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Los Angeles-based leading shipbuilder and defense contractor Northrop Grumman Corporation (NYSE:NOC) reported impressive first quarter 2011 adjusted earnings of $1.67 per share compared with $1.34 in first quarter 2010. Northrop results also exceeded the Zacks Consensus Estimate of $1.55 for the quarter. The upside in earnings was attributable to better performance across all its segments.

On a reported basis, Northrop Grumman clocked earnings per share of $1.79 versus $1.53 in the year-ago quarter. The variance between reported and adjusted in both the reported and year-ago period cropped up due to the divestment of its shipbuilding unit, Huntington Ingalls Industries Inc. (NYSE:HII), as a separate entity in March 2011.

Operational Performance

Sales for the reported quarter decrease 2.6% to $6.73 billion, from $6.91 billion in the year-ago quarter, and was 5.6% lower than the Zacks Consensus Estimate of $7.13 billion. Sales were affected by the company’s reduced participation in the Nevada National Security Site joint venture and the U.S. government's continuing resolution funding. In the reported quarter operating income increased 19% to $811 million from $679 million in the prior year period, and as a percent of sales increased to 12% from 9.8%. The improvement year-over-year reflects an increase in net pension adjustment, higher segment operating income and lower unallocated corporate expenses. Overall the company clocked net earnings of $530 million compared with $469 million in the first quarter of 2010.

Segment Performance

Aerospace Systems

Aerospace Systems quarterly sales rose 1.5% year-over-year to $2.74 billion, principally due to higher volume for manned and unmanned aircraft and restricted programs. Higher volume for these programs was partially offset by lower volume for civil space programs. Aerospace Systems’ operating income increased 1.7% to $301 million. Operating margin remained flat at 11.0% versus the year-ago quarter.

Electronic Systems

Electronic Systems sales declined 3.9% to $1.81 billion, due to lower volume for land and self-protection systems, which more than offset higher volume for targeting systems. Electronic Systems’ operating income increased 4.9% to $237 million. Also, operating margin increased to 13.1% from 12.0% year over year. Higher operating income and margin rate reflect improved program performance, primarily for land and self-protection systems and postal automation programs, which more than offset lower volume.

Information Systems

Information Systems sales of $2.03 billion were 1.9% lower than the year-ago period, principally due to lower volume for intelligence and defense programs. Civil systems sales were comparable to the prior year period. The decline in intelligence sales is principally due to lower volume for a restricted program transitioning from development to maintenance and the timing of task orders for the Counter Narco-Terrorism Program. Lower defense sales reflect lower volumes for several programs, including the F-22 and the multi-role Tactical Command Data Link. Information Systems operating income increased 6.0% to $194 million. Operating margin increased to 9.6% from 8.9% year over year.

Technical Services

Technical Services’ sales decreased 9.8% to $688 million due to the company’s reduced participation in the Nevada National Security Site joint venture. Technical Services operating income increased 10.2% to $54 million. Operating margin increased to 7.8% from 6.4% year over year. The improvements in operating income and margin reflect improved program performance.

Financial Condition

Northrop Grumman ended the reported quarter with cash and cash equivalents of approximately $4.02 billion compared with $3.70 billion at year-end 2010. Cash used in operations during the reported quarter totaled $120 million versus $531 million used in the year-ago quarter. At the end of the reported quarter, long-term debt remained flat at $3.94 billion versus at the end of fiscal 2010.

Northrop Grumman raised its quarterly dividend by 6.4% to 50 cents versus the earlier 47 cents dividend per share. This is the eighth consecutive annual increase in Northrop Grumman's quarterly dividend. The dividend is payable June 11, 2011, to shareholders of record as of the close of business on May 31, 2011, with an ex-dividend date of May 26, 2011. The company also announced that its board of directors authorized an increase in the company's outstanding share repurchase authorization to $4 billion of common stock. The company received a $1.45 billion cash contribution from Huntington Ingalls on account of the spin off of its shipbuilding unit.

Outlook

Northrop Grumman’s total order backlog at the end of the reported quarter stood at $43.73 billion compared with $46.84 billion at fiscal-end 2010. The company reaffirmed its revenue guidance for fiscal 2011 to about $27.5 billion. It however raised its fiscal 2011 earnings per share range from $6.40-$6.60 to $6.50-$6.70.

Northrop Grumman Corporation is one of the leading defense contractors in the U.S. The company supplies a broad array of products and services to the U.S. Department of Defense (DoD), including electronic systems, information technology, aircraft, space technology and systems integration services.

We maintain our long-term ‘Neutral’ recommendation on Northrop Grumman. The quantitative Zacks # 4 Rank (short-term Sell rating) for the company indicates clear downward directional pressure on the shares over the near term.

Source: Northrop Grumman Reports Q1, Beats on EPS