Northrop Grumman (NOC)

Q2 2010 Earnings Call

July 29, 2010 10:30 am ET

Executives

James Palmer - Chief Financial Officer and Corporate Vice President

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

Paul Gregory - Vice President of Investor Relations

Analysts

Cai Von Rumohr - Cowen and Company, LLC

Jason Gursky - Citigroup

Douglas Harned - Bernstein Research

Howard Rubel - Jefferies & Company, Inc.

George Shapiro - Citi

Joseph Nadol - JP Morgan Chase & Co

Ronald Epstein - BofA Merrill Lynch

Heidi Wood - Morgan Stanley

Joseph Campbell - Barclays Capital

Samuel Pearlstein - Wells Fargo Securities, LLC

Myles Walton - Deutsche Bank AG

David Strauss - UBS Investment Bank

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the Northrop Grumman Second Quarter 2010 Earnings Conference Call. My name is Laticia, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Mr. Paul Gregory, Vice President of Investor Relations. Please proceed, sir.

Paul Gregory

Very good. Thank you Laticia. Good morning, everyone, and welcome to Northrop Grumman's Second 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 the 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 second quarter results and our guidance for 2010. We will refer to non-GAAP measures, which are defined and reconciled in our earnings release and the supporting materials posted on our website.

Our results for the quarter reflect the net benefit of this quarter's $296 million tax settlement and our announced plans to consolidate our Gulf Coast Shipbuilding operations. In addition, results for all periods reported reflect the TASC divestiture, which was completed in December 2009 as discontinued operations.

On the call today are our CEO and President, Wes Bush; and our Chief Financial Officer, Jim Palmer. And with that, I think we're ready to turn the call over to Wes. Wes?

Wesley Bush

All right. Thank you, Paul. Good morning, everyone, and thank you for joining us. This morning, I'll discuss our second quarter results, operational highlights and our outlook for 2010. We're very pleased to report another solid quarter that demonstrates our commitment to delivering sustainable performance improvement across all of our businesses. Sales rose 3%, and our segment operating income increased 14%. Earnings per share of $2.34 includes $0.73 for the net benefit of this quarter's tax settlement and the Shipbuilding consolidation-related charge. Before these items, our second quarter earnings per share increased 42% to $1.61, driven by higher sales, higher segment operating income, lower net pension expense and a reduction in shares outstanding.

Before the consolidation-related charge, all five of our businesses generated higher operating income and a higher margin rate than in the prior-year period. Aerospace, Electronics, Shipbuilding and Technical Services also generated higher sales. The company's second quarter segment operating profit would have totaled 9.9% before the consolidation-related charge, representing underlying margin rate expansion of nearly 200 basis points.

EPS growth also benefited from a lower share count. During the second quarter, we repurchased approximately 6.5 million shares of our common stock, bringing this year's repurchases to 14.8 million shares for approximately $850 million. Based on our performance through the first half of the year, we are increasing our guidance for 2010 earnings to a range of $6.60 to $6.80 per share.

Turning to cash, second quarter cash from operations and free cash flow totaled $619 million and $515 million, respectively. These results included the impact of the $300 million discretionary pension plan contribution we made during the quarter. We're lowering our cash guidance for the year, principally to reflect the anticipated cash impacts of the wind down of ship construction at Avondale. We now expect that cash from operations will range between $2.3 billion and $2.8 billion, and free cash flow will range between $1.5 billion and $2 billion. Guidance for both these metrics is before discretionary pension contributions. Our updated guidance for cash reflects the impact of the consolidation decision and a strengthening of cash flows in the second half of the year, and Jim will provide more detail on cash later in the call.

During the second quarter, we also continued to execute our balanced cash deployment strategy. This included the previously mentioned pension contributions and share repurchases, a new $2 billion share repurchase authorization and a 9.3% increase in our quarterly dividend. Going forward, we remain committed to a balanced cash deployment strategy that calls for investing for the future, managing liabilities and returning cash to shareholders. At the end of the second quarter, we had a total backlog of $66 billion, which reflects new awards of $6.5 billion in the quarter.

Moving on to sector highlights. Aerospace sales increased 6%, operating income increased more than 30% and margin rate improved more than 200 basis points to 11.8%. We also had several notable awards, including a competitive Army award with potential value of up to $517 million to develop up to three Long Endurance Multi-Intelligence Vehicle systems or LEMVs. LEMV is another example of our ability to meet an urgent customer need, with an innovative solution that's flexible and rapidly deployable. This program will leverage our core competencies in unmanned air systems, C4ISR and systems integration. The design allows for plug-and-play sensor payloads and can be readily integrated with the Army's existing ground station command centers.

The LEMV will have the flexibility to operate optionally manned or unmanned, and will provide unprecedented dwell capability over theater. Also in the unmanned domain, Euro Hawk successfully completed its first flight, and we received the DARPA [Defense Advanced Research Projects Agency] award to develop and demonstrate air-to-air refueling of high-altitude unmanned systems. Under the contract, we will modify an existing Global Hawk to access a tanker to fuel another Global Hawk. This is an important step in the evolution of unmanned technology, and our successful demonstration of this capability will further strengthen our strong position in the unmanned domain.

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