Yahoo Finance Northrop Grumman Corporation (NYSE:NOC) Q1 2024 Earnings Call Transcript
Northrop Grumman Corporation (NYSE:NOC) Q1 2024 Earnings Call Transcript April 25, 2024
Northrop Grumman Corporation beats earnings expectations. Reported EPS is $6.32, expectations were $5.83. Northrop Grumman Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen. Welcome to Northrop Grumman's First Quarter 2024 Conference Call. Today's call is being recorded. My name is Josh, 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 Ernst: Thanks, Josh. Good morning and welcome to Northrop Grumman's First Quarter 2024 Conference Call. We'll refer to a presentation that is posted to our IR website this morning. Before we start, matters discussed on today's call, including guidance and outlooks for 2024 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. And 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?
Kathy Warden: Thank you, Todd. Good morning, everyone. It's so good to have you joining us today. So earlier this morning, we released our first quarter results. And as you can see, we are off to a strong start to the year with broad-based growth across our portfolio. The team's relentless execution of our strategy, which includes technology leadership aligned to our customers' priorities and a laser focus on performance, has positioned us for continued success. Growing global demand for our capabilities led to an exceptional 9% year-over-year increase in Q1 sales, driven by growth in all four of our sectors. The productivity and cost efficiency measures we've been implementing are gaining traction, and our program performance in the quarter was strong resulting in segment operating margin dollars increasing by 10%.
Operating profit expansion along with the lower share count helped to drive 15% EPS growth. Overall, our first quarter performance was in line with, or better than our expectations, and we are reaffirming our 2024 company level guidance. Global demand for our products continues to be robust, fueled by rising defense budgets and our market position. We're pleased that an agreement was reached on the U.S. fiscal year 2024 defense budget, which includes support for our key programs, and represents a 6% growth in investment accounts over 2023. In March, the administration released the 2025 defense budget, and future year's defense program, or FIDGET [ph]. And these also were consistent with our expectations. We continue to see robust support for our program portfolio in areas that include nuclear modernization, microelectronics, advanced weapons, and space.
Together, the appropriations and FIDGET [ph] give us confidence in our longer term outlook, even if we experience a somewhat slower top line growth environment for the U.S. defense budget in the short term. As we look beyond the domestic market, we continue to see numerous new international opportunities as well. These span a wide range of capabilities across our portfolio, and they provide an additional avenue for sustainable and profitable growth. In the first quarter, Poland signed a letter of acceptance with the U.S. government for an additional implementation of our IBCS product line, known as NARF [ph] . This represents the short range air and missile defense portion of Poland's missile defense architecture, and it will augment the medium range portion, which is currently being deployed.
In addition to Poland, we see an IBCS pipeline now of approximately $10 billion from numerous countries who are considering this joint battle management system. Another important suite of international opportunities for Northrop Grumman is sensor modernization of fourth generation aircraft. This includes our IVEWS electronic warfare offering, which leverages the U.S. program of record. IVEWS has been down selected by two international partners, and we are in discussions with seven other countries. Overall, IVEWS has the potential to be a new multi-billion dollar product line for us. We're also well positioned to address emerging international opportunities for autonomous systems. The first of four Triton aircraft is expected to be delivered to Australia later this year.
In addition, NATO is actively looking to expand its maritime surveillance capabilities, enabling a higher degree of interoperability amongst allied nations. We believe our Triton program is well suited to meet these requirements, providing an opportunity for up to five aircraft. And we see additional Triton opportunities emerging elsewhere in Europe. There also continues to be an uptrend in U.S. and allied partner demand for missile products and ammunition. This includes several significant ammunition opportunities for allies that in aggregate have the potential to support further growth in our defense systems portfolio at solid margins. And this week, the U.S. Congress passed supplemental funding bills, which includes munitions procurement and missile product capacity expansion.
As we've shared in our prior calls, to meet growing demand across our weapons systems business, we have been investing in our largest solid rocket motor production facility over the past five years. And we have now tripled our production capacity for tactical SRM. Technology leadership is an important part of our business strategy. And we've been investing to maintain our lead in microelectronics for defense applications. To further this objective, we recently established the Northrop Grumman Microelectronics Center, which brings together our microelectronic capability from across the company into one organization. It will be led by our mission systems business, where over 80% of their revenue is enabled by our innovation and investments in microelectronics.
Today, our U.S. microelectronics facilities produce over a million microchips a year with tailored design, fabrication, and advanced packaging needed to support the most advanced defense systems and sensors. We also work with leading edge technology developers in the commercial space, like NVIDIA, to incorporate their technology into our national security solutions. In addition to advancement in capability, we are expanding our capacity in this important technology area. In the quarter, we held a groundbreaking ceremony for our new advanced electronics facility in Williamsburg, Virginia. With this $200 million investment, we are increasing our ability to manufacture and test advanced electronics and mission solutions. As I mentioned earlier, we are laser-focused on performance and driving cost efficiencies in our business.
