Timothy N. Rowe
As 2015 ushers in 365 new days of exciting advancement, Chief Executive Officer – Wes Bush, will surely summarize the path ahead with one word – Innovation. Traditionally a domestically focused defense contractor, Northrop Grumman has woven that theme into every layer of their business. From human resources and capital investments in their personnel, to global expansion and $100 billion in potential future contracts, all thanks to their commitment of being innovators.
Satisfying customers and shareholders alike, Northrop Grumman closed out 2014 with a 17% increase in earnings per share, riding over $6 billion in fourth quarter sales to the finish line. Reducing expenses through pension adjustments, the designers of aerospace, electronics, and information systems posted $2.6 billion in from operations. Additionally, $3.2 billion was returned to shareholders through share repurchasing and payment of dividends.
All-in-all, the future is bright and the sky is opened wide for Northrop Grumman who looks to make 2015 a seminal year in their growth as the international supplier of the most refined weapons systems.
Northrop Grumman: A Year in Review, A Year Ahead
The sleeping giant of the defense contracting sector has awoken from their slumber. Closing out 2014 with a commanding relative performance, Northrop Grumman has staked their claim in international expansion. Getting there was not easy, but the path they carved has set the foundation for future success. Comparing fourth quarter 2014 to fourth quarter 2013, Northrop Grumman posted net earnings of $506 million and $478 million, respectively. This resulted in a $28 million increase over the previous fourth quarter and translated to $2.48 earnings per share, compared to $2.18 the previous year.
All told, net earnings in 2014 peaked $2 billion, coming in at a total of $2.1 billion and increasing earnings per share 17% over the past 12 months – a very healthy return by any standard and eclipsing the S&P 500 by nearly six percentage points. Perhaps the most impressive part, though, is how Northrop Grumman was able to garner such success before truly implementing its plan for global expansion. Summarizing it best was chief executive officer, Wes Bush “Our team delivered another year of strong performance in 2014. We are excited about our many future opportunities and remain committed to generating value through sustainable performance, a well aligned portfolio and effective cash deployment”.
Naturally, this sounds well and fine, but Mr. Bush, what does that actually mean? So, we dove deeper. Operating income and margins remained steadfast, allowing for the sustainability cited. While operating income did increase $73 million for 2014, it only accounted for a 2% increase, hardly the rate of inflation and perfectly acceptable for a firm of this size. Most impressive, perhaps, is that they were able to generate net profits in excess of 2%, making the additional expense a worthwhile investment.
Additionally, Northrop Grumman was able to reduce taxes by $43 million through the use of a research and development tax credit and the Tax Increase Prevention Act of 2014. This savings brought the company’s tax rate down 2.2 percentage points, to 29.6%. It is important to note, however, that the Tax Increase Prevention Act of 2014 was originally scheduled for expiration on December 31, 2013. At the time of this publication, it is unknown what tax impact will be had by modifications, and/or, executed expiration of the tax act.
Aerospace Systems (Table 1) Northrop Grumman has established themselves as one of the premier designers, builders, and support activities of manned, and unmanned, aircraft and satellites. With some of the most popular, and potent, weapon systems on the battled field today; F-18 and F-35 fighter jets and the unmanned prowler of the sky – the Global