over to Steve Movius, Vice President of Investor Relations. You may proceed.

Stephen Movius

:

Thanks, Frances, and welcome to Northrop Grumman's Third Quarter 2012 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 Chairman, CEO and President, Wes Bush; and our CFO, Jim Palmer. At this time, I'd like to turn the call over to Wes.

Wesley G. Bush

:

All right, thanks, Steve. Good morning, everyone. Thanks for joining us on our third quarter conference call. We're very pleased with this quarter's results and the performance of our businesses year-to-date. We continue to drive program performance, aggressively pursue high-quality new business with innovative, affordable solutions, reduce our cost structure and align our portfolio with our customer spending priorities in a dynamic environment.

Our intense focus on these actions, combined with effective cash deployment, continues to create value for our shareholders, customers and our employees. These are not new initiatives for us. These are the ongoing efforts and actions that have generated substantial performance improvement over the last few years and that will be increasingly important in today's challenging environment.

Third quarter EPS are comparable to last year despite continued top-line pressure. On a pension-adjusted basis, our third quarter earnings per share increased 6%. We achieved this improvement through a combination of operational performance and share repurchases. All 4 of our businesses performed well in the quarter. Our businesses continue to generate strong operating income, margin rates and cash flow. Year-to-date, we've captured more than $20 billion in new business awards for a book-to-bill ratio of more than 100%. And cash generation has also been strong, even after our $300 million discretionary pension contribution, free cash flow totaled $748 million in the third quarter. And year-to-date, we've generated free cash flow of $1.4 billion or nearly 100% of net income. Our robust margin rates and cash conversion demonstrate the quality of our operational performance for the quarter and year-to-date. We're very proud of our employees' outstanding efforts in generating these results.

Our strong cash generation continues to support share repurchases. During the quarter we repurchased about 4.4 million shares of our stock for $290 million. And year-to-date, we've repurchased 13.6 million shares for approximately $850 million. In the first 9 months of the year, share repurchases and dividends have totaled more than $1.2 billion or nearly 90% of free cash flow. We continually assess our share repurchase program to ensure that it's creating long-term shareholder value. As you know, ours is a long cycle business, and we take that perspective when considering the value of our enterprise. We consider our long-term value relative to the market's current valuation of our cash flows and earnings.

Based on where we are in the cycle, and the prices at which we are purchasing shares, we believe that share repurchases continue to contribute to long-term value creation. The board recently increased our remaining share repurchase authorization to $2 billion, which provides flexibility in a dynamic environment.

Turning to guidance, based on the strength of year-to-date results, we expect to end the year with sales of approximately $25 billion. And we now expect 2012 earnings per share of $7.35 to $7.40. On a pension-adjusted basis, this represents EPS growth of approximately 8% over last year. We're also increasing our guidance for cash from operations and free cash flow. Before discretionary pension contributions, we now expect operations to generate $2.5 billion to $2.8 billion, with free cash flow of $2.1 billion to $2.4 billion.

Looking ahead to next year, there is substantial uncertainty regarding federal budgets, including whether sequestration will occur, and if so, how it would be implemented. We believe that sequestration would not apply to obligated program funds that are currently in our funded backlog, but there's little doubt that the long-term impact of sequestration would be highly detrimental to national security and our industrial base. The short-term impacts, should sequestration take effect in January, are more difficult to assess given the lack of specific implementation detail. As a result, we're preparing for a wide range of budget outcomes. But under any scenario, we expect that as currently provided for under the Budget Control Act, sequestration would result in lower revenues, profits and cash flows for our company and our industry over the long-term.

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