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Northrop Reports Mixed Results

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Northrop Grumman Corporation (NOC - Analyst Report) reported its third-quarter 2012 results before the opening bell today. Adjusted earnings per share of $1.73 easily surpassed the Zacks Consensus Estimate of $1.70 and the year-ago figure of $1.63. The significant upside in earnings was attributable to lower share count.

Including pension adjustment of 9 cents per share, diluted earnings per share from continuing operations were $1.82 compared with $1.86 in the third quarter of 2011.

Operational Update

Sales in the reported quarter decreased 5.2% to $6.27 billion from $6.61 billion in the year-ago quarter. Quarterly revenues also missed the Zacks Consensus Estimate of $6.33 billion.

Northrop Grumman’s total order backlog as of September 30, 2012 stood at $41.0 billion, up marginally from $39.5 billion as of December 31, 2011. During the quarter under review, the company received new contracts worth $20.2 billion.

During the reported quarter, cost of products and services decreased to $5.0 billion from $5.2 billion in the prior-year quarter. General and administrative expenses also declined to $572.0 million in third-quarter 2012 from $589.0 million in the year-ago quarter.

The decline in product and service expenses, and general and administrative expenses could not offset the decline in revenue. Therefore, total operating income decreased to $736.0 million from $825.0 million in third-quarter 2011. Operating margin was 11.7% versus 12.5% in the year-ago quarter.

Segment operating margin was 11.6% versus 11.8% in the year-ago quarter.

Segmental Revenue

Aerospace Systems: Aerospace Systems quarterly sales increased 5% year over year to $2.6 billion due to higher volume for unmanned systems, primarily consisting of NATO AGS and Fire Scout, and military aircraft programs, mainly the F-35. These positive factors were partially offset by termination of a weather satellite program in the space systems and lower volume for restricted programs.
 
Electronic Systems: Electronic Systems sales declined 10% to $1.7 billion from $1.9 billion in the year-ago quarter. This decline reflects lower volume for postal automation and combat avionics programs, and infrared countermeasures and laser systems programs; partially offset by higher volume for space systems programs.

Information Systems: Information Systems sales were $1.8 billion, down 9.2% than the year-ago period, primarily due to lower volume for the defense and intelligence systems programs related to termination of the Joint Tactical Radio System Airborne, Maritime and Fixed (“JTRS AMF”) program.

Technical Services: Technical Services’ quarterly sales decreased 6% year over year to $748 million due to lower volume for the logistics and modernization programs, principally the KC-10 program, and portfolio shaping actions for defense and government services programs.

Financial Condition

Cash and cash equivalents as of September 30, 2012 were $3.5 billion, up from $3.0 billion as of December 31, 2011. Long-term debt, net of current portion as of September 30, 2012 was $3.9 billion, unchanged from the December 31, 2011 level.

Cash provided by continuing operations during the quarter were $812.0 million versus $948.0 million in the year-ago quarter. Capital expenditure was $64.0 million versus $109.0 million in the prior-year period.

During the third quarter of 2012, the company repurchased 4.4 million shares of its common stock for approximately $290.0 million. Currently, the company is left with share repurchase authorization of $2.0 billion.

Peer Comparison

Today, General Dynamics Corporation (GD - Analyst Report) announced its third-quarter 2012 operating earnings of $1.70 per share, falling short of the Zacks Consensus Estimate by 7 cents. It also missed the year-ago figure by 7.1%.

General Dynamics generated total revenue of $7.85 billion in the reported quarter versus $7.93 billion in the year-ago quarter, reflecting a growth of 1%. Reported quarter revenue also failed to meet the Zacks Consensus Estimate of $8.05 billion.

Guidance

For full-year 2012, Northrop Grumman expects to generate revenue of approximately $25.0 billion, revised from its earlier projection of $24.7 billion - $25.4 billion. It increased its earnings per share projection to a band of $7.35 - $7.40 from the prior range of $7.05 to $7.25 per share. Currently, Northrop Grumman expects total operating margin to be at the high 11% range versus its previous expectation of a mid 11% range.

Our View

Northrop Grumman reported mixed results in third-quarter 2012. Quarterly earnings beat our projection, whereas revenue missed estimates. The company expects earnings to increase going forward.

Moreover, the company has been successful in generating solid cash. The company still has $2.0 billion remaining under its share repurchase authorization. Year to date, the company has paid $401.0 million as dividend to its shareholders.

Overall, with a strong program portfolio, an improving balance sheet and an ongoing share repurchase program, Northrop Grumman seems to be well positioned to take advantage of its focus areas in the defense space.

However, we are skeptical about the defense cutbacks on high-cost platform programs, over-exposure to the Department of Defense (“DoD”) budget, cost over-runs and reductions in Afghanistan operations.

Northrop Grumman Corporation currently has short-term Zacks #3 Rank (Hold rating).

Falls Church, Virginia-based Northrop Grumman Corporation is one of the largest defense contractors in the U.S. The company supplies a broad array of products and services to the U.S. DoD, including electronic systems, information technology, aircraft, space technology, and systems integration services. With a market capitalization of $17.22 billion, Northrop Grumman has 72,500 full-time employees.

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