Northrop Grumman Reports Third Quarter 2012 Financial Results - EPS from Continuing Operations of $1.82

- Guidance for 2012 EPS from Continuing Operations Increased to $7.35 to $7.40

- Cash Provided by Operations of $812 Million and Free Cash Flow of $748 Million

- Guidance Increased for 2012 Cash Provided by Operations and Free Cash Flow

- Sales Total $6.3 Billion

- 4.4 Million Shares Repurchased

FALLS CHURCH, Va., Oct. 24, 2012 /PRNewswire-FirstCall/ -- Northrop Grumman Corporation (NYSE: NOC) reported third quarter 2012 earnings from continuing operations of $459 million, or $1.82 per diluted share, compared with $520 million, or $1.86 per diluted share, in the third quarter of 2011. The change in earnings and earnings per share is largely due to a $66 million decrease in net pension income in the 2012 third quarter. On a pension-adjusted basis, earnings per diluted share from continuing operations increased 6 percent to $1.73 from $1.63. During the third quarter the company repurchased 4.4 million shares of its common stock for approximately $290 million. Year to date through Sept. 30, 2012, the company has repurchased 13.6 million shares of its common stock, and $2.0 billion remains on its current share repurchase authorization.

"Our focus on performance, effective cash deployment, and portfolio alignment continues to create value for our shareholders, customers and employees. We are working closely with our customers to bring innovative, affordable solutions to support their needs in today's fiscally constrained environment," said Wes Bush, chairman, chief executive officer and president.

Table 1 — Financial Highlights
















Third Quarter


Nine Months

$ in millions, except per share amounts


2012


2011


2012


2011

Sales


$

6,270


$

6,612


$

18,742


$

19,906

Segment operating income1


730


777


2,301


2,282

Segment operating margin rate1


11.6%


11.8%


12.3%


11.5%

Operating income


736


825


2,306


2,477

Operating margin rate


11.7%


12.5%


12.3%


12.4%

Earnings from continuing operations


459


520


1,445


1,536

Diluted EPS from continuing operations


1.82


1.86


5.67


5.34

Net earnings


459


520


1,445


1,570

Diluted EPS


1.82


1.86


5.67


5.45

Cash provided by continuing operations


812


948


1,583


1,026

Free cash flow provided by continuing operations1


748


839


1,387


700










Pension-adjusted Operating Highlights








Operating income


736


825


2,306


2,477

Net FAS/CAS pension adjustment1


(34)


(100)


(101)


(302)

Pension-adjusted operating income1


$

702


$

725


$

2,205


$

2,175

Pension-adjusted operating margin rate1


11.2%


11.0%


11.8%


10.9%










Pension-adjusted Per Share Data








Diluted EPS from continuing operations


$

1.82


$

1.86


$

5.67


$

5.34

After-tax net pension adjustment per share1


(0.09)


(0.23)


(0.26)


(0.68)

Pension-adjusted diluted EPS from continuing operations1


$

1.73


$

1.63


$

5.41


$

4.66

Weighted average shares outstanding — Basic


247.2


274.9


250.4


283.1

Dilutive effect of stock options and stock awards


4.9


4.4


4.6


4.8

Weighted average shares outstanding — Diluted


252.1


279.3


255.0


287.9


1

Non-GAAP metric — see definitions at the end of this press release.

Third quarter 2012 operating income decreased $89 million, or 11 percent, and operating margin rate was 11.7 percent compared with 12.5 percent in the prior year period. The change in both operating income and operating margin rate is principally due to a $66 million decrease in net FAS/CAS pension adjustment in the 2012 third quarter. On a pension-adjusted basis, operating income was $702 million, and pension-adjusted operating margin rate expanded 20 basis points to 11.2 percent from 11.0 percent.

Third quarter 2012 net earnings totaled $459 million, or $1.82 per diluted share, compared with $520 million, or $1.86 per diluted share, in the third quarter of 2011. Third quarter 2012 diluted earnings per share are based on 252.1 million weighted average shares outstanding compared with 279.3 million shares in the third quarter of 2011, a 10 percent decrease.

