Northrop Grumman [NOC] on Thursday posted lower earnings and sales in its fourth quarter as top lines at all of its operating segments declined but the company’s earnings still beat analysts’ expectations, largely due to the extension of a federal tax credit and also on better than expected operating performance.
Net income slid 9 percent to $459 million, $2.49 earnings per share (EPS), versus $506 million ($2.48 EPS) a year ago, well above consensus estimates of $2.00. The extension of the federal research and development tax credit boosted earnings by $60 million (33 cents EPS) and the results were also aided by a lower share count due to stock repurchases.
Operating income fell at three of Northrop Grumman’s four segments with only Information Systems posting an increase, which was due to improved performance, cost cutting moves and more favorable business mix.
Sales fell 7 percent to $5.7 billion from $6.1 billion a year ago. The company attributed the decline in sales to lower volume on space and classified programs, logistics and modernization programs, including the ICBM program, command and control programs, in-theater force reductions, completion of the Ground Combat Vehicle contract, and a range of programs in its Electronic Systems segment.
For the year, net income dipped 5 percent to $2 billion ($10.39 EPS) while sales fell 2 percent to $23.5 billion. Operating margin was 13.1 percent.
International business accounted for 14 percent of sales, up 10 percent over 2014. Demand from customers in the Middle East continues to be robust given security realities in that region, Wes Bush, Northrop Grumman’s chairman, president and CEO, said on Thursday’s earnings call.
Orders in the quarter were $5.8 billion and $21.3 billion for the year, but don’t include the company’s win of the Long Range Strike-Bomber (LRS-B), which is under protest from a Boeing [BA]-Lockheed Martin [LMT] team.
The company’s guidance for 2016 does include the LRS-B, which Northrop Grumman expects to resume work on in February when the Government Accountability Office decides on the protest, Bush said.
Sales in 2016 are expected to hold flat to rise slightly with the outlook pegged between $23.5 billion and $24 billion. Earnings are forecast to be between $9.90 and $10.20 EPS with operating margins around 12 percent and free cash flow between $1.5 billion and $1.8 billion.
Consensus earnings estimates for 2016 are $10.42, and even though the company’s forecast is short of analysts’ expectations, J.P. Morgan aerospace and defense analyst Seth Seifman said in a note to clients that “Northrop has a strong track record of beating guidance that should help mitigate any disappointment.”
Backlog at the end of 2015 stood at $35.9 billion with $20.8 billion funded, compared to backlog of $38.2 billion a year ago. As with orders, the LRS-B contract isn’t included in backlog. In the quarter free cash flow was $1.5 billion and for 2015 it was $1.7 billion.