Development of the B-21 stealth bomber for the Air Force is going well and 2019 revenue on the development effort is expected to level off, the new CEO of Northrop Grumman [NOC] said on Thursday.
Kathy Warden didn’t mention the B-21 by name but said that the leveling of sales on the program, which is classified, “is consistent with what we would typically see in a program that’s executing well and has completed its critical design review (CDR).”
Northrop Grumman is the prime contractor for the B-21, which in late November successfully completed its CDR, the Air Force said in December.
Speaking earlier on Northrop Grumman’s fourth quarter earnings call, Warden said that sales in the quarter and all of 2018 were higher for “restricted manned aircraft,” which is how the company describes the B-21 in its financial reporting. Sales on the program will be “roughly equal” in 2019, she said, adding it is “executing successfully.”
Northrop Grumman reported a steep drop in its net income in the fourth quarter due to the adoption of a new accounting method but overall the company’s operating results were strong.
The company in December announced that it would adopt the mark-to-market method of pension accounting, which turned out to be a $655 million expense in the quarter. Net income dove 47 percent to $356 million, $2.06 earnings per share (EPS), from $672 million ($3.83 EPS) a year ago. Adjusting for the new accounting method, income more than doubled to $851 million ($4.93 EPS), and handily topped analysts’ estimates by 51 cents per share.
Sales in the quarter were up 24 percent to $8.2 billion from $6.6 billion a year ago.
The acquisition of the former Orbital ATK last June drove most of the sales increase, contributing nearly $1.5 billion, with work on the Ground-based Midcourse Defense missile interceptor, F-35 fighter, and Trident II ballistic missile programs leading the charge. Orbital ATK was folded into Northrop Grumman as the Innovation Systems segment and Warden said the “cultural” and “operations” integration continues to progress well with costs savings targets on track.
Warden said that sales on the F-35, which Lockheed Martin [LMT] produces, were almost $3 billion across the company, accounting for nearly 10 percent of Northrop Grumman’s 2018 sales. Within the Aerospace Systems segment, which also contributed to topline growth in the quarter, she said F-35-related sales were up 25 percent versus a year ago, in part on the delivery of 121 center fuselage units, an increase of 47 units from 2017.
The company’s Mission Systems segment delivered 125 Multi-Function Radar Arrays, 830 Distributed Aperture System (DAS) sensors, and about 4,400 Communications, Navigation and Identification modules for the F-35, Warden said. Raytheon [RTN] is developing DAS sensors for future F-35s. Mission Systems sales on the program were up about 10 percent in 2018 versus 2017, she said.
F-35-related sales in 2019 are expected to grow in the mid-to-high single digits, Warden said.
Innovation Systems contributed $143 million of operating income in the fourth quarter and all three of the company’s legacy segments–Aerospace, Mission Systems and Technology Services–also contributed to higher operating profit, as did a lower tax rate.
Overall in 2018, net income increased 13 percent to $3.2 billion ($18.49 EPS) from $2.9 billion ($16.34 EPS) in 2017 and operating margin increased 20 basis points to 12.6 percent. Adjusting for the accounting change, income soared 48 percent to $3.7 billion ($21. 33 EPS).
Sales for the year increased 16 percent to $30.1 billion from $26 billion a year ago, with international revenue amounting to $4.4 billion, 15 percent of the total.
In 2019, Northrop Grumman is forecasting about 13 percent sales growth to around $34 billion, with most of that coming from the Orbital ATK deal, and organic growth in the mid-single digits, Warden said. The rest will come from the Aerospace and Mission Systems segments.
Warden also said that the month-long partial shutdown of a portion of the federal government hasn’t impacted financial results so far but cautioned that another shutdown or prolonged continuing resolution for these departments and agencies could impact the company.
The company expects adjusted earnings this year to range between $18.50 and $19.00, with the results weighed down in part on pension expenses, higher taxes, and a cost claim benefit in 2018 that won’t repeat in 2019. Operating margin is forecast in the mid-to-high 10 percent range.
Free cash flow is expected to be between $2.6 billion and $3 billion. Free cash flow in 2018 was $2.6 billion.
Orders in 2018 exceeded $32 billion and total backlog at the end of 2018 stood at $53.5 billion, with $8.2 billion of that in Innovation Systems.
Warden also disclosed that she has consolidated the Technology Services, integrating the Advanced Defense Business Services and System Modernization and Services areas into the Global Services business area. She said the new arrangement will make the segment more competitive and integrated that is focused on high-end information technology services around software sustainment, development and modernization, secure networking, cloud and IT infrastructure, training systems, and cyber operations.