01—Abstract
Summary
Summary of the 10-Q filed July 26, 2017. Cited figures are marked; the original filing is the authoritative source.
Northrop Grumman Corporation reported solid financial results for the second quarter and the first half of 2017.
Total sales increased by 6% to $6.375 billion for the quarter and to $12.642 billiona for the six-month period, primarily driven by strength in the Aerospace Systems segment. Net earnings also saw a healthy increase of 7% to $552 million for the quarter and 11% to $1.192 billion for the six months, leading to a significant rise in diluted earnings per share (EPS) of 11% and 15% respectively. The company demonstrated improved operational efficiency, with operating income growing by 7% to $855 million for the quarter and 10% to $1.687 billion for the six months.
This was supported by an increase in the net FAS/CAS pension adjustment and gains on investments. Management continues to focus on capital deployment, evidenced by share repurchases and increased dividend payouts. The company reaffirms its expectation that its cash position and operating cash flow will be sufficient to fund operations for at least the next 12 months.
02—Key points
Key Highlights
- Total sales increased by 6% year-over-year to $6.375 billion for the second quarter of 2017.
- Net earnings rose by 7% to $552 million for the second quarter, with diluted EPS growing 11% to $3.15.
- Operating income for the quarter increased by 7% to $855 million, reflecting improved operational performance and a favorable net FAS/CAS pension adjustment.
- The Aerospace Systems segment was a key driver of growth, with sales up 14% for the quarter.
- The company returned capital to shareholders through increased dividends and ongoing share repurchases, with $2.4 billion remaining on its share repurchase authorization.
- Despite a decrease in net cash provided by operating activities due to changes in working capital, free cash flow was $(365) million for the first six months, indicating ongoing investment and capital deployment activities.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2017, Northrop Grumman Corp kept $0.10.
- Revenue$6.47B100.0%
- Cost of revenue−$3.04B46.9%
- Gross profit$3.44B53.1%
- Operating costs−$2.57B39.7%
- Operating income$864.0M13.3%
- Interest, other & tax−$187.0M2.9%
- Net income$677.0M10.5%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2017filed July 26, 2017Financial Statements
Q2 FY2017 against Q2 FY2016
| Line item | Q2 FY2017Q2 FY2016 | Change |
|---|---|---|
| Revenue | $6.47B$6.00B | +7.9% |
| Cost of Revenue | $3.04B$2.62B | +15.9% |
| Gross Profit | $3.44B$3.38B | +1.7% |
| Operating Income | $864.00M$797.00M | +8.4% |
| Net Income | $677.00M$517.00M | +30.9% |
| EPS (Basic) | $3.88$2.87 | +35.2% |
| EPS (Diluted) | $3.86$2.85 | +35.4% |
| Shares Outstanding (Basic) | 174.50M180.10M | −3.1% |
| Shares Outstanding (Diluted) | 175.50M181.50M | −3.3% |
05—Questions
Frequently Asked Questions
What were the main drivers of sales growth in the second quarter of 2017?
The primary driver of sales growth was the Aerospace Systems segment, which saw a 14% increase in sales for the quarter. This was largely due to higher volume on Manned Aircraft programs, including restricted sales and E-2D Advanced Hawkeye deliveries, as well as increased Autonomous Systems sales.
How did the company manage its cash flow during the first six months of 2017?
Net cash provided by operating activities decreased significantly due to an increase in trade working capital, particularly accounts receivable, and a decrease in accounts payable. Consequently, free cash flow for the first six months was negative at $(365) million, down from $73 million in the prior year, primarily due to the decrease in operating cash flow and continued capital expenditures.
What is the company's outlook regarding U.S. government funding and its impact?
The company operates heavily with the U.S. Government and faces uncertainty related to geopolitical tensions, potential debt ceiling issues, and the FY18 budget request. While the FY17 appropriations were consistent with prior acts, the FY18 budget proposes increases above statutory caps. The company notes that a government shutdown could impact its ability to perform on contracts and receive timely payments, but it is managing these risks through ongoing contract performance and operational adjustments.
What impact did the net FAS/CAS pension adjustment have on operating income?
The net FAS/CAS pension adjustment positively impacted operating income. For the second quarter, it contributed to a $68 million increase. For the six-month period, the increase was $130 million. This adjustment reflects the difference between pension expense calculated under U.S. GAAP (FAS) and that recognized for U.S. Government contract cost accounting (CAS).
06—Continue