Buoyed by the reinstatement of a federal tax credit and increased pension income, Northrop Grumman [NOC] on Thursday posted solid earnings in the fourth quarter while sales were essentially flat.
Net income increased 6 percent to $506 million, $2.48 earnings per share (EPS), from $478 million ($2.12 EPS), due mainly to the $38 million (19 cents EPS) research and development tax credit and by a more than $20 increase in favorable pension adjustments. A lower share count as a result of the company’s stock repurchase activity contributed to the higher per share earnings.
The results handily beat consensus estimates of $2.26 EPS as the tax credit was more than expected and the company delivered better than expected operational results.
Sales in the quarter fell less than a percent to $6.1 billion from $6.2 billion a year ago and free cash flow was $1.2 billion. Customer funding constraints continue to affect Northrop Grumman’s short-cycle businesses, Wes Bush, the company’s chairman, president and CEO, said on an investor call.
Solid results at the Aerospace Systems segment partially offset some of the sales drop, with segment sales up 4 percent to $2.5 billion on gains across a number of programs, which combined with improved performance drove a 7 percent gain in operating profit to $299 million.
Northrop Grumman’s other three segments all posted low single digit declines in sales due to decreased work on infrared countermeasures, laser systems, domestic ISR and targeting programs, lower volume on command and control programs, integrated logistics and modernization programs, and the Combined Tactical Training Range program.
Operating profits at the Electronic Systems, Information Systems, and Technical Services segments were also down on the lower revenues, lower favorable program adjustments, and increased investments in international business.
Bush said that international business for 2014 was up 20 percent over 2013 to about $3 billion, representing 13 percent of total sales. International business was up in all of the company’s segments, he said.
Overall in 2014, sales slipped nearly 3 percent to $24 billion from $24.7 billion while net income rose 5 percent to $2.1 billion ($9.75 EPS) from $2 billion ($8.35 EPS). Total backlog at the end of 2014 stood at $38.2 billion—14 percent from foreign customers—versus $37 billion a year ago, while orders last year were $25 billion, representing a book-to-bill ration above one.
Free cash flow in 2014 was over $2 billion and the company spent $2.7 billion on stock repurchases and $563 million on dividends, returning 160 percent of free cash to shareholders, outgoing Chief Financial Officer James Palmer said on the call.
This year Northrop Grumman expects its sales to be between $23.4 billion and $23.8 billion, ranging between 1 and 3 percent lower than 2014. Bush said international sales will comprise 15 percent of the company’s total, partially offsetting declines from domestic customers.
Unlike some of his counterparts at other major defense companies, Bush wouldn’t signal 2015 as a trough for domestic defense spending, saying that while planned outlays are higher even if a budget sequestration occurs again, the environment is too unpredictable to forecast what 2016 holds.
“I hate to try and call the bottom of a trough,” Bush said. He added that despite the better looking budget numbers, “I would caution folks not to be too excited about that. If we have a sequester, what we really have is a horrible, horrible mechanism that goes with the sequester that has this mindless approach to cutting everything equally,” eliminating “flexibility” and the Defense Department’s ability manage in a “rational way.” How the company’s customers would make decisions and get contracts in place become uncertain under sequestration, he said.
Earnings in 2015 are expected to be between $9.20 EPS and $9.50 EPS, down on lower sales, lower operating margins, and higher taxes as the forecast excludes an extension of the R&D tax credit. Operating margin in 2014 was 13.3 percent and is expected to be around 12.5 percent this year. These negatives will be partially outweighed by higher pension income and a lower share count through continued stock repurchases.