Northrop Grumman Posts Solid First Quarter Results; Says Won’t Bid GPS III, F-35 Sensor

Northrop Grumman [NOC] on Wednesday opened its fiscal year 2018 with solid results, driven by improved operating performance, lower taxes and a pension benefit, and the company upgraded its earnings outlook for the year.

Northrop Grumman officials also said on their earnings call that the company won’t bid for the second phase of production for the Air Force GPS III satellite program or on a recompete of a next-generation sensor for the F-35 Lightning II fighter aircraft that it is the incumbent for.  

Last week, Boeing [BA] said it also wouldn’t bid for the GPS III contract to build another 22 satellites, which leaves Lockheed Martin [LMT] likely as the sole bidder. For the F-35, Northrop Grumman is a key supplier to prime contract Lockheed Martin, including for the AN/AAQ-37 Distributed Aperture Sensor (DAS), which provides 360-degree situational awareness to the pilot for aircraft and missile threats, targeting, and day and night navigation.

Northrop Grumman Chairman and CEO Wes Bush. Photo: Northrop Grumman

Northrop Grumman Chairman and CEO Wes Bush. Photo: Northrop Grumman

Wes Bush, Northrop Grumman’s chairman and CEO, and Kathy Warden, president and chief operating officer, both said on the company’s earnings call that the GPS and DAS programs are relatively unattractive versus other potential business opportunities. The company has been very clear that it won’t pursue programs, no matter how big, that don’t offer returns on investments in accordance with its criteria.

These criteria are “critical to long-term, sustained performance,” Warden said. Bush said that the F-35 is still a very positive program for Northrop Grumman, which has other content on the aircraft, including supplying the center fuselage.

Lockheed Martin is hosting the competition for a new DAS. In response to a query about the competition, Lockheed Martin provided a statement to Defense Daily that said "We are constantly looking for ways to reduce costs of the F-35, as well as enhance capability. While we have conducted a competition related to the next iteration of our DAS system, it is premature to discuss specifics."

Net income in the quarter was up 14 percent to $739 million, $4.21 earnings per share (EPS), from $650 million ($3.69 EPS) a year ago, cruising past analysts’ expectations by 57 cents a share. The pension tailwind was the biggest contributor to the increased bottom line while segment operating profit was up 3 percent and segment operating margin dipped 30 basis points to 11.3 percent.

Sales were up 5 percent to $6.7 billion from $6.4 billion a year ago, driven by higher sales of classified aircraft systems, which is the Air Force B-21 stealth bomber, as well as the F-35, Navy E-2D early warning aircraft, and self-protection sensors and targeting systems. Warden said the company’s F-35-related revenue was up 30 percent from a year ago and that it delivered 20 center fuselages for the program during the first quarter, up from 15 a year ago, demonstrating a successful ramp up in production.

The higher operating income was driven by gains at the Aerospace Systems segment, due to improved sales, and at Mission Systems, also on better sales.

With a lower than expected tax rate now planned for the year, Northrop Grumman raised its earnings guidance by 40 cents to between $15.40 and $15.65 EPS.

The pending acquisition of Orbital ATK remains on track to close during the first half of 2018, Warden said.

Free cash flow in the quarter was an outflow of $542 million. The company still expects to generate between $2 billion and $2.3 billion of free cash this year.

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