About the segment
According to Northrop Grumman (NOC), its Electronic Systems segment focuses primarily on developing “Navigation and Maritime Systems, Land & Self Protection Systems such as missile tracking systems, and Intelligence, Surveillance, Reconnaissance & Targeting Systems, which help strengthen the defense system of its customers.” For more on this topic, read Understanding Northrop’s business segments.
The segment competes with the electronic systems segments of L-3 Communications Holdings (LLL), Textron (TXT), and Lockheed Martin (LMT). Electronic systems respectively represent ~14%, 10.5%, and 18% of these companies’ revenues. Some of these companies are also included the Industrial Select Sector SPDR (XLI), of which NOC forms 1.83%.
As the chart above shows, the segment didn’t perform that well in the fourth quarter, nor in the year overall. For the last quarter of 2014, sales declined by 2.8% year-over-year due to lower volume in the following areas:
- land and self protection programs, including infrared countermeasures and laser systems
- domestic intelligence, surveillance, and reconnaissance, or ISR
- targeting programs
The growth in international sales helped offset these declines to some extent. Operating incomes declined by 6% while the operating margin rate decreased by 60 basis points to 17.2% for the quarter. This was due to lower sales and a lower level of net favorable adjustments from the same quarter last year.
On a fiscal year basis, sales declined by 2.8% year-over-year from 2013. Again, growth in international sales helped offset the declining volume in the following areas:
- land and self-protection programs, including infrared countermeasures and laser systems
- domestic ISR and targeting programs, including combat avionics deliveries
- navigation and maritime programs
Operating income declined by 6.4% year-over-year, and margins fell by 60 basis points to 16.5% for the full year due to lower sales and a lower level of net favorable adjustments.
Overall, the segment had a dull final quarter and a disappointing fiscal 2014. In the next part of this series, we’ll look at the company’s Information Systems segment.