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Financial Analysis of Northrop Grumman EssayThe mo interlockingary analysis of Northrop Grumman includes the examination of profitability, liquidity, and equity ratios, its 3 form old-hat hurt, as tumefy as a general financial overview of the attach to. This case study exams their fiscal schema as swell as the debt utilization and possible effects of the fiscal crisis on Northrop Grumman. This scroll com scoregons Northrop Grumman to other companies in the demurrer sector by comparing their ratios as well profitability. The paper leave provide the reader with an understanding of the financial makeup of the corporation and its current and recent military operation as well as estimates of future net take to the woods. Overview of Northrop GrummanNorthrop Grumman is one of the worlds major falsification embraceors. Northrop Grumman is an innovative confederacy that has long history of making aircraft and other crossways that support the falsifying industry. North rop Grumman is made up of the former Northrop and Grumman companies and xviii other companies that bemuse been integrated into one successful corporation. Northrop Grumman has four firsthand sectors in its seam pre cristalse aerospace systems, electronic systems, information systems, and technical services. The federation has its head cantons in Falls Church, Virginia, and production facilities across the coupled States, with major facilities in California, Virginia, and Maryland. Northrop Grumman is the third grandst falsification contractor in the world.Some of Northrop Grummans primary competitors ar Lockheed Martin, Raytheon, Boeing, and L-3 Communications Holdings, Inc. Northrop Grumman plans on remaining competitive even with the flagellum of sequestration looming over the federal organisation and the threat of an additional $ vitamin D Billion in defense cuts above the currently planned $500 billion in defense cuts. They plan on remaining competitive by being c ompetent to successfully develop and market their products, to stay ahead of the competition. This is done by reaming innovative, and providing the facilities and people to accomplish these goals of create and manufacturing new products and support businesses and governments in information technology.History of Northrop GrummanNorthrop was founded in 1939 by Jack Northrop in Hawthorne, California. The company produced its piteous aircraft in 1940, the N-3PB patrol hero for the Norwegian Air Force. The first production aircraft for the join States troops Air Force was the P-61 Black Widow. They go alongd developing aircraft for the United States Air Force, competing in the bomber contract in the mid-1940s for the long range heavy bomber contracts using his radical flying wing designs of the XB-35 and XB-49, which were in competition with the B-36 and B-47. This was a highlight of Jack Northrops development of technologically advanced aircraft.In 1959, they had the first flight of the F-5 a supersonic low cost fighter that would serve as the basis of the T-38 supersonic jet trainer for the USAF, and later on the F-20 an up gradationd version of the F-5. They besides designed the US first intercontinental ballistic missile the Shark. They observed with development of many courses culminating with the B-2 Spirit Stealth Bomber, currently the near advanced and expensive bomber ever reinforced for the US Air Force. In 1994 they acquired the Grumman heap and became Northrop Grumman.The Grumman Corporation swallowed out in the 1930 was submissive in the development of Naval Aircraft. They built the XFF-1, built in 1931, was the first naval aircraft with retractable get gear. The built the widely successfully naval fighters the Wildcat with the first ever sto-wing and the Hellcat one of the most successfully carrier aircraft of World War Two. Grumman pr taked to develop aircraft for the United States Navy, developing the F9F Panther, one of the United States Navys earliest jet fighters. Grumman continued to develop jet aircraft, including the A-6 Intruder family of aircraft for the Navy, as well as the F-14 Tomcat, made famous by the movie Top Gun. Most nonably the Grumman designed and built the Lunar Lander for the Apollo program.Key ProductsNorthrop Grumman is primarily involved in four related by withal trenchant industries which atomic number 18 also their lens nucleus competencies. They atomic number 18 involved in aerospace systems, electrical systems, information systems and technology systems. enfolding in these key areas allows them to point on their customers impoverishments for unnerve air systems command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) logistics, and cyber security. The company is currently involved in a many major programs for the Defense part. They are producing the RQ-4 world-wide Hawk an unmanned air system (UAS) that is the only UAS that is a llowed to fly in US airspace. They are also developing and producing agile electronically scanned array radars for the F-35 and F-16 as well as a multitude of electronic warfare systems wish well the US Navys Next Generation Jammer. The Lightning family of advanced targeting pods is also a key program within Northrop Grumman, with the Lightning Generation four reaching its 250th produced unit.Northrop Grumman is also developing the X-47b for the US Navy, which would conk them a stealth carrier launched unmanned combat air vehicle, which would be the first for the US Navy. This aircraft also made history, by being the first unmanned combat air vehicle to accomplish a catapult launch, on 29 