10-QPeriod: Q2 FY2017

NORTHROP GRUMMAN CORP /DE/ Quarterly Report for Q2 Ended Jun 30, 2017

Filed July 26, 2017For Securities:NOC

Summary

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 billion 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.

Financial Highlights

48 data points
Beta

Revenue

$6.47B

53.1% Gross Margin

Net Income

$677.00M

10.5% Net Margin

EPS (Diluted)

$3.86

Total Assets

$25.81B

Cash & Equivalents

$1.38B

Free Cash Flow

$290.00M

Financial Statements
Beta
Revenue$6.47B
Cost of Revenue$3.04B
Gross Profit$3.44B
Operating Income$864.00M
Net Income$677.00M
EPS (Basic)$3.88
EPS (Diluted)$3.86
Shares Outstanding (Basic)174.50M
Shares Outstanding (Diluted)175.50M

Key Highlights

  • 1Total sales increased by 6% year-over-year to $6.375 billion for the second quarter of 2017.
  • 2Net earnings rose by 7% to $552 million for the second quarter, with diluted EPS growing 11% to $3.15.
  • 3Operating income for the quarter increased by 7% to $855 million, reflecting improved operational performance and a favorable net FAS/CAS pension adjustment.
  • 4The Aerospace Systems segment was a key driver of growth, with sales up 14% for the quarter.
  • 5The company returned capital to shareholders through increased dividends and ongoing share repurchases, with $2.4 billion remaining on its share repurchase authorization.
  • 6Despite 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.

Frequently Asked Questions

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.

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.

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.

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).