Summary
- Northrop Grumman reported healthy 2020 first-quarter results on April 29th. Revenue and free cash flow improved 5+% year over year. "Restricted work" revenue contributed 28+%, indicating growth in market share.
- Expecting an impact from the COVID-19 pandemic in the second quarter, the company adjusted 2020 guidance for revenue and mark-to-market adjusted earnings per share.
- Though Northrop adjusted its revenue guidance range by approximately 1%, it still expects year-over-year revenue growth of at least 3.4%, outpacing industry growth expectations of 2.9%.
With so much uncertainty swirling around the actual impact from the COVID-19 pandemic, most companies are withdrawing 2020 annual guidance. At this point, investors may find it reassuring to find a company willing to offer guidance... even if the numbers are lower than original guidance. For that matter, a decrease less than 25-30% could appear promising.
Northrop Grumman (NOC) initially projected sales for 2020 in a range of $35.3-35.8 billion. Its range on MTM-adjusted EPS was $22.75-23.15. Free cash flow was projected to fall in a range of $3.15-3.45 billion.
Northrop Grumman reported 2020 first-quarter results on April 29th. The company did not withdraw full-year guidance, most likely because it is one of the country's top defense contractors. But it did downgrade pieces of the guidance, though only minimally and much less than 25-30%.
2020 First-Quarter Results
Northrop's first-quarter revenue in 2020 was $8.62 billion, 5.3% greater than the $8.19 billion generated in the first quarter of 2019. Each of the company's four segments - Aeronautics Systems, Defense Systems, Mission Systems and Space Systems - posted year-over-year gains. Northrop expected its Space Systems segment to be its fastest-growing in 2020. In the first quarter, sales in this segment at $1.95 billion increased 8.2% year over year, followed by Defense Systems at 6.4%, Mission Systems at 6.2% and Aeronautics Systems at almost 1%.
Northrop Grumman considers the contribution of “restricted work” as a good measure of success and an indicator that the company is capturing market share. In 2019, it reported restricted work contributed more than 25% of total sales. In the 2020 first quarter, restricted work contributed over 28% of total revenue. The company expects the percentage to grow throughout 2020.
A 60-basis point decline in operating margin resulted in Northrop's total operating income being relatively flat year over year - $934 million in the 2020 first quarter compared to $936 million in 2019. In the Aeronautics Systems and Defense Systems segments, operating income decreased year over year. In the Mission Systems and Space Systems segments, operating income improved year over year.
On the bottom line, diluted earnings improved 1.8%, from $5.06 per share in the 2019 first quarter to $5.15 per share in 2020. A portion of the improvement is attributable to a decrease in the outstanding share count from 170.7 million in 2019 to 168.4 million in 2020. But the bottom line also saw a negative impacted related to the market decline resulting from the COVID-19 pandemic.
Free cash flow of $1.27 billion increased 5.7% compared to $1.2 billion in the 2019 first quarter.