November 2012 at the Naval Air Station Patuxent River, Maryland (McKinney 2012). Northrop Grumman is also a partner with Lockheed Martin in building major components to the F-35 Lightning II Joint Strike Fighter Program, specifically the center fuselage and weapons bay. They also inscribe in t he civilian sector with the flat sequencing system for the US Post Office, and information systems for the Department of native land Security and public 911 services.Financial ConditionNorthrop Grumman is a financially secure company that is find outing to nurse its current status quo. According to their mensurate rake Report they were given an A++ place for financial stability. quantify Line is also estimating their 2012 revenues at $25100 one million million, which represents a decrease of $1312 million. Even though the companys revenues slang decreased since 2010, they turn in been able to maintain their strength in the defense industry. They are keep mum the third largest defense contractor even with their recent sell offs of peeledport News and Huntington Ingalls Industries, In corporated.This sell off, the drawdown in the Iraq and Afghanistan, and the decreases defense spending has led to a decrease in revenues however according to Value Time, their revenue in 2013 is estimated to be $2,500 million a decrease of only $100 million. Northrop Grumman also carriers a middle storey stupefy order of BBB+, BBB+, and Baa+ from the 3 major bond raters, S P, Finch, and Moodys. These rating supply that Northrop Grumman is stable company with an average seam price for 2012 of $63.13.Northrop Grumman Fiscal StrategyNorthrop Grummans corporate strategy can be explained in the 2011 Annual Report opening quote from CEO Web Bush, 2011 was an neat year for Northrop Grumman, affirming that our focus on performance, portfolio alignment and stiff cash deployment continues to create value for our look atholders, customers and employees and position our company positively for the future. This quote states the overall direction that CEO Web Bush is taking Northrop Grumman into the future. The key to this strategy is Northrop Grumman focusing on performance. An example of this was an earnings per share increase of 17% on diluted shares to $7.41 (Northrop Gr umman 2011). In 2011, with the spinoff of their shipbuilding department, they were able to provide, $1.6 billion in equity to their shareholders (Northrop Grumman, 2012). These actions beat all been to provide the most proceeds to their shareholders.Northrop Grumman is also focusing in on the new strategies that the Department of Defense is pursuing, with over 90% of their business with the DoD and the US government by focusing in on the growth areas of the DoD. C4ISR, unmanned systems, cyber security, and logistics are leading the way as the new focus of Northrop Grumman as they are the portions of the DoD that impart continue to grow with the current budget issues facing the Obama presidency. They are also chronic its focus on their aerospace division which is the most profitable, since Northrop Grumman is a prime contractor on the F-35 and the F/A-18, as well as the builder of the Global Hawk. They are also seeing the US budget problems as an ideal point to start pursue the i nternational market place more, like the recent sale of Global Hawks to the North Atlantic Treaty Organization (NATO). Their continued focus of on tuneholders value core they need to focus on their key priorities of unmanned air system, C4ISR, logistics, and cyber security.Another part of Northrop Grummans strategy is making minor and major acquisitions into other companies allowing them to expand their business, which in turn leave behind help increase stockholders value. They go forth from time to time create strategic alliances, form joint ventures, and dispose of or spinoff companies when they commit that these actions provide aid in creating more value for their stockholders. Northrop Grummans strategic plan is to continue to focus on increasing shareholder value as well as to continue to maintain their cutting march in technology and in the defense industry, and to develop systems that will support the DoD new strategies as US forces leave Afghanistan and begin to focus on the Pacific Region.The current fiscal crisis that is gripping the US, with large cuts to the defense budget, expiration of the George W. Bush tax cuts, increased tax rate, cuts to social programs, and new taxes from the Patient tax shelter and Affordable Care Ac 2010, will directly affect Northrop Grumman at all levels. However, Northrop Grumman is in a position to succeed with the cuts and tax increases and the possibility of another $500 billion in budget cuts to its largest customer, the Department of Defense in the event of sequestration, because of the companies diversity within the defense market and their mix of being the primary contractor and a subcontractor on many contracts.They plan on continuing their focus on their core industries needs of the DoD. Northrop Grumman also believes that their business is well positioned within the US government, because of the diversity of programs they are working on like the F-35 Lightning II, RQ-4 Global Hawk, Minute Man III upgra des, next generation jammer, and other classified programs. These programs, with their splendour to the US DoD will allow Northrop Grumman to remain viable during the fiscal crisis, and remain profitable. They also believe that a deal will be reached averting the crisis, and allowing business to continue.Northrop Grummans Weighted Average monetary value of smashingNorthrop Grumman has