NOC Analysis – Group 45
Northrop Grumman Financial Analysis
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NOC Analysis – Group 45
EXECUTIVE SUMMARY
After careful and thorough analysis, the team‘s recommendation is that Northrop Grumman is a
very good company to invest into. The company offers an extraordinary portfolio of capabilities
and technologies that enable the company to deliver innovative systems and solution for
applications that range from undersea to outer space and into cyberspace. As a leader in the
global security industry, Northrop Grumman shows some strong financial power that includes
increased earnings per share from continuing operations by 5% to $7.81 per diluted share: a total
backlog increase of 3 percent, to $40. 8 billion and finally free cash flow of $2.5 billion before
discretionary pension contributions. In addition, the cyber security industry is expected to
increase significantly over the coming years and Northrop Grumman is the only company with
advanced information solution for defense, intelligence, combat avionics radars for fighter
aircraft, satellite based space sensors to name a few to take advantage of on this market share.
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NOC Analysis – Group 45
Table of Contents Page
Strategic Analysis 3
SWOT Analysis 6
Accounting Analysis 10
Financial Analysis 24
Forecasting 26
Valuation 31
Assessment of Solvency 35
Conclusion 41
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NOC Analysis – Group 45
STRATEGIC ANALYSIS
Overview
Northrop Grumman Corporation is an American global aerospace and defense technology that
originally was formed in California by Jack Northrop. During WWII, Northrop produced the
famous Flying Wing Bomber, as well as the P-61 fighter which failed to win a production
contract. The company relied heavily on its F-89 fighter and Snark missile sales in order to
generate revenue. In 1959, Thomas Jones succeeded Jack Northrop as president and he moved
the company away from risky prime contract in favor of numerous subcontracts as well as
reducing the dependence on government contracts by purchasing Page Communications
Engineers and Hallicrafters
The Company was hit with a bribery scandal in the early 70’s as well as disclosure of illegal
payments to Richard Nixon during the campaign fund. Northrop was able to withstand the
scandal and as a result, Jones retired as the president. In 1994, Northrop paid $2.1 billion for
Grumman Corporation, a premier electronic system firm, and changed its name to Northrop
Grumman. The company is publicly traded on the New York Stock Exchange under the symbol
(NOC). The company has acquired several companies over the past couple of years including
Litton industries (2001) for $3.8 Billion plus $1.3 Billion in debt as well as Newport News which
was completed in 2002. As part of the business and operational strategies and priorities,
Northrop Grumman continues to seek effective ways to help build and strengthen the security
industry. As the company looks ahead, it continues to see uncertainty with regards to
government fiscal policy as well as national security strategy.
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NOC Analysis – Group 45
Northrop Grumman team takes great pride that its 2012 financial result validates strong
performance in a challenging environment that was achieved with the highest levels of ethics and
integrity. The employees of Northrop Grumman remain committed to creating shareholder value
during these uncertain times and are fully focusing their attention on driving performance and
optimizing the company’s business portfolio.
Industry Analysis
Determining how Northrop Grumman has the advantage over other companies in the same
industry
Competitive Environment
Northrop Grumman competes with many companies in the defense industry and the intelligence
civil markets. Lockheed Martin Corporation, The Boeing Company, Raytheon Company,
General Dynamics Corporation, SAIC, BAE Systems Inc., EADS and FinmeccanicaSpA are the
company’s primary competitors. All these company creates a highly intense competition in the
industry which is evident through the number of bid protests as well as the number of
competitors bidding on program opportunities. Although there are intense competitive in the
security industry, it is very common in the defense industry for any work on a major program to
be shared among a number of companies which in turn create a very healthy partnership
between two rivalries. A company competing to be a prime contractor may, upon ultimate award
of the contract to another competitor, becomes a subcontractor for the ultimate prime contracting
company. It is not usual to compete for a contract award with a peer company and,
simultaneously, perform as a supplier to or a customer of that same competitor on other contracts
and vice versa.
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NOC Analysis – Group 45
Most companies focus on different types of security and defense services, but Northrop
Grumman primary customer is the U.S. Government. The revenue from the U.S. Government
which includes foreign military sales accounted for 90% or more of total revenues in each of the
years ended December 31, 2012, 2011 and 2010.
Competitive Advantage
Northrop Grumman has situated itself in the industry by utilizing a different business strategy.
