Northrop Grumman [NOC] on Jan. 26 reported double-digit increases in earnings and sales, ending a solid year for the company on a strong note.
The company also said that it ended 2016 with $45.3 billion in total backlog, a 26 percent hike above the $35.9 billion at the end of 2015, which was the last time the company reported backlog figures.
For the time being Northrop Grumman is only reporting backlog at the end of each year to help protect the classified nature of the Air Force B-21 long-range bomber the company is developing under a contract that it received last February. Northrop Grumman won the contract in Oct. 2015 but a subsequent protest delayed the award. The value of the company’s contract hasn’t been disclosed.
The B-21 program is accounted for within Northrop Grumman’s Aerospace Systems segment, which posted $27.3 billion in backlog at the end of 2016, up nearly 52 percent from $18 billion at the end of 2015.
“The benefit of the B-21 win is notable,” Jefferies aerospace and defense analyst Howard Rubel said in a client note on Jan. 26.
Net income in the quarter was up 14 percent to $525 million, $2.96 earnings per share (EPS), from $459 million ($2.49 EPS) a year ago. Even after adjusting for pension effects, per share earnings were $2.66, handily beating consensus estimates by 17 cents EPS.
Sales in the quarter rose 12 percent to $6.4 billion from $5.7 billion a year ago.
At the operating level sales increased across the company’s segments, led by a 20 percent gain at Aerospace Systems, followed by high single-digit rises at Mission Systems and Technical Services.
Northrop Grumman said that classified programs led the gain at Aerospace, which likely benefited from the B-21 program, but also volume on the E-2D radar aircraft and F-35 Joint Strike Fighter programs. Sales of the Triton and Global Hawk unmanned aircraft systems, and space-related programs were also higher.
Revenue at Mission Systems and Technical Services was up across each segment’s portfolios.
Operating income rose was up nearly 19 percent at Aerospace Systems and high-single digits at Mission Systems on gains related to a real estate deal, divestiture of the company’s commercial cyber security business, higher margins for unmanned aircraft systems, and higher sales.
Overall in 2016, sales increased 4 percent to $24.5 billion from $23.5 billion and net income increased 11 percent to $2.2 billion ($12.19 EPS) from $2 billion ($10.39 EPS) a year ago. Operating margin increased 90 basis points to 13 percent.
For 2017 Northrop Grumman introduced a soft outlook. Sales are expected to be around $25 billion, up 2 percent over 2016, with earnings between $11.30 and 11.60 EPS, well below consensus estimates of $12.25 EPS.. Segment operating margin is projected to be in the mid-11 percent range, down from 12 percent in 2016 due to a shift in contract mix favoring lower margin development programs.
Wes Bush, Northrop Grumman’s chairman, president and CEO, said on an earnings call that the company isn’t about growth, rather it is focused on value.
Free cash flow in 2017 is expected to be between $1.8 billion and $2 billion. Free cash flow was $1.9 billion in 2016.
Bush said the company is still assessing whether it will bid on the Air Force’s T-X pilot training program. The Request for Proposal for the T-X was released in December and a number of teams are pursuing the multi-billion dollar program.
It’s that discipline that “keeps us in the right place” about pursuing an opportunity and looking at all upcoming opportunities through “a cold hard lens” to assess the business case, Bush said.
Raytheon [RTN] and its partner on T-X, Italy’s Leonardo, withdrew from the trainer competition the week of Jan. 23 saying they couldn’t reach a business agreement that is in the best interest of the Air Force.