By Calvin Biesecker
Northrop Grumman [NOC] reported strong second quarter earnings due to a previously disclosed tax benefit combined with strong performance across its operating segments.
Net income soared 80 percent to $711 million, $2.34 earnings per share (EPS), aided by a $296 million (73 cents EPS) gain from a benefit that more than offset a $113 million (24 cents EPS) charge associated with the consolidation of its Gulf Coast shipbuilding operations in Mississippi. Analysts had expected the company to earn $2.19 EPS. Earnings a year ago were $394 million ($1.21 EPS).
Sales in the quarter were $8.8 billion, up 3 percent from $8.5 billion a year ago. Free cash flow was $515 million.
Excluding the charge at the Shipbuilding segment, each of Northrop Grumman’s operating segments boosted income and margins and only one, Information Systems, posted lower sales. The company’s operating income increased 90 basis points to 8.1 percent, including the charge.
Shipbuilding reported a $16 million loss all because of the consolidation charge and nothing to do with deteriorating performance, Wes Bush, Northrop Grumman’s president and CEO, said during yesterday’s earnings call. Excluding the charge, margins were in line with expectations, he said.
Earlier this month, the company announced plans to put all of its shipbuilding work in the Gulf Coast into its Mississippi facilities and at the same time explore strategic alternatives for the entire Shipbuilding segment, which includes aircraft carrier and submarine construction and overhaul at its Newport News, Va., operations (Defense Daily, July 14 and 15).
The factors that Northrop Grumman attributed for strong earnings performance include higher sales and improved performance on manned aircraft programs, improved performance on its targeting systems and land and self protection systems, an $18 million benefit from retiring subcontractor risk on the New York City Wireless program, and higher sales and improved business mix at its Technical Services segment.
The company also helped its per share earnings along by repurchasing its stock to reduce the number of outstanding shares. Northrop Grumman spent $855 million in the first half of this year buying its stock. Bush said that stock repurchases are a “good use” of the company’s cash.
Based on its performance in the first half of 2010, Northrop Grumman boosted its sales and earnings guidance for the year. It raised sales guidance by $300 million to about $34.8 billion. Earnings are expected to be between $6.60 and $6.80, up from prior guidance of $5.75 and $6. Guidance for free cash flow was lowered by $500 million due to the cash impacts from consolidating the shipyards.
Backlog at the end of June was $66 billion, down 3.2 billion since the start of the year. Funded backlog was actually up $2.1 billion to $36 billion since the beginning of the year.
Regarding the Defense Department’s new push to make itself more cost-efficient and create incentives for industry to do likewise, Bush said that he has been encouraged by the Pentagon’s willingness to listen to industry about the changes the government needs to make.
“A lot of what’s going to have to be done is related to how the government is going to go under contract as it tries to think about cost structures,” Bush said. He also said that the industrial base will have to find ways to consolidate, pointing to what Northrop Grumman did at its shipbuilding operations as “a good representative example of that.”
Bush said it is “incumbent on all of us” to make the affordability initiatives work. “I think we have to get to some outcomes with affordability and efficiency,” he said.