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Purchases Help Lift Northrop Profit 71%

Increased defense spending and sales at acquisitions help firm beat forecasts.

January 29, 2003|Peter Pae | Times Staff Writer

Northrop Grumman Corp.'s aggressive takeover strategy appears to be paying off as the defense contractor beat Wall Street's expectations Tuesday by reporting a 71% jump in fourth-quarter profit, bolstered by strong sales at its Newport News Shipbuilding unit.

Northrop, based in Century City, said earnings climbed to $224 million, or $1.72 a share, compared with a year-earlier profit of $131 million, or $1.28 a share. Analysts had expected the company to earn $1.66 a share in the latest quarter.

Northrop's fourth-quarter revenue increased 17% to $4.83 billion, from $4.14 billion in the year-ago period.

The results drove up Northrop's shares $3.47, or 4%, to close at $91.86 on the New York Stock Exchange.

"They definitely have a good story going forward," said Craig Fraser, an analyst for Fitch Ratings. "They're very well positioned in the defense budget."

The fourth-quarter numbers included results from Newport News, which Northrop acquired for $2.1 billion in late 2001. Operating profit at Northrop's shipbuilding business more than doubled to $104 million. Newport News' sales soared 74% to $1.4 billion.

Northrop said higher defense spending is helping all its divisions. The company's El Segundo-based Integrated Systems unit had a strong quarter as sales of its unmanned Global Hawk spy plane grew amid use by U.S. troops in the Middle East. It also got a lift from the development of the F-35 fighter.

Operating profit at the unit rose to $54 million from $51 million.

"Our 2002 fourth-quarter operating performance was outstanding, with all of our segments generating excellent cash from operations," Northrop Chairman and Chief Executive Kent Kresa said.

Under Kresa, Northrop has become the nation's second-largest defense contractor by acquiring 16 companies since 1994, culminating with last month's $6.7-billion purchase of TRW Inc. Northrop now has interests in virtually every aspect of the military, from building nuclear aircraft carriers and submarines to developing unmanned aircraft and the B-2 bomber. It also runs the White House Web site.

Northrop's latest earnings reflect an upward trend for the defense industry, as the federal government has boosted spending on weapons and new military technologies since the September 2001 terrorist attacks. The Commerce Department reported Tuesday that orders for defense products climbed 58% in December.

The upbeat earnings report was muted somewhat when Northrop said it faces a pension shortfall of as much as $600 million this year because the weak stock market has hurt pension-fund investments.

Northrop said that if the stock market doesn't improve the company may reduce its earnings estimates for 2003 to about $4 to $4.50 a share. Analysts surveyed by Thomson First Call had forecast profit of $5.01.

Lockheed Martin Corp., the nation's largest defense contractor, also warned this week that rising pension costs could depress its 2003 profit.

Wall Street wasn't fazed by the Northrop forecast, focusing instead on the latest results.

Byron K. Callan, an analyst for Merrill Lynch, said investors were relieved because some were "bracing themselves for another earnings shortfall" much like in the third quarter, when Northrop's profit was less than expected.

Northrop shares reached a peak of $135 in June before beginning a steady decline, some of it attributed to the overall stock market slump. Even with the run-up Tuesday in Northrop's shares, they still are trading close to their 52-week low of $87.20.

For all of 2002, Northrop posted net income of $64 million, or 34 cents a share, compared with $427 million, or $4.80 a share, in 2001. The latest annual results included a $432-million accounting adjustment related to the sale of commercial electronics businesses.

Northrop's 2002 revenue surged 32% to $17.2 billion, from $13 billion a year earlier.

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