Northrop Grumman (NOC) Believes Better Is Ahead
Northrop Grumman (NOC) became the latest of the large defense contractors to report their most recent quarter's earnings. While the company did turn a slight profit it was below analysts expectations. Compared to the previous year's results for the same quarter the $413 million in earnings was a vast improvement over the $2.5 billion loss.
Northrop has been able to report earnings for most of 2009 with the fourth quarter having revenue of almost $9 billion. The sale of their consulting engineering subsidiary, TASC, did not help the company as it had a decline in operating income from their information systems segment of thirty-five percent.
Northrop though is stating that it believes 2010 will be much better. They are predicting earnings of at least $5.70 a share. The consensus analyst estimate is less then $5.60. Part of the planned growth is because Northrop has finished writing off the losses related to companies it previously acquired and that had declining value. Through selling TASC and refocusing their business efforts the company feels that it will have a good 2010. Part of this is the planned move of the company's headquarters from California to the Washington D.C. area.
This belief may be part of what is motivating the company to not participate in the KC-X tanker contest. As hard as it may seem that Northrop doesn't want a chance to win the $35 billion program management may see the chances of winning it so low that they don't want to take the time and money to go through the source selection process. Of course if Boeing (BA) does submit a bid and win with no competition the whole issue may move to Congress again as Northrop and good government supporters question a process with only one bidder.
Interestingly not only did Northrop lose money through not having TASC's revenue they also had to pay over $500 million in taxes related to the sale. In 2009 keeping TASC would have had a significant effect on the bottom line of the large defense contractor. The company also paid out almost three billion dollars in dividends, debt service and to buy back shares for the year.
Like all of the big defense contractors the next few years will present challenges as the U.S. budget plans fall out. It may mean more program cancellations, reduction in the troops in Afghanistan and Iraq and further reductions in technical services and consulting. At the same time there will be new programs and contracts as the U.S. shakes out its ship building and aircraft procurement plans. There are also plenty of overseas sales and contracts that Northrop Grumman will want to bid on. The 2011 defense budget continues the status quo with a few tweaks around the edge. The U.S. cannot in the long term continue to spend the way it is now with deficits equal to a third of the budget. At some point this will end and defense spending will suffer. The companies that prepare the best will be the ones around at the end of this process. Northrop Grumman is trying to be one of those companies.