Los Angeles-based leading shipbuilder and defense contractor, Northrop Grumman Corporation (NOC) reported third quarter 2011 adjusted earnings of $1.86 per share compared with $1.51 per share in the third quarter 2010. Northrop's earnings easily exceeded the Zacks Consensus Estimate of $1.68 for the quarter.
Despite top-line pressures, the earnings growth was driven by a combination of deft performance and share repurchases.
The results reflect the spin-off of Huntington Ingalls Industries, Inc. (HII), the company’s former shipbuilding business. In March 2011, the company had separated its Shipbuilding segment through a spin-off.
Operational Performance
Sales for the reported quarter decreased 6.5% to $6.61 billion, from $7.07 billion in the year-ago quarter, and were 3% lower than the Zacks Consensus Estimate of $6.81 billion.
Total backlog during the quarter was $41.9 billion, down from $64.6 billion in the prior-year period. Of the total backlog, funded backlog comprised $24.9 billion while unfunded backlog was $17 billion.
Operating income in the reported quarter increased 14% to $825 million, from $723 million in the prior-year period, driven by improved segment operating income and an increase in net pension income, which more than offset higher unallocated corporate expenses. Overall, the company clocked net earnings of $520 million compared with $497 million in third quarter of 2010.
Segment Performance
Aerospace Systems: Segment sales declined 5% year over year to $2.57 billion, principally due to lower volume for space systems and manned aircraft programs. The volume shrink in space systems was due to reduced funding for weather satellite programs and the James Webb Space Telescope program, as well as lower volume for several other space programs.
Lower manned aircraft sales include lower volume for the F-35 program. Aerospace Systems’ operating income was up 0.3% to $304 million.
Electronic Systems: In the quarter under review, segment sales increased 2% to $1.91 billion driven by higher volume for intelligence, surveillance and reconnaissance systems, targeting systems, and naval marine systems programs.
However, these positives were partially offset by lower volume for land and self protection systems programs, including lower deliveries of Vehicular Intercommunication Systems (VIS). Segment operating income shot up 12% to $293 million.
Information Systems: Segment sales of $1.96 billion in the quarter were 8% lower than the year-ago period principally due to lower volume for defense systems and civil systems programs that was partially offset by higher volume for intelligence systems programs. Segment operating income was $187 million, down 1.6% year over year.
Technical Services: Sales at the segment decreased 22% to $680 million due to its reduced participation in the NSTec joint venture. Segment operating income slipped 1.8% to $55 million.
Financial Condition
Northrop Grumman ended the reported quarter with cash and cash equivalents of approximately $2.65 billion compared with $2.53 billion at the end of third quarter 2010. Cash provided by continuing operations before discretionary pension contributions was $903 million compared with $829 million in the prior-year period. Long-term debt, net of current portion, was $3.94 billion versus $3.44 billion in the third quarter of 2010.
In the reported quarter, the company repurchased 12.7 million shares. Till the end of third quarter 2011, the company had repurchased 28.4 million shares of its common stock for $1.6 billion with $2.4 billion remaining under its share repurchase authorization.
Outlook
The company increased its earnings guidance to a range of $6.95 to $7.05 per diluted share from $6.75 to $6.90 per share earlier. The guidance reflects higher expected segment operating margin rate and total operating margin rate, and lower weighted average shares outstanding.
Our Take
Northrop Grumman offers a strong program portfolio positioned to take advantage of focus areas in the defense space, an improving balance sheet and an ongoing share repurchase program.
However, the positives are muted by apprehensions regarding defense cutbacks on high-cost platform programs,over-exposure to the DoD budget, lower backlog, cost over-runs and reductions in Afghanistan and Iraq operations. Thus, over the near term, we find few catalysts driving the company. Northrop presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.
Los Angeles-based Northrop Grumman Corporation is one of the leading defense contractors in the U.S. The company supplies a broad array of products and services to the U.S. DoD, including electronic systems, information technology, aircraft, space technology, and systems integration services.
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