Financial Analysis of Northrop Grumman Essay Example
Financial Analysis of Northrop Grumman Essay Example

Financial Analysis of Northrop Grumman Essay Example

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  • Pages: 16 (4342 words)
  • Published: September 19, 2017
  • Type: Case Study
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When analyzing Northrop Grumman's finances, it is important to assess both profitability and liquidity.

This document examines Northrop Grumman's financial strategy and debt utilization, analyzes the potential effects of the financial crisis on the company, compares its ratios and profitability with other defense sector companies, and offers insights into Northrop Grumman's financial structure, recent performance, and future earnings projections.

Overview of Northrop Grumman

Northrop Grumman is a well-known global defense contractor that specializes in manufacturing aircraft and other products for the defense industry. It is the result of the merger between Northrop and Grumman, along with eighteen integrated companies. The company has achieved considerable success and has become a prominent corporation. Its business model includes four main sectors, with a particular emphasis on aerospace systems.

The company is based in Falls Church and specializes in electronic systems, information systems, and proficient services.



rginia is home to major production installations in California, Virginia, and Maryland within the United States. Northrop Grumman, a global defense contractor ranked 3rd in size, operates nationwide.

Northrop Grumman is in competition with several industry companies including Lockheed Martin, Raytheon, Boeing, and L-3 Communications Holdings, Inc.

Despite the risks of segregation and a $500 billion decrease in defense expenditure, Northrop Grumman remains committed to maintaining their competitiveness. Their strategy involves efficiently creating and promoting products, fostering innovation, providing manufacturing capabilities for new products, as well as offering information technology support to businesses and governments.

History of Northrop Grumman

Northrop Grumman was established by Jack Northrop in 1939 in Hawthorne, California. In 1940, the company produced its first aircraft, the N-3PB patrol bomber, specifically for the Norwegian Air Force.

The United States Army Air Force's first aircraft, the P-61 Black Widow, served as

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a precursor to other planes such as the XB-35 and XB-49 for the United States Air Force. These aircraft competed with the B-36 and B-47 in order to win contracts for building long-range heavy bombers during the mid-1940s.

This marked a major milestone in Jack Northrop's advancement of advanced aircraft technology. In 1959, they achieved the successful maiden flight of the F-5, an affordable supersonic combat aircraft that later became the foundation for the T-38 supersonic jet trainer used by the USAF. Moreover, they developed an enhanced iteration of the F-5 called the F-20. Furthermore, they played a crucial role in designing the United States' inaugural intercontinental ballistic missile (ICBM) named Shark.

Following the creation of multiple plans, the B-2 Spirit Stealth Bomber was ultimately developed as the most advanced and expensive aircraft ever built for the US Air Force. In 1994, Northrop Grumman was established through its acquisition and merger with the Grumman Corporation, a company that had played a vital role in advancing naval aircraft since its founding in the 1930s.

Built in 1931, the XFF-1 was the first naval aircraft with retractable landing gear. Additionally, they developed the Wildcat featuring an innovative sto-wing and produced the Hellcat, a highly successful carrier aircraft during World War Two.

Grumman's development of aircraft for the United States Navy included the F9F Panther, which was one of the earliest jet combatants for the Navy. They also developed jet aircraft such as the A-6 Intruder household of aircraft for the Navy and the F-14 Tomcat.

The film Top Gun brought fame to Grumman, particularly for their creation of the Lunar Lander for the Apollo mission.

Key Products

Northrop Grumman is primarily

engaged in four interconnected yet distinct industries, which are also their core competencies. They are involved in aerospace systems and electrical systems.

Businesses can prioritize meeting their customers' needs for remote-controlled air systems by focusing on these primary countries. This includes bid control, communication, computing devices, and intelligence.

The company is currently providing support to the Defense Department in several areas, including surveillance, reconnaissance (C4ISR), logistics, and cyber security.

Northrop Grumman is a manufacturer of various defense systems. They are responsible for producing the RQ-4 Global Hawk, which is an unmanned aerial system (UAS) approved to operate in US airspace. Additionally, they manufacture active electronically scanned array radars for both the F-35 and F-16 aircraft. Northrop Grumman also develops electronic warfare systems like the Next Generation Jammer used by the US Navy. Another significant project at Northrop Grumman is the Lightning family of advanced targeting pods. The production of Lightning Generation four has recently achieved its 250th unit milestone. Furthermore, Northrop Grumman is engaged in the development of the X-47b for the US Navy.

