Northrop profit beats Street but 2013 forecast lowered

Wed Jan 30, 2013 5:19pm EST

1 of 4. The landing gear on a mockup of a Northrop Grumman X-47B long-range, high endurance unmanned aircraft is seen during the Naval Aviation Centennial event at Naval Air Station North Island in San Diego, California in this file photo from February 11, 2011. U.S. weapons maker Northrop Grumman Corp reported higher-than-expected quarterly profit January 30, 2013 but said sales and earnings would fall sharply in 2013, given the mounting pressure on the U.S. defense budget.

Credit: Reuters/Mike Blake/Files

(Reuters) - U.S. weapons maker Northrop Grumman Corp (NOC.N) reported higher-than-expected quarterly profit on Wednesday but said sales and earnings would fall sharply in 2013, given the mounting pressure on the U.S. defense budget.

Northrop, which builds Global Hawk unmanned surveillance planes, radar and electronic systems for the U.S. military, said revenue fell in three of its four business areas in the fourth quarter, but aerospace systems saw a 7 percent rise due to increased demand for unmanned systems.

Aerospace systems and electronic systems had higher operating income, but the information systems and technical services businesses had lower earnings.

Overall, earnings from continuing operations were $533 million, or $2.14 per share, far exceeding analysts' average forecast of $1.74 per share, according to Thomson Reuters I/B/E/S. In the year-earlier period, operating earnings totaled $550 million, or $2.09 per share. Earnings per share rose because of a decline in shares outstanding.

Fourth-quarter sales fell to $6.47 billion from $6.51 a year earlier. Cost-cutting measures kept operating margins high.

Lockheed Martin Corp (LMT.N), General Dynamics Corp (GD.N) and other U.S. arms makers also forecast tougher times, even if Congress averts more draconian budget cuts due to start taking effect in March.

"It's finally catching up. We're about to enter a very uncertain period here," said Byron Callan, analyst with Capital Alpha Securities. He said across-the-board budget cuts would hit defense companies hardest in 2014 or 2015, if they do take effect, given the long-term nature of most weapons contracts.

Also on Wednesday, Boeing Co's defense division (BA.N) posted a 13-percent drop in fourth-quarter earnings as sales edged 2 percent lower, with sales expected to drop again this year. L-3 Communications Holdings (LLL.N), by contrast, reported higher than expected profit and revenue and raised its full-year outlook, citing a U.S. tax credit.

Northrop forecast 2013 sales of about $24 billion, down almost 5 percent from 2012. It said earnings from continuing operations could fall as much as 12 percent to a range of $6.85 to $7.15 a share, a sharp drop from $7.81 in 2012.

Northrop shares fell 1 percent to $66 in premarket trading, but rebounded to trade 31 cents higher around midday on the New York Stock Exchange.

Northrop Chief Financial Officer Jim Palmer told financial analysts the company expected to strong cash flow again in 2013 after generating $2.3 billion in 2012, and aimed to keep returning "a substantial amount of cash" to shareholders.

Northrop said 2012 earnings from continuing operations fell nearly 5 percent from 2011. It blamed the decrease on a $268 million decline in pension adjustments and a higher effective tax rate. Earnings per share rose due to a 10 percent decrease in the number of shares outstanding.

In 2012 the company repurchased 20.9 million shares of its common stock for $1.3 billion. It still has $1.5 billion in authorized funds for more buybacks.

Chief Executive Wes Bush called the fourth-quarter results "outstanding" and said they validated the company's focus on performance, effective cash deployment and portfolio alignment.

"As we look ahead, we expect challenges, but we are confident in the team's ability to address those challenges and continue to create value for all our stakeholders," Bush said.

Like most other weapons makers, Northrop's guidance for 2013 assumes no additional big cuts in Pentagon spending.

Chief Executive Wes Bush told analysts that international sales would likely exceed 10 percent of total revenues in 2013, up from around 8 percent in 2012.

But he said the company's book-to-bill ratio would come under increased pressure given continued uncertainty about the future U.S. budget outlook, and a ratio anywhere near 1 would be positive after a ratio of 1.05 in 2012.

Northrop said 2012 earnings from continuing operations fell nearly 5 percent from 2011. It blamed the decrease on a $268 million decline in pension adjustments and a higher effective tax rate. Earnings per share rose due to a 10 percent decrease in the number of shares outstanding.

Northrop repurchased 20.9 million shares of its common stock for $1.3 billion in 2012, but still has $1.5 billion in authorized funds for more buybacks.

Bush called the fourth-quarter results "outstanding" and said they validated the company's focus on performance, effective cash deployment and portfolio alignment.

Bush told analysts he could not recall a time of greater uncertainty for future budgets, but said Northrop was ready for leaner times: "The work we've done over the last several years on performance, as well as our strong balance sheet, leaves us well prepared for a likely defense spending downturn."

The company's guidance for 2013 assumes no additional big cuts in Pentagon spending.

Northrop said segment operating income rose 13 percent in the fourth quarter, and the segment operating margin jumped to 13.5 percent from 11.9 percent a year earlier.

Segment operating margin rose 1 percentage point to a new record of 12.6 percent in 2012, but is projected to drop back to the low- to mid-11-percent range in 2013.

The company's backlog rose 3 percent to $40.8 billion at the end of 2012, buoyed by new business awards of $26.5 billion.

(Additional reporting by Karen Jacobs in Atlanta; Editing by Gerald E. McCormick, John Wallace and David Gregorio)

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