Northrop Grumman Reports Third Quarter 2002 Earnings
Northrop Grumman Corporation has reported net income from continuing operations of $141 million for the 2002 third quarter, or $1.17 per share, on 115.2 million average diluted shares outstanding, compared with adjusted net income from continuing operations of $140 million, or $1.56 per share, on 86.4 million average diluted shares in the year ago period. These results are adjusted to exclude amortization of goodwill in 2001 in accordance with SFAS No. 142 - Goodwill and Other Intangible Assets. On an economic earnings basis, Northrop Grumman's 2002 third quarter earnings from continuing operations increased to $154 million, or $1.28 per share, compared with $100 million, or $1.09 per share, for the comparable period in 2001. In the 2002 third quarter, the company reported pension income of $23 million compared with $88 million for the same period a year earlier.
The company's 2002 third quarter results included an $87 million pre-tax charge on its Polar Tanker program and a $65 million pre-tax charge on its F-16 Block 60 contract. The 2002 third quarter results also included positive pre-tax adjustments of $69 million on the cancelled commercial cruise ship program and $20 million on a Technology Services contract. Before these items, 2002 third quarter GAAP earnings from continuing operations totaled $182 million, or $1.53 per share, and economic earnings from continuing operations totaled $195 million, or $1.64 per share.
In September 2002, Northrop Grumman entered into a definitive agreement to sell two of its Electronic Systems sector businesses, Electron Devices and Ruggedized Displays. The company expects these sales to close in the fourth quarter of 2002. During the third quarter, the company decided to sell the businesses of its Component Technologies sector and expects to conclude the sale of these businesses within the next 12 months. As a result, these businesses are reported as discontinued operations for both the current and prior years. The company reported an estimated after-tax loss on disposal of $208 million, which considers only those businesses that may be sold at a loss. Gains realized on the sale of any of these businesses will be reported in the period in which their divestiture is complete.
Sales for the quarter ended Sept. 30, 2002, were $4.2 billion, up 24 percent from the $3.4 billion reported for the 2001 third quarter, reflecting increased sales at the company's Electronic Systems, Ships and Integrated Systems segments. Northrop Grumman's operating margin for the quarter increased six percent to $313 million compared with the adjusted $295 million reported for the same period a year ago. For the 2002 third quarter, Northrop Grumman's contract acquisitions totaled $4.1 billion compared with $2.5 billion for the third quarter of 2001. The increase is primarily due to funding received on several Electronic Systems programs and on Ship Systems' DD(X) and LHD programs. The company's business backlog at Sept. 30, 2002, was $21.5 billion, compared with the $15.7 billion reported a year earlier.
Kent Kresa, Northrop Grumman chairman and chief executive officer, stated, "Our core defense businesses, despite charges on two programs, continue to perform well, with 24 percent sales growth and very strong cash flow. As a result, we are confirming 2003 economic earnings guidance relating to our ongoing businesses. Additionally, we continue to be pleased with the successful integration of recent acquisitions, having achieved all integration-related milestones. We received notice yesterday that the European Union approved our acquisition of TRW. We anticipate completing the acquisition shortly and beginning the integration of that business by year- end.
"Looking forward, Northrop Grumman has assembled the essential capabilities and technologies to compete for the highest priority 21st century national defense and homeland security programs. After careful consideration, we concluded that the Component Technologies businesses do not fit with our long-term strategic plan and we have decided to divest these businesses. The long-term prospects for the defense industry remain extremely bright and we are confident in Northrop Grumman's future growth prospects," Kresa concluded.
Dr. Ronald D. Sugar, Northrop Grumman president and chief operating officer, added, "Overall, our defense operations continue to deliver excellent results in acquisitions, sales, cash and margin. Our Integrated Systems sector posted another excellent quarter as did our Electronic Systems sector overall. Although we were disappointed that the complexity of the F-16 Block 60 final design and the material costs associated with it exceeded our original estimates and required the additional investment, finalizing the design significantly reduces the risk of executing on the balance of the program.
"We are also disappointed with the charge on the Polar Tanker program. Despite this charge, we are bullish on the outlook for our shipbuilding business, due to increased defense budget spending, significant new contract wins and a strengthened management team," Sugar concluded.
