Bolstered by generally solid results across its operating segments, Northrop Grumman on Thursday reported higher sales and earnings in its second quarter and the company raised its outlook for the top and bottom lines for 2020.
in a quarterly call with investors, Kathy Warden, the company’s chairman, president, and chief executive officer, said the company still expects the Air Force in late August to award it a $10 billion to $15 billion contract for engineering and manufacturing of the Ground-Based Strategic Deterrent (GBSD) program: the Air Force’s effort to replace the existing nuclear-tipped fleet of silo-based Minuteman III intercontinental ballistic missiles.
Net income rose 17 percent to $1 billion, $6.01 earnings per share (EPS), from $861 million ($5.06 EPS) a year ago, smashing consensus estimates by 69 cents per share. The company attributed the higher earnings to a pension benefit, segment performance, and favorable returns on marketable securities, partially offset by a higher tax rate.
Sales increased 5 percent to $8.9 billion from $8.5 billion a year ago.
Sales rose in three of the company’s four sectors led by a solid-double digit percentage increase at Space Systems followed by Aeronautics Systems and Mission Systems. The top-line was boosted by a number of programs including classified, Next Generation Overhead Persistent Infrared Radar, Arctic Satellite Broadband Mission, hypersonics and launch vehicles, classified manned aircraft, the E-2D and Triton aircraft, airborne radar programs, Guided Multiple Launch Rocket System, Advanced Anti-Radiation Guided Missile, and classified mission readiness programs.
Space Systems, which will take care of the GBSD work, is Northrop Grumman’s fastest growing segment and is expected to remain so in 2021 and beyond based on work in backlog and future opportunities, Warden said on the call. The segment garnered $9.2 billion in orders during the quarter, including a $5.9 billion classified award that she said is “quite significant” and a “long-term program.”
All four sectors posted increases in operating income led again by Space Systems on higher sales, the benefit of a favorable resolution on a government accounting matter in Aeronautics, and improved performance in mission readiness.
The Air Force expects to procure more than 650 GBSD missiles, which beginning in 2030 are scheduled to start replacing 400 deployed Minuteman III missiles on a one-for-one basis. Missiles not deployed will be spares used for testing, or to backstop potential one-off failures of individual launchers.
The Air Force expects to spends about $100 billion to acquire, maintain, and operate GBSD through the 2080s. The missiles will use W87-0 and W87-1 warheads provided by the National Nuclear Security Administration.
After lowering its sales and adjusted earnings forecast following the first quarter due to the COVID-19 virus, Northrop Grumman increased its guidance for the rest of the year based on first half results and believing the worst of the pandemic is behind it.
Sales are now forecast to be between $35.3 billion and $35.6 billion, up from the first quarter forecast of $35 billion to $35.4 billion, due to better than expected revenue in the Aeronautics Systems segment in the second quarter. The bottom end of the new outlook is in line with projections made in January and the top end is $200 million below the original guidance.
Adjusted earnings are expected to range between $22 and $22.40 EPS, 20 cents higher than forecast at the end of the first quarter but still 75 cents lower than expected going into this year. The company also increased its outlook for free cash flow by $100 million on the high end of the range to between $3.2 billion and $3.6 billion.
Orders in the quarter were a robust $14.8 billion of which $7.4 billion is for classified work and total backlog stood at $70 billion, up 8 percent from $64.8 billion at the end of 2019. Free cashflow was $2.1 billion.
Cash flow in the quarter received a $300 million boost due to payroll tax deferrals in a COVID relief bill and an increase in some customer progress payments, Dave Keffer, Northrop Grumman’s chief financial officer, said on the call.
During the earnings call, one analyst asked Warden why she didn’t sign a letter earlier this month with other defense industry executives asking Congress for financial relief to reimburse companies for unanticipated costs stemming from COVID-19. She replied that the impacts on the company from the pandemic have been less than it expected and less “than projected elsewhere” due to a continued focus on providing for a safe work environment, ensuring suppliers have what they need, and working with customers “to be innovative in how we continue to get work done.”
Northrop Grumman is focused on “Making these impacts as small as possible so that we are not in a position where we have an additional bill for taxpayers to get capability delivered,” she said.
During the quarter, COVID-19 did suppress sales on the company’s work on the F-35 fighter program in its Aeronautics segment.
This story first appeared in Nuclear Security & Deterrence Monitor affiliate publication Defense Daily.
