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Northrop Grumman Corp. (NOC) reported first quarter 2013 results before the opening bell today. Adjusted earnings per share of $1.94 easily surpassed the Zacks Consensus Estimate of $1.73 and the year-ago figure of $1.88. The significant upside in earnings was attributable to a lower share count and strong operating performance.

Including pension adjustment of 9 cents per share, diluted earnings per share from continuing operations were $2.03 compared with $1.96 in the first quarter of 2012.

Operational Update

Sales in the reported quarter decreased 1.5% to $6.10 billion from $6.20 billion in the year-ago quarter. However, quarterly revenues surpassed the Zacks Consensus Estimate of $5.90 billion.

Northrop Grumman’s total order backlog as of Mar 31, 2013 stood at $39.4 billion, marginally down from $40.8 billion as of Dec 31, 2012. During the quarter under review, the company received new contracts worth $4.7 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 $4.78 billion from $4.84 billion in the prior-year quarter. General and administrative expenses also declined to $558 million in the first quarter of 2013 from $561.0 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 $759 million from $796 million in first quarter of 2012. Operating margin was 12.4% versus 12.8% in the year-ago quarter.

Segment operating margin was 12.3% versus 12.7% in the year-ago quarter.

Segmental Revenue

Aerospace Systems: Aerospace Systems’ quarterly sales increased 4.3% year over year to $2.5 billion driven by higher volume for manned military aircraft and unmanned programs, partially offset by lower volume for space systems programs.

Electronic Systems: Electronic Systems sales declined 0.17% year over year to $1.7 billion. This marginal decline reflects higher volume for space and international programs offset by lower volume for infrared countermeasures and laser systems due to in-theater force reductions and lower volume for combat avionics and maritime systems due to program completions.

Information Systems: Information Systems sales were $1.7 billion, down 9.2% year over year. The decline reflects program completions, lower funding levels across the existing program portfolio, and in-theater force reductions.

Technical Services: Technical Services’ quarterly sales decreased 4.4% year over year to $717 million due to portfolio shaping actions and lower volume for the ICBM and KC-10 programs.

Financial Condition

Cash and cash equivalents as of Mar 31, 2013 were $3.2 billion versus $3.9 billion as of Dec 31, 2012. Long-term debt, net of current portion as of Mar 31, 2013 was $3.9 billion, approximately flat with the year-end 2012 level.

Cash from continuing operations during the quarter was $1 million versus ($105) million in the year-ago quarter. Capital expenditure was $40 million versus $81 million in the prior-year period.

During the first quarter of 2013, the company repurchased 6.5 million shares of its common stock for approximately $456 million. Currently, the company has share repurchase authorization of $1.0 billion.

At the Peer

Recently, the world’s largest stand-alone defense contractor, Lockheed Martin Corp. (LMT) posted first quarter 2013 adjusted earnings of $2.48 per share, comfortably surpassing the Zacks Consensus Estimate of $2.01 by 23.4%.

Guidance

For full-year 2013, Northrop Grumman expects to generate revenue of approximately $24.0 billion. It expects earnings per share in the range of $6.85 - $7.15. Currently, Northrop Grumman expects total operating margin in the high 10% to low 11% range.

Our View

Northrop Grumman’s top and bottom line results succeeded in beating the Zacks Consensus Estimate on the back of strong operational performance.

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’s effective cash deployment strategy, portfolio alignment and its focus on program performance would to a large extent offset the headwinds. Northrop Grumman currently carries a short-term Zacks #3 Rank (Hold).

In the aerospace and defense space, stocks worth considering are Wesco Aircraft Holdings, Inc. (WAIR) and B/E Aerospace Inc. (BEAV), both with a Zacks Rank #2 (Buy).