01—Abstract
Summary
Summary of the 10-Q filed April 25, 2018. Cited figures are marked; the original filing is the authoritative source.
Northrop Grumman Corporation reported solid financial results for the first quarter of 2018, with total sales increasing by 5% year-over-year to $6.735 billiona.
This growth was primarily driven by the Aerospace Systems segment, which saw a 10% increase in sales. Net earnings rose by a significant 14% to $739 millionb, leading to a corresponding increase in diluted earnings per share to $4.21.
The company also announced the expected closing of the Orbital ATK acquisition in the first half of 2018, a strategic move expected to enhance its capabilities and market position. Despite a slight decrease in operating income margin to 12.7%c, the company demonstrated strong revenue growth and profitability, positioning it well for future expansion and program execution.
02—Key points
Key Highlights
- Total sales increased by 5% to $6.735 billion, driven by strong performance in the Aerospace Systems segment.
- Net earnings grew by 14% to $739 million, with diluted earnings per share increasing to $4.21.
- The company is on track to close the acquisition of Orbital ATK in the first half of 2018, which is expected to create a fourth business sector.
- Operating income saw a slight decrease of 1%, primarily due to pension adjustments, but segment operating income increased by 3%.
- The effective tax rate decreased to 15.2% from 17.5% due to the U.S. corporate tax rate reduction.
- Backlog remained strong at $42.3 billion as of March 31, 2018.
- The company repurchased $229 million less in stock compared to the prior year's first quarter, indicating a focus on other capital deployment strategies or market conditions.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q1 FY2018, Northrop Grumman Corp kept $0.12.
- Revenue$6.74B100.0%
- Cost of revenue−$3.27B48.5%
- Gross profit$3.47B51.5%
- Operating costs−$2.62B38.9%
- Operating income$848.0M12.6%
- Interest, other & tax−$8.0M0.1%
- Net income$840.0M12.5%
04—Financials
Financial Highlights
Figures from 10-QQ1 FY2018filed April 25, 2018Financial Statements
Q1 FY2018 against Q1 FY2017
| Line item | Q1 FY2018Q1 FY2017 | Change |
|---|---|---|
| Revenue | $6.74B$6.41B | +5.1% |
| Cost of Revenue | $3.27B$2.98B | +9.5% |
| Gross Profit | $3.47B$3.43B | +1.3% |
| Operating Income | $848.00M$853.00M | −0.6% |
| Net Income | $840.00M$770.00M | +9.1% |
| EPS (Basic) | $4.82$4.41 | +9.3% |
| EPS (Diluted) | $4.79$4.37 | +9.6% |
| Shares Outstanding (Basic) | 174.30M174.80M | −0.3% |
| Shares Outstanding (Diluted) | 175.40M176.10M | −0.4% |
05—Questions
Frequently Asked Questions
What is the financial impact of the pending Orbital ATK acquisition?
The acquisition of Orbital ATK for approximately $7.8 billion in cash plus $1.4 billion in net debt is expected to close in the first half of 2018. Northrop Grumman expects this acquisition to broaden its capabilities and offerings, create shareholder value, and establish a new, fourth business sector named Northrop Grumman Innovation Systems. The financial statements in this report do not reflect the acquisition as it has not yet closed.
How did the new revenue recognition standard (ASC Topic 606) affect the reported results?
Northrop Grumman adopted ASC Topic 606 on January 1, 2018, using the full retrospective method. The company states that while the standard changed the timing of revenue and margin recognition for certain contracts, particularly those where revenue was previously recognized as units were delivered, the overall impact on the reported results for the first quarter of 2018 was not material. Prior periods, specifically Q1 2017, were recast to reflect the adoption of this standard and ASU 2017-07 for comparative purposes.
What is the outlook for U.S. Government spending and its impact on Northrop Grumman?
The company operates in an environment of uncertainty related to global security threats and economic tensions. The Bipartisan Budget Act of 2018 increased defense spending caps for FY18 and FY19, and the Omnibus Appropriations Act provided approximately $700 billion for national security in FY18. Despite potential debates around the federal budget and debt ceiling, the company relies heavily on U.S. Government contracts, and these appropriations suggest continued significant funding for defense programs relevant to Northrop Grumman's business.
How is the company managing its pension obligations and what is the impact on earnings?
Northrop Grumman has significant pension and post-retirement benefit plan liabilities. The adoption of ASU 2017-07 changed the presentation of net periodic pension cost, separating service cost from other components. While the company made pension contributions and recognized benefit plan costs, the net FAS (non-service) pension benefit was positive ($120 million in Q1 2018 vs. -$18 million in Q1 2017), contributing to the increase in net earnings. The effective tax rate was also positively impacted by the U.S. corporate tax rate reduction.
06—Continue