By Calvin Biesecker
Northrop Grumman [NOC] yesterday reported strong operating results, allowing it to overcome higher tax payments and post a slight increase in net earnings in the third quarter.
Net income inched up a percent to $497 million, $1.67 earnings per share (EPS), from $490 million ($1.53 EPS), as a strong increase in income at its operating segments and lower pension expense was largely offset by higher tax payments. A year ago, Northrop Grumman’s earnings benefited from a tax benefit.
Income from continuing operations was $489 million ($1.64 EPS) versus $464 million ($1.45 EPS) a year ago, handily beating consensus estimates by 18 cents. Segment operating margins gained 80 basis points to 9.8 percent. Per share results were also aided by additional stock repurchases in the quarter, which reduced the overall share count.
Sales increased 4 percent to $8.7 billion from $8.4 billion. Free cash flow was $817 million.
Based on results through the first nine months of the year, including the potential for better than expected overall segment margins, Northrop Grumman boosted its earnings guidance from continuing operations for the year to between $6.85 and $7, an increase of 25 cents on the low end and 20 cents on the high end. The sales forecast was nudged up $100 million to around $34.9 billion.
On the income front all but one of the company’s segments, Shipbuilding, contributed to the gains, and double-digit increases at that. And all the segments posted higher sales, although Information Systems was barely above flat.
Growth in sales and operating income, at least in percentage terms, was led by Technical Services which benefited from more work on integrated logistics and modernization programs such as the KC-10 tanker and the C-20 special mission aircraft, a favorable mix of business and improved performance.
Overall, the company’s sales drivers included its mix of manned and unmanned aircraft programs such as work on the Advanced E-2C Hawkeye and Global Hawk, targeting and postal automation systems. Operating income benefited from the higher sales and improved program performance on a number of programs.
Wes Bush, Northrop Grumman’s president and CEO, said the company continues to make progress reducing Global Hawk air vehicle production costs ahead of a decision next spring for the Air Force program to enter full-rate production. Going forward, he expects air vehicle and payload costs to continue declining as platform configurations mature and as affordability initiatives are implemented.
The unmanned aircraft program is over budget and under pressure from the Pentagon to get costs under control (Defense Daily, Sept. 29).
Northrop Grumman’s strategic review of its Shipbuilding business remains under review and on track with no final decision yet on whether to divest the business and, if so, by sale or spin-off, Bush said. The company announced the strategic review in July and said it would take several quarters to complete.
In the quarter, Shipbuilding eked out a 1 percent sales gain, although operating income fell 11 percent on lower performance in expeditionary warfare programs.
Regarding the outlook for defense spending, Bush sees flat to low growth, and the company is aligning its cost structure to account for this. Despite the soft sales outlook, Bush believes that operating profits can be improved, saying that margin expansion isn’t linked to sales growth.
Margin drivers include lowering program risk and going after programs with higher payoffs, Bush said. For example, he noted that the company is finding attractive opportunities in federal civil programs as it moves away from outsourcing business at the state and local level. However, in doing so, the Northrop Grumman is seeking opportunities where it can bring valuable capabilities such cyber security and engineering know-how to bear and where margin rates make sense.
Bush also said that the company will continue to create value for shareholders by boosting margins, smartly deploying cash and staying head of its customers needs by properly shaping its portfolio of capabilities.
Northrop Grumman’s backlog at the end of the quarter was $64.6 billion, down from $69.2 billion at the end of last year. Bush attributed the decline to lumpiness in the orders for the Aerospace and Shipbuilding segments where awards tend to be large but periodic. He added that the continuing budget resolution for FY ’11 may also delay orders.