Northrop Grumman [NOC] on Thursday posted strong sales in its second quarter but like some of its peers, earnings tumbled.
Net income fell 14 percent to $812 million, $5.34 earnings per share (EPS), from $946 million ($6.06 EPS) a year ago, nipping analysts’ expectations by a penny. Sales were strong, up 9 percent to $9.6 billion from $8.8 billion a year ago.
Pension headwind knocked $160 million ($1.01 EPS) off the bottom-line and overall segment operating income contracted 2 percent.
An increase in operating income at the Aeronautics Systems segment was more than offset by lower operating earnings at the Space Systems, Mission Systems, and Defense Systems segments. Space Systems was lower due to an unfavorable $36 million cost adjustment on NASA’s Habitation and Logistics Outpost program stemming from the evolving Lunar Gateway architecture and mission requirements, macroeconomic challenges, and a $15 million write-down of commercial inventory.
These shortfalls were partially offset by a gain in returns on marketable securities.
Sales were higher across the company’s segments, led by Space Systems on a bevy of programs, including the Ground Based Strategic Deterrent ICBM, the Next Generation Interceptor and Ground-based Midcourse Defense Weapon missile defense programs, classified programs, the Next Generation Overhead Persistent Infrared Polar satellite, and the Space Development Agency’s Tranche 1 Tracking Layer missile tracking satellites.
Northrop Grumman’s updated outlook for 2023 includes an increase of $400 million in sales to between $38.4 billion and $38.8 billion versus prior guidance with the boost coming from the Space and Defense Systems segments. Segment operating income is unchanged at between $4.3 billion and $4.4 billion and the outlook for adjusted earnings has been narrowed to be between $22.45 and $22.85 EPS versus prior expectation of between $22.25 and $22.85 EPS. Free cash flow is still expected to range between $1.9 billion and $2.2 billion.
In the quarter, free cash flow was $615 million. The company booked $10.9 billion in orders and backlog stood at $78.8 billion, relatively unchanged from $78.7 billion at the end of 2022.
Northrop Grumman Chairwoman, President and CEO Kathy Warden said supply chain constraints continue to ease and the company has been successful raising its headcount and reducing employee attrition. Inflation pressures are also moderating, she said, but cautioned that the previous impacts of inflation have increased base costs, particularly with labor, pinching profits on work in the backlog that was won before inflation hit.
About 70 percent that backlog has been converted to sales and new work is being bid with the higher costs from inflation factored in, she said.
Operating margin for the year is expected to come in at a little over 11 percent and Warden said the company has plans to increase margin in 2024 and beyond using three levers. The first is stabilizing macro-economic factors through better supply chain management and workforce training, and more discipline in bidding for fixed-price contracts.
The second lever is cost management, which includes the continuing adoption of digital tools to increase efficiencies, reduce costs, and bolster competitiveness, Warden said. Digital solutions are also being brought to bear to manage the supply chain, she said.
“Over the next several years, we expect to have the majority of our supply base fully integrated,” she said. “this is expected to lower supplier costs and significantly improve productivity.”
The third factor that should drive margin upward is the coming shift to production for several franchise programs that are in the development phase, which typically offers small profits at best.