By Calvin Biesecker
Northrop Grumman [NOC] yesterday reported solid increases in net income and sales although the higher earnings were driven by lower corporate and pension expenses as three of the company’ operating segments saw their income decline despite top line growth in all.
The company’s shipbuilding segment posted the largest operating decline driven by previously disclosed schedule impacts on several programs due to problems found late in construction of the Navy’s LHD-8 amphibious assault ship. Poor management on that shipbuilding effort caused a steep loss in Northrop Grumman’s first quarter earnings (Defense Daily, April 16 and April 25).
Delivery of the LHD-8 is slated for the second quarter of 2009 and the company is making progress toward that end, Wes Bush, Northrop Grumman’s president and chief operating officer, said on yesterday’s earnings call. In the second quarter the ship achieved aft main engine light off and is scheduled to complete electrical cabling installation in the third quarter of 2008, a "critical" milestone toward meeting the delivery goal next year, he said.
The Information and Services segment also struggled on the income line as both its Mission Systems and Information Technology sectors posted profit declines. Lower margins at Mission Systems were blamed on an unusual number of favorable contract adjustments a year ago that served to bolster profits then. At Information Technology the company lowered its expected revenues from an information technology outsourcing contract with the County of San Diego and projects zero margins on the program, James Palmer, Northrop Grumman’s chief financial officer, said on the earnings call.
Electronics, the only segment that boosted profits, suffered a $20 million charge related to a radar program for the Wedgetail program, on which Boeing [BA] is the prime contractor and took a $250 million charge due to delays (Defense Daily, July 24). Bush said that Northrop Grumman is making progress on radar development with ground and flight tests slated shortly.
Despite the drop in operating segment income, Northrop Grumman’s net income increased 8 percent to $495 million, $1.44 earnings per share (EPS), from $460 million ($1.31 EPS) a year ago. Last year’s results were hurt by a $12 million loss in discontinued operations, which turned in a $12 million profit this year. Interest expense in the second quarter improved by $11 million.
Earnings from continuing operations increased 2 percent to $483 million ($1.40 EPS) versus $472 million ($1.35 EPS) a year ago, in line with consensus estimates. Segment operating margins declined a 1 percent to 9.1 percent, with the slow down in ship construction, the Wedgetail radar charge and the revenue adjustment for the San Diego contract primarily responsible for that drop off, Palmer said.
Compared to most of Northrop Grumman’s peers, the company’s segment performance lagged in the second quarter. Boeing’s defense division also posted lower profits, due to the Wedgetail problems. General Dynamics [GD], Lockheed Martin [LMT] and Raytheon [RTN] all boosted their operating profits nicely in the second quarter and raised earnings expectations for the year.
Each of Northrop Grumman’s four segments grew sales in the second quarter, up 10 percent overall to $8.6 billion from $7.9 billion. The increase was driven by mainly by 24 percent growth at Shipbuilding.
Palmer said that several factors accounted for nearly half of the sales increase at Shipbuilding, including lower sales a year ago due to a labor strike, the addition of revenues from a former joint venture, and a separate adjustment on the LHD-8 program taken a year ago. Excluding these events, Shipbuilding sales would have increased about 13 percent in the second quarter, he said.
Regarding the Navy’s plans to stop production of the new DDG-1000 destroyers in favor of restarting production of DDG-51 destroyers, Ron Sugar, Northrop Grumman’s chairman and CEO, said it’s all speculation for now as to what path the Navy and Congress will ultimately take but either way he expects the impact to be relatively neutral to his company. There is still a lot of work Northrop Grumman has to do to complete the one DDG-1000 it is constructing and to restart the DDG-51 line will require some lead time, he said.
Northrop Grumman maintained its financial outlook for 2008 with sales expected to be around $33 billion and EPS from continuing operations between $4.90 and $5.15. Free cash flow was down 22 percent to $431 million in the second quarter but is projected to be strong in the back half of the year. Free cash guidance remains at between $1.7 billion and $2.1 billion.
Backlog increased to $66.9 billion, representing $3.2 billion of growth since the beginning of the year, which continues to bode well for future growth, company official said.