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Northrop Grumman: Electronic Systems segment has a tough year

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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%.

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Financial performance

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.

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