As of Sept. 30, 2012, total backlog was $41.0 billion compared with total backlog of $39.5 billion on Dec. 31, 2011. Total backlog as of Sept. 30, 2012, includes new business awards of $20.2 billion.

Table 2 — Cash Flow Highlights




















Third Quarter




Nine Months



$ millions


2012


2011


Change


2012


2011


Change

Cash provided by continuing operations before discretionary pension contributions1


$

1,033


$

903


130


$

1,804


$

1,393


411

After-tax discretionary pension pre-funding impact


(221)


45


(266)


(221)


(367)


146

Cash provided by continuing operations


$

812


$

948


(136)


$

1,583


$

1,026


557

Less:












Capital expenditures


(64)


(109)


45


(196)


(326)


130

Free cash flow provided by continuing operations1


$

748


$

839


(91)


$

1,387


$

700


687

After-tax discretionary pension pre-funding impact


221


(45)


266


221


367


(146)


















Free cash flow provided by continuing operations before discretionary pension contributions1


$

969


$

794


175


$

1,608


$

1,067


541



1

Non-GAAP metric — see definitions at the end of this press release.

Cash provided by continuing operations through Sept. 30, 2012, increased to $1.6 billion from $1.0 billion in the prior year, due to lower discretionary pension funding and working capital requirements than in the prior year period. In the third quarter of 2012 the company made a $300 million discretionary contribution to its pension plans that impacted cash flows through Sept. 30, 2012, by $221 million on an after-tax basis, compared with a discretionary contribution of $500 million in 2011 that impacted cash flows by $367 million on an after-tax basis. Free cash flow from continuing operations through Sept. 30, 2012, totaled $1.4 billion compared with $700 million in the prior year due to the cash trends mentioned above and lower capital spending than in the prior year period.

Before the impact of discretionary pension plan contributions, cash provided by continuing operations totaled $1.0 billion for the 2012 third quarter and $1.8 billion for the nine months ended Sept. 30, 2012, and free cash flow totaled $969 million for the 2012 third quarter and $1.6 billion for the nine months ended Sept. 30, 2012.

Changes in cash and cash equivalents described in Schedule 3 of this press release include the following items for cash from operations, investing and financing through Sept. 30, 2012:

Operations

  • $1.6 billion provided by continuing operations

Investing

  • $196 million for capital expenditures

Financing

  • $846 million for repurchases of common stock
  • $401 million for dividends
  • $153 million from exercises of stock options

2012 Guidance Updated














$ in millions, except per share amounts


Prior


Current










Sales


24,700


-

25,400



~25,000










Segment operating margin %1


High 11%


~12%










Operating margin %


Mid 11%


High 11%










Diluted EPS from continuing operations


7.05


-

7.25



7.35

-

7.40










Cash provided by operations before discretionary
pension contributions


2,300


-

2,600



2,500


-

2,800











Free cash flow before discretionary pension
contributions1


1,800


-

2,100



2,100


-

2,400











1 Non-GAAP metric - see definitions at the end of this press release.

 

Table 3 — Business Results

Consolidated Sales & Segment Operating Income1


















Third Quarter




Nine Months



$ millions

2012


2011


Change


2012


2011


Change

Sales












Aerospace Systems

$

2,586


$

2,455


5%


$

7,373


$

7,521


(2%)

Electronic Systems

1,707


1,905


(10%)


5,175


5,504


(6%)

Information Systems

1,776


1,955


(9%)


5,476


6,011


(9%)

Technical Services

748


796


(6%)


2,281


2,403


(5%)

Intersegment eliminations

(547)


(499)




(1,563)


(1,533)




6,270


6,612


(5%)


18,742


19,906


(6%)

Segment operating income1












Aerospace Systems

288


295


(2%)


859


902


(5%)

Electronic Systems

279


293


(5%)


859


814


6%

Information Systems

170


187


(9%)


577


570


1%

Technical Services

62


63


(2%)


