Los Angeles-based leading shipbuilder and defense contractor Northrop Grumman Corporation (NOC) reported impressive second quarter 2010 results of $2.34 per share, compared to $1.21 in the second quarter of 2009. Northrop results exceeded the Zacks Consensus Estimate of $2.19 for the quarter. The company’s results reflect the impact of a tax benefit (97 cents) and a pre-tax charge related to consolidation of its shipbuilding operations (24 cents).
Operational Performance
Sales for the reported quarter increased 3.3% to $8.8 billion from $8.5 billion in the year-ago quarter, soundly beating the Zacks Consensus Estimate of $8.6 billion. In the reported quarter, earnings from continuing operations increased to $711 million from $368 million in the second quarter of 2009. However, quarterly earnings included a tax benefit of $296 million which was partially offset by a pre-tax charge of $113 million related to the company’s decision to consolidate its Gulf Coast shipbuilding operations.
Segmental Performance
Aerospace Systems
Aerospace Systems quarterly sales increased 6.3% year-over-year to $2.8 billion, principally due to higher volume for manned and unmanned aircraft, space and restricted programs. Higher volume for these programs was partially offset by lower volume for missile defense programs. Aerospace Systems operating income increased 30% and increased to 11.8% from 9.6% in the year-ago quarter, based on sales. Higher operating income and margin rate are due to higher volume and improved program performance, primarily in manned aircraft programs.
Electronic Systems
Electronic Systems sales increased 0.9% to $2 billion due to higher sales for targeting systems programs. Electronic Systems’ operating income increased 5% and increased to 13.3% from 12.8% based on sales. Higher operating income and margin rate reflect slightly higher volume and improved program performance for targeting systems and land and self-protection systems programs. This was partially offset by lower performance for postal automation.
Information Systems
Information Systems sales of $2.1 billion were 1.3% lower than the year-ago period, principally due to lower volume for civil systems and intelligence programs, which more than offset higher volume for defense programs. Information Systems operating income increased 26% and based on sales totaled 9.7%, compared with 7.6% in the prior-year period.
Higher operating income and rate reflect improved performance across several programs as well as risk retirement of $18 million related to a subcontractor on the New York City Wireless program; these items more than offset lower volume.
Shipbuilding
Shipbuilding sales increased 4.9% to $1.6 billion, due to higher volume for aircraft carriers, expeditionary warfare, and submarine programs. Shipbuilding recorded a $16 million operating loss in the reported quarter due to a $113 million pre-tax charge related to the company’s decision to consolidate its Gulf Coast shipyards.
Northrop Grumman will consolidate its new Gulf Coast ship construction in Mississippi and will wind down construction at its Avondale facility in 2013. As a result, the company increased its estimates to complete ships currently under construction at Avondale by approximately $210 million.
Of that amount, $113 million was recognized in the reported quarter as a pre-tax charge to operating income. The balance will be recognized as lower margin in later periods. Before the consolidation charge, Shipbuilding operating income totaled $97 million, or 5.7% of sales, compared with $14 million in the second quarter of 2009.
Technical Services
Technical Services’ sales increased 14% to $801 million, due to higher volume for new and existing programs. Technical Services operating income increased 21% to $52 million, and as a percentage of sales increased to 6.5% from 6.1%. The improvements in operating income and rate are due to higher volume and improved business mix.
Financial Condition
Northrop Grumman ended the quarter with cash and cash equivalents of approximately $2 billion compared to $3.3 billion at year-end 2009. Cash provided by operations in the second quarter of 2010 totaled $619 million compared with cash provided by operations of $830 million in the second quarter of 2009. Long-term debt decreased to $3.4 billion at the end of the reported quarter from $4.2 billion at the end of fiscal 2009.
Outlook
Northrop Grumman’s total order backlog at the end of the reported quarter stood at slightly above $66 billion compared to $69.2 billion at fiscal-end 2009. The company updated its revenue guidance for fiscal 2010 to about $34.8 billion from the earlier guidance of $34.5 billion. It has also updated its EPS guidance range to $6.60 – $6.80 from its earlier guidance range of $5.75 – $6.00.
We maintain our market Neutral recommendation on the Zacks #3 Rank (Hold) stock.
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