WASHINGTON (Reuters) - Northrop Grumman Corp (NOC.N), maker of Global Hawk unmanned planes, on Wednesday reported sharply higher-than-expected third-quarter earnings and raised its forecast for full-year profit even as U.S. military spending cuts start to bite.
Northrop Chief Executive Wes Bush told analysts during an earnings call that while he expected to generate strong margins in 2014, continuing uncertainty about U.S. budget levels would further depress sales next year.
“Today’s budget environment creates uncertainty, but by focusing on the things we can control - performance and capital deployment - we expect to deliver solid 2014 results,” he said, noting strong interest in drone aircraft.
The company reported an 8 percent increase in net profit to $497 million, from $459 million a year earlier, while sales slipped to $6.1 billion from $6.27 billion a year earlier.
Quarterly earnings per share rose 18 percent to $2.14 from $1.82 a year earlier, while the number of outstanding shares decreased 8 percent.
The result came in well above the $1.82 that analysts expected, according to a poll by Thomson Reuters I/B/E/S, sending its shares 4 percent higher to close at a new high of $105.56 on the New York Stock Exchange.
Northrop raised its forecast for full-year earnings per share to a range of $8.00 to $8.15, from $7.60 to $7.80. That compares to the company’s 2012 earnings per share of $7.81.
It also forecast higher operating margins, after boosting margins sharply in the quarter, and revised its forecast for full-year revenues up slightly to $24.4 billion from $24.3 billion.
Northrop, like most other weapons makers, has been cutting costs as it braces for a decline in U.S. military spending, which is slated to drop by about $1 trillion over the next decade.
“Although the company continues to execute well in a difficult environment, we are maintaining our ‘hold’ rating on the shares, as we believe profit margins have peaked for the company this year and growth will be difficult to achieve over the next few years (with) a declining budget,” said William Loomis, managing director at Stifel Nicolaus & Co.
The company reported lower revenues in its aerospace, information systems and technical service businesses. Revenues in its electronic systems division however rose by 4 percent in the quarter, lifted by higher volume for international and combat avionics programs.
Revenues are down across the sector even though the decline has not been as bad this year as companies had expected. However, backlogs reflect a slowdown in government orders.
Northrop said its total backlog was $37.5 billion at the end of the quarter, down from $40.8 billion at the end of December, mainly due to reduced and delayed customer awards resulting from the U.S. budget climate.
The decline also reflected a $1 billion adjustment in the unfunded backlog of the information systems division for expired periods of performance on active contracts, Northrop said.
Bush told analysts the company expected to continue generating strong cash flow in 2014 and was committed to continuing share buybacks. Northrop has said it plans to retire 25 percent of its common stock, or 60 million shares by 2015, market conditions permitting.
He said Northrop was also increasing capital investment to ensure long-term competitiveness, affordability and innovation.
Northrop Chief Financial Officer Jim Palmer said international sales were expected to reach 10 percent of overall revenues in 2013, up from 8 percent in 2012, and further gains were possible in 2014.
Bush cited strong interest in unmanned planes and intelligence, surveillance and other electronic equipment. He said Northrop would also benefit from international sales of the F-35 fighter jet built by Lockheed Martin Corp (LMT.N) and the F/A-18 fighter built by Boeing Co (BA.N).
Reporting by Andrea Shalal-Esa; Editing by Gerald E. McCormick, Jeffrey Benkoe and Carol Bishopric