Northrop Grumman [NOC] on Thursday reported strong first quarter results driven by gains across its operating segments, particularly Aeronautics Systems, which benefited from work on fighter and unmanned aircraft.
Net income increased 12 percent to $944 million, $6.32 earnings per share (EPS), from $842 million ($5.50 EPS) a year ago, smashing consensus estimates of $5.78 per share. Sales increased 9 percent to $10.1 billion from $9.3 billion.
Aeronautics Systems enjoyed strong double-digit growth in revenue and operating profit driven by work on the B-21 bomber, F-35 fighter, both production and sustainment, the E-2 airborne early warning aircraft, and the Triton and Global Hawk unmanned aircraft, and cost and program efficiencies.
The B-21 and F-35 programs benefited from improved timing of material receipts, boosting revenue in both programs that exceeded expectations. There were no charges on the B-21, unlike the fourth quarter of 2023 when the company increased its estimate to complete the low-rate initial production (LRIP) phase of the program by $1.2 billion.
“Good progress” on B-21 is being made on the test phase of development efforts and in LRIP, Dave Keffer, Northrop Grumman’s chief financial officer, said during the earnings call. He also said that the negotiations have been finalized with more suppliers and are in the “late stages” of negotiations with the remaining suppliers.
International business accounted for about 14 percent of sales in the quarter and that percentage is expected to grow faster than domestic business over the next few years due to a number of programs in the pipeline, including Integrated Battle Command System, the Integrated Viper Electronic Warfare Suite to modernize fourth generation aircraft—a potential multi-billion-dollar product line—the Triton unmanned aircraft system, and missile products and ammunition, Kathy Warden, Northrop Grumman’s chairwoman, president and CEO, said on the call.
Northrop Grumman’s Operations also benefited from work on missiles and ammunition, classified microelectronics, the Space Development Agency’s Tranche 2 Transport Layer, classified space work, NASA’s Commercial Resupply Services, hypersonics, and the counter-hypersonic Glide Phase Interceptor weapon.
Pension tailwinds also contributed to higher net income.
During the quarter, the company finished implementing an upgrade to its financial enterprise resource planning system, which was a “massive undertaking” that will support digital transformation efforts, operational efficiencies, and margin expansion, Warden said.
Northrop Grumman tallied $6.5 billion in orders, well below sales, but the company expects its book-to-bill ratio for the year to be “near” annual sales, Warden said. Backlog stood at $78.9 billion, down 6 percent from $84.2 billion at the end of 2023. The government’s termination for convenience related to classified work in the company’s Space Systems segment that was disclosed in January resulted in a $1.6 billion reduction to backlog.
Free cash was a $976 million outflow in the quarter. Northrop Grumman maintained its financial guidance for 2024, including free cash flow between $2.3 billion and $2.7 billion.
The company’s outlook did not include potential work in the Air Force’s unmanned Collaborative Combat Aircraft (CCAs) first phase, Warden said. This week the Air Force selected Anduril Industries
and General Atomics to build production representative test CCAs in increment one of the program, leaving Northrop Grumman, Boeing [BA], and Lockheed Martin [LMT] out for now (Defense Daily, April 25).
Warden said that while disappointing, Increment 1 is “relatively small” and highlighted that the service will be maintaining competition for subsequent CCA phases, which are already being outlined. The loss does not change the company’s strategy around autonomy, she said, noting that the first of four Triton deliveries to Australia will occur later this year, and there is the potential to sell five unmanned aircraft to NATAO for maritime surveillance.
“But we’ll monitor how the CCA program progresses and incorporate any learnings that we have into those future opportunities,” she said.
Seth Seifman, an aerospace and defense analyst with J.P. Morgan, noted that Northrop Grumman’s autonomous unmanned aircraft are typically “exquisite” products and asked how that fits with increasing demand for more affordable solutions.
Warden replied that the company is driving down costs and does “not want to be viewed as only offering exquisite and expensive technology.” Northrop Grumman’s CCA offering was “compelling” and it “can compete in that marketplace,” but the company is “positioned” to provide solutions against “high-end threats,” and is “not looking to compete in a more commoditized part of the market” with low-cost attritable products, she said.
“That’s just not our business model,” Warden said.