Northrop Grumman [NOC] on Wednesday posted a solid increase in net income due to a tax benefit, although sales declined slightly.

Net income increased 4 percent to $531 million, $2.74 earnings per share (EPS), from $511 million ($2.37 EPS), beating consensus estimates by 41 cents per share. The tax benefit for research credits from prior year returns contributed $38 million (20 cents EPS) to the bottom line, with per share results also helped by a lower share count.

Northrop Grumman-built Global Hawk unmanned aerial vehicle (UAV). Sales of unmanned aircraft are expected to increase in 2015. Photo: Northrop Grumman.
Although Northrop Grumman reported a slight decline in second quarter revenue, sales of unmanned systems increased. Here is shown the company’s Global Hawk unmanned aerial vehicle. Photo: Northrop Grumman.

The company’s operating profits at its business segments were flat at $742 million versus a year ago but better than analysts had expected. A strong double-digit increase at the aerospace systems segment due to risk retirements on a classified program was offset by declines in the other segments.

Sales fell 2 percent to $5.9 billion from $6 billion a year ago. 

Northrop Grumman’s technical services, electronic systems, and information systems segments all posted low to mid-single digit revenue declines on lower volume on the ICBM program, completion of the Combined Tactical Training Range (CTTR) program, lower volume for the Consolidated Afloat Network and Enterprise Solutions (CANES) program, in-theater force reductions, completion of the Ground Combat Vehicle (GCV) program, and lower volume for land and self-protection systems, and airborne tactical sensor programs.

The aerospace systems segment had a sales gain of less than a half-percent, driven mainly by unmanned systems programs and to a lesser extent space programs. Wes Bush, Northrop Grumman’s chairman, president and CEO, said on an earnings call that he believes that “we’re still at the early stages of understanding collectively from a defense and security, and perhaps even more broad perspective, how unmanned systems” will increasingly have roles in missions for the United States and its allies. Moreover, he said the company has demonstrated through its Global Hawk unmanned aircraft system program the ability to bring operating costs down to an “attractive” level that the “cost equation” will continue to improve as uses of the systems grow.

Free cash flow in the quarter was $511 million and the company increased its guidance for 2015 free cash to between $1.9 billion and $2.1 billion versus the prior outlook of between $1.7 billion and $2 billion. Bush gave no indication on the call that Northrop Grumman is interested in pursuing any significant merger and acquisition opportunities, saying there are is “big burning hole in our portfolio,” so any decisions will be “value based and we really have to see the business case for something to make sense for us,” noting later that “we do not manage our company on the top line, we manage the company based on value creation.”

Northrop Grumman’s cash priorities continue to be reinvesting in the company, managing the balance sheet, dividends and share repurchases, Bush said.

Northrop Grumman raised its per share earnings outlook for the year to between $9.55 to $9.70 EPS, accounting for the tax credit, lower share count, and better than expected segment operating results. Prior guidance was between $9.40 and $9.60 EPS.

Sales guidance is maintained at between $23.4 billion and $23.8 billion because the company expects the federal government to begin its fiscal year 2016 in October with a continuing budget resolution, Bush said. The company still expects international customers to account for 15 percent of annual sales.

Orders in the quarter were $4.6 billion and total backlog at the end of the quarter stood at $37 billion, down from $38.2 billion at the end of 2014. Funded backlog stood at $22.6 billion.