Northrop trims profit outlook by 35 cents a share

It reveals $100 million in new interest costs

March 06, 2003|By Robert Little | Robert Little,SUN STAFF

Northrop Grumman Corp. surprised investors yesterday by lowering its profit outlook and revealing $100 million in unexpected interest costs from its recent acquisitions, a move that propelled the company's stock into a 4 percent decline.

The additional interest expense grew out of the company's recent $11.8 billion takeover of satellite and electronics maker TRW Inc., a deal that built Northrop Grumman into the nation's third largest defense contractor. Its largest division, Electronics Systems, is based in Linthicum.

The company split off and sold TRW's automotive parts division this week for $4.7 billion - $3.9 billion in cash - as part of its long-standing plan to retire $4 billion in debt that it inherited with the acquisition.

But because the automotive division transaction took longer to close than anticipated, the company must pay $100 million in additional interest, a spokesman said yesterday.

The expense was unrelated to Northrop Grumman's everyday operations, but it prompted company officials to lower their projected earnings for 2003 by 35 cents per share - to a range between $3.65 and $4.15. Investors reacted harshly. Northrop Grumman's stock fell $3.51 on the New York Stock Exchange to close at $83.75.

"I think the way that the stock is reacting suggests that the investing community thinks this could have been handled a little better," said Peter Arment, vice president of JSA Research Inc.

"But even though it was a surprise, it was a nonoperational surprise. It says more about the mechanics of how their debt was classified than how they run their business."

The Los Angeles defense contractor, which employs about 11,000 in Maryland, has about $10 billion in long-term debt and still plans to pay off "a significant amount" with money from the automotive division sale, a process that should be completed by June, a spokesman said yesterday.

Because of the interest it will pay until then, Northrop Grumman increased its anticipated interest expense for the year from $370 million to $470 million.

"The plan is to pay off significant debt by the end of the second quarter," said Northrop Grumman spokesman Frank Moore. "As a result of that time frame, we determined that additional interest expense will be incurred."

Northrop Grumman built itself into an industry giant the past three years, buying TRW, Newport News Shipbuilding and Litton Industries to become the nation's largest warship builder and a top purveyor of military electronics and satellites. The company expects as much as $26 billion in revenue this year and $29 billion next year, forecasts that did not change yesterday.

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