NOC Beats Earnings & Sales, Lifts View

Zacks

Northrop Grumman Corp. (NOC) reported third quarter 2013 results before the opening bell today. Adjusted earnings per share of $1.97 comfortably surpassed the Zacks Consensus Estimate of $1.81. Also, the figure was above the year-ago figure by 13.9%. The significant upside in earnings was attributable to a lower share count and strong operating performance.

Operational Update

Sales in the reported quarter declined 2.6% to $6,106 million from $6,270 million in the year-ago quarter. However, quarterly revenues surpassed the Zacks Consensus Estimate of $5,935 million by 2.9%.

Northrop Grumman’s total order backlog as of Sep 30, 2013 was $37,518 million, down from $40,809 million as of Dec 31, 2012. Of the backlog, $18,563 million belonged to the Aerospace Systems and $8,770 million to the Electronics Systems segments. The rest is made up of $7,335 million for Information Systems and $2,850 million for Technical Services

During the quarter under review, the company received new contracts worth $5.9 billion. The decline in backlog reflects customers’ cautious response to the current U.S. government budget environment.

During the reported quarter, cost of products and services decreased to $4,761 million from $4,962 million in the prior-year quarter. General and administrative expenses declined 2.3% year over year to $555 million.

The decline in revenue was partly mitigated by a cut in operating expenses, thereby leading to a 7.3% rise in operating income to $790 million.

Segmental Revenue

Aerospace Systems: Aerospace Systems’ quarterly sales decreased 3.9% year over year to $2,484 million. The decline reflects lower volume for manned military aircraft and unmanned programs. These were, however, partially offset by higher sales for space programs.

Electronic Systems: Segment sales were up 3.9% year over year to $1,774 million. The increase reflects higher volume for international and combat avionics programs. These increases were partially offset by lower volume for navigation and maritime systems programs.

Information Systems: Sales at the segment were $1,619 million, down 8.8% year over year. The decline reflects portfolio reshaping initiatives. Excluding the company’s efforts to reshuffle the business, sales were down 8% due to lower funding levels and contract completions across the board.

Technical Services: Technical Services’ quarterly sales decreased 4.7% year over year to $713 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 Sep 30, 2013 were $4.9 billion versus $3.9 billion as of Dec 31, 2012. Long-term debt, net of current portion as of Sep 30, 2013 was $5.9 billion versus $3.9 billion as of Dec 31, 2012. Net cash provided by operating activities during the quarter increased to $950 million from $812 million in the year-ago period.

During the third quarter of 2013, the company repurchased 8.1 million shares of its common stock, bringing the number to 20.6 million shares repurchased to date.

Guidance

For full-year 2013, Northrop Grumman increased its revenue guidance to $24.4 billion from its prior expectation of approximately $24.3 billion. The company expects earnings per share in the range of $8.00 to $8.15 versus its prior expectation of $7.60 to $7.80. Currently, Northrop Grumman expects total operating margin approximately in the low-to-mid 12% range versus its prior expectation of 12%.

At the Peer

Recently, Lockheed Martin Corp. (LMT) posted third quarter 2013 earnings of $2.57 per share, comfortably surpassing the Zacks Consensus Estimate of $2.26 by 13.7%. Earnings in the reported quarter also surged almost 16.3% from the year-ago profit level of $2.21 per share.

Defense and aerospace operator General Dynamics Corp. (GD) today announced third quarter 2013 operating earnings of $1.84 per share, surpassing the Zacks Consensus Estimate of $1.68 by 9.5%. Earnings were also ahead of the year-ago figure of $1.70, backed by robust aerospace activity.

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.

We are, however, a little concerned about the lower backlog at the end of the reported quarter.  This is due to the uncertain and constrained budget environment.

Northrop Grumman currently carries a short-term Zacks #1 Rank (Strong Buy). We also have Erickson Air-Crane Inc. (EAC) in the space with a Zacks Rank #2.

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