Northrop Reports Strong Profit on Acquisition, Military Spending
Northrop Grumman Corp., bolstered by its TRW Inc. acquisition and a Pentagon spending spree that helped all its defense businesses, posted sharply higher first-quarter profit Tuesday and raised its earnings forecast for the year.
The results exceeded Wall Street’s expectations, prompting a rally in Northrop’s shares. The stock rose 3% and closed at $89.29, up $2.76, on the New York Stock Exchange.
Century City-based Northrop is the nation’s second-largest defense contractor. In the first quarter, the company had net income of $253 million, or $1.34 a share, contrasted with a loss of $283 million, or $2.56, in the year-earlier period, when it took a $432-million charge against earnings to write down goodwill assets on various acquisitions.
“We’re very pleased with the quarter,” said Ronald D. Sugar, Northrop’s new chief executive. “We’re hitting on all cylinders, and we have excellent opportunities ahead of us.”
Northrop raised its estimate of year-end operating earnings to $3.80 to $4.20 a share from its previous forecast of $3.65 to $4.15, in part because of a lower tax rate.
“They had good performance across the board,” said Eric Hugel, a defense analyst for Stephens Inc. who expected Northrop to post first-quarter operating earnings of about 60 cents a share. Northrop posted 91 cents a share in earnings from continuing operations.
Northrop has six business segments -- including stealth fighters, warships, satellite systems and the Global Hawk unmanned spy plane -- and they all contributed products used in the Iraq war.
Sugar said the war showcased the importance of electronics and other sophisticated technologies in helping coordinate a battle plan with fewer soldiers than in past conflicts.
The biggest gains in the first quarter were posted by Northrop’s Information Technology unit, which saw sales rise 18% as government agencies began upgrading computer systems and networks. The unit garnered key classified projects for intelligence agencies after the Sept. 11 terrorist attacks.
A steady increase in military spending also helped boost sales at the Electronic Systems unit, Northrop’s largest business. Sales grew 11% to $1.3 billion as the Pentagon accelerated deliveries of electronic equipment for Apache Longbow helicopters, F-16 fighter jets and the F/A-22 stealth fighter, Northrop said.
Total sales rose nearly 50% to $5.9 billion from $3.9 billion a year earlier.
Though Northrop benefited from the Pentagon’s push to add more sophisticated weaponry in the last 18 months, Sugar said, the most recent spending during the Iraq war had little direct financial effect on Northrop earnings. “Much of the surge of money there is really for replenishing bombs, beans and blankets,” he said.
Looking ahead, Sugar said in a conference call with analysts that several major contracts worth billions could be awarded this year, including a multibillion-dollar program for the nation’s missile defense agency to develop so-called kinetic energy interceptors that would destroy targets on the force of impact, rather than by explosive devices. The Coast Guard’s efforts to upgrade its fleet also could generate strong sales for the company, Sugar said.
Hours later, Homeland Security Secretary Tom Ridge announced that Northrop had been awarded a $129-million contract to develop a vessel to guard U.S. coasts against terrorists.
Sugar took over Northrop’s helm April 1 from longtime CEO Kent Kresa. A decade ago, Northrop was struggling to survive. But Kresa bet heavily on developing the electronics and computer software packages that go into so-called network-centric warfare, a major focus of Pentagon’s efforts to transform the military.
Analysts said Northrop’s acquisition last year of TRW’s space and defense electronics business for $7.8 billion appears to be paying off. The business, with operations in Redondo Beach and Carson, contributed nearly $1.5 billion in sales and $88 million in operating profit in the first quarter.
