Northrop Profit Jumps in Period Despite Writeoffs

Northrop earned $139.6 million in the first quarter, a sharp increase attributed to a $135.1-million gain on a tax accounting change that offset a 35% drop in its operating profit.

The Los Angeles aerospace firm took a number of charges against profit in the quarter, including a $12.7-million charge resulting from a “dissolution agreement” on a subcontract it had received from Martin Marietta. The program involved the supersonic low-altitude target (SLAT), a Navy system now under development that will simulate anti-ship missiles for target practice.

Northrop spokesman Tony Cantafio declined to comment on the dissolution agreement, but a Pentagon official said: “Martin threw Northrop off the contract when Northrop couldn’t perform. They caused Martin all sorts of headaches and finally Martin said the heck with it.”

A Martin spokesman said the agreement with Northrop bars either party from making comment but added: “The dissolution agreement was signed in the best interests of the program.” The dispute has also been featured in the trade press.

Northrop’s operating profit was also reduced by a $20.4-million settlement with the Pentagon relating to workers’ compensation claims that the company had submitted and were later disallowed, Cantafio said.

The government paid the claim but later contested it, requiring a refund and interest on the money, according to the spokesman.

A third charge against earnings resulted from an $11.4-million arbitration award to Triad Financial Establishment, which is run by Saudi Arabian arms broker Adnan Khashoggi. The award was for interest on a previous $31.5-million award won by Khashoggi in connection with a 1970 agreement that he signed with Northrop to represent the company in Saudi Arabia.

Such payments were later forbidden by the Foreign Corrupt Practices Act of 1977. Northrop disputed Khashoggi’s claims and alleged that Triad had bribed Saudi officials. The dispute was submitted to arbitration, and the company lost there as well as in subsequent legal appeals in federal courts.

All of the charges were fully offset by the $135.1-million tax benefit, which resulted from a gain on deferred income taxes under the newly adopted Financial Accounting Standards Board Statement 96. Under government contracts, a firm defers payment of taxes until it completes a contract and is paid its profit. As a result of federal tax law changes that lowered corporate income tax rates, including those on the deferred payments, Northrop and other aerospace firms have realized large gains.

Northrop posted an operating profit of $67.5 million during the quarter, down from $103.6 million in the same period the previous year. The net profit of $139.6 million compared to a profit last year of $40.6 million. Meanwhile, sales fell 3% to $1.37 billion from $1.41 billion last year.

Aerospace analysts were mixed in their reactions to the Northrop earnings statement.

Paul Nisbet of Prudential-Bache Securities said, “It is not as bad as it looks.” He said the company earned about what analysts had predicted, based on subtracting all of the non-recurring charges. “I certainly wasn’t cheered,” said Wolfgang Demisch, analyst in New York for Union Bank of Switzerland. “One doesn’t like these negative adjustments, various settlements here and there. Was I shocked or dismayed? No.”

Demisch said the decline in sales suggests that the Stealth bomber program has entered a transition phase between development and production, which could be exacerbated by delays or technical problems in the program. It is not known how long or how deep the drop in revenue will be, he said.