Their business offers an extraordinary portfolio of capabilities and technologies that enable us to
deliver innovative systems and solutions which sets them apart from the rest of the competitors.
The company’s future success depends, in part, on its ability to develop new products and new
technologies as well as maintain facilities and a qualified workforce to meet the needs of current
and future customers. Northrop Grumman has successfully utilized a different business strategy
to earn its position as the largest and most recognized leader in the defense industry.
SWOT ANALYSIS
STRENGTHS: Northrop Grumman is committed to provide customer satisfaction as well as
quality products /services and continuous improvement. Its shareholder return $2.9 billion
through share repurchases and dividends and excellent financial performance in relation to
earnings per share growth by a compound annual growth rate of 7%. Another Strength of
Northrop Grumman is in its International business which showed a sales growth of
approximately $2.5 billion and a strong impact on International sales on total revenue which is
slightly more than 10% increase. The company record pension adjustment operating margin of
12% in the interest of employees and have a policy regarding supplier relationships. It also
appointed four country chief executives in each of its four foreign country markets and finally
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NOC Analysis – Group 45
Northrop Grumman aggressively focused on unmanned systems,.C41SR, cyber and logistics and
modernization, as well as manned strike aircraft systems which is projected to increase sales.
WEAKNESS: Since the end of 2009, the company have seen decline in sales and its inadequate
research to identify the needs of additional new global markets. Northrop Grumman has over
reliance on the U.S Government as a single customer with more than 86% of total revenue
during the past several years. The company inability to negotiate the terms and condition for U.S
Government contracts which is highly regulated industry.
OPPORTUNITIES: Northrop Grumman ability to retain existing domestic market share as well
as increase global market share. Its International expansion should be planned with metrics.
THREAT: Due to the nature of the industry, export licenses and controls the limit in the
international expansion and political, economic and social factors poses risk to penetrating
export markets. Country risk rating with respect to payment of funds may limit the need to
expand international and foreign currency exchange rate fluctuations may hinder growth.
Another potential threat is the risk of decreased U.S Government funding may lead to fewer
contracts and the additional regulations may create technical barriers to trade.
Values of Key Personnel
Northrop Grumman Corporation, values of the key personal are based under the company values.
Some of the Company’s values that are adhere are: “We take responsibility for QUALITY” and it
means that its products and services are the best in class in terms of values received for dollars
paid. The company delivers excellence, strive for continuous improvement and respond
vigorously to change. Each one of the employees is responsible for the quality of whatever they
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NOC Analysis – Group 45
do. Another one of the company key values is its “Customer Satisfaction”. Northrop Grumman
is dedicated to satisfying its customers and believes in respecting the customer they serve,
listening to their request and understanding their expectations. They strive to exceed their
expectations in affordability, quality and on-time delivery. The company provides”
LEADERSHIP” as a company and as individuals. Northrop Grumman’ leadership is founded on
talented employees effectively applying advanced technology, innovative manufacturing and
sound business management. More value are added at a lower cost with faster response and each
lead through its competence, creativity and teamwork. Acting with INTEGRITY in all they do is
one of the key values personal for Northrop Grumman. Each person is personally accountable
for the highest standards of behavior, including honesty and fairness in all aspects of their work.
The company fulfills its commitments as responsible citizens and employees. Integrity means
treating customers and company resources with the utmost respect and Northrop Grumman
exhibits that and more. The company respects each employee and takes great pride in the
significant contribution that come from the diversity of each individual and ideas. Northrop
Grumman success requires us to provide the education and development needed to help its
people grow. It is committed to openness and trust in all relationship. The company regards
their supplies as essential team members as well as owes the suppliers the same type of respect
that they show to their customers. The suppliers deserve fair and equitable treatment, clear
agreements and honest feedback on performance. The needs of the suppliers are considered
when conducting all aspects of the business.
The relationship with suppliers and government is based on the instruction that the company
realize that business in an “open matter and above matter” not seeking to influence business in an
improper way. Northrop Grummandoes not offer any business courtesy to their customers or
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NOC Analysis – Group 45
government officials than can ultimately affect the decision to doing business with the company.
Example of this could range from travel and luxuries items, tickets or invitation to various events
to name a few. Employees are prohibited from accepting gift or compensation from suppliers or
contractors in exchange of their benefits or maintaining a business that could engage in a conflict
of interest.
