Los Angeles-based leading shipbuilder and defense contractor Northrop Grumman Corp. (NOC) reported impressive first quarter 2010 results of $1.53 per share compared to $1.17 in the year-ago quarter. Northrop results exceeded the Zacks Consensus Estimate of $1.32 for the quarter. First quarter 2010 diluted earnings per share are based on 306.1 million shares outstanding compared with 332.1 million shares in the first quarter of 2009.
Operational Performance
Sales for the reported quarter increased 8.5% to $8.6 billion from $7.9 billion in the year-ago period. In the reported quarter operating income increased 24% to $765 million from $619 million in the year-ago period. The improvement reflects a decrease in net pension adjustment, higher segment operating income and lower unallocated corporate expenses.
In the reported quarter net pension adjustment declined to $8 million from $76 million in the prior year period. Northrop Grumman’s earnings from continuing operations increased to $462 million from $366 million in the first quarter of 2009.
Segmental Performance
Aerospace Systems
Aerospace Systems quarterly sales increased 10% year-over-year, principally due to higher volume for manned and unmanned aircraft and space programs. Higher volume for these programs was partially offset by lower volume for missile defense programs.
Aerospace Systems operating income increased 15%, and as a percentage of sales increased to 11% from 10.5% in the year-ago quarter. Higher operating income and margin rate were driven by higher volume and improved program performance.
Electronic Systems
Electronic Systems sales increased 5% due to higher sales for targeting systems programs, increased inter-company sales, and higher volume for navigation systems programs. Electronic Systems’ operating income was slightly lower than the prior year period, and as a percentage of sales was 12%, compared with 12.8% in the year-ago quarter. The change in margin rate reflects lower performance for postal automation programs and lower royalty income than in the prior year period.
Information Systems
Information Systems sales were 1% lower than the year-ago period principally due to lower volume for civil systems and defense programs, which more than offset higher volume for intelligence programs. The decline in civil systems reflects lower volume across several programs, including state and local and Defense Integrated Military HR System (DIMHRS). Information Systems operating income declined 1.6% due to lower sales volume and as a percentage of sales was comparable to the prior year period at 8.9%.
Shipbuilding
Shipbuilding sales increased 25% due to higher volume for expeditionary warfare, surface combatant and aircraft carrier programs. Shipbuilding operating income increased 26% as a result of higher volume, and as a percentage of sales operating income improved to 6.2% from 6.1% in the prior year period. Reported quarter operating income includes lower performance of the LPD program, which was partially offset by an insurance recovery for business interruption related to Hurricane Ike.
Technical Services
Technical Services sales increased 21% due to higher volume for life cycle optimization & engineering (LCOE), systems support, and training & simulation programs. Higher volume for existing programs, including Counter Narco-Terrorism, Hunter, and National Security Technology, as well as new programs contributed to higher sales.
Technical Services operating income increased 32%, and as a percentage of sales increased to 6.4% from 5.9%. The improvements in operating income and rate are due to higher volume, improved program performance and a shift in mix toward higher margin LCOE business.
Financial Condition
Northrop Grumman ended the quarter with cash and cash equivalents of $2 billion, compared to $3.3 billion after year-end 2009. Cash used by operations in the first quarter of 2010 totaled $531 million compared with cash used by operations of $172 million in the year-ago quarter. 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 $67.5 billion compared to $69.2 billion at fiscal-end 2009. The company updated its revenue guidance for fiscal 2010 to about $34.5 billion from the earlier guidance range of $34 billion – $34.6 billion. Northrop Grumman also updated its EPS guidance range to $5.75 – $6.00 from earlier guidance range of $5.70 – $5.95. This is in line with the Zacks Consensus Estimate of $5.86.
We maintain our market Neutral recommendation on the Zacks #3 Rank (‘Hold’) stock.
Read the full analyst report on “NOC”
Zacks Investment Research
