Northrop Grumman Reports Fourth Quarter and 2012 Financial Results

FALLS CHURCH, Va., Jan. 30, 2013 /PRNewswire/ -- Northrop Grumman Corporation (NYSE: NOC) reported fourth quarter 2012 earnings from continuing operations of $533 million, or $2.14 per diluted share, compared with $550 million, or $2.09 per diluted share, in the fourth quarter of 2011. The increase in earnings per share was principally due to a $102 million increase in segment operating income and a lower share count, partially offset by a $67 million decrease in net FAS/CAS pension adjustment and a higher effective tax rate. On a pension-adjusted basis, earnings per diluted share from continuing operations increased 11 percent to $2.06 from $1.85. Diluted earnings per share for the fourth quarter of 2012 are based on weighted average diluted shares outstanding of 248.9 million compared with 262.7 million in the prior year period, a 5 percent decrease. During the fourth quarter the company repurchased 7.3 million shares of its common stock for approximately $487 million.

For 2012, earnings from continuing operations totaled $2.0 billion, or $7.81 per diluted share, compared with $2.1 billion, or $7.41 per diluted share in 2011. The change in earnings was principally due to a $268 million decrease in 2012 net FAS/CAS pension adjustment and a higher effective tax rate, which more than offset a $121 million increase in segment operating income. The increase in diluted earnings per share reflects higher segment operating income and a lower share count in 2012. Diluted earnings per share for 2012 are based on 253.4 million weighted average shares outstanding compared with 281.6 million weighted average shares outstanding in 2011, a 10 percent decrease. In 2012, the company repurchased 20.9 million shares of its common stock for $1.3 billion, and $1.5 billion remained on its current share repurchase authorization as of Dec. 31, 2012.

"Our team delivered outstanding results for the quarter and the year. Our focus on performance, effective cash deployment, and portfolio alignment continues to create value for our shareholders, customers and employees. As we look ahead, we expect challenges, but we are confident in our team's ability to address those challenges and continue to create value for all our stakeholders," said Wes Bush, chairman, chief executive officer and president.

Fourth quarter 2012 operating income increased $25 million, or 3 percent, and operating margin rate expanded 40 basis points to 12.7 percent from 12.3 percent in the prior year period. The improvement in operating income and margin rate reflects a 13 percent increase in segment operating income and a segment operating margin rate of 13.5 percent, which more than offset slightly lower sales and a $67 million decline in net FAS/CAS pension adjustment. On a pension-adjusted basis, fourth quarter 2012 operating income increased $92 million, or 13 percent, to $793 million, and pension-adjusted operating margin rate expanded 140 basis points to 12.2 percent from 10.8 percent.

For 2012, operating income decreased 4 percent and operating margin rate was unchanged at 12.4 percent. The change in operating income principally reflects a $268 million decrease in net FAS/CAS pension adjustment, which more than offset a $121 million, or 4 percent, increase in segment operating income to $3.2 billion from $3.1 billion in 2011. In 2012, segment operating margin rate increased 100 basis points to 12.6 percent.

As of Dec. 31, 2012, total backlog increased 3 percent to $40.8 billion compared with total backlog of $39.5 billion as of Dec. 31, 2011. Total backlog as of Dec. 31, 2012, includes new business awards of $26.5 billion in 2012.

Through Dec. 31, 2012, cash provided by continuing operations increased to $2.6 billion from $2.3 billion in the prior year. The increase is principally due to lower discretionary pension pre-funding in 2012. Free cash flow from continuing operations through Dec. 31, 2012, increased to $2.3 billion from $1.9 billion in the prior year due to higher cash provided by operating activities and lower capital expenditures in 2012. Capital expenditures in 2011 included non-recurring expenditures related to the relocation of the company's corporate office.

