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Northrop Grumman Corp. (NOC - Analyst Report) reported second quarter 2013 results before the opening bell today. Adjusted earnings per share of $1.97 easily surpassed the Zacks Consensus Estimate of $1.70 and the year-ago figure of $1.79.

The significant upside in earnings was attributable to a lower share count and strong operating performance.

Including pension adjustment of 8 cents per share, diluted earnings per share from continuing operations were $2.05 compared with $1.88 per share in the second quarter of 2012.

Operational Update

Sales in the reported quarter increased marginally by 0.31% to $6.29 billion from $6.27 billion in the year-ago quarter. Also, quarterly revenues surpassed the Zacks Consensus Estimate of $5.96 billion.

Northrop Grumman’s total order backlog as of Jun 30, 2013 was $37.7 billion, down from $40.8 billion as of Dec 31, 2012. During the quarter under review, the company received new contracts worth $5.5 billion. The decline in backlog reflects customers’ cautious response to the current U.S. government budget environment.

During the reported quarter, cost of products and services decreased marginally to $4.91 billion from $4.92 billion in the prior-year quarter. General and administrative expenses climbed slightly to $582 million in the second quarter of 2013 from $580 million in the year-ago quarter.

The company clocked operating income of $806 million, up 4.1% year over year. Operating margin during the quarter was $12.8% versus 12.3% in the prior-year quarter.

Segmental Revenue

Aerospace Systems: Aerospace Systems’ quarterly sales increased 8.7% year over year to $2.61 billion driven by higher volume for manned military aircraft, unmanned and space programs, partially offset by lower volume for restricted programs and lower Global Hawk volume.  

Electronic Systems: Segment sales were up 1.5% year over year to $1.8 billion. The results were driven by higher volume for international, tactical sensor and space programs. These positives were, however, partially offset by lower volume for navigation, combat avionics and maritime systems due to program completions, as well as lower volume for laser systems and infrared countermeasures.

Information Systems: Sales at the segment were $1.7 billion, down 9% year over year. The decline reflects portfolio reshaping initiatives. Excluding the company’s efforts to reshuffle the business, sales were down 7% due to lower funding levels and contract completions across the board.

Technical Services: Technical Services’ quarterly sales decreased 7.8% year over year to $722 million due to lower volume for the KC-10 and ICBM programs as well as portfolio shaping actions.

Financial Condition

Cash and cash equivalents as of Jun 30, 2013 were $4.9 billion versus $3.9 billion as of Dec 31, 2012. Long-term debt, net of current portion as of Jun 30, 2013 was $5.9 billion versus $3.9 billion as of Dec 31, 2012.

Net cash provided by operating activities during the quarter was $328 million compared with $876 million in the year-ago period.

During the second quarter of 2013, the company repurchased 6.1 million shares of its common stock bringing the number to 12.6 million shares repurchased in the first half of 2013. This is consistent with the company’s goal of repurchasing approximately 60 million shares of its common stock by the end of 2015.

Guidance

For full-year 2013, Northrop Grumman increased its revenue guidance to $24.3 billion from its prior expectation of approximately $24 billion. It expects earnings per share in the range of $7.60 to $7.80 versus its prior expectation of $6.85 to $7.15. Currently, Northrop Grumman expects total operating margin to be approximately 12% compared to the prior expectation of high 10% to low 11%.

At the Peer

Recently, Lockheed Martin Corp. (LMT - Analyst Report), the world’s leading stand-alone defense contractor, posted second quarter 2013 earnings of $2.64 per share, comfortably surpassing the Zacks Consensus Estimate of $2.21 by 19.5%.

Our View

Northrop Grumman’s top- and bottom-line results succeeded in beating the Zacks Consensus Estimate driven by the company’s strong operational performance. Going forward, Northrop’s strong program portfolio, improving balance sheet and its cash deployment strategy would help the company to sustain the trend.

We are however concerned about the lower backlog at the end of the reported quarter.  This may be attributable to an uncertain and constrained budget environment. Northrop Grumman currently carries a short-term Zacks #3 Rank (Hold).

However, stocks to look out for in the space are The Boeing Company (BA - Analyst Report) and Exelis, Inc. (XLS - Snapshot Report). While Exelis, Inc. carries Zacks Rank #1 (Strong Buy), Boeing holds a Zacks Rank #2 (Buy).

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