The acquisition last year of Orbital ATK combined with strong results in the company’s Aerospace Systems led to a solid opening quarter for Northrop Grumman [NOC], with sales and earnings higher and the outlook for earnings higher this year.

Net income increased 3 percent to $863 million, $5.06 earnings per share (EPS), from $840 million ($4.79 EPS) a year ago, whipping analysts’ expectations by 46 cents per share. Sales increased 22 percent to $8.2 billion from $6.7 billion, with the Orbital ATK deal accounting for $1.4 billion of the gain

Outside of Orbital ATK, which makes up the company’s new Innovation Systems segment, the sales and earnings drivers were due to increased volume on the B-21 stealth bomber, F-35 fighter, E-2D airborne early warning aircraft, Triton unmanned aircraft system, and a secure satellite communications program at the Aerospace segment.

Northrop Grumman President and CEO Kathy Warden. Photo: Northrop Grumman

Sales were flat at Mission Systems while operating income was up slightly on improved performance, and sales were off 15 percent at Technical Services, which posted a 16 percent drop in profit on the sales decline. Mission Systems will return to growth in the second quarter and Technical Services late this year, Kathy Warden, president and CEO of Northrop Grumman, said on the company’s earnings call.

While Innovation Systems also drove the higher earnings, Northrop Grumman also said improved operating performance helped boost the bottom line. The company overcame higher corporate expenses and a slight pension headwind to increase earnings.

Segment operating margins rose 50 basis points to 11.8 percent.

Warden said that the recent $323 million award by the Navy for engineering and manufacturing development of the company’s Advanced Anti-Radiation Guided Missile (AARGM)-Extended Range is an example of the synergies expected from the Orbital ATK acquisition. Innovation Systems leads the effort with contributions from two of the company’s other segments, she said.

“This draws from the full breadth of our technologies and capabilities for delivering high-speed missile systems and demonstrates our ability to work seamlessly across the company to provide needed capabilities to our customers,” Warden said.

The AARGM-ER will first be fielded on the Navy’s F-18E/F and F-18G aircraft and will be the first supersonic long-range missile to be deployed on the F-35 Joint Strike Fighter, Warden said, adding the missile is “expected to be the strike weapon of choice for both the Navy and the Air Force.”

The Air Force variant of AARGM-ER is funded in the fiscal year 2020 budget request and is called Stand In Attack Weapon, she said.

Follow-on production awards for AARGM-ER will eventually reach the “multi-billion dollar range,” Warden said.

Integration of Orbital ATK into Northrop Grumman continues to go well and cost savings are starting to be realized across the company, Warden said. Revenue synergies from the deal are also being realized in the space and missiles portfolios, she said, highlighting AARGM-ER as an example.

While sales guidance was unchanged at around $34 billion, the outlook for earnings in 2019 was increased to between $18.90 and $19.30 EPS from prior projections of between $18.50 to $19 EPS due to lower than expected interest expense.

Orders in the quarter were $12.3 billion and backlog rose 7 percent to $57.3 billion from the end of 2018, driven by increases at Mission and Aerospace Systems. Free cash was a $1.2 billion outflow in the quarter.