Los Angeles-based leading shipbuilder and defense contractor, Northrop Grumman Corporation (NOC) reported second quarter 2011 adjusted earnings of $1.81 per share compared with $1.46 per share in the second quarter 2010.
The results reflect the spin-off of Huntington Ingalls Industries, Inc. (HII), the company’s former shipbuilding business. Northrop's earnings also exceeded the Zacks Consensus Estimate of $1.67 for the quarter.
Operational Performance
Sales for the reported quarter decreased 9.6% to $6.56 billion, from $7.26 billion in the year-ago quarter, and were 6.0% lower than the Zacks Consensus Estimate of $6.98 billion. The results reflect the impact of lower U.S. Department of Defense (DoD) investment outlays including announced force reductions in overseas contingency operations.
The top line was also hurt by the company’s reduced participation in the Nevada National Security Site (NSTec) joint venture and delayed awards for manned aircraft programs.
Total backlog during the quarter was $41.8 billion, down from $66.0 billion in the prior-year period. Of the total backlog, funded backlog comprised $23.4 billion while unfunded backlog was $18.4 billion.
Operating income in the reported quarter increased 12% to $841 million, from $750 million in the prior-year period, driven by an increase in net pension income. Overall, the company clocked net earnings of $520 million compared with $711 million in the second quarter of 2010.
Segment Performance
Aerospace Systems: Segment sales declined 9% year over year to $2.59 billion, principally due to lower volumes on manned aircraft programs and civil space programs. Contraction in manned aircraft volume reflects timing of awards for the F-35 and E-2 programs, while lower civil space volume principally reflects the restructuring of National Polar-orbiting Operational Environmental Satellite System. Aerospace Systems’ operating income slipped 1.2% to $331 million.
Electronic Systems: In the quarter under review, segment sales declined 10% to $1.79 billion due to lower volume for land and self-protection systems and targeting systems programs. Segment operating income nevertheless increased 7.6% to $284 million driven by improvement in performance for intelligence, surveillance and reconnaissance programs.
Information Systems: Segment sales of $2.03 billion in the quarter were 4.3% lower than the year-ago period, principally due to lower volumes on defense systems programs. Segment operating income also dropped 8% to $189 million.
Technical Services: Sales at the segment decreased 18% to $656 million due to the change in the NSTec joint venture, which more than offset higher volumes on integrated logistics and modernization programs. Segment operating income slipped 1.9% to $51 million.
Financial Condition
Northrop Grumman ended the reported quarter with cash and cash equivalents of approximately $2.81 billion compared with $2.04 billion at the end of second quarter 2010. Cash provided by continuing operations before discretionary pension contributions was $378 million compared with $828 million in the prior-year period. Long-term debt, net of current portion, was $3.94 billion versus $3.44 billion in the second quarter of 2010.
Outlook
The company lowered its sales expectation to $27 billion for 2011 from the prior estimate of $27.5 billion. However, it increased its earnings guidance to a range of $6.75 to $6.90 per diluted share from $6.50 to $6.70 per share earlier. The company still expects cash provided by continuing operations before discretionary pension contributions in the range of $2.3–$2.7 billion.
Our Take
Northrop Grumman has a strong presence in Air Force, Space & Cyber Security programs. Its product line is well positioned in high priority categories, such as defense electronics, unmanned aircraft and missile defense. The company anticipates favorable top and bottom lines, from diversified streams, supported by strong growth potential.
However, the positives could be offset by apprehension regarding defense cutbacks on high-cost platform programs, over-exposure to the DoD budget, cost over-runs and inordinate exposure to missile-defense-related programs. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our 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.
In March 2011, the company separated its Shipbuilding segment through a spin-off of its subsidiary, Huntington Ingalls Industries, which operates in major shipyards in Louisiana, Mississippi and Virginia.
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