Northrop Grumman [NOC] on Thursday posted solid third quarter financial results driven by strong operating performance at its business segments and pension gains, helping the company overcome higher taxes.
Net income increased 6 percent to $986 million, $5.89 earnings per share (EPS), from $933 million ($5.49 EPS) a year ago, slamming consensus estimates by 27 cents per share. Sales increased 7 percent to $9.1 billion from $8.5 billion a year ago.
All four of the company’s operating segments generated higher profit, driven by higher sales at three of the segments and improved operating margin. The overall segment operating margin rate was 11.5 percent in the quarter versus 11.3 percent a year ago.
The Air Force’s award in September of a new ICBM contract to Northrop Grumman drove exceptional orders, as the company booked $20.3 billion in business, a book to bill ratio that was 2.2 times sales. The Ground Based Strategic Deterrent (GBSD) win accounted for $13. 3 billion in orders and the company also said classified programs contributed $1.9 billion and the F-35 fighter program $900 million to the strong order flow.
The impressive order flow also drove total backlog to a new record, $81.3 billion at the end of the quarter, up 25 percent so far this year from $64.8 billion at the end of 2019.
The GBSD program is expected to add $1 billion to sales in 2021 and grow further in 2022, Kathy Warden, Northrop Grumman’s chairman, president and CEO said during the company’s earnings call. Work on the cost-type engineering and manufacturing development contract will also pressure margins in the Space Systems segment in 2021 and 2022, she said.
At the operating level, the Space, Mission and Aeronautics Systems segments posted higher sales led by classified space work, Next Generation Overhead Persistent Infrared early warning satellite, Artemis crewed spaceflight program, launch vehicles, hypersonics programs, airborne radar, self-protection and targeting systems, maritime and land systems and sensors, classified cyber and intelligence mission solutions, classified manned aircraft programs, the E-2D Hawkeye airborne early warning program, F-35 and unmanned aircraft programs.
Warden said that following recent successful captive carry tests of the Air Force-Defense Advanced Research Projects Agency Hypersonic Air-breathing Weapon Concept (HAWC) the program is on track to move into free-flight testing. She also said the company is “establishing manufacturing plans to meet initial low-rate production quantities” for HAWC. Northrop Grumman is providing the scramjet combustors to prime contractor Raytheon [RTN] for HAWC.
Higher operating income at the operating level was led by Space Systems due to the higher sales, overhead rate performance at Aeronautics, improved performance on Battle Management and Missile Systems at the Defense Systems segment, and higher sales at Mission Systems.
Given year-to-date results and expectations for more good results in the fourth quarter, Northrop Grumman increased its outlook for sales, earnings and free cash flow this year.
Sales are now forecast to be $400 million higher and be between $35.7 billion and $36 billion. Adjusted earnings are pegged to be between $22.25 and $22.65 EPS, 25 cents above prior guidance. Free cash flow is expected to range between $3.3 billion and $3.6 billion, up from prior expectations of $3.15 billion to $3.55 billion.
Free cash in the quarter was $1.1 billion and was $1.9 billion through the first nine months of the year.
The company also outlined expectations for 2021, with sales up 3 to 5 percent to a range to the low to mid $37 billion range. Dave Keffer, Northrop Grumman’s chief financial officer, said on the earnings call that Space Systems will grow in the low to mid-teen percentages fueled by a robust backlog with GBSD and classified awards.
Mission Systems is expected to grow in the mid-single digits, driven by classified business and airborne and ground radar programs, Keffer said. Aeronautics is expected to grow in the low-single digits in 2021 due impacts on commercial aircraft production stemming from the COVID-19 pandemic, flattening production related to the F-35, and defense budget pressures on large unmanned aircraft system programs, he said.
Defense Systems is expected to be flat next year as the segment copes with a $400 million loss in revenue from operating an Army ammunition plant that is transitioning to a new contractor, Keffer said.
He also said that segment margin in 2021 will trend to the low end of the 2020 guidance range of 11.3 to 11.5 percent. There will be opportunities to offset the expected decline in Space Systems margin rate due to the GBSD development contract through improved program performance and cost reductions elsewhere in the company, Keffer said.