October 10, 2005
Northrop Grumman updates guidance on hurricane impact
Northrop Grumman Corporation (NYSE: NOC) has updated its assessments of damage, work delays and cost growth resulting from hurricanes Katrina and Rita.
Production work has resumed on the 11 ships under construction at Northrop Grumman Ship Systems operations in New Orleans, La., Pascagoula, Miss. and Gulfport, Miss., and approximately 12,500 of its 19,800 employees are back to work at these shipyards.
"The Gulf Coast shipyards are a national asset critical to serving America's security needs," says Ronald D. Sugar, chairman, chief executive officer and president. "Although we experienced significant damage and disruption from the hurricanes, our team has already made solid progress in restoring the yards and resuming production. We are working closely with our customers to fully reinstate this vital capability. We're extremely proud of the hard work and dedication our employees continue to display in the face of extreme personal hardship."
Ship Systems facilities incurred significant damage from Hurricane Katrina, with lesser damage reported at several smaller operations in the area.
Damage from Hurricane Rita was minor.
A preliminary property damage assessment has been completed, and the company currently estimates that the cost to replace and repair its property, plant and equipment will be approximately $1 billion. The company currently estimates that the net book value of the damaged property, plus the cost of clean-up and recovery, is less than $500 million. The company's insurance provider for coverage of losses over $500 million has verbally advised the company of a disagreement regarding coverage for certain losses above $500 million. Notwithstanding this disagreement, the company continues to expect to recover from its insurance carriers the preponderance of its cost to replace and repair its damaged property.
While a substantial portion of the workforce has returned, ship production schedules have been significantly delayed. Work delays are now expected to reduce 2005 earnings per share by $0.08 versus the previously estimated range of $0.06 to $0.12 per share. The delayed work is now expected to be performed in 2006 and 2007.
In addition to work delays, the company will also incur additional costs under its current Ship Systems contracts due to hurricane related delay and disruption of work under those contracts
The cost growth is expected to reduce earned margin on these contracts. As a result, in the third quarter of 2005, the company expects to take a charge to earnings of $0.25 to $0.30 per share to account for contract cost growth. In addition the company expects to report lower than previously planned margin under those current contracts into the future. The total impact of cost growth on 2005 earnings is expected to be $0.30 to $0.35 per share. When combined with the impact of work delays, the total reduction to 2005 earnings is expected to be approximately $0.40 per share. The company is working with its customers and insurers to mitigate the potential impact of this cost growth. The company maintains business interruption insurance; however, the company cannot presently estimate the timing or amounts recoverable in subsequent periods. Accordingly, no such amounts have been recognized by the company.
As a result of hurricane related work delays and cost growth, the company now expects 2005 revenue of $30.5 to $31 billion compared with previous guidance of $31 to $31.5 billion, and 2005 earnings per share of $3.55 to $3.65, compared with previous guidance of $3.90 to $4.00 per share.
The reduction in 2005 estimated earnings reflects approximately $0.40 per share impact of work delays and cost growth due to the hurricanes. Although the impacts of the hurricanes will put pressure on the company's cash from operations, the company continues to expect 2005 cash from operations of $2.2 to $2.5 billion.
For 2006, the company continues to expect revenue of approximately $32 billion and earnings per share of $4.10 to $4.30.
For 2006, the company expects that Ship Systems' recovery to normal levels of operation may affect the company's near-term working capital performance. As a result, the company now expects 2006 cash from operations of approximately $2.3 to $2.5 billion compared with its previous guidance of approximately $2.5 billion.
As the company progresses toward full recovery it will continue to assess whether its goodwill and other intangible assets at the affected locations are impaired.