Northrop Grumman [NOC] on Thursday reported strong second quarter financial results led by a number of programs in its Space Systems and Mission Systems segments and the company again raised its top and bottom-line guidance for the year.
Net income increased 3 percent to $1.04 billion, $6.42 earnings per (EPS) from $1.01 billion ($6.01 EPS) a year ago, smashing consensus estimates of $5.85 by 57 cents per share. Federal taxes were higher in the quarter. Sales also increased 3 percent to $9.2 billion from $8.9 billion.
The top and bottom-line results were impacted by the sale earlier this year of Northrop Grumman’s information technology (IT) solutions business to the private equity firm Veritas Capital. Excluding results from that business, organic revenue climbed 10 percent in the quarter.
Space Systems, the company’s fastest growing segment, led the charge, posting strong double-digit gains in sales, up 34 percent, and operating profit, up 44 percent. Northrop Grumman cited various programs in the segment for the results including the Ground Based Strategic Deterrent (GBSD) ICBM and Next-Generation Interceptor missile defense development efforts, NASA’s Commercial Resupply Services to the space station and Artemis lunar programs, hypersonic and classified programs, the Next Generation Overhead Persistent Infrared satellite program and risk retirements.
Asked on the company’s earnings call why sales and profit in the Space Systems segment are expected to decelerate in the second half of the year, Kathy Warden, chairman, president and CEO, replied that “This business has exceeded our expectations frankly since it was stood up 19 months ago and we aren’t betting against it in the second half but generally we don’t forecast that kind of success that the business is having, but we certainly strive to deliver it and that’s what the team has been doing all year to this point.”
The space business is a combination of legacy Northrop Grumman capabilities and a portion of the former Orbital ATK business that it acquired in June 2018.
The Mission Systems segment also contributed to the strong results with an 18 percent increase in operating income and a 6 percent gain in sales. Various programs contributed to the growth including the Ground/Air Task-Oriented Radar, marine systems and international programs, GBSD, airborne radar, and the Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare program. Income benefited from the higher sales, the favorable resolution of an accounting matter and a contract mix with higher margins.
The increases at Space and Mission Systems more than offset declines at Defense Systems, which suffered from the IT business divestiture and the close out of an Army ammunition contract, and flattish results in the Aerospace Systems segment.
Segment operating margin rose 60 basis points to 12.2 percent versus a year ago.
Strong results in the first half of the year combined with an improved outlook for the second half led the company to raise its guidance for 2021. Sales are now forecast to be between $35.8 billion and $36.2 billion, $500 million above the prior outlook.
Adjusted earnings are now expected to be between $24.40 and $24.80 EPS, up from the previous projection of $24 to $24.50. The increase is largely being driven by operating improvements.
Northrop Grumman notched $6.5 billion in orders in the quarter and backlog at the end of June stood at $76.6 billion, down 5 percent from $81 billion at the end of 2020. Adjusted free cash flow in the quarter was $1.2 billion, which included a $390 million gain from the sale of the IT business.