10-QPeriod: Q2 FY2015

NORTHROP GRUMMAN CORP /DE/ Quarterly Report for Q2 Ended Jun 30, 2015

Filed July 29, 2015For Securities:NOC

Summary

Northrop Grumman Corporation (NOC) reported its second-quarter 2015 financial results, indicating a slight decrease in sales and net earnings compared to the same period in the prior year. Total sales for the quarter were $5.9 billion, down 2% year-over-year, while net earnings were $531 million, a 4% increase driven primarily by a lower effective tax rate. Diluted earnings per share saw a significant increase of 16% to $2.74, largely due to reduced share count from ongoing share repurchase programs. The company's cash flow from operations for the first six months of 2015 turned negative at $(28) million, a considerable decrease from the $170 million generated in the prior year, primarily due to a $500 million voluntary pension contribution. Despite this, the company announced a continued commitment to returning capital to shareholders, with a 14% increase in its quarterly dividend and significant share repurchases. Management highlighted investments in independent research and development (IR&D) as a key factor in increased general and administrative expenses. The company also noted ongoing legal proceedings, particularly related to a firm fixed-price contract with the U.S. Postal Service, the outcome of which remains uncertain but is not currently expected to have a material adverse effect on the company's financial position.

Financial Highlights

47 data points
Beta

Revenue

$5.90B

56.4% Gross Margin

Net Income

$531.00M

9.0% Net Margin

EPS (Diluted)

$2.74

Total Assets

$24.55B

Cash & Equivalents

$1.91B

Free Cash Flow

$511.00M

Financial Statements
Beta
Revenue$5.90B
Cost of Revenue$2.57B
Gross Profit$3.33B
Operating Income$813.00M
Net Income$531.00M
EPS (Basic)$2.77
EPS (Diluted)$2.74
Shares Outstanding (Basic)191.80M
Shares Outstanding (Diluted)193.70M

Key Highlights

  • 1Total sales for Q2 2015 decreased by 2% to $5.9 billion, compared to $6.0 billion in Q2 2014.
  • 2Net earnings for Q2 2015 increased by 4% to $531 million, compared to $511 million in Q2 2014, primarily due to a lower effective tax rate.
  • 3Diluted earnings per share (EPS) increased by 16% to $2.74 in Q2 2015, driven by a reduced number of outstanding shares from buybacks.
  • 4Net cash used in operating activities for the six months ended June 30, 2015, was $(28) million, a decrease from $170 million in the prior year, largely due to a $500 million voluntary pension contribution.
  • 5The company repurchased approximately 6.8 million shares for $1.1 billion during the second quarter of 2015, continuing its share repurchase program.
  • 6The quarterly common stock dividend was increased by 14% to $0.80 per share in May 2015.
  • 7General and administrative expenses as a percentage of total sales increased in both Q2 and year-to-date 2015 due to higher investments in independent research and development (IR&D).

Frequently Asked Questions

The primary driver for the increase in diluted EPS for the six months ended June 30, 2015, was the reduction in the weighted-average number of diluted shares outstanding. This reduction is a direct result of the company's ongoing share repurchase programs, which reduce the total number of shares available, thereby increasing the EPS figure even if net earnings see a slight decrease.

For the six months ended June 30, 2015, net cash used in operating activities was $(28) million, a significant decrease from the $170 million provided by operating activities in the same period of 2014. The main reason for this decrease was a $500 million voluntary pre-tax pension contribution made by the company in the first quarter of 2015, which impacted operating cash flow.

Northrop Grumman is involved in significant litigation concerning a firm fixed-price contract with the U.S. Postal Service (USPS) for flats sequencing systems (FSS). The company is pursuing claims for unpaid contract amounts and damages, while the U.S. has counterclaims. While the outcome is uncertain and the company cannot predict any possible loss, it intends to vigorously defend these matters. Based on current information, the company does not believe the outcome of these FSS matters, or other pending legal proceedings, is likely to have a material adverse effect on its financial position, results of operations, or cash flows.

The company has increased its investment in independent research and development (IR&D) as part of its strategy to invest in future business opportunities. This increase in IR&D is a primary reason for the rise in general and administrative expenses as a percentage of total sales in both the second quarter and year-to-date periods of 2015 compared to 2014. Management views these investments as crucial for future growth.