Northrop Grumman : Transcript 232.2 KB

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NOC.N - Q1 2023 Northrop Grumman Corp Earnings Call

EVENT DATE/TIME: APRIL 27, 2023 / 1:00PM GMT

OVERVIEW:

Co. reported 1Q23 sales of $9.3b and diluted EPS of $5.50.

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APRIL 27, 2023 / 1:00PM, NOC.N - Q1 2023 Northrop Grumman Corp Earnings Call

C O R P O R A T E P A R T I C I P A N T S

David F. Keffer Northrop Grumman Corporation - Corporate VP & CFO

Kathy J. Warden Northrop Grumman Corporation - Chair, CEO & President

Todd B. Ernst Northrop Grumman Corporation - VP of IR

C O N F E R E N C E C A L L P A R T I C I P A N T S

Cai von Rumohr TD Cowen, Research Division - MD & Senior Research Analyst

David Egon Strauss Barclays Bank PLC, Research Division - Research Analyst

Douglas Stuart Harned Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst

Jason Michael Gursky Citigroup Inc., Research Division - Research Analyst

Kenneth George Herbert RBC Capital Markets, Research Division - Analyst

Kristine Tan Liwag Morgan Stanley, Research Division - Equity Analyst

Myles Alexander Walton Wolfe Research, LLC - MD & Senior Analyst

Peter J. Arment Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Robert Alan Stallard Vertical Research Partners, LLC - Partner

Robert Michael Spingarn Melius Research LLC - MD

Ronald Jay Epstein BofA Securities, Research Division - MD in Equity Research & Industry Analyst

Seth Michael Seifman JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst

Sheila Karin Kahyaoglu Jefferies LLC, Research Division - Equity Analyst

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen, and welcome to Northrop Grumman's First Quarter Conference Call. Today's call is being recorded. My name is Lisa, and I will be your operator today. (Operator Instructions) I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed.

Todd B. Ernst - Northrop Grumman Corporation - VP of IR

Thanks, Lisa. Good morning, everyone, and welcome to Northrop Grumman's First Quarter 2023 Conference Call. We'll refer to a PowerPoint presentation that is posted on our IR web page, this morning. Before we start, matters discussed on today's call, including guidance and outlooks for 2023 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws.

Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release.

On the call today are Kathy Warden, our Chair, CEO and President; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

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APRIL 27, 2023 / 1:00PM, NOC.N - Q1 2023 Northrop Grumman Corp Earnings Call

Kathy J. Warden - Northrop Grumman Corporation - Chair, CEO & President

Thanks, Todd. Good morning, everyone, and thank you for joining us. Northrop Grumman is off to a solid start to the year. Our team is driving industry-leading growth by executing our strategy, meeting the growing global demand from our customers and performing on our programs. As a result, we increased sales by 6% and delivered strong earnings per share in the quarter.

Additionally, we're delivering on our capital deployment strategy, which prioritizes investing in our business and returning cash to shareholders. In the first quarter, we continued thoughtful investments in the capability and capacity needed to support our customers' operational initiatives, and we initiated a $500 million accelerated share repurchase plan, returning a total of nearly $1 billion to shareholders through dividends and share repurchases.

Based on first quarter results and our continued expectations for growth and strong operational performance, we're reaffirming our 2023 segment guidance. We're increasing our EPS guidance based on our continued confidence in our business outlook and to account for the divestiture of a small minority investment, signed this week, and expected to close this year. As we look to the long term, increasing threats to freedom and security persist around the world. Given this, we expect continued support in Congress and the administration for the priorities outlined in the National Defense strategy, which align well with the Northrop Grumman portfolio solution.

This support was reaffirmed in the administration's budget request, which was released in March. DoD investment accounts are up by nearly 4% for fiscal year 2024. Northrop Grumman programs continue to be well supported in the budget request, particularly in the areas of strategic deterrence, space, missile defense and advanced computing and communication technologies. The 2024 budget request also reflects the growing need for weapons capability and capacity, with overall funding increasing more than 20% compared to fiscal year 2023 and significant funding increases to major weapon programs, including many of which we provide key components.

Two of our franchise programs, GBSD and B-21, each saw total investment account funding increased by approximately 10%. The Future Years Defense Plan, or FYDP, also prioritizes these programs, with funding projected to nearly double from about $8 billion in fiscal year 2023 to $15 billion in 2028.

Outside the U.S., the geopolitical landscape remains dynamic. Global defense budgets are increasing as many U.S. allies modernize and expand their defense capabilities. An important part of our long-term growth strategy is focused on leveraging our portfolio to meet these growing global needs, and we continue to make progress in this area.

