A pension tailwind, lower tax rate and higher operating income led Northrop Grumman [NOC] on Wednesday to post strong earnings in its first quarter as sales grew modestly.
Net income rose 15 percent to $640 million, $3.63 earnings per share (EPS), from $556 million ($3.03 EPS) a year ago, topping analysts’ expectations by 21 cents per share. The per share results also benefited from a lower share count due to the company’s spending on stock repurchases.
Overall operating margin expanded 1.1 percent to 13.3 percent.
Sales increased 5 percent to $6.3 billion from $6 billion a year ago.
The boost from the pension adjustment added $62 million in pre-tax income while segment operating income as $25 million higher than a year ago. The increase in operating profit was led by the Aerospace Systems segment on higher sales and improved performance in unmanned aircraft systems (UAS). The Technology Services segment also posted higher profit on improved performance while income at the Mission Systems segment was flat.
Aerospace Systems also drove the higher sales on the back of classified manned aircraft programs, which is the development work for the Air Force’s B-21 bomber, two more deliveries related to the F-35 fighter program that Lockheed Martin [LMT] is the prime contractor on, and higher volume in the Triton UAS program.
Sales at Mission Systems were slightly higher on volume in communications and combat avionics programs, specifically the F-35 program and the Joint Counter Radio Controlled Improvised Explosive Device Electronic Warfare programs, while revenue at Technology Services declined slightly due to the completion of several programs last year.
Northrop Grumman didn’t provide its backlog but said in a filing with the Securities and Exchange Commission that “total backlog declined modestly” during the first quarter. The company is only reporting backlog at the end of its fiscal year following the win of the classified B-21 contract in 2015. At the end of 2016 total backlog stood at $45.3 billion, up from $35.9 billion at the end of 2015.
The favorable pension adjustment in the quarter combined with a lower than expected tax rate in 2017 led Northrop Grumman to increase its earnings guidance for the year by 50 cents per share to between $11.80 and $12.10 EPS.
Free cash was a $655 million outflow in the quarter but the company maintained its outlook for between $1.8 billion and $2 billion of free cash flow this year.
Wes Bush, Northrop Grumman’s chairman, president and CEO, said the outlook for defense spending under the Trump administration appears positive. He expects a “modest upward trend for the foreseeable future in national security spending.”
Regarding the military services’ concerns with readiness, which is an area they emphasize is a priority for increased spending, Bush said that about 25 percent of the company’s sales come from the Defense Department’s operations and maintenance accounts.