Northrop Grumman [NOC] on Thursday swung to a loss in its fourth quarter due to a change it adopted a year ago in accounting for pension and other post-retirement benefits, but sales were higher, free cash flow was robust, operating results were strong, adjusted earnings were well above consensus estimates and the company is forecasting top and bottom line growth in 2020.
The net loss in the quarter, which includes a $1.4 billion expense related to use of the mark-to-mark method of accounting, was $409 million, negative $2.43 earnings per share (EPS), versus net income a year ago of $356 million ($2.06 EPS).
Excluding the accounting-related expense, adjusted earnings climbed nearly 12 percent to $949 million ($5.61 EPS), 84 cents a share above analysts’ estimates. Free cash flow was $2 billion.
Sales in quarter rose 7 percent to $8.7 billion from $8.2 billion a year.
Sales were higher at the Aerospace, Innovation and Mission Systems segments, driven by work on classified programs, likely including the B-21 stealth bomber, the F-35 fighter, E-2 airborne early warning aircraft, the Next Generation Overhead Persistent Infrared satellite program, Global Hawk and Triton unmanned aircraft systems, national security satellites, propulsion and tactical missile programs, an integrated air and missile defense battle command system for Poland, airborne radar, marine systems and space programs.
All three segments driving the higher revenue also helped drive higher profits due to the sales increases and improved performance in certain areas. Improved operating profits combined with favorable tax outcomes and cost claims, more than offset a pension headwind to boost adjusted earnings in the quarter.
Overall, operating margin across the segments increased 30 basis points to 11.7 percent in the quarter.
For the year, sales increased 12 percent to $33.8 billion from $30.1 billion in 2018 and net income slid 30 percent to $2.2 billion ($13.22 EPS) from $3.2 billion ($18.49 EPS). Classified work accounted for more than 25 percent of the company’s sales, Kathy Warden, Northrop Grumman’s chairman, president and CEO, said on an earnings call. Classified sales increased by a double-digit percentage over 2018, she added.
Adjusted earnings, which include the $1.4 billion after-tax expense associated with the mark-to-mark accounting method, dipped 3 percent to $3.6 billion ($21.21 EPS). Segment operating margin was up 10 basis points to 11.6 percent. Free cash flow was $3 billion.
In 2020, Northrop Grumman expects sales to grow between 4 to 6 percent to between $35.3 billion and $35.8 billion. Adjusted earnings are expected to range between $22.75 and $23.15 EPS with segment operating margin between 11.3 and 11.5 percent. Free cash flow is forecast to be between $3.2 billion and $3.5 billion.
The guidance includes winning the Air Force’s Ground Based Strategic Deterrent program (GBSD), which is aimed at replacing the current Minuteman III ICBM nuclear force. Northrop Grumman is the only bidder for the program, which is expected to be awarded in August.
Warden said GBSD is expected to provide revenue in 2020 and be “slightly dilutive” to operating margin and free cash flow as the company invests in the program.
Key sales drivers this year include classified manned aircraft, various F-35 activities, E-2 production for the Navy and Japan, production ramp ups in the G/ATOR radar, Common Infrared Countermeasures program, and SABR aircraft radar, and classified development work, Ken Bedingfield, Northrop Grumman’s chief financial officer, said on the call.
Backlog at the end of 2019 stood at $64.8 billion, up 21 percent from $53.5 billion a year ago and driven by $45.2 billion in orders. Warden said the company recorded nearly $11 billion in classified orders during the year, with $7 billion in space-related work. The classified work in the space arena is broad-based and will be consolidated under the company’s new Space Systems segment, she said.