01—Abstract
Summary
Summary of the 10-Q filed July 25, 2018. Cited figures are marked; the original filing is the authoritative source.
Northrop Grumman Corporation reported strong top-line growth in the second quarter and first half of 2018, with total sales increasing by 10%a and 8% year-over-year, respectively.
This growth was significantly driven by the acquisition of Orbital ATK, which was completed in June 2018 and contributed $400 millionb in sales to the new Innovation Systems segment. Despite revenue growth, operating income saw a slight decrease of 6% for the quarter and 3% year-to-date, primarily due to increased unallocated corporate expenses related to the acquisition and a lower operating margin rate. Net earnings, however, showed a significant increase of 24% for the quarter and 19% year-to-date, largely benefiting from a lower effective tax rate due to the Tax Cuts and Jobs Act of 2017 and favorable adjustments related to pension benefits.
Key financial metrics reflect the impact of the Orbital ATK acquisition, which added substantial goodwill and intangible assets, contributing to an increase in total assets. The company's backlog also saw a significant increase, reflecting future revenue potential.
While the acquisition is expected to broaden capabilities and create shareholder value, investors should monitor the integration progress and its impact on future profitability and operational efficiency. The company's liquidity remains strong, supported by operating cash flow and available credit facilities.
02—Key points
Key Highlights
- Total sales increased by 10% to $7.1 billion for the quarter and 8% to $13.9 billion for the first half of 2018, largely driven by the integration of Orbital ATK.
- Net earnings increased by 24% to $689 million for the quarter and 19% to $1.4 billion for the first half, significantly boosted by a lower effective tax rate and favorable pension adjustments.
- Operating income decreased by 6% for the quarter and 3% for the first half, primarily due to increased acquisition-related corporate expenses and a reduced operating margin rate.
- The acquisition of Orbital ATK was completed on June 6, 2018, adding $400 million in sales and establishing the new Innovation Systems segment, with $6.3 billion in goodwill recognized.
- Backlog grew to $52.2 billion as of June 30, 2018, up from $42.6 billion at the end of 2017, indicating strong future revenue prospects.
- Diluted Earnings Per Share (EPS) showed robust growth, up 24% to $3.93 for the quarter and 19% to $8.14 for the first half, aligning with net earnings growth.
- Effective income tax rate decreased significantly to 18.8% for the quarter and 17.0% for the first half, compared to 31.7% and 24.7% respectively in the prior year, due to tax reforms.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2018, Northrop Grumman Corp kept $0.11.
- Revenue$7.12B100.0%
- Cost of revenue−$3.69B51.9%
- Gross profit$3.42B48.1%
- Operating costs−$2.61B36.6%
- Operating income$817.0M11.5%
- Interest, other & tax−$28.0M0.4%
- Net income$789.0M11.1%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2018filed July 25, 2018Financial Statements
Q2 FY2018 against Q2 FY2017
| Line item | Q2 FY2018Q2 FY2017 | Change |
|---|---|---|
| Revenue | $7.12B$6.47B | +10.0% |
| Cost of Revenue | $3.69B$3.04B | +21.6% |
| Gross Profit | $3.42B$3.44B | −0.3% |
| R&D Expenses | $764.00M— | — |
| Operating Income | $817.00M$864.00M | −5.4% |
| Net Income | $789.00M$677.00M | +16.5% |
| EPS (Basic) | $4.52$3.88 | +16.5% |
| EPS (Diluted) | $4.50$3.86 | +16.6% |
| Shares Outstanding (Basic) | 174.50M174.50M | 0.0% |
| Shares Outstanding (Diluted) | 175.40M175.50M | −0.1% |
05—Questions
Frequently Asked Questions
What was the primary driver of the significant increase in sales for the second quarter of 2018?
The primary driver of the significant increase in sales was the acquisition of Orbital ATK, which was completed on June 6, 2018. This acquisition contributed $400 million in sales to the newly formed Innovation Systems segment.
Why did operating income decrease despite the increase in sales?
Operating income decreased due to a combination of factors including higher unallocated corporate expenses, largely related to costs associated with the Orbital ATK acquisition, and a decrease in the operating margin rate. While revenue grew, the cost structure and integration expenses impacted profitability at the operating income level.
How did the new tax law affect Northrop Grumman's financial results?
The Tax Cuts and Jobs Act of 2017 significantly reduced the U.S. corporate income tax rate. This led to a lower effective tax rate for Northrop Grumman, resulting in a substantial increase in net earnings and diluted earnings per share. The company reported an effective tax rate of 18.8% for the quarter and 17.0% for the first half of 2018, down from 31.7% and 24.7% respectively in the prior year.
What is the significance of the increase in goodwill and intangible assets?
The significant increase in goodwill ($6.3 billion) and intangible assets ($1.3 billion) is a direct result of the Orbital ATK acquisition. These represent the excess of the purchase price over the fair value of the net identifiable assets acquired. Investors should monitor how effectively the company integrates these acquired assets and realizes the expected synergies.
06—Continue