206


193


7%

Intersegment eliminations

(69)


(61)




(200)


(197)



Segment operating income1

730


777


(6%)


2,301


2,282


1%

Segment operating margin rate1

11.6%


11.8%


(20) bps


12.3%


11.5%


80 bps

Reconciliation to operating income












Unallocated corporate expenses

(27)


(48)


44%


(89)


(96)


7%

Net FAS/CAS pension adjustment1

34


100


(66%)


101


302


(67%)

Reversal of royalty income included above

(1)


(4)


75%


(7)


(11)


36%

Operating income

736


825


(11%)


2,306


2,477


(7%)

Operating margin rate

11.7%


12.5%


(80) bps


12.3%


12.4%


(10) bps

Interest expense

(53)


(57)


7%


(158)


(168)


6%

Other, net

12


(13)


192%


30


(8)


475%













Earnings from continuing operations before income taxes

695


755




2,178


2,301



Federal and foreign income tax expense

(236)


(235)



(733)


(765)


4%

Earnings from continuing operations

459


520


(12%)


1,445


1,536


(6%)

Earnings from discontinued operations






34



Net earnings

$

459


$

520


(12%)


$

1,445


$

1,570


(8%)


1

Non-GAAP metric — see definitions at the end of this press release.

Federal and foreign income tax expense totaled $236 million in the third quarter of 2012 compared with $235 million in the prior year period. The third quarter 2012 effective tax rate was 34 percent compared with 31.1 percent for the prior year period. In the third quarter of 2011 the company recognized net tax benefits of $14 million related to adjustments to prior year tax returns.

Effective Jan. 1, 2012, the company transferred its missile business, principally the Intercontinental Ballistic Missile (ICBM) program, previously reported in Aerospace Systems to Technical Services. Schedule 6 presents the previously reported and recast results following the realignment.

Aerospace Systems




















Third Quarter




Nine Months



$ millions


2012


2011


Change


2012


2011


Change

Sales


$

2,586


$

2,455


5.3%


$

7,373


$

7,521


(2.0%)

Operating income


288


295


(2.4%)


859


902


(4.8%)

Operating margin rate


11.1%


12.0%




11.7%


12.0%



Aerospace Systems third quarter 2012 sales increased 5 percent due to higher volume for unmanned systems, including NATO AGS and Fire Scout, and military aircraft programs, principally the F-35. Higher volume for these areas was partially offset by lower volume for restricted programs and the termination of a weather satellite program in space systems.

Aerospace Systems third quarter 2012 operating income declined 2 percent and operating margin rate declined to 11.1 percent from 12 percent. The change in operating income and margin rate is principally due to the F/A-18 program's transition from the multiyear 2 contract to the lower margin multiyear 3 contract.

Electronic Systems




















Third Quarter




Nine Months


$ millions


2012


2011


Change


2012


2011


Change

Sales


$

1,707


$

1,905


(10.4%)


$

5,175


$

5,504


(6.0%)

Operating income


279


293


(4.8%)


859


814


5.5%

Operating margin rate


16.3%


15.4%




16.6%


14.8%



Electronic Systems third quarter 2012 sales declined 10 percent, which reflects lower volume for combat avionics and postal automation programs, including the de-emphasis of the company's domestic postal automation business. Volume for infrared countermeasures and laser systems programs also declined due to force reductions in overseas contingency operations. Declines in these programs were partially offset by higher volume for space systems programs.

Electronic Systems third quarter 2012 operating income declined 5 percent, and operating margin rate increased 90 basis points to 16.3 percent. Lower operating income is due to lower volume and higher margin rate reflects improved program performance. Third quarter 2011 operating income included a provision for a dispute on a domestic postal automation program.

