10-QPeriod: Q3 FY2015

NORTHROP GRUMMAN CORP /DE/ Quarterly Report for Q3 Ended Sep 30, 2015

Filed October 28, 2015For Securities:NOC

Summary

Northrop Grumman Corporation reported stable total sales for the first nine months of 2015 compared to the same period in 2014, with $17.832 billion in sales. However, operating income saw a slight decrease to $2.387 billion from $2.434 billion, impacting diluted earnings per share, which rose to $7.89 from $7.28 due to a significant reduction in outstanding shares from robust share repurchase programs. The company's balance sheet shows a notable decrease in cash and cash equivalents, from $3.863 billion at the end of 2014 to $1.292 billion by September 30, 2015, largely due to substantial share repurchases and a voluntary pension contribution. Financially, the company demonstrated solid operational execution with a focus on returning capital to shareholders. The significant share buybacks, coupled with a stated intention to continue them, along with a consistent dividend payout, signal management's confidence in future cash flows and profitability. Investors should note the company's reliance on U.S. Government contracts and the potential impact of evolving defense budgets and appropriations, which are discussed as key risks. The ongoing environmental remediation liabilities represent a material contingent liability that, while managed, warrants investor attention.

Financial Highlights

48 data points
Beta

Revenue

$5.98B

56.0% Gross Margin

Net Income

$516.00M

8.6% Net Margin

EPS (Diluted)

$2.75

Total Assets

$23.97B

Cash & Equivalents

$1.29B

Free Cash Flow

$455.00M

Financial Statements
Beta
Revenue$5.98B
Cost of Revenue$2.63B
Gross Profit$3.35B
Operating Income$794.00M
Net Income$516.00M
EPS (Basic)$2.78
EPS (Diluted)$2.75
Shares Outstanding (Basic)185.80M
Shares Outstanding (Diluted)187.90M

Key Highlights

  • 1Total sales remained stable year-over-year for the nine months ended September 30, 2015, at $17.832 billion.
  • 2Diluted Earnings Per Share (EPS) increased to $7.89 for the nine months ended September 30, 2015, up from $7.28 in the prior year period, primarily driven by a significant reduction in outstanding shares due to share repurchases.
  • 3The company actively returned capital to shareholders, repurchasing approximately $2.864 billion in common stock and paying $458 million in dividends during the nine months ended September 30, 2015.
  • 4Cash and cash equivalents decreased substantially from $3.863 billion at December 31, 2014, to $1.292 billion at September 30, 2015, impacted by share repurchases and a $500 million voluntary pension contribution.
  • 5Operating income for the nine months ended September 30, 2015, decreased slightly to $2.387 billion from $2.434 billion in the prior year period, impacted by lower segment operating income and an increase in general and administrative expenses.
  • 6The Aerospace Systems segment experienced a decrease in operating income and margin rate, primarily due to the absence of a prior-year settlement benefit and lower CAS pension costs.
  • 7Environmental remediation liabilities are estimated to range between $351 million and $794 million, with $368 million accrued as of September 30, 2015.

Frequently Asked Questions

For the nine months ended September 30, 2015, Northrop Grumman reported stable total sales of $17.832 billion, but operating income decreased slightly to $2.387 billion from $2.434 billion in the prior year. Diluted Earnings Per Share (EPS) increased to $7.89 from $7.28, primarily due to a significant reduction in the number of outstanding shares resulting from substantial share repurchase activities.

The company's cash and cash equivalents decreased significantly to $1.292 billion by September 30, 2015, from $3.863 billion at the end of 2014. This reduction is mainly attributed to aggressive share repurchases totaling approximately $2.864 billion and a $500 million voluntary pension contribution made in the first quarter of 2015. The company also issued $600 million in senior notes and amended its credit facility. Management is focused on efficient cash conversion and returning capital to shareholders.

A primary risk is the company's significant dependence on the U.S. Government as a customer, making it susceptible to changes in defense budgets, appropriations, and government funding levels. Uncertainty surrounding federal budgets, sequestration, continuing resolutions, and the debt ceiling poses potential risks to program funding and timely payments. Additionally, the company faces ongoing environmental remediation liabilities, which are substantial but are being managed and accrued for. Legal proceedings, while not currently expected to have a material adverse effect, are also a noted risk factor.

The Aerospace Systems segment saw an increase in sales but a decrease in operating income and margin rate, partly due to the absence of a significant settlement benefit recognized in the prior year. Electronic Systems' sales were up slightly, but operating income decreased due to business mix changes and lower CAS pension costs in the prior year. Information Systems experienced a decrease in both sales and operating income due to lower volume on certain command and control programs. Technical Services showed a slight increase in sales but a decrease in operating income and margin rate, influenced by lower income from a joint venture.