By Calvin Biesecker
As expected, Northrop Grumman‘s [NOC] first quarter profits plunged due to a hefty charge at its shipbuilding operations yet the company still managed to beat analysts’ expectations due to higher sales and improved performance.
Earlier this month the company disclosed major problems with construction of the LHD-8 amphibious assault ship for the Navy due to poor management controls and a large pool of inexperienced workers at its shipyard in Pascagoula, Miss., which is also impacting work on other vessels (Defense Daily, April 16). Those problems led to cost growth and schedule delays, primarily on the LHD-8, and the $326 million, 61 cents earnings per share (EPS), that hurt first quarter earnings.
Wes Bush, Northrop Grumman’s president and chief operating officer, on yesterday’s earnings call outlined series of critical milestones planned for LHD-8 over the next year as a way to track the company’s progress toward meeting the new delivery goal in the second quarter of 2009. Those milestones include aft engine light off in the second quarter of 2008, completion of the electrical cabling installation in the third quarter, a pier side integrated propulsion test in the fourth quarter and builder’s trials in the first quarter of 2009.
Along the way to meeting each of the key milestones are a slew of “inch-stones” that the shipyard will have to meet, Bush said.
Bush also mentioned two other programs that have given Northrop Grumman trouble in the past and at times have hindered earnings performance. Both the Falcon Edge electronic warfare upgrade for F-16 fighters for the United Arab Emirates and the Wedgetail early warning aircraft program for Australia are completing their respective development and test milestones on schedule, he said.
Net income in the quarter tumbled 32 percent to $264 million (76 cents EPS) from $387 million ($1.10 EPS) a year ago, beating consensus estimates by 13 cents. Sales increased 6 percent to $7.7 billion from $7.3 billion a year ago. Excluding a $134 million “step back adjustment” to account for the shipyard delays, sales in the quarter would have increased nearly 8 percent, Jim Palmer, Northrop Grumman’s chief financial officer, said on the call.
As a continued show of confidence in its current financial strength and long-term prospects, Northrop Grumman announced an 8 percent increase in its quarterly dividend to 40 cents per share. The company also spent $600 million on share repurchases in the quarter.
Total backlog increased more than $4 billion since the start of the year to a record $68 billion, with a large chunk of that, $1.5 billion due to the company’s win over Boeing [BA] for the Air Force’s new aerial refueling tanker. That award is under protest by Boeing. Northrop Grumman also said it won $2.6 billion in new classified awards in the quarter.
While the Shipbuilding segment tumbled to a $218 million operating loss, the company’s Information & Services, Aerospace and Electronics segments posted strong gains. Excluding the charge, operating margins increased 60 basis points to 10 percent, Palmer said. Each of the company’s segments also boosted sales, led by Shipbuilding due to the production ramp up on the Navy’s next-generation destroyers and more fleet support work.
Northrop Grumman reduced its earnings and cash flow guidance for the year due to the charge at Shipbuilding. Sales are still expected to around $33 billion but EPS from continuing operations is expected to be between $4.90 and $5.15, 60 cents lower than the prior outlook. It could have been worse but company executives said performance improvements at the Aerospace and Electronics segments this year will soften the blow somewhat.
Free cash flow expectations were reduced by $200 million to between $1.7 billion and $1.9 billion. Free cash flow in the first quarter was $16 million.