In February, Australia issued a request for AARGM-ER, a high-speed,long-range,air-to-ground missile that provides counter-air defense capability. Northrop Grumman is the prime contractor for AARGM-ER and this recent FMS request has a potential value of over $500 million. Australia is one of over a half dozen additional countries expressing interest in this capability.

In addition, last month, the Defense Security Cooperation Agency approved the sale of five additional E-2D Hawkeye aircraft to Japan. These aircraft, along with the existing backlog, are expected to extend E-2D production well past mid-decade. These international opportunities, together with a broad set of others in IBCS, munitions and sensors, form a strong foundation to grow our international revenue at a double-digit rate over the next several years.

With this global demand signal as a backdrop, we've been executing a strategy over the past few years to significantly enhance capabilities and capacity in our weapons portfolio. This portfolio includes components such as electronics, propulsion systems, warheads, and fuzes; as well as missiles, armaments and interceptors. And as a result, we have multiple positions on key programs as both a supplier and a prime contractor.

Let me share a few examples of progress we've made on this strategy. In the first quarter, we received awards for nearly $350 million for medium- and large-caliber ammunition, Bushmaster cannon and propulsion products for the Guided Multiple Launch Rocket System, or GMLRS. In addition, we're developing smarter, more advanced weapons required for future high-end fight with innovations in next-generation strike weapons, high-speed propulsion and smart ammunition.

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APRIL 27, 2023 / 1:00PM, NOC.N - Q1 2023 Northrop Grumman Corp Earnings Call

One example of this advancement is the Air Force's Stand-in Attack Weapon, also known as SiAW, a high-speed,longer-range,air-to-ground missile. During the first quarter, we received an award that takes us to the next phase of this competitive program. To meet our customers' growing demand in this area, we have invested nearly $1 billion since acquiring Orbital ATK, building our capacity for weapons and missile components.

Our investments significantly increased capacity to produce solid rocket motors, supporting our expectation for continued demand for this capability as well as increased capacity for GEM 63 boosters, which supports the growing launch needs of our civil and commercial customers. We're also investing to increase capacity in our missile integration facility located at the Allegheny Ballistics Laboratory in West Virginia. Our newest 113,000 square foot facility is a factory of the future. It is designed to support production of up to 600 strike missiles per year.

Production operations will commence with the second lot of low-rate initial production for AARGM-ER, adding to other programs that we currently support at this complex, including GMLRS, TOW, Hellfire and Precision Strike Missile, among several others. In addition, we're building a new hypersonic center of excellence in Elkton, Maryland. Slated to open this summer, this new production facility is designed to provide full life cycle production for hypersonic weapons from design and development to production and integration using the latest digital engineering and smart manufacturing technologies.

The Elkton facility supports programs like Hypersonic Attack Cruise Missile, known as HACM, an air-launched,scramjet-powered, hypersonic weapon that we're producing in partnership with Raytheon Technologies. We're not only a provider of missile systems, we also are a leading provider of missile defense systems. This is a rapidly growing area within our business and includes a diverse set of franchise programs.

Our work in missile defense is now approaching 10% of company revenue, and we see an opportunity to expand that in the years ahead. Our broad end-to-end missile defense portfolio includes sensors, interceptors and command and control systems. One example is our prime contractor role on the Next-Generation Overhead Persistent Infrared, or OPIR Polar segment. This OPIR satellite constellation will operate at a highly elliptical orbit and provide critical strategic missile defense warning capabilities.

Importantly, we also provide proliferated low earth orbit missile defense capabilities on programs like HBTSS and recent awards for SDA Tracking Tranche 1. In addition, we're a prime integrator on next-generation intercept capabilities, including NGI and Glide Phase Interceptor. They protect against advanced ballistic and hypersonic missile threats. Shortly after the close of the quarter, we received approval for full rate production for IBCS, an integrated air and missile defense system.

This key milestone allows the U.S. Army to set the fielding schedule for IBCS to its air defense units, which will significantly bolster regional defense capabilities. Over the FYDP period, domestic deliveries of IBCS units are expected to increase by 40%. And as a reminder, Poland selected IBCS to serve as the centerpiece of its air and missile defense modernization and a number of other allies are also evaluating the system.

Before turning the call over to Dave, I'd like to touch on a couple of key program updates, starting with B-21. The program remains on the government's baseline for cost and schedule, and we're continuing to work towards first flight, which will be informed by events and data and remains on track for this year. There are no material changes in our EACs this quarter for the EMD nor the LRIP phases of the program, and we continue to expect to receive the first LRIP award later this year.

