Hurricane Exacts Toll on Northrop
Northrop Grumman Corp., one of the nation’s largest defense contractors, said Tuesday that its first-quarter profit sank 12% as hurricane-related damage to its Gulf Coast shipyards slowed work on warships.
The Century City-based company reported earnings of $358 million, or $1.02 a share, compared with $409 million, or $1.11, a year earlier. Although its latest profit beat analysts’ estimates, Northrop’s stock price fell.
Revenue slipped nearly 4% to $7.18 billion as a 25% drop in warship sales offset more revenue from jet fighters, military electronics and communication satellites. The Pentagon’s decision to slash development funding for a new class of destroyers also cut into ship sales, Northrop said.
“It’s still hitting them hard,” Paul Nisbet, defense industry analyst for JSA Research Inc., said of last summer’s Hurricane Katrina. “The big issue for them is recovering from the hurricane and getting the shipyard back to normal as quickly as possible.”
About 19,800 workers were displaced by Katrina when it hit shipyards in Mississippi and Louisiana where Northrop builds destroyers and transports for the Navy. The damage caused significant production delays and left Northrop with large repair costs.
In a conference call Tuesday with analysts, Northrop Chairman Ronald D. Sugar said that shipyard production had returned to about 80% of normal and that the workforce was back to about 85% of its pre-Katrina level.
“We expect to be fully recovered by the end of the year,” Sugar said, adding that estimated hurricane-related losses are now expected to be about $850 million, down from an initial forecast of about $1 billion. Northrop expects to recover most of the cost from insurance, although it is in a legal dispute with one insurance carrier.
Ship sales for the quarter fell to $1.13 billion from $1.5 billion during the year-earlier period.
As such, Northrop lowered the projected year-end revenue for its ship systems business to about $5 billion from $5.6 billion.
But Northrop said it was maintaining its overall total revenue estimate for the year: $31 billion.
Except for ship systems, results across the other six businesses were “very solid,” Sugar said.
Northrop, which has more than 27,000 employees in Southern California, makes and develops a wide range of equipment and systems for the federal government, including anthrax detection devices for the Postal Service, nuclear aircraft carriers for the Navy, unmanned spy planes for the Air Force and missile systems.
For the second straight quarter, the largest sales gains were posted by its El Segundo-based Integrated Systems unit, which makes fuselages for F/A-18 and F-35 fighters. Sales increased nearly 12% to $1.44 billion from $1.29 billion.
Despite a lower ship profit, Northrop posted overall earnings that were slightly better than expected. On average, analysts had expected Northrop to report earnings of 99 cents a share.
Still, shares of Northrop fell $2.13 cents to close at $69.10 after hitting an eight-year high Monday.
“It’s profit taking,” Nisbet said, adding that defense stocks had been “going through the roof.”
Shares of major defense companies have climbed sharply to record levels in recent months as anticipated Pentagon budget cuts never materialized. Investors had feared rising federal deficits and the costs of the war in Iraq would rein in Pentagon spending. But investors have been buoyed by recent Pentagon budget plans that call for higher defense budgets.
In addition to purchasing more weapons, Pentagon planners have been calling for outsourcing more work to defense contractors. The White House also has asked Congress to set aside more money for military operations in Iraq and Afghanistan.
Northrop executives said defense spending showed no signs of slowing, noting how it won $12.3 billion in contracts in the first quarter compared with $7.8 billion a year earlier.
