Tags: Northrup | NOC | LMT | defense

Northrop Grumman Ahead of Coming Cuts

By    |   Tuesday, 27 Sep 2011 11:58 AM

When Northrop Grumman (NOC) decided to leave its roots in sunny Los Angeles and get closer to one of its key customers, the Department of Defense, heading for Virginia seemed like a good plan. Now that the Pentagon budget is in doubt, cost savings associated with the move might be one of the company’s saving graces.

The company announced in September 2010 that it would cut 500 aerospace jobs in California. A year later, the company again said it would lose another 500 more aerospace positions just in time to coincide with the opening of the new headquarters in Falls Church, Va. Along with those cuts came the opportunity for 23,000 employees to voluntarily quit.

The company is now reviewing the decisions of those 23,000. Those who decide to take the buyout offer will be granted a one-time lump sum along with extended health care benefits.

Northrop had to bring in a global relocation service to buy out the CEO’s house in LA in order to help with the move to Virginia. The CEO will be reimbursed against a loss when the house sold and will be have security upgrades for his new home covered. The VP/CFO will receive a lump sum of $750,000 to handle relocation costs.

Much like its competition Lockheed Martin (LMT), NOC is taking the opportunity to shore up some cheaper money ahead of potential cuts in DOD. It is spending by securing a five-year revolving credit facility in an aggregate principal amount of $1.5 billion, led by JP Morgan, as well as a $500 million 364-day revolving credit facility, also led by the bank.

Cheaper debt

The new credit facilities replace a previous $2 billion, five-year credit facility under the Amended and Restated Credit Agreement dated as of Aug. 10, 2007 and extends it through 2016.

At its second quarter reporting on July 27, the company reported $6.56 billion in sales, down from $7.26 billion the year before. Interest expenses for the quarter declined to $53 million due to the issuance of $1.5 billion of lower coupon debt in the 2010 fourth quarter and the retirement of $1.4 billion of higher coupon debt, demonstrating the company’s continued dedication to securing cheaper finance.

Bernstein Research said in a recent note that defense stocks are at historic lows, meaning there’s significant upside potential. Deutsche Bank has a hold rating on NOC with a price target range of $69 to $74. Northrop Grumman next reports Oct. 26.

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When Northrop Grumman (NOC) decided to leave its roots in sunny Los Angeles and get closer to one of its key customers, the Department of Defense, heading for Virginia seemed like a good plan. Now that the Pentagon budget is in doubt, cost savings associated with the move...
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