A manufacturing process change that will allow Northrop Grumman [NOC] to reduce risk, increase production rates, and set the foundation for expanded production numbers of the B-21 stealth bomber beyond current plans helped lead to a $397 million after-tax loss on the Air Force program in the first quarter, the company said on Tuesday.
The manufacturing change relates to the first five low-rate initial production (LRIP) options for the bomber, including a $226 million pre-tax reserve on the first two lots. On top of the change, Northrop Grumman said the B-21 charge also accounts for higher than expected prices and “consumption” of “general procurement materials” due to macroeconomic factors and lessons learned so far in initial aircraft production, Kathy Warden, Northrop Grumman’s chairwoman, president, and CEO, said on the company’s earnings call.
Current plans call for 100 B-21s although the Air Force has said it is considering increasing production beyond that and the process change provides “optionality” for this, Warden said. It will help the customer “de-risking options beyond the program of record,” she said.
Production of the first two LRIP lots is ongoing, and the purchase of some long-lead items have been purchased through the fourth lot, Warden said. The company does not expect to have to relearn the lessons of the manufacturing process changes incorporated in the first two production options for future lots, she said, adding that without the changes “that learning only would have compounded if we would have waited later in the program and had a higher production volume.”
Warden declined to break out the respective values of the process charge and the materials costs, but noted the former is higher. The investment in the process change was a joint decision with the Air Force, she said.
“So, we’ve built a good bit of experience now in building the aircraft, and as we have progressed through the build process, we made the determination working with the Air Force to reduce risk as we scale to the program of record, which will happen at the end of LRIP, and even to position us now to ramp above the program of record,” Warden said.
The five LRIP lots cover 21 B-21s. The next 19 bombers will be contracted under not-to-exceed (NTE) terms that were set at a higher price than LRIP deal. Northrop Grumman still expects to turn a profit under the NTE contract, Warden said, noting the manufacturing process change should “positively impact our ability to deliver the NTE units profitably.”
Increases in the cost and quantity of the general procurement materials could be a partial drag on the aircraft built under the NTE terms, she said.
Overall, in the quarter, net income tumbled 49 percent to $481 million, $3.32 earnings per share (EPS) from $944 million ($6.32 EPS), far below consensus estimates of $6.24 EPS). In addition to the B-21 charge, earnings also declined on lower operating profit in the Space Systems segment—down on lower sales—and the Mission Systems segment—off on investments in classified business opportunities and lower sales in microelectronics.
Segment operating margins were 6 percent versus 10.1 percent a year ago, reflecting the B-21 charge and operations at the Mission Systems segment.
Sales in the quarter fell 7 percent to $9.5 billion from $10.1 billion a year ago, with the B-21 being a $100 million headwind. Sales related to sustainment of the F-35 fighter were also down, partly due to materials timing, and the Space Systems segment also recorded lower revenue on the wind-down of work on classified space and the Next Generation Interceptor programs, declines in NASA resupply missions, and work on Space Development Agency and other classified space programs.
International business accounted for 14 percent of sales in the quarter.
The outlook for sales in 2025 is unchanged at between $42 billion and $42.5 billion and the same with free cash flow, which is forecast in the $2.9 billion to $3.3 billion range. However, segment operating income is now expected to be between $4.2 billion and nearly $4.4 billion, down from the prior range of nearly $4.7 billion to $4.8 billion. Adjusted earnings are forecast between $24.95 and $25.35 EPS, down a dime from previous guidance.
Warden also gave an update on a recent explosion at a solid rocket motor-related facility in Promontory, Utah, that produced an ingredient used in the propellant for large rocket motors. Northrop Grumman has external supply sources and does not expect an impact on its programs, she said.