The B-21 program is expected to be the centerpiece of the Air Force's long-range strike portfolio for decades to come. With steady growth in the projected funding across the FYDP, as I outlined, and strong customer demand for its unmatched range, stealth and survivability, the long-term outlook for the B-21 program remains robust.

On GBSD, we achieved two key milestones in the quarter. This includes its first full-scale static test fire of the stage-one solid rocket motor and the successful completion of a series of wind tunnel tests, which tested the system in both subsonic and hypersonic environments. The comprehensive test campaign validated our digital modeling and simulations and proved design maturity of the missile.

And earlier this month, the James Webb Space Telescope industry team, led by Northrop Grumman, won the prestigious Collier Trophy for revolutionizing the field of astrophysics. I want to congratulate the team for a pioneering design and unwavering commitment, which were instrumental in winning our industry's highest honor.

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APRIL 27, 2023 / 1:00PM, NOC.N - Q1 2023 Northrop Grumman Corp Earnings Call

Overall, our strong start to the year is a clear indicator of this team's performance. We see continued robust demand for our solutions in the U.S. and abroad, and we believe we're well positioned to maintain our industry-leading profitable growth and deliver value creation for shareholders and customers alike. With that said, I'll hand the call over to Dave to cover the details of our financial results and our outlook. Dave?

David F. Keffer - Northrop Grumman Corporation - Corporate VP & CFO

Okay. Thanks, Kathy, and good morning, everyone. As Kathy noted, our first quarter results provide further evidence that our strategy is working. The strategic investments that we're making in franchise programs and key customer priority areas have positioned us to deliver differentiated growth. And our team continues to do an outstanding job of managing through challenges in the macroeconomic environment. We added substantially to our headcount again this quarter. With respect to the supply chain, we saw signs of modest progress in Q1, but continue to believe that our supply base will experience areas of pressure for some time. And inflation levels have begun to moderate but continue to have a higher base effect on our costs over time, especially on longer-term programs.

As we've discussed on prior earnings calls, we've been experiencing impacts from inflation-related cost increases over the past year. We continue to drive efficiencies in our business and partner with our customers in an effort to reduce those impacts going forward.

Now turning to Q1 results, bookings of roughly $8 billion were in line with our expectations, including $3.2 billion in restricted awards. Our backlog remains solid at more than 2x our annual sales, including nearly $24 billion in restricted backlog. At the segment level, our Q1 sales were particularly strong at Space Systems, which grew 17% year-over-year. Aeronautics sales were slightly below the projected full year run rate, primarily due to timing of volume on a few of our large programs.

MS was up 3% in the quarter, driven by expansion in restricted sales in the Networked Information Solutions business. And Defense Systems sales were up 7%. Its Battle Management and Missile Systems business, several components of which Kathy described earlier, is experiencing particularly strong customer demand given the global threat environment.

Segment margins were 10.8% in Q1, in line with our expectations, and included roughly 50 basis points of unfavorable impact associated with higher CAS pension costs that were incorporated into our rates in Q1. Those impacts were spread relatively evenly across the four segments. AS margins were down from the first quarter of 2022, primarily because of the $67 million favorable EAC change on the B-21 EMD phase last year. DS margins were about in line with our full year outlook, adjusting for the CAS pension impacts.

MS was slightly under its 2023 projection, due in part to a loss recognized on an unconsolidated joint venture. And Space margins were solid in the quarter with lower EAC adjustments partially offset by the sale of a license to a customer. At the enterprise level, we generated sales volume of $9.3 billion, representing growth of 6% compared to the first quarter of 2022.

Consistent with what we communicated last quarter, our Q1 sales were just over 24% of the midpoint of our full year estimate and were driven by both our hiring trends and supplier deliveries. Our first quarter operating income also grew 6%, due to lower corporate unallocated expense and intangible asset amortization. Our diluted earnings per share were $5.50 and included a headwind of over $1 per share compared to the first quarter of 2022 from lower net pension income.

This noncash pension headwind will continue to be a factor in our year-over-year EPS comparisons throughout 2023. And based on current estimates, we expect pension income to begin to increase next year. We also had a few Q1 benefits below the segment line that contributed to our earnings per share.

First, our other corporate unallocated expenses were only $4 million. And while our forecast for corporate unallocated was already weighted toward the second half of the year, this created a timing benefit of roughly $0.10 per share in the quarter. Our marketable securities were favorable in the period and contributed roughly $0.10 to earnings.

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