Northrop Grumman [NOC] on Wednesday posted a slight increase in sales and a slight drop in net income due to lower segment margins and pension headwinds but per share earnings rose nicely due to a lower share count stemming from the company’s repurchases of its stock.
Net income dipped nearly 3 percent to $517 million, $2.85 earnings per share (EPS), from $531 million ($2.74 EPS) a year ago, topping consensus estimates by 32 cents per share. Operating margins fell a half-percent on lower segment income and higher pension expense but the company’s repurchase of $682 million worth of its stock resulted in a 6 percent decline in the share count, which boosted share returns to investors.
The company raised its earnings guidance for the year to between $10.75 and $11 EPS to reflect year-to-date performance and a 20 cents EPS tax benefit that will accrue in the third quarter. The previous earnings guidance was between $10.40 and $10.70 EPS.
Sales edged up 2 percent in the quarter to $6 billion from $5.9 billion a year ago.
The sales gain was driven by higher volume on classified programs, subcontract work on the F-35 Joint Strike Fighter, the Global Hawk and Triton unmanned aircraft system programs, the Surface Electronic Warfare Improvement Program Block III jammer, the Joint Counter Radio Controlled Improvised Explosive Device Electronic Warfare program, the G/ATOR Ground/Air Task Oriented Radar, and Common Infrared Countermeasures program, the company said.
Wes Bush, Northrop Grumman’s chairman, president and CEO, said on the earnings call that the company’s Aerospace Systems segment is reaching an “inflection point where new programs and the planned ramp ups on production programs are beginning to outpace declines on mature legacy programs.”
Segment operating income was down a percent to $731 million as a decline in Aerospace Systems more than offset increases at Mission Systems and Technology Services. Aerospace profit was down on contract mix related to manned aircraft programs and lower risk retirements versus a year ago while profit was up at Mission Systems on contract mix and at Technology Services on improved performance.
Segment margins fell 40 basis points in the quarter to 12.2 percent while overall operating margins were down a half-percent to 13.3 percent.
Bush said he expects the government will start its FY ’17 in October under a continuing resolution, which will “constrain our customers’ ability to achieve planned program ramp-ups and start new programs.” He added that while these resolutions have become routine, the “larger concern” will be how long it lasts, with longer equaling more “disruption” to acquisition plans.
With its win last year of the Air Force’s classified B-21 bomber program, for which the contract value hasn’t been disclosed, Northrop Grumman isn’t providing backlog numbers until year-end but is providing trends. Ken Bedingfield, the company’s chief financial officer, said that overall this year backlog has increased due to an increase at Aerospace, which has more than offset a modest decline at Mission Systems and a high single-digit decline at Technology Services.
Free cash flow in the quarter was $431 million.