By Calvin Biesecker
Northrop Grumman [NOC] yesterday posted a higher net income driven by lower pension expenses and higher operating income at its Aerospace, Shipbuilding and Technical Services segments, which combined with an ongoing stock buyback program allowed it to easily beat consensus earnings estimates.
Earnings from continuing operations increased 26 percent to $462 million, $1.51 earnings per share (EPS), from $366 million ($1.10 EPS). Analysts projected $1.32 EPS.
The gain in EPS was actually 37 percent, which benefited from a pickup in the company’s stock repurchase program aimed at offsetting the earnings dilution stemming from the sale last year of its former advisory services business TASC Inc. Going forward, share repurchases will moderate, Wes Bush, Northrop Grumman’s president and CEO, said during an analyst call.
Net income increased 21 percent to $469 million ($1.53 EPS) from $389 million ($1.25 EPS) a year ago. Pension expenses were only $8 million in the quarter versus $76 million a year ago.
Sales increased 9 percent to $8.6 billion from $7.9 billion a year ago. The sales gains were due in part to more working days in the quarter versus a year ago, with the added revenue also contributing to some of the improvement in earnings, 8 cents EPS to be exact, James Palmer, Northrop Grumman’s chief financial officer, said on the earnings call. Without the extra working days, the sales increase would have been in the low single digits, he said.
The top line growth was driven by double-digit gains at Shipbuilding, Technical Services and Aerospace. Shipbuilding sales improved in large part to the extra work days and due to a negative adjustment a year ago, and also on higher volume on a variety of surface ship programs.
Operating income and margins rose in part on the higher sales at the Shipbuilding, Technical Services and Aerospace segments and also due to improved program performance as well as a shift toward higher margin life-cycle optimization and engineering work at Technical Services. Shipbuilding also benefited from additional recovery of insurance monies related to Hurricane Ike.
Both the Information Systems and Electronic Systems segments saw operating profits drop slightly. At Information Systems, profits were down on lower sales although margins remained flat. Sales declined as the company refocuses part of this business away from state and local government work and toward opportunities in the defense and intelligence markets, which make up 75 percent of the segment’s sales.
Bush said that the company’s top priority for the rest of the year is sustaining the improved operating performance. The biggest opportunities are margin expansion and deploying cash to improve shareholder value, he said. Palmer said that based on the improved performance in the quarter, combined with potentially higher sales and margins at some segments, the company boosted its guidance for EPS from continuing operations in 2010 by a nickel to between $5.75 and $6.
Sales for the year are expected to be around $34.5 billion, which is at the high end of the previous guidance. Free cash flow for the year, before voluntary pension contributions, is still forecast to be between $1.7 billion and $2.2 billion. Free cash in the first quarter was a $669 million outflow, including a $30 million discretionary contribution to pension plans.
Regarding the sale of TASC last December, Bush said that recent proposed regulations by the Pentagon to address organizational conflicts of interest (OCI) by defense contractors confirms that Northrop Grumman made the right call in shedding the advisory unit. While other defense contractors haven’t unloaded any business units yet to avoid OCI issues, Bush said that now these companies will have to take a “hard look” at what to do here.
Total backlog at the end of the quarter stood at $67.5 billion, down $1.7 billion from the end of 2009.