A decline in pension income coupled with lower sales drove Northrop Grumman’s [NOC] earnings down in the second quarter but strong operating performance coupled with a bright outlook for the rest of the year led the company to boost its earnings and cash flow guidance for 2012.
However, uncertainty reigns beyond 2012.
Even if the looming specter of deep cuts to defense spending beginning in January from a potential budget sequestration is cast aside, an ongoing continuing budget resolution that is funding the federal government into next March is clouding the outlook beyond 2012, Wes Bush, chairman, president and CEO of Northrop Grumman, said on yesterday’s earnings call.
While the continuing resolution (CR) permits greater spending than previous CRs, it contains constraints such as no exceptions for new program starts, including new task orders on indefinite delivery, indefinite quantity contracts, and no increases in production quantities, Bush said. The CR also limits the ability to shift funding between programs compared to past budget resolutions, he said.
It’s also possible that the CR will be extended, further clouding prospects for 2013, Bush said.
“Under any reasonable scenario, we would expect lower 2013 sales as a result of the CR restriction on new starts along with the other constraints our customer is facing,” Bush said.
Net income in the quarter fell 12 percent to $459 million, $1.82 earnings per share (EPS), from $520 million ($1.86 EPS) a year ago, although the results surpassed consensus estimates of $1.69 EPS. Pension income was $66 million lower in the quarter compared to a year ago.
Operating profits at each of the company’s segments declined.
Despite the lower net income, Northrop Grumman’s per share earnings remained close to last year’s levels due to the company’s robust stock repurchase program, which is being fueled by strong cash generation. Northrop Grumman repurchased 4.4 million shares of its common stock for $290 million in the quarter while free cash flow in the period was $748 million.
Including the impact from the pension income, Northrop Grumman’s operating margin in the quarter was 11.7 percent versus 12.5 percent a year ago.
Sales in the quarter dipped five percent to $6.3 billion from $6.6 billion, as declines at the Electronic Systems, Information Systems, and Technical Services segments outpaced an increase at Aerospace Systems.
Given Northrop Grumman’s overall strong performance so far this year, the company raised and narrowed its earnings guidance for 2012 to between $7.35 and $7.40 EPS compared to $7.05 to $7.25 previously. Free cash flow, prior to any discretionary pension contributions, is pegged at between $2.1 billion and $2.4 billion compared to between $1.8 billion and $2.1 billion previously. Sales are projected to be about $25 billion, the middle of the previous guidance range with stronger than expected segment operating margins driving the gain in per share earnings.