Northrop Grumman Misses on Q2 Earnings yet Guides Higher

Northrop Grumman Corporation (NOC) reported second-quarter 2014 adjusted earnings of $2.04 per share, lagging the Zacks Consensus Estimate of $2.20 by 7.3%. However, earnings were 3.6% higher year over year.

Reported earnings before after-tax pension adjustments were $2.37 per share, up 15.6% year over year.

Total Revenue

In second-quarter 2014, Northrop Grumman reported sales of $6.04 billion, surpassing the Zacks Consensus Estimate of $5.97 billion by 1.1%. However, quarterly revenues decreased 4.1% year over year from $6.29 billion.

The top-line decline was due to a 0.8% fall in product revenues and an 8.4% drop in service revenues.

Quarterly Segmental Revenue

Aerospace Systems: Aerospace Systems quarterly sales decreased 4.2% year over year to $2.5 billion due to lower volume for unmanned and space programs. These were, however, partially offset by higher volume for the North Atlantic Treaty Organization (NATO) Alliance Ground Surveillance.

Electronic Systems: Segment sales edged down 1.5% to $1.74 billion from the prior-year results. This was primarily due to decreased volume from the infrared countermeasures products and navigation and maritime systems programs, partially offset by improvement in international programs.

Information Systems: Sales at the segment were $1.56 billion, down 7.5% year over year. The decrease was primarily due to lower volumes across a large number of programs as funding remained weak. In-theater force reductions also negatively impacted revenues.

.

Technical Services: Technical Services quarterly sales increased 1.4% year over year to $0.7 billion due to higher international sales resulting from the acquisition of Qantas Defence Services Pty Limited in the first quarter of 2014.

Operational Update

Total operating cost and expenses were $5.22 billion, down 4.9% from the year-ago period.

Segment operating income in the reported quarter declined 7% year over year primarily due to lower sales volume.

Total order backlog as of Jun 30, 2014 was $35.55 billion, down 3.9% from $37.03 billion as of Dec 31, 2013 due to the timing of contracts at Aerospace Systems.

Financial Condition

Northrop Grumman’s cash and cash equivalents as of Jun 30, 2014 were $3.47 billion versus $5.15 billion as of Dec 31, 2013.

Long-term debt, net of current portion, as of Jun 30, 2014 was $5,927 million versus $5,928 million as of Dec 31, 2013.

Net cash from operating activities during the first half of 2014 was $170 million compared with $329 million in the year-ago period.

Guidance

Northrop Grumman reiterated its revenue guidance for 2014 in the range of $23,500 million to $23,800 million.

The company increased its diluted earnings per share projection for 2014 to a band of $9.15–$9.35 per share from $8.90–$9.15 per share earlier.

Northrop Grumman expects total operating margin of 13% and free cash flow in the $1,700 million to $2,000 million range.

Other Upcoming Releases

Raytheon Co. (RTN) is slated to release its second-quarter 2014 earnings on Jul 24. The Zacks Consensus Estimate is $1.65.

L 3 Communications Holdings Inc. (LLL) is slated to release its second-quarter 2014 earnings on Jul 31. The Zacks Consensus Estimate is $2.01.

Alliant Techsystems Inc. (ATK) is slated to release its second-quarter 2014 results on Jul 31. The Zacks Consensus Estimate is pegged at $2.61.

Our View

Northrop continues to enhance shareholder value through systematic share buybacks and regular dividend payments. In the second quarter, the company repurchased 6.1 million shares worth $741 million. Northrop still has 28.3 million shares to be repurchased under its 60 million share repurchase authorization, which expires at the end of 2015.

Northrop currently has a Zacks Rank #2 (Buy). The company’s ability to win consistent contracts will be the key to its performance going forward.