Information Systems




















Third Quarter




Nine Months



$ millions


2012


2011


Change


2012


2011


Change

Sales


$

1,776


$

1,955


(9.2%)


$

5,476


$

6,011


(8.9%)

Operating income


170


187


(9.1%)


577


570


1.2%

Operating margin rate


9.6%


9.6%




10.5%


9.5%



Information Systems third quarter 2012 sales declined 9 percent due to lower volume for defense and intelligence systems programs. Lower volume for defense systems primarily reflects the termination of the Joint Tactical Radio System Airborne, Maritime and Fixed (JTRS AMF) program, as well as lower volume across several other programs. Lower intelligence systems sales are primarily due to lower volume for several restricted programs.

Information Systems third quarter 2012 operating income decreased 9 percent, consistent with the decline in volume, and operating margin rate of 9.6 percent was consistent with the prior year period.

Technical Services




















Third Quarter




Nine Months



$ millions


2012


2011


Change


2012


2011


Change

Sales


$

748


$

796


(6.0%)


$

2,281


$

2,403


(5.1%)

Operating income


62


63


(1.6%)


206


193


6.7%

Operating margin rate


8.3%


7.9%




9.0%


8.0%



Technical Services third quarter 2012 sales decreased 6 percent due to lower volume for logistics and modernization programs, principally the KC-10 program, as well as portfolio shaping actions for defense and government services programs.

Technical Services third quarter 2012 operating income decreased 2 percent, and operating margin rate increased to 8.3 percent from 7.9 percent.

About Northrop Grumman
Northrop Grumman will webcast its earnings conference call at 11:30 a.m. Eastern time on Oct. 24, 2012. A live audio broadcast of the conference call along with a supplemental presentation will be available on the investor relations page of the company's website at www.northropgrumman.com.

Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cybersecurity, C4ISR, and logistics and modernization to government and commercial customers worldwide. Please visit www.northropgrumman.com for more information.

This release and the attachments contain statements, other than statements of historical fact, that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expect," "intend," "may," "could," "plan," "project," "forecast," "believe," "estimate," "outlook," "anticipate," "trends," "guidance," and similar expressions generally identify these forward-looking statements. Forward-looking statements in this release and the attachments include, among other things, financial guidance regarding future sales, segment operating income, pension expense, employer contributions under pension plans and medical and life benefits plans, cash flow and earnings. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Actual results may differ materially from those expressed or implied in these forward-looking statements due to factors such as: the effect of economic conditions in the United States and globally; changes in government and customer priorities and requirements (including, government budgetary constraints, shifts or reductions in defense spending, changes in import and export policies, and changes in customer short-range and long-range plans); access to capital; future sales and cash flows; the timing of cash receipts; effective tax rates and timing and amounts of tax payments; returns on pension plan assets, interest and discount rates and other changes that may impact pension plan assumptions; retiree medical expense; the outcome of litigation, claims, audits, appeals, bid protests and investigations; the adequacy of our insurance coverage and recoveries (including earthquake-related coverage); the costs of environmental remediation; our ability to attract and retain qualified personnel; the costs of capital investments; changes in organizational structure and reporting segments; risks associated with acquisitions, dispositions, spin-off transactions, joint ventures, strategic alliances and other business arrangements; possible impairments of goodwill or other intangible assets; the effects of legislation, rulemaking, and changes in accounting, tax or defense procurement rules or regulations; the acquisition or termination of contracts; technical, operational or quality setbacks in contract performance; our ability to protect intellectual property rights; risks associated with our nuclear operations; issues with, and financial viability of, key suppliers and subcontractors; availability of materials and supplies; controlling costs of fixed-price development programs; contractual performance relief and the application of cost sharing terms; allowability and allocability of costs under U.S. Government contracts; progress and acceptance of new products and technology; domestic and international competition; legal, financial and governmental risks related to international transactions; potential security threats, information technology attacks, natural disasters and other disruptions not under our control; and other risk factors disclosed in our filings with the Securities and Exchange Commission.

You should not put undue reliance on any forward-looking statements in this release. These forward-looking statements speak only as of the date of this release, and we undertake no obligation to update or revise any forward-looking statements after we distribute this release. This release and the attachments also contain non-GAAP financial measures. A reconciliation to the nearest GAAP measure and a discussion of the company's use of these measures are included in this release or the attachments.