For the first nine months of 2002, income from continuing operations and before the cumulative effect of accounting change totaled $471 million. Net loss for the first nine months of 2002 was $160 million and includes the cumulative effect of an accounting change on Jan. 1, 2002, to recognize the impairment of goodwill in the company's Component Technologies reporting units, along with the anticipated loss from the sale of the businesses.
Reflecting the net effect of the significant items, the company has revised its 2002 GAAP earnings guidance for continuing operations to a range of $5.65 to $5.75 per share. 2002 economic earnings for continuing operations are now expected to range between $6.10 and $6.20 per share. Those values are before the consideration of the impairment of goodwill. For 2002, the company expects to generate cash available to pay down debt to be in excess of $500 million. For 2003, the company confirmed its economic earnings guidance relating to the ongoing businesses of $7.60 to $8.10 per share. Due to the uncertainty of the pension asset returns for 2002 and potential changes to the actuarial assumptions, the company cannot provide an estimate for 2003 pension expense and therefore cannot provide reliable 2003 GAAP guidance at this time.
If on a plan-by-plan basis, the value of pension assets is less than its accumulated pension benefit obligation at year-end, the company will be required to recognize a non-cash reduction to retained earnings. This adjustment would not impact the company's income statement, cash flow or bank covenants.
Sector Results
Electronic Systems sector sales in the third quarter of 2002 were $1.3 billion compared with the $1.2 billion reported in the third quarter of 2001. The increase is due to higher sales in C4ISR&N, Aerospace Electronic Systems and Space, partially offset by lower sales in Navigation Systems. Operating margin for the quarter was $75 million compared with adjusted operating margin of $119 million for the same period last year. Third quarter operating margin includes a pre-tax charge of $65 million for the F-16 Block 60 fixed price combat avionics program, offsetting margin improvements across the sector. The complexity of the integrated electronic warfare system portion of the sensor suite, the design of which was finalized during the third quarter, and the associated material costs, exceed that of the originally proposed configuration. The contract, which is currently in the EMD and transition to production phases, is expected to be completed in 2007.
Ships, which includes the financial results of the Newport News and Ship Systems sectors, generated 2002 third quarter sales of $1.1 billion and operating margin of $64 million compared with sales of $528 million and an adjusted operating loss of $31 million in the 2001 third quarter. The 2002 third quarter results reflect the November 2001 acquisition of Newport News. Upon completion of a comprehensive third quarter review of the estimated costs to complete the three remaining Polar Tanker ships, Ships segment recorded a 2002 third quarter pre-tax charge of $87 million to operating margin. The increased estimate to complete reflects a reduced learning curve experience ship to ship as well as one-time schedule penalties. The third ship is scheduled for delivery in the second quarter of 2003, and the fourth and fifth ships, which are approximately 50 percent and 15 percent complete, respectively, are planned for delivery in 2004.
Ships segment's 2002 third quarter operating margin also includes a pre- tax adjustment of $69 million recorded to reverse previously established reserves. During the quarter, Northrop Grumman reached an agreement to sell the partially complete structures and material associated with its cancelled commercial cruise ship program to Norwegian Cruise Line. Also during the quarter the company successfully concluded negotiations on the majority of the program's vendor terminations. Last year's third quarter results include a pre-tax charge to operating margin of $60 million on the commercial cruise ship program.
Information Technology sector reported third quarter sales of $1.1 billion and operating margin of $89 million compared with sales of $1.0 billion and adjusted operating margin of $69 million reported in the third quarter of 2001. Third quarter 2002 operating margin includes a $20 million favorable pre-tax adjustment resulting from the restructuring of a Technology Services contract.
Integrated Systems sector generated sales of $807 million in the third quarter, up from the $718 million reported for the same period a year ago due to increased F-35 and unmanned vehicles sales. Operating margin for the quarter was $83 million compared with adjusted operating margin of $82 million reported in the third quarter of 2001. Third quarter 2001 results included a $20 million positive adjustment for Joint STARS and downward cumulative margin rate adjustments on unmanned vehicle contracts totaling $10 million.
Component Technologies, which is included in discontinued operations, reported sales for the quarter of $130 million and operating margin of $2 million as compared with sales of $142 million and adjusted operating margin of $2 million in the prior year. While Component Technologies sales and operating profit continue to be adversely affected by the downturn in the telecommunications industry, its non-telecommunications businesses continue to generate solid performance.
