Northrop Grumman [NOC] on Thursday reported lower net income in its first quarter largely due to a decline in pension income while the company recorded a healthy sales gain and raised its earnings guidance for the year due to the pending sale of a stake in a business.
Net income slid 12 percent to $842 million, $5.50 earnings per share (EPS), from $955 million ($6.10 EPS) a year ago, easily beating consensus estimates of $5.14 EPS. Lower pension income clipped $164 million ($1.04 EPS) off the bottom-line.
Later this year, Northrop Grumman expects to close the sale of a minority stake in an international business resulting in a 40 cents EPS benefit to adjusted earnings in 2023. As a result, the company raised its adjusted per share earnings guidance for the year by 40 cents to between $22.25 and $22.85 EPS. No changes were made to the rest of the outlook.
Sales increased 6 percent to $9.3 billion from $8.8 billion a year ago.
Results at the operating level were mixed with Space Systems continuing to be a driver, recording strong double digit-percentage increases on the top and bottom lines due to the next-generation ICBM program and various ground and space-based missile defense programs.
Defense Systems also had higher sales and earnings, up in the single-digits, driven by Integrated Air and Missile Defense Battle Command System (IBCS), which entered full-rate production in April, 120mm tank training ammunition, and an international training program.
Sales and income were down at the Aeronautics Systems segment on declines in manned and unmanned aircraft work and lower favorable program completion adjustments than a year ago. Mission Systems posted higher sales but lower income due to contract mix and a loss on a joint venture.
Overall, segment operating margin fell a percent to 10.8 percent.
During the fourth quarter earnings call in January, company executives warned of a “possible” but not “probable” loss on the first low-rate initial production contract for the Air Force’s B-21 stealth bomber due to inflationary pressures. The program remains within the government’s independent cost targets and is on track for the first LRIP award later this year, Kathy Warden, chairwoman, president and CEO, said during the company’s first quarter earnings call on Thursday.
Warden said the company does “believe” it will get relief from the government related to inflation on labor and material costs as part of the annual congressional budget appropriations or potentially in separate bills designed to address inflation impacts.
Asked about the out-year budget profile for the B-21 that shows more funding being added for research and development (R&D) in the near-term and to shift of some production spending to later, Warden replied that because the program is beating its development cost estimates, the Air Force is asking Congress for more R&D funding for future modernization of the bomber. She also said that the margins on the B-21 modernization are expected to be better than the LRIP work.
Inflation levels overall for the company are beginning to moderate but challenges remain and the company has efficiency initiatives underway and is working with its customers to reduce costs, Dave Keffer, Northrop Grumman’s chief financial officer, said. He also said that the supply chain showed “signs of modest progress” during the first quarter but the company continues “to believe that our supply base will experience areas of pressure for some time.”
Over the next several years, international sales are expected to grow at a double-digit clip due to strong demand for a variety of capabilities, Warden said. This demand includes recent approval to sell five more E-2D Hawkeye battle management command and control aircraft to Japan, Australia’s request for the Advanced Anti-Radiation Guided Missile-Extended Range, and opportunities for IBCS, munitions and sensors, she said.
The demand has been building the past few years, which has led the company to invested in better capabilities and more capacity, Warden said. Since Northrop Grumman acquired Orbital ATK nearly five years ago, the company has invested nearly $1 billion in its capacity for weapons and missile components, she said.
Northrop Grumman now has more capacity to build solid rocket motors, is investing in more capacity at its missile integration facility in West Virginia, and a new hypersonic center of excellence that will open in Maryland this year, Warden said.
Bookings in the quarter totaled $8 billion and backlog stood at $77.5 billion, down 2 percent from $78.7 billion at the end of 2022. Free cash flow in the quarter was $1 billion.