Earnings Beat at Northrop, Backlog Falls

Zacks

Northrop Grumman Corp. (NOC) reported fourth quarter 2013 results before the opening bell today. Adjusted earnings per share of $2.00 comfortably surpassed the Zacks Consensus Estimate of $1.94 by 3.1%. The earnings beat was attributable to a lower share count and strong operating performance. However, the bottom line came in below the year-ago figure of $2.06 by 2.9% mainly due to lower revenue generation.

Full year 2013 adjusted earnings came in at $7.88 per share, below our forecast of $8.16 by 3.4%. Yet, the company managed to lift its full year earnings on a year-over-year basis by 5.5%.

Operational Update

Sales in the reported quarter declined 4.9% to $6,157 million from $6,476 million in the year-ago quarter. However, quarterly revenues surpassed the Zacks Consensus Estimate of $6,019 million by 2.3%.

In 2013, the company’s top line slipped 2.2% year over year to $24,661 million but beat the Zacks Consensus Estimate of $24,509 million. While revenues at the Aerospace and Electronics segments increased, Information Systems and Technical Systems saw a downward movement in revenues.

Northrop Grumman’s total order backlog as of Dec 31, 2013 was $37,033 million, down from $40,809 million as of Dec 31, 2012. Of the backlog, $18,321 million belonged to Aerospace Systems and $9,037 million to Electronics Systems. The rest of the backlog comprised $6,864 million for Information Systems and $2,811 million for Technical Services.

During the quarter under review, the company received new contracts worth $5.7 billion with a book-to-bill of 92%. For the year 2013, new contracts totaled $21.9 billion and the book-to-bill was 89%. The decline in backlog reflects a cautious stance on the part of customers in response to the current U.S. government budget environment.

Quarterly Segmental Revenue

Aerospace Systems: Aerospace Systems’ quarterly sales decreased 6.6% year over year to $2,432 million. The decline reflects lower volume from unmanned as well as space programs. These were, however, partially offset by higher sales for the James Webb Space Telescope.

Electronic Systems: Segment sales climbed 6.1% year over year to $1,883 million. The increase reflects higher volume for international, combat avionics as well as space programs. These increases were partially offset by lower volume for navigation and maritime systems programs.

Information Systems: Sales at the segment were $1,614 million, down 14.1% year over year. The decline reflects lower funding levels and contract completions across the board.

Technical Services: Technical Services’ quarterly sales dropped 6.4% year over year to $691 million due to lower volume for integrated logistics and modernization programs and lower volume for the ICBM program.

Financial Condition

Cash and cash equivalents as of Dec 31, 2013 were $5,150 million versus $3,862 million as of Dec 31, 2012. Long-term debt, net of current portion as of Dec 31, 2013 was $5,928 million versus $3,930 million as of Dec 31, 2012. Net cash provided by operating activities during 2013 decreased to $2,483 million from $2,640 million in the year-ago period.

During the fourth quarter of 2013, the company repurchased 6.6 million shares of its common stock, bringing the number to 20.8 million shares repurchased to date. Northrop has plans to buy back 60 million shares of its outstanding common stock by the end of 2015.

Guidance

For full-year 2014, Northrop Grumman expects revenues between $23,500 million and $23,800 million. Earnings per share are expected in the range of $8.70 to $9.00 while the Zacks Consensus Estimate for 2014 is lower at $8.53.

Northrop Grumman expects total operating margin on the higher side of the 12% range and free cash flow in the $1,700–$2,000 million range.

At the Peers

Yesterday, aerospace giant The Boeing Company (BA) reported stellar fourth quarter 2013 results on the back of solid performance across the company's businesses and robust deliveries. Its adjusted fourth quarter 2013 earnings came in at $1.88 per share, beating the Zacks Consensus Estimate of $1.58 by 19.0% as well as the year-ago profit of $1.46 by 28.8%.

The world’s largest stand-alone defense contractor, Lockheed Martin Corp. (LMT), posted fourth quarter 2013 adjusted earnings from continuing operations of $2.38 per share, comfortably surpassing the Zacks Consensus Estimate of $2.00 by 19.0%. Earnings in the reported quarter also surged almost 21.4% from the year-ago adjusted profit level of $1.96 per share. The upcast in earnings was mainly attributable to its strong operational performance.

Defense and aerospace operator General Dynamics Corp.’s (GD) fourth-quarter 2013 operating earnings were $1.76 per share, in line with the Zacks Consensus Estimate. Earnings were ahead of the year-ago figure of $1.39.

Our View

Northrop Grumman’s top- and bottom-line results succeeded in beating the Zacks Consensus Estimate driven by the company’s strong operational performance. The company continues to focus on superior program performance, effective cash deployment and portfolio alignment which would sustain the earnings surprise trend.

However, the lower backlog at the end of the reported quarter evokes concern.  This is due to the uncertain and constrained domestic budget environment.

Northrop Grumman currently carries a short-term Zacks Rank #2 (Buy), while Boeing and Lockheed Martin sport a Zacks Rank #1 (Strong Buy).
 

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