Northrop Grumman considers that their corporate responsibility could be assets in several areas
such as:
Corporate citizenship: the company encourages employees to participate in their communities,
promotes cultural awareness and diversity, supports education programs and gives a solid
support to the troop’s ad veterans.
Corporate diversity and inclusion: the company promotes diversity and they understand that
success comes from understanding and learning different cultures and opinions.
Corporate environmental policies: the company is committed to deliver a healthy workplace, as
well as conducting business in environmentally responsible manner and reducing the impact in
the environment. All business is required to adhere to federal and government regulations. The
company promotes conservation policies not only at work but at the home of their employees.
Northrop Grumman Foundation was created to inspire students to study careers in the field of
science to be the next environment innovations.
SOCIETAL EXPECTATION
Northrop Grumman is a leading global security company providing innovative system, cyber
security, solutions in unmanned system to government and commercial customers worldwide.
Many view cyber security as something that everyone should be aware since most of the dealing
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and wheeling are done online. The company applies core competencies and innovative
capabilities to address the diverse and complex issues facing its customers including the defense
of the nation and alias; Cyber security and homeland security. The expectation of the company is
to work with ethics, integrity and trust as well as be the most trusted provider of system and
technologies that ensures the security and freedom of the nation. Societies have pressured
security agencies to protect and safeguard and Northrop Grumman ensures that the freedom and
security of the country is the first and foremost priority. Another important expectation from
Northrop Grumman is the environmental impact of the company. A Northrop Grumman greeNG
program strategy includes the use of renewable energy and addresses its role in encouraging
green power to be produced as part of the national grid. Engaging the employee in environment
initiatives and expanding environmental awareness is essential to the success of the greeNG
program. Employees are offered diverse opportunities to learn more about topics such as
recycling, composting, native gardening energy and water efficiency at home. Northrop
Grumman has responded very well to societal pressure while still being able to retain the most
profitable company in the global security industry.
ACCOUNTING ANALYSIS
Northrop Grumman works mainly off contracts with the US government, Department of
Defense, and the intelligence community. As such, they partake in many “accounting estimates”
that can differ materially from reported figures. The estimates and judgments are made using the
most current and best available information and an affect assets, liabilities, revenue, and
expenses. The major effect of the estimates can be seen in Northrop Grumman’s revenue
recognition.
Principles of Consolidation
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NOC Analysis – Group 45
Northrop Grumman and its subsidiaries are consolidated in the financial statements to eliminate
all material intercompany accounts, transactions, and profits. Investments in equity securities and
joint ventures where the company has significant influence, but not control, are account for using
the equity method.
Competitor Comparison: Boeing, Lockheed martin, and Raytheon all followed the practice of
consolidating their financials to eliminate intercompany transactions.
Revenue and Estimates
In recognizing revenue, Northrop Grumman uses mainly two methods: Cost-to-Cost or Units-of-
Delivery method of percentage-of-completion accounting.
Cost-to-Cost Method: Sales under cost-reimbursement contracts and construction type
contracts are accounted for using this method. The reasoning is that these types of
contracts provide for deliveries at lower volumes or a smaller number of units.
Units-of-Delivery: Contrary to the cost-to-cost method, this method is utilized for higher
volume rates per year or large number of units. Under this method, revenue is recognized
as units are delivered to the client.
The calculation for profit on contracts is the difference between total estimated revenue and total
estimated cost of a contract at completion. The recognition of profit occurs as costs are incurred
(cost-to-cost) or as units are delivered to customers (units-of-completion).
Northrop Grumman may sometimes include estimated amounts not contractually agreed to by
the customer. Such items are: price redetermination, cost or performance incentives, un-priced
change orders, claims, and requests for equitable adjustments. All items are included in revenue
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when they are reliably estimable and realization is probable for the exception of one. Un-priced
change orders require that they are probable of recovery in an amount at least equal to the cost.
Changes in estimates of contracts revenues, expenses, or profits are recognized using the
cumulative catch-up method of accounting. This method calls for the cumulative effect of the
changes in current and prior periods to be recognized in the period that changes are made
(current). The future periods are then changed as if the revised estimates had been used since the
beginning of the contract. If a loss is determined to arise from the completion of a contract, the
entire amount is recognized when identified. Loss provisions are first offset against costs that are
included in unbilled accounts receivable or inventoried costs. Any remaining amount will appear
in liabilities in the balance sheet.
