February 1, 2012 2:47 pm

US defence cuts sink Northrop outlook

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Northrop Grumman, the US defence contractor, on Wednesday reported another drop in quarterly sales, reduced its estimated order backlog and forecast lower than expected earnings for 2012, pointing to continued US government spending restraints.

For the three months to the end of December, revenues slipped to $6.5bn from $6.8bn in the same period a year earlier. Over the full year, sales dropped about 6 per cent to about $26.4bn.

Between the end of December 2010 and the end of December 2011, Northrop’s order backlog dropped from $46.8bn to $39.5bn, as it adjusted its order measurement criteria to acknowledge that certain expected sales would not now occur.

In recent years, defence contractors such as Northrop and Lockheed Martin have been struggling to cope with an increasingly tough market as their largest customer, the US defence department, cuts its spending in order to help bring down the US budget deficit.

Last week, the Pentagon gave its first detailed insights into how it intends to trim about $500bn from its budget plans over the next decade, indicating that it would cancel one version of Northrop’s Global Hawk, an unmanned aerial vehicle.

Northrop has been particularly aggressive in reshaping its business in response. In 2011, it spun off its shipbuilding division as Huntington Ingalls Industries and the company said it had also cut back on volumes in its underperforming and non-core units.

At the same time, it has worked to cut costs and improve productivity. Operating income from continuing operations rose about 18 per cent to $799m in the fourth quarter and margins increased in three of its four units.

Net income rose 46 per cent to $548m, giving earnings per share of about $2.09, although the results were flattered by certain charges relating to debt redemption in the prior year.

“Fourth-quarter and full-year results demonstrate our progress in achieving superior operating performance and effective cash deployment. Our businesses drove higher operating income, earnings, cash and a strong book-to-bill ratio for the quarter,” Wes Bush, chief executive of Northrop, said in a statement.

Mr Bush said that in 2012 the company expected to achieve profit from continuing operations of between $6.40 and $6.70 a share on sales of between $24.7bn and $25.4bn. Analysts had forecast earnings of $6.82 a share on sales of about $26.1bn.

“Our 2012 guidance reflects our continued commitment to performance, affordability for our customers and strong cash generation. While we are in a challenging environment, we believe that we can continue to create value,” Mr Bush said.

“The pattern continues – defence revenues light, defence margins strong,“ Rob Stallard, with RBC Capital Markets, wrote in a note to clients. “With volumes heading down and the customer tightening the terms, we shall see how long this situation can last.”

Northrop shares, which have lost about 14 per cent of their value in the past year, were up 1 per cent to $58.65 on Wednesday morning in New York.

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