On Jan. 30, Northrop Grumman (NYSE:NOC) reported its fourth-quarter results, as well as 2014 guidance. The good news is Northrop's 2014 EPS guidance of $8.70 to $9.00 beat analysts' estimates. The bad news is its total backlog declined to $37 billion for 2013, compared with $40.8 billion in 2012 -- not good for long-term investors.
However, international interest for Northrop's Global Hawk has increased, which is potentially great news for Northrop's future profits. Here's what you need to know.
The Global Hawk
Northrop has four business segments, of which, Aerospace Systems -- which includes the Global Hawk -- is the most profitable. In 2013, the Aerospace Systems division had sales of more than $10 billion, compared with Northrop's next highest business segment for 2013 -- Electronic Systems -- which reported $7.1 in sales.
More importantly, while overall Aerospace sales were up for the year, Northrop's fourth-quarter sales declined, as Northrop stated, because of "lower volume for unmanned and space programs." Furthermore, "Unmanned volume was lower for several programs, primarily Global Hawk."
The unmanned future
The good news is that in December, Northrop began production of Global Hawks for NATO and, according to Reuters, is also working on a similar deal for South Korea. This could be worth around $848 million.
Moreover, the use of unmanned aerial systems, or UASes, like the Global Hawk, is increasing: Indeed, the Pentagon wants the use of drones to increase significantly by fiscal 2022. While it's likely that most of that increase will come from smaller -- and less expensive -- drones, like AeroVironment's (NASDAQ:AVAV) RQ-11 Raven, Northrop is arguably one of the premier names in UASes and will probably profit from the expansion in UAS use.
What to watch
Northrop's declining backlog is concerning, and long-term investors would do well to continue tracking it. However, it's not unexpected, given the nature of reduced government spending. The good news is Northrop has expanded its international sales, and Reuters reports that Northrop expects international sales to make up a larger percentage of its revenue in 2014. Plus, $37 billion is still a substantial amount of money, and drone use is expected to increase significantly over the coming years. Consequently, Northrop investors shouldn't be too worried, but keep an eye on backlog.