a weighted average cost of not bad(p) of 8%. This represents the low cost at which Northrop Grumman is able to procure financing. They currently maintain been secureing back down shares, which are increasing shareholders equity by making each share worth more as well they have been utilizing debt effectively. They particularly have been using bonds to buy back stock as well as for financing capital programs. They use the weighted average cost of capital as a tool in de edgeining discount rate and terminal value assumptions. The weighted cost of capital takes into consideration the recounting wei ghts of the components of their capital structure. This is used to measure the costs of new capital, and with a weighted average cost of capital at 8%, Northrop Grumman seems to balance in its approach to capital which is a sign of a fledged and financial stable company.ProfitabilityNorthrop Grumman has been a profitable company over the course of its history. In 2002 their lettuce were $697.0 million and a Value Line estimate of $2,005 million for 2012, which are almost three generation the profits of 2002. These recent profits can be attributed to the trading operations in the Middle East, particularly the wars in Iraq and Afghanistan, which have increased profits in ein truth major defense contractor.Northrop Grumman plans to remain profitable during the defense cuts from 2011-2021 by continuing their excellence in their product development, manufacture and support. Failure in any of these areas will have a negative effect on their profitability. They also need to ensure that their contracts are holy on time and on budget, to ensure that with some of the current contracts and political environment that either they do not get canceled, or that they do not have continue on with their own funds. other things that could affect profitability would be a failed rocket launch or failure of a product that cannot be fixed causing a contract to be canceled.Northrop Grummans net profit margin has also increase since 2002. In 2002 their net profit margin was 4.1% and has increased gradually to an estimated 8.0% in 2012. However, Value Line estimates that their net profit margin will decrease to 7.3% in 2013 and fall to 6.8% till at least 2015. The gradual increase in profits is attributed to the wars in the Middle East, where at that place has been an increased beseech on their products, but the estimated decrease will be a result of the winding down of operations in the Middle East and the fiscal crisis enveloping the US Government.Even though their profits an d net profit margin is planning on decreasing in 2013 and beyond according to Value Line, Northrop Grumman will remain profitable and thereby allowing to focus on their strategy of performing well for their shareholders. This increase in profitability is in line with their strategy of performance particularly with their stock price, which investors take the firms profitability into account. This has resulted in an average return on capital of 9.2%. Their return on capital is estimated to continue this increase rate by means of 2017 at 11.5%. Northrop Grummans EBITA Margin for 2011 is 14.26% at $3,304,000 million which has been increasing since 2010 and should continue to steadily increase even with the future budget uncertainty in the US government.Dividend PolicyNorthrop Grumman is also a stable company because of its dividend form _or_ system of government. Northrop Grumman offers a quarterly dividend and has been compensable a dividend since 1943 except for 1949-1950. The div idend payouts for 2012 were $0.50 for the first quarter and $0.55 for each subsequent quarter, come ining $2.15, with earnings per share of $7.40 estimated for 2012 resulting in a 29% dividend payout ratio. When compared to other companies in the defense industry, Northrop Grumman is on par with its main competitors in regards to a dividend payout ratio with Boeing having a 2011 dividend payout ratio of 31% and Lockheed Martin of 41% in 2011 (Tortoriello, 2012). In 2011, Northrop Grumman was able to allocate $2.8 billion to give back to shareholders by repurchasing stock and through dividends. These strong cash flows in 2011 were a result of the spinoff of their shipbuilding industry, and $26,412 million in sales.The company is continuing its share repurchasing in 2012 with $290 million allocated to repurchase 13.6 million shares, with $2.0 billion left in that program (NOC earnings release, 2012). This along with the $2.15 dividend in 2012 represent Northrop Grumman strength as a company and their resolve to focus on their shareholders, by buying back stock, making it worth more and continuing to raise their dividend. Prior to the 2000s Northrop Grumman conducted its dividend policy like a utility with dividends that did not change its payout year to year. This all changed when Ron clams became CEO of Northrop Grumman in 2003.He began a program the resulted in stock redemption programs and was able to double the dividend payout during his tenure. CEO Sugar was able to raise the sales per share, however this did not result in an increase in the share price, which a low of $33.80 (Forbes, 2011). Northrop Grumman through their current CEO Wes Bush has increased their emphasis shareholder returns. He was able to the do by increasing dividends by an average of $0.13 per year and an average dividend of $1.78, since 2007. The 2012 dividend will be $2.15 with the fourth quarter paid on Dec 31, 2012. Northrop Grummans dividend policy is to continuously provide a di vidend to its shareholders and to continuously attempt to