Northrop Grumman on Wednesday reported a strong second quarter on higher earnings and sales and strong order flow also drove a substantial increase in the company’s backlog.
The company also ended the week in a position to be the sole bidder on a massive contract to build the Ground-Based Strategic Deterrent: the next-generation, nuclear-tipped intercontinental ballistic missile slated to replace the Minuteman III beginning in 2030. Boeing pulled out of the competition, citing an unfair advantage to Northrop, which owns its own rocket motor production business. There is only one company besides Northrop that provides the solid-fueled motors needed for the Minuteman replacement to fly.
Northrop Grumman net income increased 9 percent to $861 million, $5.06 earnings per share (EPS), from $789 million ($4.50 EPS) a year ago, beating consensus estimates by $0.38 per share. Sales increased 19% to $8.5 billion from $7.1 billion.
The primary driver behind the higher sales was the contribution from the rocket business of the former Orbital ATK, which Northrop Grumman acquired last June. Organic sales, were up 4%, driven by infrared countermeasures, airborne radar, classified programs, space payloads and mission programs at the Mission Systems segment, and F-35 production and a civil space program at the Aerospace Systems segment.
The Orbital ATK acquisition, in addition to providing a captive solid rocket motor business, also made Northrop part owner of Consolidated Nuclear Security, the National Nuclear Security Administration’s management and operations contractor for the Y-12 National Security Complex in Tennessee and the Pantex Plant in Texas. If the NNSA exercises all options, the Bechtel National-led team could stay on the job through October 2024. The 10-year award’s average annual value is roughly $2 billion.
Northrop is also building the Air Force’s next strategic bomber, the B-21 Raider. The costs of that program are classified.
Northrop’s classified work, as a percent of revenue, is growing across its businesses, Kathy Warden, Northrop Grumman’s president and CEO, said on a call with analysts. The company booked $843 million in classified space work during and $4.5 billion in the first quarter, she said.
Overall, orders in the second quartered totaled $13.5 billion, fueling an increase in backlog to $63 billion from $57.3 billion at the end of the first quarter.
Income at the operating segment level was robust, with all four of the company’s segments contributing, led by the Orbital ATK acquisition, but also due to improved performance on classified programs, improved performance in services work, the absence of a charge for information technology work that dented earnings a year ago under a state and local services contract, and higher sales at Aerospace Systems.
Segment operating margins rose 70 basis points to 11.6%
Based on performance so far this year combined with the outlook for the rest of 2019, Northrop Grumman boosted its adjusted earnings guidance for the year to between $19.30 and $19.55 per share from the prior outlook of between $18.90 to $19.30 per share. The forecast for sales remains around $34 billion.
Warden said that within the Aerospace Systems segment, space business is expected to be the leading growth driver given government budget increases. It will also be “one of the fastest growing segments in the company over time,” she said of the space division.
The outlook for the Aerospace Systems segment remains positive overall with growth expected in programs like the E-2D Hawkeye airborne warning aircraft, F-35, and unmanned aircraft, particularly given the ramp up in the Triton program for the Navy and international sales, Warden said.
Free cash flow in the quarter was $1.4 billion.
This story first appeared in Nuclear Security & Deterrence Monitor sister publication Defense Daily.
