By Calvin Biesecker
Northrop Grumman [NOC] yesterday reported strong first quarter earnings despite weaker sales due to income from its pension assets, operating segments and from its former shipbuilding unit combined with lower corporate and interest expenses.
Sales were down in part due to the continuing budget resolution that delayed contract awards and suppressed federal spending through the first three months of 2011 and because of the company’s previously announced plan to reduce its participation in a joint venture managing a test site for the Department of Energy (DoE).
Pension income was $103 million versus a $2 million expense a year ago while segment operating income increased $15 million, or 2 percent. The former shipbuilding unit, now a public company called Huntington Ingalls Industries [HII], provided $34 million in earnings from discontinued operations.
Wes Bush, Northrop Grumman’s chairman and CEO, said that moving forward top line growth will not be a driver for creating shareholder value.
“It is likely that there will be a significant amount of debate in the coming months regarding deficit reduction and defense spending,” Bush said during yesterday’s earnings call. “Our challenge is to continue to anticipate the needs of our customers and aggressively address our cost structure, operational execution and productivity. As I said before, ours is not a top line story. We continue to believe we can create value for our shareholders even in an environment of constrained top line growth by focusing on our key priorities, building on our performance improvements, optimizing our portfolio and effectively deploying our cash.”
The sale of HII generated $1.4 billion in cash, which Northrop Grumman is adding to its stock buyback program, which the company said yesterday that its board of directors has increased to $4 billion. The company also said it is raising its quarterly stock dividend by 3 cents, or more than 6 percent, to 50 cents per share.
Sales in the quarter fell 3 percent to $6.7 billion from $6.9 billion with Aerospace Systems the lone segment posting a gain. Total backlog was $43.7 billion, down $3.1 billion since the end of 2010 due to the withdrawal from the DoE test site joint venture as well as declines in all of the operating segments.
Net income rose 13 percent to $530 million, $1.79 earnings per share (EPS), versus $469 million ($1.34 EPS) a year ago. Excluding HII, earnings from continuing operations were $496 million ($1.67 EPS), which beat consensus estimates by 11 cents EPS. Segment margins increased a half percent to 10.7 percent as each turned in higher profits.
Free cash was negative $11 million but the forecast remains between $1.7 billion and $2 billion for the year before discretionary pension contributions.
Earnings guidance for continuing operations for the year was increased by a dime to between $6.50 to $6.60 EPS, accounting for share repurchases and operating results in the quarter. Sales are still expected to be around $27.5 billion.