The US Navy achieved a historic milestone on 29 November 2012 when they successfully launched a remote-controlled combat air vehicle at the Naval Air Station Patuxent River using a slingshot method. This groundbreaking achievement had never been accomplished by any other aircraft of its kind.

Maryland (McKinney 2012). Northrop Grumman, in collaboration with Lockheed Martin, is involved in the production of important components for the F-35 Lightning II Joint Strike Fighter Program. These components include the center fuselage and arms bay. Additionally, they provide support to various civilian sectors such as supplying the level sequencing system for the US Post Office and developing information systems for

both the Department of Homeland Security and public 911 services.

Fiscal Condition

Northrop Grumman is committed to preserving its current financial standing and has achieved an A++ rating for fiscal stability, as per the Value Line Report. The report predicts that their 2012 revenues will reach $25,100 million, marking a $1,312 million decrease compared to previous years. Despite this decline since 2010, Northrop Grumman continues to thrive in the defense industry.

Despite recent sales, Newport News and Huntington Ingalls Industries Incorporated still hold the position of being the third largest defense contractor. Their revenues have been affected by the sell-off, drawdown in Iraq and Afghanistan, as well as a decrease in defense spending. However, Value Time forecasts their projected revenue for 2013 to be $2.

Northrop Grumman's bond evaluation is BBB+ from the 3 major bond raters, S, Finch, and Baa+. Its total worth has decreased from 500 million to just 100 million.

Northrop Grumman has been assessed by both Standard & Poor's and Moody’s as a stable company. In 2012, the average stock value was $63.13.

In terms of fiscal strategy, Northrop Grumman emphasizes performance according to CEO Wes Bush in the opening quote of the 2011 Annual Report, considering it an outstanding year.

The CEO of Northrop Grumman, Web Bush, is prioritizing portfolio alliance, efficient cash deployment, and delivering value to stockholders, clients, and employees in order to achieve strong long-term performance. This commitment is demonstrated by the 17% increase in diluted earnings per share to $7.

In 2011, Northrop Grumman spun off their ship building division.

Northrop Grumman (Northrop Grumman, 2012) has dedicated $1.6 billion in equity to stockholders with the aim of maximizing benefits for them. Moreover, the company is

actively adopting new strategies that align with the goals of the Department of Defense.

The main areas of focus for the Department of Defense (DoD) and US authorities are developing countries, with an emphasis on C4ISR, remote-controlled systems, and cyber security.

Northrop Grumman is prioritizing management and logistics, recognizing their significance in helping the Department of Defense (DoD) adapt to budget challenges during the Obama administration. Additionally, the company emphasizes its accomplished aerospace division, wherein it acts as a primary contractor for key projects like the F-35, F/A-18, and Global Hawk.

A potential entry into the international market is being seen by them through considering the US budget jobs. This is evidenced by the recent sale of Global Hawks to NATO. Their emphasis on shareholder value necessitates prioritizing remote-controlled air systems, C4ISR, and logistics.

Northrop Grumman also focuses on cybersecurity and uses acquisitions and alliances to expand their business and increase shareholder value. They occasionally form strategic alliances and joint ventures with other companies.

Northrop Grumman's objective is to improve shareholder value and sustain its leadership in technology and the defense industry by divesting or spinning off particular assets. The company's strategic program centers on augmenting stockholder value while remaining at the forefront of technology and defense. Furthermore, Northrop Grumman intends to develop systems that will assist the Department of Defense in implementing new strategies as the US shifts its attention from Afghanistan to the Pacific Region. Nevertheless, substantial cuts have been made to the defense budget due to the ongoing financial crisis.

The impact on Northrop Grumman, at all levels, will be a direct result of multiple factors. These include the expiration of revenue enhancement cuts from George W. Bush's

administration, increased tax rates and reduced social programs, as well as the introduction of new taxes through the Patient Protection and Affordable Care Act 2010.

Northrop Grumman, despite budget cuts and the potential $500 billion funding reduction from its primary client, the Department of Defense, is still well-positioned for success. The company thrives in the defense market due to its diversified presence as both a main contractor and subcontractor for various contracts.

Northrop Grumman is committed to addressing the critical industrial needs of the Department of Defense. Additionally, its strategic position within the US government is reinforced through participation in various programs such as the F-35 Lightning II and the RQ-4 Global Hawk.

These plans include Minute Man III ascents, coevals jammer, and other classified plans.

Northrop Grumman is confident that it will remain viable and profitable amidst the financial crisis due to its significance to the US DoD. They also anticipate a resolution to be reached, enabling business continuity.

