Northrop Grumman [NOC] yesterday reported lower sales and earnings in the second quarter due to constrained federal spending and higher pension expenses while the operating income at its business segments remained flat.
The company also managed to boost its per share earnings by 4 percent despite lower net income due to share repurchases in the quarter and raised its earnings guidance for the year.
Net income slid nearly 8 percent to $480 million, $1.88 earnings per share (EPS), from $520 million ($1.81 EPS) a year ago. Pension expenses were about 64 million higher in the recent quarter and the company spent $295 million to buy back 4.9 million shares of stock. The EPS results were well above consensus estimates of $1.61.
Sales were down 5 percent in the quarter to $6.3 billion from $6.6 billion.
For the year, Northrop Grumman expects earnings to be between $7.05 and $7.25 EPS, up from the previous outlook of $6.70 to $6.95 based on stronger than expected results in the first half of 2012. Operating margins for the first half are up 20 basis points to 12.6 percent despite lower sales.
Wes Bush, Northrop Grumman’s chairman, president and CEO, said the company expects Congress to pass a continuing budget resolution to maintain federal funding at FY ’12 levels at least initially. He said the company is getting good at managing its business amid the seemingly annual continuing resolutions that greet each new federal fiscal year but said the guidance doesn’t factor in a budget sequestration.
If Congress and the Obama Administration can’t agree on a long-term budget plan to avoid sequestration, Bush said the resulting spending cuts will mean lower sales, earnings and cash flows for the company. If sequestration occurs, the Pentagon would be forced to cut about $500 billion from its budget over 10 years beginning in 2013.
In the quarter, increases in operating income at the Information Systems and Technical Services segments were offset by declines at the Aerospace and Electronics Systems segments. On the sales line, Technical Services was the only segment to grow, gaining a percent.
Free cash flow in the quarter was $825 million and total backlog stood at $41.5 billion, up $2 billion since the end of 2011. Bush pointed to the strong backlog, cash flow, and business capture, which resulted in an order bookings rate of 1.4 times sales as some of the quarter’s highlights.