Northrop Results Impressive

Los Angeles-based leading shipbuilder and the second largest U.S. defense contractor Northrop Grumman Corporation (NOC - Analyst Report) reported impressive third quarter results, with EPS of $1.52 crossing both the Zacks Consensus Estimate of $1.18 and the year-ago result of $1.50. The upsurge came through higher revenue and share repurchases.

Sales for the reported quarter increased 4% to $8.73 billion from $8.38 billion in the year-ago quarter. In the quarter, Shipbuilding sales grew by double digits (14%), with impressive growth from the Aerospace systems (5%), Information Systems (4%) and Technical Services (4%), while Electronic Systems grew marginally (2%).

Shipbuilding sales surged primarily due to higher volume for the LPD, Virginia-class submarines and DDG programs. Aerospace Systems sales increased principally due to higher volume for unmanned aircraft programs such as Broad Area Maritime Surveillance Unmanned Aerial System (BAMS UAS), Global Hawk and Navy Unmanned Combat Air System (N-UCAS); restricted programs and manned aircraft programs such as E-2D Advanced Hawkeye, the B-2 and the EA-18G.

Operating income rose by double digits in the Information Systems (32%) and Aerospace Systems (14%) segments. Information Systems operating income increased as the year-ago period included a $57 million negative performance adjustment for a state and local programs. Aerospace Systems operating income rose due to higher volume and improved program performance. Electronic Systems operating income declined 18% due to lower performance from government systems programs.

Northrop Grumman won new business contracts totaling $10 billion in the reported quarter. Total backlog as a result stood at $71.5 billion as of Sept. 30, 2009, compared with $70.4 billion at June 30, 2009. The company ended the reported quarter with cash and cash equivalents of $1.9 billion compared to $1.5 billion after year-end 2008. The company has repurchased 4.7 million shares of common stock in the reported quarter. It has also raised its fiscal 2009 GAAP EPS guidance range to $5.00 - $5.15 from the earlier guidance range of $4.65 - $4.90. We maintain our Outperform recommendation on the shares.