Northrop Grumman Corporation (NOC) reported fourth-quarter 2014 adjusted earnings of $2.26 per share, beating the Zacks Consensus Estimate of $2.22 by 1.8%. Earnings were 13% higher year over year.
Reported earnings before after-tax pension adjustments were $2.48 per share, up nearly 17% year over year.
Northrop Grumman’s full year earnings of $8.93 missed the Zacks Consensus Estimate of $9.51 by 6%. However, earnings increased 13.3% from $7.88 per share a year ago.
Total Revenue
In fourth-quarter 2014, Northrop Grumman reported revenues of $6.1 billion, beating the Zacks Consensus Estimate of $5.99 billion by 1.9%. However, quarterly revenues decreased 0.8% from $6.15 billion in the year-ago quarter.
In 2014, Northrop Grumman recorded revenues of $23.97 billion, ahead of the Zacks Consensus Estimate of $23.8 billion by 0.6%. Revenues however declined 2.8% year over year.
The 2014 top-line decline was due to a 3% fall in Electronic Systems sales, a 6% sales decline in Information Systems and 2% in Technical Services.
Quarterly Segmental Details
Aerospace Systems: Segment sales improved 4.1% year over year to $2.53 billion due to the timing of volume across a number of programs.
Operating income in the fourth quarter increased 7% year over year to $299 million while operating margin expanded 30 basis points to 11.8%. The improvement is attributable to higher sales volume and an improved performance.
Electronic Systems: Segment sales edged down 2.8% to $1.83 billion from the prior year. This was primarily due to decreased volume from land and self-protection programs, including infrared countermeasures and laser systems, and domestic intelligence, surveillance and reconnaissance (ISR) and targeting programs.
Operating income in the fourth quarter decreased 6% year over year to $315 million and operating margin contracted 60 basis points to 17.2%. The decline was due to lower sales and a lower level of net favorable adjustments than in the prior-year period
Information Systems: Sales at the segment were $1.57 billion, down 2.6% year over year. The decrease was primarily due to lower volume for command and control programs as a result of reduced funding levels and in-theater force reductions.
Operating income in the fourth quarter decreased 8.2% year over year to $146 million while operating margin was down to 9.3%. The decline was due to lower sales and increased investments in international business.
Technical Services: Quarterly sales decreased 1.7% year over year to $0.68 billion due to lower volume from the integrated logistics and modernization program.
Operating income in the fourth quarter decreased 3.3% year over year to $59 million.
Operational Update
Total operating cost and expenses in 2014 were $20.78 billion, down 3.5% from the prior year.
Segment operating income in 2014 increased 2.3% year over year to $3.2 billion thanks to a strong Aerospace Systems division.
Total order backlog as of Dec 31, 2014 was $38.2 billion, up 3.2% from $37 billion as of Dec 31, 2013. In 2014, new awards totaled $25.0 billion and book-to-bill was 104%, better than 2013 new awards of $21.9 billion and book-to-bill of 89%.
The company registered an improvement in total backlog at the end of 2014, primarily due to higher contribution from its Aerospace and Electronic Systems segments.
Financial Condition
Northrop Grumman’s cash and cash equivalents as of Dec 31, 2014 were $3.86 billion compared with $5.15 billion as of Dec 31, 2013.
Long-term debt, net of current portion as of Dec 31, 2014 was $5,925 million compared with $5,928 million as of Dec 31, 2013.
Net cash from operating activities during 2014 was $2.59 billion compared with $2.48 million in the year-ago period.
Guidance
Northrop Grumman expects revenues for 2015 in a band of $23,400 million to $23,800 million.
The company expects 2015 diluted earnings per share in the $9.20 to $9.50 range.
Northrop Grumman projects free cash flow in the $1,700 million to $2,000 million range for 2015.
Other Aerospace & Defense Releases
The Boeing Company (BA) reported adjusted fourth-quarter 2014 earnings of $2.31 per share, beating the Zacks Consensus Estimate of $2.07 by 11.6%.
Lockheed Martin Corp. (LMT) posted fourth-quarter 2014 adjusted quarterly earnings of $3.01 per share, surpassing the Zacks Consensus Estimate of $2.81 by 7.1%.
General Dynamics Corp. (GD) reported fourth-quarter 2014 earnings of $2.19 per share, surpassing the Zacks Consensus Estimate of $2.10 by 4.3%
Our View
Northrop’s cash flow generating capability enables it to fund its capital investment programs and sustain shareholder friendly moves. Free cash flow in 2014 was in excess of $2 billion.
Northrop continues to enhance shareholder value through systematic share buybacks and regular dividend payments. In 2014, the company repurchased 21.4 million shares worth $2.7 billion. Northrop still has 17.8 million shares to be repurchased under its 60 million share repurchase authorization, which expires at the end of 2015.
Northrop’s ability to win consistent contracts will be the key to its performance going forward.
Northrop currently has a Zacks Rank #3 (Hold).
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