Surprise loss at Northrop sends shares down 11.7%

Defense contractor lost 56 cents a share in 3rd quarter

October 18, 2002|By Robert Little | Robert Little,SUN STAFF

Northrop Grumman Corp., regarded lately as a marquee performer in the defense industry, posted a $59 million third-quarter loss yesterday, surprising analysts and investors, and propelling the company's stock price into a dive of nearly 12 percent.

The loss was blamed largely on two contracts that resulted in unexpected costs, including work in Linthicum to design and build F-16 electronics for the United Arab Emirates. The company recorded a $65 million loss on that local project and an $87 million loss on a contract in New Orleans to build five crude oil tankers for Phillips Petroleum Co.

Analysts said the company remains a high performer, but the news placed Northrop Grumman executives in the unusual position of defending a company that has fast become one of the top defense contractors in the nation.

Through acquisitions the past three years, Northrop Grumman has become the largest builder of military ships and has strong positions in defense electronics, space systems and unmanned aerial surveillance, all growing segments of the industry.

"Our core defense businesses, despite charges on two programs, continue to perform well," said Kent Kresa, Northrop Grumman's chairman and chief executive officer. "The long-term prospects for the defense industry remain extremely bright, and we are confident in Northrop Grumman's future growth prospects."

The company also took a $208 million loss when it revalued two electronics businesses that it plans to sell. The $59 million quarterly loss, or 56 cents a share, compared with a profit of $79 million, or 84 cents a share, in the third quarter last year.

Investors reacted harshly to yesterday's announcement, sending Northrop Grumman's share price down $13.51, or 11.75 percent, to $101.50 on the New York Stock Exchange.

Analysts suggested that the stock's decline stemmed largely from investors' confusion about the company's finances, not from any fundamental change in its operations or market position.

"It was a very convoluted quarter for them. All sorts of things were happening, and they didn't really allay the convolution when they tried to explain it all," said Paul H. Nisbet, a defense analyst for JSA Research Inc. in Newport, R.I. "But nothing that they've done will in anyway affect future earnings. It's all in the past.

"We're still saying, as we were yesterday, that they will have a share price by the end of next year somewhere around $152. It's a good company."

Excluding the one-time charges, the company posted income of $182 million, or $1.53 a share. Sales in the quarter that ended Sept. 30 rose 24 percent, to $4.21 billion from $3.41 billion a year earlier.

Northrop Grumman's Electronic Systems sector in Linthicum remained the company's largest division, with $1.3 billion in sales in the quarter. And the unit contributed to the quarter's loss, announcing $65 million in overruns for the electronic warfare system on United Arab Emirates F-16s, one of its core development projects.

Like the tanker project, the F-16 project is a multiyear, fixed-price contract worth more than $1 billion to Northrop Grumman.

Ronald D. Sugar, Northrop Grumman's president and chief operating officer, characterized the increased cost as an unanticipated investment in a system expected to reap future profits in the form of new foreign sales and perhaps sales to the U.S. Air Force.

"We've got a solid design here," Sugar said.

Company officials also said that Northrop Grumman's $11.8 billion merger with TRW Inc. remains on schedule to be completed before the end of the year.

TRW posted a $13 million third-quarter profit Wednesday, based largely on its success in the space and electronics businesses that Northrop Grumman most coveted.

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