A benefit from a cost claim combined with a pension tailwind drove Northrop Grumman’s [NOC] net income higher in the second quarter and the company’s sales also rose, driven in large part by development work on the Air Force’s new B-21 stealth bomber.

Net income increased 7 percent to $552 million, $3.15 earnings per share (EPS), from $517 million ($2.85 EPS), easily beating analysts’ expectations by 28 cents per share. The cost recovery action added $54 million to operating income. The tax rate was higher in the quarter versus a year ago, which moderated the gains at the bottom line.

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

Operating income was up at all three reporting segments, with all benefiting from the cost recovery action. Overall operating margin increased 10 basis points to 13.4 percent while segment operating margin fell 40 basis points to 11.8 percent due to changes in contract mix on manned aircraft and the timing of risk reductions on space programs at Aerospace Systems.

Sales increased 6 percent to $6.4 billion from $6 billion a year ago, led by a double-digit increase at the Aerospace Systems segment and a modest increase at Mission Systems. Northrop Grumman doesn’t mention the B-21’s contributions to sales but said classified manned aircraft and work on the E-2D Advanced Hawkeye airborne early warning aircraft drove the sales at Aerospace Systems, with the Triton unmanned aircraft system also aiding the top line. Increased volume related to the F-35 fighter program and SABR radar upgrade program for F-16 aircraft led the gains at Mission Systems.

Free cash flow was $290 million in the quarter and international business was up 4 percent.

Based on performance so far this year, Northrop Grumman raised its sales and earnings guidance for 2017. Earnings are now expected to be between $12.10 and $12.40 EPS, up 30 cents from the prior outlook, and sales are expected to be in the low $25 billion range, up slightly from around $25 billion. Operating margin is forecast to be in the mid to high 12 percent range versus the earlier outlook of mid-12 percent.

Wes Bush, Northrop Grumman’s chairman, president and CEO, said on the earnings call that the company expects national security spending to grow modestly “for the foreseeable future.” Later in the call, he cautioned about “some uncertainty” in the budget environment in terms of Congress completing work in time on an FY ’18 spending bill.

“And I think many in our customer community are of a mind that we are likely to have a continuing resolution at the end of the year,” Bush said. He added that in the past, customers have behaved in various ways at the start of each new government fiscal year when a continuing resolution is in place. A continuing resolution typically means no new programs can begin and funding is limited to prior year levels until a budget is agreed to.