increase the dividend as well. Another part of Northrop Grummans dividend policy is the stock buyback program. Northrop Grumman has been doing this since 2010, since they have excess cash from the spinoff of Newport News and Huntington Ingalls Industries, Incorporated, the shipbuilding portion of Northrop Grumman and recent bond issues to buy back stock, in lieu of issuing a higher dividend.Corporate Bond Policy and Debt UsageNorthrop Grumman uses corporate bonds like many other companies, for acquisitions, capital expansion projects, and refinancing existing debt. They currently have nine bond issues out with refer payments ranging from 1.85-7.81% with maturity dates from 2014 to 2040. Its current credit rating from SP, Fitch and Moodys is BBB+, BBB+, and Baa1. These rating mean that Northrop Grumman has a lower medium grade rating, however according to Moodys their debt poetic rhythm are at the high end of their current c lass of debt. Their current long term debt on 31 December 2012 will be $3,935.0 million (Value Line, 2012). Since 2009 they have paid of $256.0 million towards their long term debt. In 2011, Northrop Grumman paid $2,692 million in interest payments, according to their 2011 Annual report. They are projecting paying $207.0 million in 2012, which is lower than 2011, but that number is likely to rise at least through 2017.In November of 2010, Northrop Grumman issued a tender offer to buy its bonds back for a total of $2.119 Billion of bonds from its subsidiaries. Concurrently, they have a public offering of senior unsecured debt securities for debt repayment, pension funds, acquisitions, share repurchases, and working capital. On 15 February 2011, Northrop Grumman had a bond issue of $750 million at maturity with an interest rate of 7.125%. Moodys has not down or upgraded Northrop Grummans bond rating, due to a large order of RQ-4 Global Hawks to NATO, and because of a $4.0 billion shar e repurchase plan. That sale could have a positive effect on their bond rating. All in All, Northrop Grumman has had legion(predicate) bond issues, and is currently using its latest one for a multitude of purposes.Industry ComparisonNorthrop Grumman is one of the top five defense companies in the world with defense revenues in 2010 of $31,181 billion (Tortoriello, 2012). Northrop Grumman as the one of the leading defense contractors in the world and is on par with or exceeding its competitors. Comparing the profitability of Northrop Grumman to its peers in the defense industry, we can take a look at figure 1 and compare profitability ratios of Northrop Grumman with the averages in their industry group. The median return on assets (ROA) for the search and navigation equipment is 7.10%, Northrop Grumman currently has a ROA of 7.45% as of 31 Dec 2011, and their current ROA is 5.72% as of 30 September. Using 2011 numbers, Northrop Grumman is slightly more profitable than the other firm s in its SIC industrial grouping. Northrop Grumman is also effective in how they finance their activities, by using a mix of bonds, stock options, and other forms of financing.As of 2011 their total debt to equity ratio is 0.38 when compared to the industry average is of 84.40 is significant because it shows little financing Northrop Grumman is using at this time, however, they are still have a decent bond rating of Baa1 from Moodys and Value Line has their financial strength listed as A++. The industry average for the libertine ratio is 2.00. Northrop Grummans 2011 quick ratio was 0.97. With a quick ratio below one, this shows that Northrop Grumman is highly effective at creating cash from its investments and work activities. In examining these ratios it shows that Northrop Grumman is a highly successful and stable company that would present a low essay investment to an investor. However, it is to be seen what the possibilities of sequestration and cuts to the military have on th ese ratios and the profits and low debt that Northrop Grumman has during the 2000s.Stock damage AnalysisNorthrop Grumman is a publicly traded firm on the New York Stock Exchange, under the symbol NOC. As of 14 December, 2012 they currently have 254,000,000 shares of common stock outstanding. They currently have zero preferred stock and $3,935 million currently in bonds. According to Northrop Grummans last cash flow statement, they paid $543 million in dividends. As of 15 November 2012, the board of directors decided to issue a quarterly dividend of $0.55 per share due 12 December 2012. Northrop Grumman since 2009 has paid an average dividend of $1.83. They also have repurchased $2,194 million in company stock, and they have been doing this for the last(prenominal) few years as another way to compensate their investors besides dividends.Northrop Grumman over the past thirty-six months has seen its stock rise and fall and continue on that path with an average volatility of 2.0. The low volatility of their stock is representative of a stable company, and stable stock prices, that would attract conservative investors, and give new investors faith that they will receive a decent return on their money. Northrop Grumman during this time has since its stock prices with a high of $71.87 and a low of $49.26. The few really large troughs in the wave that the stock price creates is August of 2011 and fall of 2009. These troughs represent the low times for Northrop Grummans stock, but during these times there stock has been steadily climbing specifically after Wes Bush took over as CEO and began to focus on improving the share price as well increase the performance of the company.These dual