Northrop Grumman [NOC] on Tuesday posted lower first quarter earnings due to declines in operating profits at two of its business segments, a less favorable pension adjustment versus a year ago, and a higher tax rate, but the results still beat consensus estimates and the company raised its earnings guidance for 2015.
Net income slid 16 percent to $484 million, $2.41 earnings per share (EPS), from $579 million ($2.61 EPS), topping analysts’ estimates by 14 cents per share. Operating margins fell 130 basis points to 13.1 percent.
Operating income at the Aerospace Systems and Electronic Systems segments was down in the single digits due to lower performance, including a number of small charges on various programs, and a shift in volume toward lower margin development programs.
Sales increased 2 percent to $6 billion from $5.8 billion, driven by an 11 percent increase in the Technical Services segment to $770 million, a 3 percent gain at Aerospace to $2.5 billion and a 2 percent rise at Electronic Systems to $1.7 billion. The favorable sales drivers included growth in a number of international programs such as the unmanned NATO Alliance Ground Surveillance program and others, higher volume on space sensors and classified space program, tactical sensors and marine systems.
Company officials said on an analyst call that an important contributor to the overall sales growth was the fact there were four more working days in the quarter than a year ago, although they couldn’t quantify the higher sales on a daily basis.
The company’s Information Systems segment managed a nearly 3 percent increase in operating income to $166 million despite flat sales of $1.6 billion as margins ticked up due to risk retirements related to completed programs.
Ken Bedingfield, Northrop Grumman’s chief financial officer, said on the analyst call that Information Systems is off to a good start but there is risk ahead in domestic defense spending if customers turn cautious with their “short-cycle spending…due to budget uncertainty, particularly if we are operating under a continuing resolution in the fourth quarter.”
Wes Bush, Northrop Grumman’s chairman, president and CEO, said the company is pleased that national policy makers are expressing support for national security needs in the FY ’16 budget process but “we remain cautious on the budget process and customer spending later in the year.” Without a budget by the end of September, there may be a continuing resolution to begin FY ’16 and the threat of sequestration looms next January, he said.
Still, based on first quarter results and the outlook for the rest of the year the company increased its earnings guidance for 2015 to between $9.40 and $9.60 per share from the prior outlook of between $9.20 and $9.50 EPS, Bush said.
Sales guidance remains at between $23.4 billion and $23.8 billion with the international component still expected to be 15 percent of the total. The company did not break out international sales in the first quarter.
Asked about the company’s cyber security business and Raytheon’s [RTN] pending deal for commercial cyber provider Websense, Bush said that Northrop Grumman will remain focused on United States government markets and to a lesser degree with international government customers.
“So that focus of ours tends to be on the high end of the cyber capabilities,” Bush said. “It does not lead us down the path typically of looking at some of the properties that come onto the marketplace that tend to have a little bit more robust component towards the commercial sector. So I think this is really about portfolio philosophy and where we’re focused and we like our focus on the government side.”
Of the five big defense contractors, Lockheed Martin [LMT] and Raytheon have stated their commitment to serving government and commercial customers in the cyber security area while Boeing [BA], General Dynamics [GD] and Northrop Grumman are focused solely on the government market.
Total backlog at the end of the quarter stood at $38.4 billion, up $200 million since the end of 2014. Funded backlog at the end of the quarter was $24 billion. The company had $6.1 billion in bookings and free cash flow was a $771 million outflow, which included a $325 million discretionary contribution. Free cash flow guidance for the year remains at between $1.7 billion and $2 billion.