Northrop Grumman Beats on Earnings, Revenues - Analyst Blog

Northrop Grumman Corporation NOC reported first-quarter 2014 adjusted earnings of $2.40 per share, surpassing the Zacks Consensus Estimate of $2.15 by 11.6%. Reported earnings improved 18.2% year over year, primarily due to a lower share count and decreases in product and services operating costs and general and administrative expenses.

Including a tax benefit of 23 cents as a result of partial resolution of the Internal Revenue Service examination of the company's 2007-2009 tax returns, the company's earnings came in at $2.63 per share in first-quarter 2014 versus $2.03 a year ago.

Operational Update

In first-quarter 2014, Northrop Grumman reported sales of $5,848 million, surpassing the Zacks Consensus Estimate of $5,809 million by 0.7%. However, quarterly revenues decreased 4.2% from $6,104 million a year ago.

Total order backlog as of Mar 31, 2014 was $36,237 million, down 2.1% from $37,033 million as of Dec 31, 2013 due to the timing of contracts in the Aerospace Systems division. Of the total backlog, $17,365 million belonged to Aerospace Systems and $9,218 million to Electronics Systems. The remaining backlog comprised $6,742 million for Information Systems and $2,912 million for Technical Services.

During the quarter, Northrop Grumman received new contracts worth $4.9 billion.

Quarterly Segmental Revenue

Aerospace Systems: Aerospace Systems' quarterly sales decreased 2.6% year over year to $2,420 million, due to lower volume for unmanned and space programs. These were, however, partially offset by higher volume for the North Atlantic Treaty Organization (NATO) Alliance Ground Surveillance.

Electronic Systems: Segment sales edged down 4.5% to $1,644 million from the prior-year results. This was primarily due to decreased volume from the combat avionics and navigation and maritime systems programs, which was partially offset by improvement in international programs.

Information Systems: Sales at the segment were $1,577 million, down 5.8% year over year. The decrease was primarily due to a drop in volume across a large number of programs, including restricted programs. In-theater force reductions also negatively impacted revenues.

Technical Services: Technical Services' quarterly sales dropped 2.8% year over year to $697 million due to lower volume for integrated logistics and modernization programs.

Financial Condition

Northrop Grumman's cash and cash equivalents as of Mar 31, 2014 were $3,885 million versus $5,150 million as of Dec 31, 2013.

Long-term debt, net of current portion, as of Dec 31, 2013, was $5,927 million versus $5,928 million as of Dec 31, 2013.

Net cash used in operating activities during the first three months of 2014 were $402 million compared with net cash provided by operating activities of $1 million in the year-ago comparable period.

Share Repurchase Update

During first-quarter 2014, Northrop Grumman repurchased 4.8 million shares of its common stock, worth $564 million, totaling 25.6 million shares as of Mar 31, 2014. The company has plans to buy back 60 million shares of its outstanding common stock by the end of 2015.

Guidance

Northrop Grumman reiterated revenues guidance for 2014 in the range of $23,500 million to $23,800 million.

The company increased projection for 2014 diluted earnings to $8.90 - $9.15 per share from the previous guidance of $8.70 - $9.00 per share.

Northrop Grumman expects total operating margin of 13% and free cash flow in the $1,700 million - $2,000 million range.

At the Peers

Lockheed Martin Corp. LMT announced first-quarter 2014 earnings of $2.87 per share, surpassing the Zacks Consensus Estimate of $2.52 by 13.9%.

Aerospace giant The Boeing Co. BA reported first-quarter 2014 adjusted earnings of $1.76 per share, beating the Zacks Consensus Estimate of $1.54 by 14.3%.

Another defense major, General Dynamics Corp. GD reported first-quarter 2014 earnings of $1.71 per share, surpassing the Zacks Consensus Estimate by 4.9%.

Our View

Northrop Grumman's top and bottom line surpassed the Zacks Consensus Estimate, primarily on the heels of the company's strong operational performance. The company continues to focus on its performance and portfolio alignment activities, which enables it to maintain the earnings surprise trend.

In addition, Northrop Grumman's effort towards reduction of costs and expenses, and efficient cash deployment strategy are expected to play an important role for boosting future margin.

Northrop Grumman currently has a Zacks Rank #2 (Buy).