01—Abstract
Summary
Summary of the 10-Q filed April 27, 2016. Cited figures are marked; the original filing is the authoritative source.
Northrop Grumman Corporation reported a solid first quarter for 2016, with net earnings increasing by 15% year-over-year to $556 milliona, or $3.03 per diluted share, up from $484 million, or $2.41 per diluted share, in the prior year period.
This growth was primarily driven by a significantly lower effective tax rate, partly due to the adoption of a new accounting standard for share-based payments, which provided an $80 millionb tax benefit. Total sales remained relatively flat at $5.96 billion, as growth in Aerospace Systems was offset by declines in Mission Systems and Technology Services. The company also experienced a substantial improvement in net cash used in operating activities, which narrowed to $60 million from $654 million in the prior year, largely due to a significant pension contribution made in Q1 2015.
While overall sales were stable, a key point for investors is the slight decrease in operating income by 5% to $739 millionc, leading to a compressed operating margin rate of 12.4% compared to 13.1% in the prior year. This was attributed to higher operating costs and expenses as a percentage of sales. The company's segment performance showed mixed results, with Mission Systems demonstrating a slight increase in operating income and margin, while Aerospace Systems saw a decrease in both.
Technology Services reported declines in both sales and operating income. The company continues to actively manage its capital structure, with significant share repurchases completed under its 2014 program and ongoing repurchases under its 2015 program.
02—Key points
Key Highlights
- Net earnings increased by 15% to $556 million ($3.03 diluted EPS) in Q1 2016, driven by a lower effective tax rate.
- Total sales remained stable at $5.96 billion, with mixed segment performance (Aerospace Systems up, Mission Systems and Technology Services down).
- Operating income decreased by 5% to $739 million, and the operating margin rate compressed to 12.4% from 13.1% due to higher operating costs as a percentage of sales.
- Net cash used in operating activities significantly improved, decreasing by 91% to $60 million, largely due to a large pension contribution in the prior year.
- The company completed its $3.0 billion share repurchase program in March 2016 and has begun repurchases under a new $4.0 billion program, with $11 million repurchased as of March 31, 2016.
- The company reorganized its reporting segments from four to three effective January 1, 2016, combining Mission Systems and Technology Services.
- Aerospace Systems saw a 3% sales increase driven by Manned Aircraft and Autonomous Systems programs, but operating income and margin declined due to lower margins on key programs.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q1 FY2016, Northrop Grumman Corp kept $0.09.
- Revenue$5.96B100.0%
- Cost of revenue−$2.61B43.8%
- Gross profit$3.35B56.2%
- Operating costs−$2.61B43.8%
- Operating income$739.0M12.4%
- Interest, other & tax−$183.0M3.1%
- Net income$556.0M9.3%
04—Financials
Financial Highlights
Figures from 10-QQ1 FY2016filed April 27, 2016Financial Statements
Q1 FY2016 against Q1 FY2015
| Line item | Q1 FY2016Q1 FY2015 | Change |
|---|---|---|
| Revenue | $5.96B$5.96B | 0.0% |
| Cost of Revenue | $2.61B$2.54B | +2.7% |
| Gross Profit | $3.35B$3.42B | −2.0% |
| Operating Income | $739.00M$780.00M | −5.3% |
| Net Income | $556.00M$484.00M | +14.9% |
| EPS (Basic) | $3.07$2.45 | +25.3% |
| EPS (Diluted) | $3.03$2.41 | +25.7% |
| Shares Outstanding (Basic) | 181.30M197.70M | −8.3% |
| Shares Outstanding (Diluted) | 183.40M200.50M | −8.5% |
05—Questions
Frequently Asked Questions
What was the primary driver of the increase in net earnings?
The primary driver of the increase in net earnings was a significantly lower effective tax rate in the first quarter of 2016. This was partly due to the adoption of Accounting Standards Update (ASU) No. 2016-09, which resulted in an $80 million tax benefit, and the extension of the research tax credit.
Why did the operating income decrease despite stable sales?
Operating income decreased by 5% to $739 million, and the operating margin rate compressed to 12.4% from 13.1% in the prior year period. This was primarily due to an increase in operating costs and expenses as a percentage of sales, including higher general and administrative expenses due to increased investment in R&D.
How did the company's cash flow performance improve?
Net cash used in operating activities significantly improved, decreasing by 91% to $60 million in Q1 2016 from $654 million in Q1 2015. This improvement was largely attributed to a $500 million voluntary pension contribution made in the first quarter of 2015, changes in trade working capital, and the impact of adopting ASU No. 2016-09.
What are the key changes in the company's segment reporting?
Effective January 1, 2016, Northrop Grumman streamlined its reporting segments from four to three: Aerospace Systems, Mission Systems, and Technology Services. This involved merging elements of former Electronic Systems, Information Systems, and Technical Services sectors into the new Mission Systems and Technology Services segments to better align with customer needs and enhance innovation.
06—Continue