Feeling the pressure of a constrained environment for defense spending, Northrop Grumman [NOC] yesterday posted top and bottom line declines in its first quarter yet still managed to beat analysts’ earnings estimates by producing strong segment operating margins.
Operating results were led by the Electronic Systems segment, which boosted income by 28 percent to $304 million despite a 5 percent drop in sales to $1.7 billion. Margins in the segment rose 4.5 percent to 17.6 percent, which the company attributed to performance adjustments in intelligence, surveillance, reconnaissance and targeting programs due to contract risk mitigation and cost reductions.
Northrop Grumman didn’t single out any particular programs in the Electronic Systems segment, or in any of its other segments, all of which showed margin improvement despite lower sales. Jim Palmer, the company’s chief financial officer, said the company benefited from about $60 million on favorable contract adjustments spread across 15 contracts, none of which were material on their own.
Segment operating margins were 12.7 percent, up 2 percent from a year ago, while overall operating margins were 12.8 percent, up 80 basis points from a year ago, which includes the impacts of pension adjustments and certain corporate expenses.
Overall, net income decreased 5 percent to $506 million, $1.96 earnings per share (EPS), from $530 million ($1.79 EPS) a year ago, topping consensus estimates by 37 cents EPS. Earnings a year ago benefited from a $34 million gain due to the divestiture of Northrop Grumman’s shipbuilding business, which is now Huntington Ingalls Industries [HII].
EPS results also benefited from the company’s ongoing share repurchase program, which reduced the number of shares of stock outstanding.
With the strong operating results, Northrop Grumman increased its earnings outlook from continuing operations to between $6.70 and $6.95 EPS versus prior guidance of $6.40 to $6.70 EPS. Sales are still projected to be between $24.7 billion and $25.4 billion.
The forecast assumes that the federal government will operate on a continuing budget resolution in the fourth quarter, said Wes Bush, Northrop Grumman’s chairman, president and CEO. He warned that the potential for a budget sequestration would have a negative impact on both the company and defense industry but said the guidance doesn’t factor in “extraordinary sequestration actions,” adding that this scenario is “too hard to call.”
Total backlog at the end of the quarter was $39.1 billion, down $400 million since the end of 2011. Free cash flow was a $186 million outflow in the quarter, although the guidance for the year remains intact at between $1.8 billion and $2.1 billion.