FALLS CHURCH, Va. - Northrop Grumman reported that first quarter 2014 sales fell 4 percent to $5.85 billion from $6.10 billion in the first quarter of 2013. Net income for the quarter was up at $579 million compared to $489 million in the same period a year ago.
"First quarter results reflect another solid performance by our team and a good start to the year. Our sustained performance, coupled with share repurchases, drove higher earnings per share for the quarter. We continue to focus on performance, cash deployment and portfolio alignment as the primary value creation drivers for our shareholders, customers and employees," said Wes Bush, chairman, chief executive officer and president.
Total backlog as of March 31, 2014, was $36.2 billion compared with $37.0 billion as of December 31, 2013. The decline in backlog was primarily due to the timing of awards in Aerospace Systems.
The downturn in defense spending has long been on the minds of Northrop Grumman officials. As such, the company has been preparing by increasing program performance, aggressively pursuing new business, reducing cost structures, and aligning its portfolio to match customer spending priorities.
While sequestration cuts have been enacted, they are not as deep as originally proposed. Though the cuts are painful, some of that loss is being ameliorated by increases in maintenance of existing systems. For example, the next-generation bomber program has been delayed indefinitely, and though such a loss hurts Northrop, it means the B-2 will remain in service all the longer, providing more maintenance and upgrade opportunities for the firm. This type of work is expected to be the norm in coming years as the U.S. military maintains its airpower capabilities by equipping existing aircraft with new missiles, sensors, and communications and electronic warfare systems - the latter areas being especially strong for Northrop Grumman.
In addition, a greater emphasis will be placed on the growing cybersecurity market. Both the government and the private sector have been made painfully aware of the reality of cyber attacks. As such, they have begun investing heavily in safeguarding their assets against these attacks. This increase in spending for cybersecurity should provide an opportunity for defense firms going forward.
Northrop Grumman has always been a consistent and conservative player in the U.S. defense landscape. With the downturn showing its teeth, Northrop Grumman's management has carefully planned for the new environment and is, so far, hitting its marks.
INDUSTRY SEGMENTS
Aerospace Systems
Aerospace Systems first quarter 2014 sales decreased 3 percent to $2.42 billion (2013: $2.46 billion) due to lower volume for space and unmanned programs. Lower unmanned sales reflect volume declines for several programs, including Global Hawk and Fire Scout, partially offset by higher volume for NATO Alliance Ground Surveillance. Volume for manned military aircraft programs was comparable to the prior year period.
Aerospace Systems first quarter 2014 operating income increased 20 percent to $324 billion (2013: $270 billion) and operating margin rate increased 250 basis points to 13.4 percent. Higher operating income and operating margin rate are primarily due to a $48 million increase in net favorable adjustments, which more than offset the impact of lower sales.
Electronic Systems
Electronic Systems first quarter 2014 sales decreased 4 percent to $1.64 billion (2013: $1.72 billion) primarily due to lower volume for combat avionics and navigation and maritime systems programs, partially offset by growth in international programs.
Electronic Systems first quarter 2014 operating income decreased 9 percent to $268 million (2013: $296 million) , and operating margin rate decreased 90 basis points to 16.3 percent. First quarter 2013 operating income and operating margin rate benefited from the reversal of a $26 million non-programmatic risk reserve and a higher level of net favorable adjustments than in the first quarter of 2014. Electronic Systems first quarter 2014 operating income and operating margin rate reflect lower sales and improved contract performance due in part to the continuing effect of prior favorable adjustments.
Information Systems
Information Systems first quarter 2014 sales declined 6 percent to $1.58 billion (2013: $1.67 billion) due to lower volume across a broad number of programs including restricted programs and programs impacted by in-theater force reductions.
Information Systems first quarter 2014 operating income decreased 5 percent to $162 million (2013: $171 million) due to lower sales, and operating margin rate was comparable to the prior year period.
Technical Services
Technical Services first quarter 2014 sales declined by 3 percent to $697 million (2013: $717 million) , primarily due to lower volume for integrated logistics and modernization programs.
Technical Services first quarter 2014 operating income increased 5 percent to $68 million (2013: $65 million) and operating margin rate increased 70 basis points to 9.8 percent. The increase in operating margin rate is primarily due to improved performance across several programs, which more than offset the impact of lower sales.
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