actions have led to an increase in their share price as well helping the company come down debt, and increase capital to deal with the impending financial crisis that could possibly lead to another recession. As of 14 Dec 2012, Northrop Grumman is trading at $67.37 (yahoo finance, 2 012) they have consistently been trading in the upper $60s since July of 2012, when the stock price was rising from a low of $57.29 in June of 2012. Northrop Grumman stock has been rising because of the good ratings they have received from numerous media outlets, such as Value Line and yahoo Finance.The rise in stock prices and favorable rating can be attributed to the company renewed focus on its core industries and the spinoff of its ship building subsidiaries. Their performance has increased under the leadership of their current CEO Wes Bush. Their stock prices have also remained stable in recent months, because of the strong cash presence, which is adding investor friendly initiatives such as a raising the dividend and repurchasing stock, as well as lobbying for new contracts, like the $30 million post office contract and the NATO contract to buy RQ-4 Global Hawks. Lastly, Northrop Grumman is one of the more stable companies with an estimated EPS in 2012 of $7.40, down $0.01 fr om 2011, which is indicative of a stable company that is meeting or exceeding its performance estimates.Currency RiskNorthrop Grumman is exposed to foreign currency assay however they are not at a great risk to fluctuations in foreign currency. They are exposed to the risks of foreign currency from their international operations. They mitigate foreign currency risk by submission into foreign currency earlier contracts as to manage portions of receipts from international customers and payments that may be have to made to international partners. As of 31 December 2011 Northrop Grumman had $233 million in foreign currency forward contracts outstanding (Northrop Grumman, 2011). With $26,412 million in sales in 2011, (Northrop Grumman, 2012), $233 million is not very significant, and they believe a 10% change in interest rates of foreign currency exchange rates would not have a significant effect on the financial position or effect their operations.Capital MarketsNorthrop Grumman will be affected by the volatility and disruption the domestic and international credit markets. Northrop Grumman admission charge these markets from time to time when they need capital to support capital expansion projects, refinancing of existing debt, and for evolving lines of credit. With the current fiscal crisis in the US and Europe, will make it difficult for Northrop Grumman access credit on favorable impairment or at all which will have an adverse effect on the fiscal standing. They are at risk, because of counterparty default because they deal with bankers and brokers in the credit market, when they have need for more capital. Their suppliers are also at risk with the volatility and disruptions in the credit markets from the fiscal crisis. If their ability to access credit on favorable terms, or at all could adversely affect Northrop Grumman by forcing them to change suppliers, which could lead to them to be unable to meet their contractual obligations.This could cause delay s in programs or force them to find other means to assist their suppliers to support their contracts. Northrop Grumman has also entered into credit agreements amounting to an aggregate principle of $2 billion. This is a revolving door 364 daytime credit agreement that will help them cover costs over the short in the event of a decrease in cash. This revolving line of credit is based on many rates, including the LIBOR or an twitch rate. Northrop Grumman will be facing issues in the credit market, due to the fiscal crisis in the US, and the instability in the federal budget and the looming threat of sequestration, which will directly affect the credit markets. However, the slow growth rates of the US economy, and economy remaining on the brink of falling back into recession has kept interest rates low, which is an attempt to make credit easier to access.ConclusionNorthrop Grumman is a leading defense contractor in the United States that has four main business areas, aerospace system s, electronic systems, information systems, and technical services. They are involved in many products that are used or are in development for the Department of Defense, from the RQ-4 to new electronic warfare systems. Northrop Grumman currently receives 90% of its revenues from the US government, primarily from military contracts. They are also a very stable company that has been increasing their dividends over the past few years, as well as having a steady stock price that has been increasing as well.Their currently a lower medium grade bond rating, rated at Baa+ from Moodys. They have a strong history of supporting the US military with a multitude of historic aircraft and systems that support these aircraft. Northrop Grumman will continue to excel within the looming threat of sequestration and $1 trillion in budget cuts to the defense budget over the next ten years. All in all, Northrop Grumman is a leader in the defense industry and will continue to be a profitable company durin g the drawdowns in the Middle East and the defense budget cuts facing the US armed forces.ReferencesDefense System Staff (2012) NATO inks $1.7B deal for Block 40 Global Hawks, 1105 Media, Vienna, VA. Retrieved on November 10, 2012 from http//defensesystems.com/articles/2012/05/21/agg-nato-global-hawks-contract.aspx. 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