Better operating results, pension tailwind and the lack of a hefty charge that hurt earnings a year ago led Northrop Grumman [NOC] to post strong net income in the fourth quarter despite lower sales.
The higher net income, up 46 percent to $548 million, $2.09 earnings per share (EPS) was achieved despite taxes more than doubling. The results easily surpassed consensus estimates of $1.67 EPS. Segment operating margins were up a percent to 11.9 percent in large part on improved program performance and a favorable business mix.
A year ago, net income was $376 million ($1.27 EPS) and was impacted by a debt retirement charge that chopped $229 million from the results before taxes.
Sales in the quarter slipped 6 percent to $6.5 billion from $6.9 billion, in part because of decreased participation in a joint venture for the Nevada National Security Site, less work on space systems and self-protection systems, a change in revenue recognition on F-35 aircraft deliveries, budget uncertainty and its impact on various programs, and actions taken to reduce volume on non-core programs and underperforming businesses.
Bookings in the quarter were solid at $7.1 billion but the total backlog fell 16 percent to $39.5 billion from $46.8 billion at the end of 2010 in part because the company removed $3 billion in work it no longer expects to perform. Other reasons for the decline include $1.5 billion removed due to canceled space programs and another $1.7 billion related to the Nevada Nuclear Site joint venture, Jim Palmer, Northrop Grumman’s chief financial officer, said on yesterday’s earnings call.
On the operating front, the better profits were driven by double-digit gains at the Information Systems and Technical Services segments with a small contribution from the Aerospace sector, more than offsetting a decline at Electronic Systems.
On the revenue side, Technical Services, Information Systems and Aerospace all declined while Electronic Systems remained flat.
As with other defense companies, budget pressures mean a lower sales forecast for 2012 and lower earnings. Sales this year are pegged to come in between $24.7 billion and $25.4 billion versus $26.4 billion in 2011. The decline this year is linked to terminations of space programs, less work supporting troops in theater, the transition from the Navy’s F/A-18 fighter aircraft program from the second multi-year production contract to the third multi-year buy, a winddown in the B-2 bomber upgrade program, and less volume supporting the ICBM program.
Offsetting some of the expected program declines will be growth in cyber security work and unmanned aircraft systems, but Northrop Grumman CEO Wes Bush said continued budget uncertainty and the potential for the FY ’13 defense budget to be impacted by a Continuing Resolution means there may be additional pressure on spending to come.
Earnings are also expected to be off in 2012, with EPS projected to be in the $6.40 to $6.70 range, impacted in part by lower sales, lower segment margins, as well as pension and tax headwinds. The decline will be partially offset by a reduced share count, which is one of the company’s target areas for cash deployment.
Net income for 2011 was just over $2.1 billion ($7.52 EPS) versus just under $2.1 billion ($6.82 EPS) in 2010. Per share earnings in 2011 were bolstered by the ongoing stock repurchase program.
Free cash flow in the quarter was a robust $1.4 billion and for 2011 $2.5 billion before discretionary pension contributions. The free cash flow forecast for 2012 is between $1.8 billion and $2.1 billion, which are still healthy levels that Northrop Grumman expects to use to continue buying back stock and paying dividends to shareholders as part of its value creation plan.