Before discretionary pension contributions, cash provided by continuing operations totaled $2.8 billion in 2012 compared with $3.0 billion in 2011, and 2012 free cash flow before discretionary pension contributions of $2.5 billion was unchanged from the prior year. The company made discretionary pension plan contributions of $300 million in 2012 and $1.0 billion in 2011. The change in cash provided by continuing operations before the discretionary pension contributions is principally due to higher income taxes paid and lower net income in 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 Dec. 31, 2012:

Operations

• $2.6 billion provided by continuing operations

Investing

• $331 million for capital expenditures

Financing

• $1.3 billion for repurchases of common stock
• $535 million for dividends
• $188 million from exercises of stock options

2013 Guidance

The company's 2013 financial guidance is based on the assumption that the current six-month Continuing Resolution (CR) will be immediately followed by appropriations, which, even if in the form of a full-year CR, will provide for program spending levels consistent with those set forth in the President's FY 2013 Budget request (PBFY13) and that support and fund the company's programs. Guidance for 2013 also assumes there is no disruption or shutdown of government operations resulting from a federal government debt ceiling breach or lack of immediate appropriations following the current CR, that sequestration is not triggered, and any budgetary approach agreed by Congress to address longer term spending does not result in significant reductions to our customers' FY13 budget levels. 

For 2012, Other, net increased $19 million due to higher returns on non-qualified deferred compensation plans than in the prior year period. Federal and foreign income tax expense totaled $254 million in the fourth quarter of 2012 compared with $232 million in the prior year period. The fourth quarter 2012 effective tax rate was 32.3 percent compared with 29.7 percent for the prior year period. Federal and foreign income taxes totaled $987 million in 2012 compared with $997 million in 2011. The effective tax rate for 2012 was 33.3 percent compared with 32.3 percent in 2011.

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

Aerospace Systems fourth quarter 2012 sales increased 7 percent and 2012 sales increased by less than 1 percent. Increased sales for both periods are principally due to higher volume for unmanned systems, including NATO AGS and Fire Scout, and higher volume for the F-35 and Advanced Extremely High Frequency satellite (AEHF) programs. Higher volume for these programs was partially offset by declines in both periods for the F/A-18 and Joint Surveillance Target Attack Radar System (JSTARS) programs, as well as lower volume for restricted space programs and the termination of a weather satellite program.

Aerospace Systems fourth quarter 2012 operating income increased 14 percent and operating margin rate increased to 13.8 percent from 12.9 percent. Higher fourth quarter operating income reflects increased sales volume and improved program performance, which more than offset the impact of lower F/A-18 margin due to that program's transition from the multiyear 2 contract to the lower margin multiyear 3 contract. For 2012, operating income was comparable to the prior year period and operating margin rate was unchanged at 12.2 percent.

Electronic Systems

Electronic Systems fourth quarter 2012 sales declined 5 percent, which reflects lower volume for infrared countermeasures, LITENING targeting systems, and postal automation programs. Declines in these programs were partially offset by higher volume for space and international programs.

For 2012, sales declined 6 percent, principally due to a decrease of approximately $250 million in postal automation volume and lower volume for infrared countermeasures. Lower postal automation volume includes the impact of the company's decision to de-emphasize its domestic business. These declines were partially offset by higher volume for space programs.

Electronic Systems fourth quarter 2012 operating income increased 28 percent, and operating margin rate increased to 18.5 percent from 13.7 percent. Fourth quarter 2012 operating income and margin rate reflect improved program performance as well as the benefit of cost reduction initiatives. Fourth quarter 2011 operating income and margin rate included provisions for contractual matters and higher provisions for reductions in force.

For 2012, operating income increased 11 percent, and operating margin rate increased to 17.1 percent from 14.5 percent in 2011. Higher operating income and margin rate reflect an increase in net favorable performance adjustments of approximately $160 million in 2012. Higher net favorable performance adjustments primarily resulted from improved program performance for several combat avionics programs that completed deliveries, negotiated contract modifications, and successfully mitigated risk. The de-emphasis of the domestic postal automation business, which incurred $50 million of negative adjustments in 2011, also contributed to the increase in net favorable performance adjustments.

Information Systems