Northrop Grumman posts 3Q dip but lifts outlook

Northrop Grumman Corp. said Wednesday earnings for the third quarter were hurt by higher pension costs, but solid revenue and a tax break pushed results well past analyst estimates. The maker of military aircraft and defense electronics also lifted its profit outlook for the year.

Northrop now predicts 2009 earnings per share between $5 and $5.15 - surpassing Wall Street's current forecast of $4.85 per share, as measured by a Thomson Reuters analyst survey. Northrop previously projected income of $4.65 to $4.90 per share for the year.

In afternoon trading, shares of the No. 2 defense contractor by revenue edged down 11 cents to $49.68, but they earlier traded as high as $51.69.

Northrop has been repositioning itself in recent years to expand its electronics, information and intelligence businesses, keeping in line with the Pentagon's buying strategy.

Under President Barack Obama, the Pentagon has restrained spending, placing more emphasis on weapons needed to fight the insurgents it faces in Afghanistan. That means less of an appetite for the big weapons used to fight conventional wars, like giant warships, expensive fighter jets and hulking Army vehicles.

"We have a program portfolio correctly aligned with future defense needs," said Ron Sugar, Northrop's outgoing CEO, on a call with analysts. He highlighted increased demand by the Pentagon for unmanned aircraft, cyberwarfare systems and the Joint Strike Fighter, the Air Force's next-generation fighter jet being built by Lockheed Martin Corp. Northrop is building several systems for the fighter jet including avionics and communications systems.

In the third quarter, Northrop's income fell about 4 percent to $490 million, or $1.53 per share, from $512 million, or $1.51 per share, in the same period last year. It was well above analysts' average forecast of $1.18 per share. Per-share results improved despite a decline in net income because the company repurchased 4.7 million shares during the quarter, reducing its share count.

Quarterly earnings were reduced by 19 cents per share as a result of pension expense. However, Northrop also recorded a tax break of 23 cents per share, which helped to lift its profit during the quarter.

Revenue grew 4 percent to $8.73 billion, led by the company's shipbuilding unit. Analysts expected revenue of $8.58 billion.

Shipbuilding sales rose 14 percent as a result of increased work on several Navy programs including the Virginia-class submarines, an amphibious transport dock ship and a class of destroyers.

Aerospace sales increased 5 percent on higher revenue from unmanned aircraft, like the Global Hawk.

Revenue from Northrop's Electronic Systems and Information Systems units rose 2 percent and 4 percent, respectively.

The Los Angeles-based company contributed $586 million to its pension plan in the third quarter, which it didn't in the same quarter last year.

Northrop said it received a total of $10 billion in new business awards during the July-September period.

Elsewhere in the sector, Northrop rival Lockheed Martin on Tuesday raised its 2009 profit outlook to reflect a tax benefit, but offered a dim outlook for next year as the Pentagon clamps down on spending and pension costs rise.

Aerospace company Boeing Co. on Wednesday posted a 9 percent gain in its defense business, which makes fighter jets, satellites and security systems.

Northrop's Sugar is stepping down as chairman and CEO at the end of the year, ahead of his retirement in June 2010. He is being succeeded by Northrop President and Chief Operating Officer Wesley Bush effective Jan. 1.

The executive shuffle comes at a pivotal time for Northrop and its partner Airbus parent European Aeronautic Defense and Space Co., which also named a new key executive on Tuesday. They are competing against Boeing Co. for the third time for a lucrative $35 billion contract to build mid-flight refueling tankers. The Air Force has tried and failed twice before to award a contract to replace its Eisenhower-era fleet of 179 tankers.

Northrop won the deal in February 2008. Boeing later successfully protested the award after congressional investigators found the Air Force failed to evaluate both proposals on the same merits. That followed a 2004 award to Boeing, which was undone by an ethics scandal that resulted in prison terms for a former company executive and a former Air Force official.

Last month, the Air Force released its draft request for bids for a new competition. A contract award is anticipated next summer.

In an interview, Sugar said Northrop is reviewing and preparing responses to the Air Force's draft. The company also is discussing concerns raised last month about pricing data from its previous bid which was revealed by the Pentagon to Boeing during the last competition.

EADS said Tuesday General Electric Co.'s Sean O'Keefe will become CEO of its North American division, effective Nov. 1. He replaces current CEO Ralph Crosby, who will remain as non-executive chairman and will oversee EADS' role in the Air Force's troubled $35 billion tanker competition.