Understanding Northrop Grumman’s Weighted Average Cost of Capital

The weighted average cost of capital for Northrop Grumman is 8%, highlighting their ability to obtain funding at a low cost.

The company is currently buying back shares to improve shareholder equity and increase their value. Additionally, they have been using bonds as an effective way to acquire funds for stock buybacks and capital projects. The weighted average cost of capital is used to assess discount rates and terminal value assumptions, taking into account the relative weights of different components in their capital structure. This helps evaluate the costs associated with obtaining new capital.

Northrop Grumman exhibits a strong and secure financial strategy with an average cost of capital at 8%. The company has consistently

been profitable throughout its history, earning $697.0 million in profits in 2002. According to Value Line, it is projected that their profits will increase to $2.005 million by 2012.

The net incomes for recent years have increased approximately threefold compared to the net incomes in 2002. This surge in current net incomes is attributed to operations conducted in the Middle East, particularly the wars in Iraq and Afghanistan, which have significantly bolstered net incomes for all major defense contractors.

Northrop Grumman is committed to maintaining its profitability amidst the defense cuts from 2011-2021. Their strategy entails excelling in product development, industry, and support, as any shortcomings in these areas would adversely affect their profitability. Additionally, they must ensure timely and budget-compliant completion of contracts since there is a risk of cancellations or reliance on internal funds due to existing contracts and political circumstances.

There are various factors that can impact profitability, including a failed projectile launch or the failure to repair a faulty product resulting in contract termination. It is important to mention that Northrop Grumman's net profit margin has also increased since 2002. In that particular year, their net profit margin stood at 4.1%, and it has consistently risen to approximately 8.0% by 2012. Nevertheless, there are additional considerations to consider.

According to Value Line, the net income margin is predicted to decrease to 7.3% in 2013 and continue declining to at least 6.8% by 2015. The increase in profits is attributed to increased product demand resulting from conflicts in the Middle East. However, the projected decrease is expected due to downsizing operations in the region and the ongoing financial crisis of the US Government.

Value Line predicts that

Northrop Grumman's net incomes and net income margin will decline in 2013 and beyond. Despite this, the company will still be able to generate profits, enabling them to concentrate on their stockholders' success strategy. This enhanced profitability aligns with their performance strategy, particularly regarding their stock price as investors take into account the company's profitability when making choices. Consequently, the average return on capital stands at 9.2%.

The estimated return on capital for Northrop Grumman is expected to grow by 11.5% until 2017. As of 2011, the company's EBITA Margin is at 14.26%, which is equal to $3.304.

Northrop Grumman, a stable company, has been consistently increasing its revenue since 2010 and is expected to continue growing despite the uncertain budget situation in the US government. Moreover, Northrop Grumman's stability can be credited to its long-standing dividend policy. The company has paid dividends quarterly since 1943 (excluding 1949-1950) with a total payout of $0 in 2012.

The price for the first one-fourth is $50, while each subsequent one-fourth costs $0.55, resulting in a total price of $2.15. The estimated net income per portion for 2012 amounts to $7.40, leading to a dividend payout ratio of 29%.

Northrop Grumman is similar to its main competitors in the defence industry in terms of dividend payout ratio. In 2011, Boeing had a dividend payout ratio of 31% and Lockheed Martin had a ratio of 41% (Tortoriello, 2012).

Northrop Grumman allocated $2.8 billion to shareholders through stock buybacks and dividends, thanks to strong cash flows in 2011. These cash flows were a result of the spinoff of their shipbuilding industry, along with gross revenues of $26.412 million.

The company is continuing its share buyback in

2012 with $290 million designated to repurchase 13.6 million shares, leaving $2.0 billion remaining in the plan (NOC earnings release, 2012).

Northrop Grumman's commitment to its stockholders is evident in its strong financial performance, highlighted by the $2.15 dividend in 2012. This, along with their strategy of purchasing back stock and increasing dividends, showcases the company's determination to prioritize the interests of their stockholders. Prior to 2000s, Northrop Grumman maintained a consistent dividend policy, resembling that of a public-service corporation. However, this approach changed under the leadership of CEO Ron Sugar, who assumed the position in 2003.

The CEO initiated a strategy that led to the implementation of stock redemption plans and successfully replicated the dividend payout throughout his tenure. Additionally, CEO Sugar managed to increase the gross revenues per share; however, this did not result in a corresponding increase in the share price, which experienced a decline of $33.80 (Forbes).

In 2011, Wes Bush, the current CEO of Northrop Grumman, successfully increased stockholder returns. He achieved this by raising dividends by an average of $0.13 per year, resulting in an average dividend of $1.78 since 2007.

