A day after winning the Air Force’s new $80 billion bomber program, Northrop Grumman [NOC] on Wednesday reported strong third quarter net income and the company increased its earnings guidance for the year.
Given the classified nature of the stealth bomber program, the company had little to say about what comes next and referred analysts on Wednesday’s earnings call to Air Force information accompanying the selection of the contractor on Tuesday.
Wes Bush, Northrop Grumman’s chairman, president and CEO, said the Long Range Strike Bomber (LRS-B) contract “validates that we are successfully positioning Northrop Grumman for innovation and affordability in support of our customers’ missions.”
Bush also said that the company’s internal resources required to support development of the LRS-B won’t limit it in other major pursuits such as the Air Force’s Joint Surveillance Target Attack Radar System recapitalization and T-X trainer programs and the Navy’s Unmanned Carrier-Launched Airborne Surveillance and Strike program.
There is “substantial capacity” within Northrop Grumman to take on LRS-B and other major development efforts largely given that other programs like the F-35 strike fighter, E-2D Advanced Hawkeye airborne early warning aircraft, and the Triton unmanned aircraft system, have moved, or are moving, from design and development into production, Bush said.
In awarding the LRS-B contract to Northrop Grumman, senior Air Force officials mentioned the importance of open architecture and open mission systems standards to enable future competition for the aircraft’s components and subsystems.
Bush put his support behind the Air Force’s moves in general to move to open mission systems and architectures saying for years Northrop Grumman has been a “strong proponent of that architectural strategy” mainly because it will allow technology to be inserted into any system over its life-cycle more easily while keeping the system more sustainable for longer.
“So it becomes really an avenue for innovation and creates new engines of innovation within the defense community and I think overall we’re excited about that because we know that we need those avenues of innovation to ensure that we maintain long-term technological superiority,” Bush said. This “thrust” is true with the broader Defense Department and intelligence community customer bases, he said.
Bush also said the current situation of the defense industrial base is unlike the 1990s when major national military asset program awards frequently resulted in changes to the industrial base through mergers and acquisitions. Consolidation in the 1990s and early 2000s has already occurred, he said.
“I wouldn’t be particularly focused on single event triggers,” Bush said. “But that said, we’re in an industry like every other industry that continues to shape, continues to change, and over time I think it’s really important that the industry itself figures out what is the best way of providing its products and services to its customers.”
Net income in the quarter increased 9 percent to $516 million, $2.75 earnings per share (EPS), from $473 million ($2.26 EPS), far outpacing analysts’ estimates of $2.19 EPS. Earnings rose on a pension tailwind, lower taxes and a lower share count due to stock repurchases.
Going forward share repurchases will remain important to the company’s capital deployment strategy, Bush said. Early in October the company reached a two-year old goal of retiring 25 percent of its outstanding shares, he said, adding it won’t announce a new target for share reductions.
Bush said Northrop Grumman’s capital deployment strategy is unchanged. The key pillars of that strategy include investing in its businesses, managing the balance sheet, and returning cash to shareholders through dividends and share repurchases.
The company’s operating income at the segment level declined due to a tough comparison with a year ago when it benefited from favorable legal settlements. Operating profits were down at the Aerospace Systems, Information Systems, and Technical Services segments and flat at Electronic Systems. The LRS-B program will be managed within the Aerospace Systems segment, Bush said.
Seth Seifman, aerospace and defense analyst with J.P. Morgan, said in a note to clients that the LRS-B award is a “major strategic win” for Northrop Grumman and “should be a key component of sales and earnings for decades.”
Sales were flat at $6 billion as gains at Aerospace Systems, Electronic Systems and Technical Services were offset by a decline at Information Systems.
Bush said a recently announced reorganization of the company into three reporting segments beginning on Jan. 1, 2016 is part of its positioning for the future.
“Our new structure is aimed at better focusing our innovation and affordability efforts to provide our customers enhanced mission capability at a reduced cost,” Bush said. “By more effectively aligning and aggregating our product and services businesses, we’re enabling greater synergy in the way we operate and we are enhancing our ability to develop, produce, sustain and upgrade our products over their life-cycle.”
For 2015 Northrop Grumman expects sales between $23.6 billion and $23.8 billion, a narrowing of the prior range by $200 million on the low end. Earnings are now expected to be between $9.70 and $9.80 EPS versus the prior projection of between $9.55 to $9.70 EPS. Free cash flow is pegged at around $2 billion, the mid-point of prior guidance.
Free cash flow in the quarter was $455 million and bookings totaled $4.8 billion. Backlog at the end of the quarter stood at $35.9 billion, down from $38.2 billion in December. Funded backlog at the end of the quarter was $21.8 billion.