After previously warning of a potential but not “probable” loss on the initial B-21 stealth bomber production contracts, Northrop Grumman [NOC] on Thursday reported a $1.2 billion after-tax charge on the program that covers the first five low-rate initial production (LRIP) options due to various “macroeconomic factors” impacting the cost to complete that work.
The first B-21 LRIP option was awarded late last fall after Northrop Grumman conducted a successful first flight of the next-generation bomber. The remaining LRIP options are expected to be awarded through the end of the current decade with all the work on these done at a loss.
Northrop Grumman Chief Financial Officer Dave Keffer said last January during the company’s fourth quarter 2022 earnings call that a B-21 loss was “possible” but not “probable” due to macroeconomic factors as well as discussions with suppliers and customers. At the time, the company bounded the negative impact from these factors on the fixed-price LRIP options at between $0 and $1.2 billion (Defense Daily, Jan. 26, 2023).
The macroeconomic factors include inflation, supply chain and labor constraints. Northrop Grumman company said a year ago it might seek relief from the government to offset the economic issues. Most suppliers are now on contract for the B-21 LRIP lots, giving the company more certainty on costs, Keffer said during Thursday’s earnings call.
The company has changed its outlook on potential government help, at least for now.
“The loss is largely driven by a change in our assumptions regarding funding to mitigate the impact of macroeconomic disruptions on the LRIP phase of the program and higher projected manufacturing costs that reflect recent supplier negotiations and our experience in completing the first aircraft,” Northorp Grumman said on Thursday in its fourth quarter earnings release.
Kathy Warden, Northrop Grumman’s chairwoman, president and CEO, pointed out that when the company bid and won the contract for B-21 development and initial production lots, the aircraft design was not mature and it could not forecast the difficult macroeconomic factors that lay ahead, which also included challenges posed by the COVID-19 pandemic.
In 2023, the Air Force allocated $60 million in inflation relief toward advance procurement of the first B-21 LRIP option. Relief for future LRIP lots has yet to be “worked through” and based on “conversations and the tight budget environment we’ve actually lowered those expectations for inflation relief,” Warden said. “And so, at this point, our focus is on executing this program and finding opportunities in the performance on the program.”
The pre-tax size of the B-21 charge is nearly $1.6 billion, with just $143 million included in the fourth quarter in terms of estimated additional costs to complete work on the first LRIP lot. Subsequent lots will face modestly larger estimates to complete, Keffer told analysts. As it does with all its programs, the company will update its loss projections on the B-21 every quarter, he said.
Warden and Keffer both highlighted that Northrop Grumman is performing well on the program.
The B-21 charge did not seriously impact cash generation or the outlook for cash. Free cash flow in 2023 was $2.1 billion and is projected to continue growing each year and reach $4 billion in 2028. In 2024, Northrop Grumman expects to spend at least $2 billion on stock buybacks, including $1 billion to accelerate share repurchase that will be initiated shortly, Warden said.
The B-21 charge coupled with a mark-to-market expense related to pension and projected benefit gains and losses sent Northrop Grumman to a $535 million, $3.54 earnings per share (EPS), net loss in the quarter versus $2.1 billion ($13.46 EPS) in income a year ago.
The B-21 charge lopped $7.68 EPS off the bottom-line and the mark-to-market expense another $2.08 EPS. Consensus estimates were for earnings of $5.80 per share and did not factor in the losses.
Northrop Grumman also recorded a $42 million charge the Habitation and Logistics Outpost program for NASA’s future Gateway space station that will serve as a home base for astronauts performing work on the moon.
For all of 2023, net income of $2.1 billion ($13.53 EPS) tumbled 58 percent from $4.9 billion ($31.47 EPS) in 2022.
Sales in the fourth quarter increased 6 percent to $10.6 billion from $10 billion a year ago on gains in the Aeronautics Systems, Mission Systems, and still high-flying Space Systems segments. For the year, sales increased 7 percent to $39.3 billion from $36.6 billion in 2022.
Warden highlighted that demand is increasing for weapons made by Northrop Grumman, which currently account for 7 percent of total sales. Weapons sales will grow faster than the “company average for the foreseeable future,” Warden said.
In 2024, Northrop Grumman forecasts sales to be between $40.8 billion and $41.2 billion, representing 4 percent growth at the mid-point of the range over 2023. Adjusted earnings are expected to be in the range of $24.45 to $24.85 EPS versus $15.61 in 2023, and free cash flow is expected to be between $2.3 billion and $2.7 billion.
The guidance assumes that Congress will approve appropriations budgets in March.
Warden said the recent disclosure by the Air Force of a cost breach in the Sentinel next-generation ICBM the company is developing does not affect the outlook for profitability on the program. The cost breach is centered on the estimates for the build out of related command and launch facilities, which are funded under the Military Construction and Procurement account, she said.
Backlog at the end of 2023 stood at a record $84.2 billion, up 7 percent from $78.7 billion in 2022. The increase in backlog was driven by strong orders, which were $44.8 billion, with each operating segment recording a book-to-bill ratio greater than their respective sales.