Northrop Grumman's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Northrop Grumman (NOC)

Q1 2012 Earnings Call

April 25, 2012 11:30 am ET


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


Joseph Nadol - JP Morgan Chase & Co, Research Division

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

Robert Spingarn - Crédit Suisse AG, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Jason M. Gursky - Citigroup Inc, Research Division

George Shapiro

Robert Stallard - RBC Capital Markets, LLC, Research Division



Good day, ladies and gentlemen, and welcome to the Northrop Grumman First Quarter Earnings Conference Call. My name is Dienna, and I'll be the operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Steve Movius, Vice President, Investor Relations. Please proceed.

Stephen Movius

Thanks, Dienna, and welcome to Northrop Grumman's first quarter 2012 conference call. We provided supplemental information in the form of a PowerPoint presentation, which you can access at

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 and CEO, Wes Bush; and our CFO, Jim Palmer.

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

Wesley G. Bush

All right. Thanks, Steve. Good morning, everyone. Things for joining us. We're very pleased with this quarter's results. We're off to a strong start for the year in a challenging environment. It's rewarding to see the positive results being generated by our team's continued focus on performance, affordability and efficiency. As we've mentioned on our last few calls, we've been working hard across the company to reduce costs and improve productivity, and those efforts are continuing to pay off in terms of our financial results and our performance for our customers.

First quarter earnings per share from continuing operations rose 17% to $1.96, and on a pension-adjusted basis, earnings per share rose 31%. EPS growth for the quarter reflects improved performance across all 4 of our businesses as well as the positive impact of our share repurchases.

Despite lower sales, 3 of our 4 businesses posted higher operating income and all 4 sectors generated higher margin rates. Electronic Systems and Information Systems had particularly strong quarters. As a result, our segment operating income increased 9% and our segment margin rate increased 200 basis points to 12.7%.

During the quarter, we repurchased 4.4 million shares of our common stock for approximately $260 million. We plan to continue executing a balanced cash deployment strategy that includes returning cash to shareholders through share repurchases and dividends. Historically, our return of cash to shareholders has been weighted towards share repurchases, and we don't have any plans to change our practice.

Our 2012 EPS guidance assumes a reduction in weighted average shares outstanding of approximately 9%. We consider our dividend a long-term commitment to shareholders, and we evaluate our dividend as a payout ratio of pension-adjusted earnings. Maintaining a competitive dividend payout in line with our industry continues to be our focus.

Now I'll provide a top overview of our first quarter performance, and then Jim will provide some additional details. First quarter sales of $6.2 billion are consistent with our expectations and support our guidance for the year. Our sales outlook assumes a continuing resolution of the fourth quarter, but does not contemplate extraordinary customer actions in anticipation of potential sequestration.

As we discussed last quarter in providing a 2012 guidance, our portfolio-shaping actions and the adoption of units of delivery revenue recognition on F-35 LRIP 5 will reduce year-over-year sales by approximately $500 million; and changes to a number of our programs, including fewer F/A-18 deliveries as we transition from multiyear 2 to multiyear 3; cancellation of NPOESS DWSS; lower volume for B-2 and Joint STARS modernization programs; lower in-theater sales; and lower ICBM volume will have an aggregate impact of approximately $1 billion on 2012 sales.

Together, these factors reduced our first quarter sales by approximately $450 million with F-35 representing about $90 million of that impact.

We expect sales to be more heavily weighted toward the second half of the year, as F-35 LRIP 5 deliveries are expected to begin in the third quarter.

New business awards in the quarter totaled $5.8 billion, a book-to-bill ratio of 94%. We ended the quarter with total backlog of $39.1 billion, down slightly from year end, but a satisfactory result given program award delays.

Notable follow-on awards for AS include $919 million for the E-2D Advanced Hawkeye and $289 million for the F-35. ES received an $88 million FMS award for F-16 fire control radars for several foreign countries and was also awarded $332 million for LAIRCM. TS received $100 million contract to continue supporting the Army's 3-core Mission Command Training Center. Information Systems was awarded $122 million follow-on award for Counter-Rocket, Artillery and Mortar systems. Over the last 2 quarters, IS also has won several important competitions. These include CANES, a program to consolidate and modernize the U.S. Navy shipboard network systems to improve operational effectiveness and affordability across the fleet, the ground combat vehicle C4ISR suite and the Air and Space Operations Center Weapons Systems Modernization Program, called AOC WS.

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