NOC Northrop Grumman Corp Holding Co

Los Angeles-based leading defense contractor, Northrop Grumman Corporation (NOC), reported fourth quarter and full-year 2012 results. The company reported earnings of $2.06 per share compared with $1.85 in the fourth quarter of 2011. The reported figures also comfortably surpassed the Zacks Consensus Estimate of $1.74 per share.

The upside in earnings was attributable to improved performance and lower share count. However, this was partially offset by higher effective tax rate.

Full-year 2012 earnings came in at $7.47 per share, up 15.1% year over year. The results also easily exceeded the Zacks Consensus Estimate of $6.64 per share.

Operational Performance

Sales for the reported quarter decreased 0.5% year over year to $6.5 billion. However, they were above the Zacks Consensus Estimate by $154 million.

Full year 2012 revenue was $25.2 billion, down 4.5% year over year. Full year revenue came below than the Zacks Consensus Estimate by $112 million.

Northrop Grumman’s total order backlog at the end of full year 2012 stood at $40.8 billion compared with $39.5 billion at the end of 2011. New contract in full year 2012 was $26.5 billion.

Operating income in the fourth quarter of 2012 was $793 million, up 13.1% year over year. In the reported quarter, earnings from continuing operations decreased to $533 million from $550 million in the fourth quarter of 2011. Net earnings in the reported quarter decreased to $533 million from $548 million in the prior-year period.

Segment Performance

Aerospace Systems

Aerospace Systems’ quarterly sales were up 6.6% year over year to $2.6 billion driven by higher volumes for unmanned systems, F-35 and Advanced Extremely High Frequency satellite programs. However, these were partially offset by declines in the F/A-18 and Joint Surveillance Target Attack Radar System programs as well as lower volume for restricted space programs and the termination of a weather satellite program.

Electronic Systems

Electronic Systems sales declined 5% to $1.8 billion. The decline reflects lower volume for infrared countermeasures, LITENING targeting systems, and postal automation programs. These declines, however, were partially offset by higher volume for space and international programs.

Information Systems

Information Systems sales of $1.9 billion were 1.6% lower than the year-ago period. The downside reflects wind down and completion of several programs and divestiture of Park Air Norway in Apr 2012. However, these declines were partially offset by higher volume for Consolidated Afloat Network & Enterprise Services and the F-35.

Technical Services

Technical Services’ sales decreased 6.6% to $738 million due to portfolio shaping actions and lower volume for the KC-10 and ICBM programs.

Financial Condition

Northrop Grumman ended 2012 with cash and cash equivalents of approximately $3.9 billion, up from $3 billion at year-end 2011. Long-term debt remained approximately flat year over year at $3.9 billion at the end of Dec 31, 2012. Cash generated from operations in 2012 totaled $2.6 billion versus cash from operations of $2.1 billion in the year-ago period.

In full-year 2012, the company repurchased 20.9 million shares of its common stock for $1.3 billion. As of Dec 31, 2012, the company had $1.5 billion remaining under its current share repurchase authorization.

Guidance

The company expects revenue to be approximately $24 billion in 2013.  It expects earnings from continuing operations to be in the range of $6.85 to $7.15 in 2013. Cash provided by operations before discretionary pension contributions are expected to be in the range of $2.1 billion to $2.4 billion.

Our Take

Northrop surpassed the top and bottom line expectations due to its strong presence in the current focus areas of cyber security, modernization of defense and homeland security assets, intelligence, surveillance and reconnaissance systems, advanced electronics and software development. Moreover, the company’s focus on effective cash deployment, and portfolio alignment would bring more healthy results in the current quarter.

However, we remained concerned due to the apprehension regarding defense cutbacks on high-cost platform programs, over-exposure to the Department of Defense budget, cost over-runs and reductions in the Afghanistan and Iraq operations. The company presently retains a short-term Zacks Rank #3 (Hold).

Falls Church, Virginia-based Northrop Grumman Corporation supplies a broad array of products and services to the U.S. Department of Defense, including electronic systems, information technology, aircraft, space technology, and systems integration services.

Other stocks to consider are Huntington Ingalls Industries, Inc. (HII) and Esterline Technologies Corp. (ESL) that carry a Zacks Rank #1 (Strong Buy) and Lockheed Martin Corporation (LMT) with a Zacks Rank #2 (Buy).

 
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NORTHROP GRUMMN (NOC): Free Stock Analysis Report
 
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