The 2012 dividend will be $2.15, and the fourth quarter will be paid on December 31, 2012. Northrop Grumman aims to provide continuous dividends to shareholders and endeavors to increase them. The stock redemption plan has been in place at Northrop Grumman since 2010.

Northrop Grumman uses corporate bonds, similar to other companies, for acquisitions, as they have surplus funds from the spinoff of Newport News and Huntington Ingalls Industries Incorporated, the shipbuilding segment of Northrop Grumman, and recent bond issues to repurchase stock instead of increasing dividends.

Capital enlargement undertakings and refinancing bing

debt are currently being carried out. The company currently has nine bond issues, with interest payments ranging from 1.85% to 7%.

From 2014 to 2040, Northrop Grumman has experienced an 81% increase in adult-like days. The current credit ratings by S;P, Fitch, and Moody's are BBB+, BBB+, and Baa1 respectively. These ratings indicate that Northrop Grumman has a relatively lower medium-class evaluation.

Despite this, according to Moody's, their debt metrics are at the upper end of their current debt category. Their long term debt as of December 31, 2012 will amount to $3,935.0 million (Value Line, 2012). Over the period from 2009, they have reduced their debt by $256.

Northrop Grumman paid $2.692 million in involvement payments towards their long term debt, according to their 2011 Annual report.

They are predicting that their expenses in 2012 will be $207.0 million, which is lower than in 2011. However, they expect that this amount will increase until at least 2017.

Northrop Grumman offered to buy its bonds back in November 2010, with a value of $2.119 billion, from its subordinate entities.

On February 15, 2011, they announced a public offering of senior unbarred debt securities. This offering is intended for debt refund, pension finances, acquisitions, portion repurchases, and working capital.

Northrop Grumman issued bonds worth $750 million with a maturity date and an interest rate of 7.125%. Moody’s has neither reduced nor upgraded Northrop Grumman’s bond rating. This is primarily due to a significant order of RQ-4 Global Hawks from NATO, as well as a $4.0 billion share redemption program.

The sale could have a positive impact on the bond evaluation of Northrop Grumman, which has issued numerous bonds and is

currently using its latest one for various purposes.

Industry Comparison

Northrop Grumman, one of the top five defense companies globally, had defense revenues of $31 billion in 2010.

The profitability of Northrop Grumman, one of the leading defense contractors globally, is on par with or surpasses its competitors. Comparing Northrop Grumman's profitability to that of its peers in the defense industry, we can refer to figure 1 and compare profitability ratios to industry averages.

The average return on assets (ROA) for the hunt and pilotage equipment is 7.10%. Northrop Grumman currently has a ROA of 7.45% as of December 31, 2011.

As of 30 September, Northrop Grumman's current ROA is 5.72% using 2011 numbers. Compared to the other houses in its SIC industrial grouping, Northrop Grumman is relatively more profitable.

Northrop Grumman effectively finances their activities by utilizing a combination of bonds, stock options, and other forms of funding.

As of 2011, Northrop Grumman has a debt to equity ratio of 0.38, which is significantly lower than the industry norm of 84.40. This indicates that Northrop Grumman is using minimal funding at the moment. Despite this, they still maintain a good bond evaluation of Baa1 from Moody's and a strong fiscal strength rating of A++ from Value Line. The industry norm for the quick ratio is 2.

Northrop Grumman had a quick ratio of 0.97 in 2011, indicating that it is highly efficient in generating cash from its investments and operations.

In analyzing these ratios, it is evident that Northrop Grumman is a highly successful and stable company, making it a low-risk investment option for investors. However, it remains to be seen how potential military cuts and segregation could impact the company's ratios,

net incomes, and low debt during the 2000s.

Stock Price Analysis

Northrop Grumman is listed on the New York Stock Exchange under the symbol NOC and is publicly traded. This information was as of 14 December.

As of 2012, they have a total of 254,000,000 portions of common stock outstanding and zero preferred stock. Their current financial value is $3.

According to Northrop Grumman's most recent cash flow statement, they currently have 935 million in bonds and have paid 543 million in dividends as of November 15, 2012.

The board of managers has decided to release a quarterly dividend of $0.55 per share, which will be due on December 12, 2012. Since 2009, Northrop Grumman has consistently paid an average dividend of $1.83 per share. Additionally, they have also bought back $2.194 million worth of company stock.

Northrop Grumman has been using dividends as a way to compensate their investors in recent years. Over the past 36 months, their stock has experienced both rises and falls with an average volatility of 2.0. However, the low volatility indicates a stable company and stock prices, which makes it appealing to conservative investors.

