Review of Debt Leads Northrop to Cut Back Forecast

Times Staff Writer

Northrop Grumman Corp. on Wednesday unexpectedly cut its 2003 earnings projections about 8% after the defense industry giant discovered it had underestimated its annual interest expense by $100 million.

The news took many Wall Street investors and analysts by surprise, and shares of the Century City-based defense contractor fell $3.51, or 4%, to $83.75 on the New York Stock Exchange. During the day Northrop hit a 52-week low of $82.10.

Although Northrop stood by previous sales and operating estimates, the company lowered its projected earnings per share to between $3.65 and $4.15, compared with earlier guidance of $4 to $4.50.

Northrop is still expected to turn in a strong performance this year, but such large and unexpected adjustments raise concern amonginvestors, industry observers said.

"This does hurt their credibility," said Jim Kelleher, an aerospace analyst at Argus Research.

The lower earnings projections and a sharp increase in interest expense stems from Northrop's $6.7-billion acquisition last year of electronics company TRW Inc. As part of that deal, Northrop turned around and sold TRW's automotive parts division to the investment firm Blackstone Group for $4.7 billion. That sale was completed this week.

Although Northrop owned the automotive unit for about two months, the defense company failed to include the interest expense related to that division when it released its earlier financial projections for 2003. But after a review, Northrop increased its previous estimate of interest expense -- about $370 million -- by $100 million, spokesman Frank Moore said.

"As we embarked on a detailed debt production planning process," Moore said, "it became apparent that our prior estimate was too low."

Northrop assumed about $4 billion in debt when it bought TRW, boosting Northrop's total debt to about $10 billion. Most of the proceeds from the sale of the TRW auto unit will go to pay down debt, Moore said.

The sharply higher interest expense is the second unwelcome surprise Northrop has delivered to shareholders this year, industry analysts point out.

Last month, the company said it may have to reduce earnings estimates this year in the face of a pension shortfall of as much as $600 million because the weak stock market had hurt pension fund investments.

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