- Earnings Per Share from Continuing Operations Increase to $0.80
- Income from Continuing Operations Increases to $291 Million
- Sales Increase 11 Percent to $7.4 Billion
- Company Completes $700 Million Share Repurchase Program
- New $1 Billion Share Repurchase Program Authorized
- Provides Updated 2004 and 2005 Financial Guidance
Northrop Grumman Corporation (NYSE:NOC) reported that third quarter 2004 income from continuing operations rose 46 percent to $291 million, or $0.80 per diluted share, from $200 million, or $0.54 per diluted share, for the same period of 2003. Third quarter 2004 and third quarter 2003 income from continuing operations reflects the reclassification of certain operations from discontinued to continuing operations. Sales for the third quarter of 2004 increased 11 percent to $7.4 billion from $6.7 billion for the same period of 2003.
“Strong performance at Mission Systems, Integrated Systems, Ships, and Space Technology led to another quarter of double-digit sales growth, which was accompanied by outstanding cash generation,” said Ronald D. Sugar, Northrop Grumman chairman, chief executive officer and president.
“We continue to view the future with confidence, and our board has authorized the repurchase of an additional $1 billion of our common stock. This new, larger share buyback program, combined with a competitive dividend payout ratio, are major components of our strategy to deliver value to shareholders, while strengthening our credit profile and maintaining financial flexibility,” Sugar concluded.
Operating margin for the 2004 third quarter increased 37 percent to $538 million from $394 million for the same period of 2003, including the effect of lower pension expense and higher unallocated expenses than in the prior period.
Third quarter 2004 pension expense, as determined in accordance with accounting principles generally accepted in the United States, declined to $87 million from $143 million for the same period of 2003. Pension expense allocated to contracts pursuant to government Cost Accounting Standards (CAS) increased operating margin by $90 million in the third quarter of 2004 and $64 million for the same period of 2003.
Unallocated corporate expenses increased to $62 million in the third quarter of 2004 from $18 million for the same period of 2003. The increase in unallocated corporate expenses was primarily due to increases in legal costs, environmental remediation costs, and deferred state income taxes.
Net income for the 2004 third quarter increased to $278 million, or $0.76 per diluted share, from $184 million, or $0.50 per diluted share, for the same period of 2003.
Contract acquisitions increased to $4.7 billion in the third quarter of 2004 from $4.3 billion for the same period of 2003. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, increased to $58.4 billion at Sept. 30, 2004, from $58.2 billion at Dec. 31, 2003.
Reclassification of Discontinued Operations
On Oct. 17, 2002, the company announced its intention to sell the businesses comprising its Component Technologies reporting segment, and these businesses were classified as discontinued operations beginning in the third quarter of 2002. The remaining unsold operations are a manufacturer of complex printed circuit boards and assemblies, an electronic connector manufacturer, and a European-based marketing group. During the third quarter of 2004, the company suspended its efforts to sell these remaining businesses, and they have been reclassified to continuing operations and are reported under the segment entitled “Other.”
As a result of the reclassification, third quarter 2003 sales increased by $45 million, and third quarter 2003 income from continuing operations was reduced by $24 million, which included a $31 million pre-tax charge for the expected loss on sale of the reclassified businesses. The reclassification reduced third quarter 2003 diluted earnings per share from continuing operations to $0.54 from $0.61.
Share Repurchase Program
On Oct. 5, 2004, the company completed the $700 million share repurchase program announced on Aug. 20, 2003. Under that authorization, the company repurchased approximately 14.4 million shares of common stock at an average price of $48.71, after giving effect to the 2-for-1 stock split effective June 21, 2004. On Oct. 26, 2004, the board of directors authorized the repurchase of an additional $1 billion of the company’s outstanding common stock, which is expected to be completed over 12 to 18 months, commencing in November 2004. Share repurchases will take place at management’s discretion and under pre-established non-discretionary programs from time to time, depending on market conditions, in the open market, and in privately negotiated transactions.
2004 & 2005 Guidance
The company expects 2004 sales in excess of $29 billion versus previous guidance of approximately $29 billion, primarily due to the reclassification of previously discontinued businesses to continuing operations. The company now expects 2004 earnings per share from continuing operations of $2.95 to $3.00 versus previous guidance of $2.90 to $3.00. Net cash provided by operating activities is expected to be approximately $1.8 billion in 2004 versus previous guidance of approximately $1.7 billion.
For 2005, the company expects sales of approximately $31 billion. Earnings per share from continuing operations are expected to grow, on a percentage basis, in the mid- to high-teens over 2004. The estimated growth in 2005 earnings per share from continuing operations is before adoption of Proposed Statement of Financial Accounting Standards, Share-based Payments — an amendment of Statements No. 123 and 95, and assumes that pension expense, as determined in accordance with accounting principles generally accepted in the United States and pension expense allocated to contracts pursuant to government Cost Accounting Standards (CAS), are the same as estimates for 2004. For 2005, net cash provided by operations is expected to be in the range of $1.8 to $2 billion.