The text below highlights the positive outlook for new investors, assuring them of a profitable return on their investment. Northrop Grumman's stock prices have experienced fluctuations, reaching a pinnacle of $71.87 and dipping to a low of $49.26. Notably, the stock has faced significant drops in value in August 2011 and autumn of 2009, representing challenging times for Northrop Grumman.

During this time at that particular place, the stock has been steadily increasing, especially after Wes Bush became the CEO. He focused on improving the company's stock price

and performance, resulting in an increase in their stock value and helping the company reduce debt and increase capital. This was crucial to deal with the upcoming financial crisis that could potentially lead to another recession. As of December 14, 2012, Northrop Grumman is trading at $67.37 according to Yahoo Finance.

Since July of 2012, Northrop Grumman stock has consistently been trading in the upper $60s. This increase in stock price can be attributed to positive evaluations from various media outlets, including Value Line and Yahoo Finance. The company's renewed focus on its core industries and the spinoff of its ship building subsidiaries have also contributed to the rise in stock prices.

Under the leadership of their current CEO Wes Bush, the public presentation of the company has improved significantly. Additionally, their stock prices have remained stable thanks to a strong cash presence. The company has implemented investor-friendly initiatives, such as increasing dividends and buying back stock, in addition to actively pursuing new contracts.

Northrop Grumman is a stable company with various contracts, including the $30 million station office contract and the NATO contract for purchasing RQ-4 Global Hawks. Additionally, their estimated EPS in 2012 is $7.40, which is a slight decrease of $0.01 compared to 2011.

which is declarative of a stable company that is meeting or exceeding its performance estimations.

Currency Hazard

Northrop Grumman is exposed to foreign currency hazard; however, they are not greatly at risk to fluctuations in foreign currency. They are exposed to the risks of foreign currency from their international operations. They mitigate foreign currency hazard by entering into foreign currency forward contracts to manage portions of revenues

from international clients and payments that may be delayed to be made to international partners.

As of December 31, 2011, Northrop Grumman had outstanding foreign currency forward contracts totaling $233 million (Northrop Grumman, 2011). The company's gross revenues in 2011 amounted to $26.412 million.+

Northrop Grumman stated in 2012 that $233 million is not significant and they do not believe a 10% change in interest rates of foreign currency exchange rates would have a significant impact on their financial position or operations.

Capital Markets

Northrop Grumman will be impacted by the volatility and disruption in the domestic and international credit markets. They access these markets occasionally to obtain capital for supporting capital expansion projects.

Refinancing of bing debt and seeking new sources for credit are necessary for Northrop Grumman amidst the current financial crisis in the US and Europe. However, this task may prove to be challenging or even impossible, which will negatively impact the company's financial position. They are facing significant risks.

Due to counterparty default related to bankers and agents in the recognition market, Northrop Grumman faces a higher risk when they require additional capital. Furthermore, their providers are also exposed to the volatility and disruptions in the recognition markets resulting from the financial crisis. In the event that Northrop Grumman's ability to access recognition becomes negatively affected or ceases altogether, it could have adverse consequences for the company. This may force them to switch providers, potentially resulting in their inability to fulfill their contractual obligations.

Northrop Grumman has entered into credit agreements totaling $2 billion, which can be used to support their contracts in case of cash shortage. This revolving line of credit lasts for 364 days and is

based on various rates, including LIBOR or an alternative rate.

Northrop Grumman will face challenges in the recognition market due to the financial crisis in the US, instability in the federal budget, and the imminent threat of segregation that will directly impact the recognition markets.

However, the slow growth rates of the US economy and the economy remaining on the brink of recession have kept interest rates low, making it easier for individuals to access credit.


Northrop Grumman, a major defense contractor in the United States, operates in four main business areas: aerospace systems, electronic systems, information systems, and technical services. They are engaged in the production and development of various products for the Department of Defense.

Northrop Grumman, a stable company, primarily generates 90% of its revenue from military contracts with the US government. They have consistently increased their dividends and their stock price has also shown steady growth. Currently, they hold a lower medium class bond rating.

Rated at Baa+ from Moody’s, Northrop Grumman has a strong history of supporting the US military with a battalion of historic aircraft and systems. Despite the looming menace of segregation and $1 trillion in budget cuts to the defense budget over the following 10 years, Northrop Grumman will continue to stand out. Overall, it remains a leader in the defense industry and will continue to be a profitable company during the drawdowns in the Middle East and the defense budget cuts facing the US armed forces.


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