This includes deploying systems and tools that help enable increased productivity across our business. In the first quarter, we completed the implementation of a significant financial ERP upgrade, which consolidated multiple versions of our prior system, and it will significantly improve the efficiency of our operations. This new system provides a foundation that supports many of the other digital transformation initiatives, and it plays an integral role in our longer-term margin expansion strategy. The upgrade, as you would understand, was a massive undertaking that was achieved with minimal disruption to our business. It's really a credit to the entire team who worked tirelessly to achieve this outcome. We also continue to proactively address our overhead costs and indirect rates to drive affordability for our customers.
We saw benefits of this in the first quarter, particularly in production programs at both AS and DS. Efficiency in both direct and indirect cost management continues to be a priority across the company. Program execution is another area of particular emphasis in 2024. In our Space sector, after rapid growth over the last several years, we are keenly focused on delivering key capabilities for our customers, executing our extensive backlog, and generating strong returns in the process. This includes the progress we're making on the Sentinel Program. We're continuing to execute the EMD phase of the program, and we've made solid progress on design and development activities for the facilities and support equipment, as well as the missile itself.
The Nunn-McCurdy review is continuing, and we are providing support to the Department of Defense in that process as well. It's a complex undertaking to modernize the U.S. strategic deterrent, which requires delivering the most advanced capabilities in the world to form the basis of that deterrent. We're honored to be part of this vital mission, so we're partnering with our customers in bringing the focus, resources, and talent needed to deliver on those commitments. Finally, I'd like to provide an update on our capital deployment strategy. First and foremost, we are investing in capabilities that meet our customers' needs to address rapidly evolving threats. This year, we continue to expect that we'll invest roughly $1.8 billion in capital expenditures, bringing our total investment to nearly $8 billion since the beginning of 2020.
These investments have contributed to our strong growth performance and outlook. At the same time, we are efficiently returning capital to shareholders, including nearly $1.5 billion in the first quarter. So, in summary, with a broad portfolio of well-supported programs, continued new domestic and international opportunities, a relentless focus on performance, and a capital deployment strategy designed to create value for customers and shareholders alike, Northrop Grumman is well-positioned for the future. So, with that, I'd like to hand the call over to Dave, and he's going to cover some of the details of our financial performance and outlook before we take your question. Dave?
Dave Keffer: Thanks, and good morning, everyone. As Kathy highlighted, we're off to a strong start to the year. Sales, operating income, and EPS all increased meaningfully from the first quarter of 2023 as we execute on our backlog and drive efficiencies in our business. Starting with our top-line results on slide four in our earnings deck, first quarter sales increased 9% to $10.1 billion. We were pleased to deliver higher Q1 sales at all four of our segments. These results were ahead of our initial projections for the first quarter due in part to the timing of material volume on certain programs. With that in mind, we expect a more gradual ramp in our quarterly sales profile than in the past few years. I'll address the factors contributing to this as I walk through updates to our segment guidance.
As AS sales were particularly strong, up 18%, driven by higher volume on the B-21 program, as well as on mature production programs like F-35. Defense system sales increased 3%, primarily due to growth on multiple programs in our weapons business, and as expected, were partially offset by lower volume on an international training program. Mission system sales grew by 4%, led by rapid growth on advanced microelectronics programs in our restricted portfolio, partially offset by lower volume on SABR, and sales at space increased by 9% with broad-based growth throughout the portfolio, including on the SDA Transport Layer programs as they continued to ramp. Turning to the bottom line, we remain laser focused on performance. In Q1, we generated segment operating income of $1.1 billion, a year-over-year increase of 10%.
Margin rate was also solid at 10.9%. As we've outlined on previous earnings calls, we expect to increase our margin rate over time as mixed shifts favorably, macro conditions improve, and productivity measures continue to bear fruit. Aeronautics operating income increased 25% for an operating margin rate of 10%. Efficient indirect rate performance, driven by productivity initiatives, and careful cost management helped to generate a healthy volume of favorable net EAC adjustments. These adjustments were recognized across the AS portfolio, but primarily benefited mature production programs. On B-21, there were no significant changes to our EACs, and we continue to make good progress in the test phase of the EMD program and on the build of the LRIP production units in flow.
We have finalized negotiations with additional suppliers on the LRIP phase of the program and are in the late stages of negotiations with the remaining. Defense systems operating income grew 11%. They also benefited from favorable mix and indirect rate performance, driving their OM rate to 12.5%. Admission systems, segment operating income increased 5%, and margin rate increased 20 basis points to 14.2%. MS's OM rate benefited from favorable mix on higher margin advanced microelectronics programs, partially offset by lower net favorable EAC adjustments. We see opportunities to further improve performance at MS, driven by operational efficiencies and investments we've made in our factories. Lastly, space operating income increased 6%, and its margin rate was a solid 9.1%.
Moving to earnings per share on slide 6, diluted EPS were $6.32 in Q1, an increase of 15% from the prior year. The increase was driven by our strong growth and segment performance, as well as from higher net pension income and a lower share count. Turning to cash flow, we're pleased with our cash performance, particularly in light of our ERP conversion that went live in the first quarter. This was a significant undertaking that will help to drive additional efficiencies in our business over time. Q1 free cash flow was an outflow of approximately $1 billion, and we expect a strong quarter of cash generation in Q2. This profile is consistent with our seasonal pattern of generating the majority of our free cash flow in the second half of the year.
Moving to guidance, we are reaffirming our 2024 company level guidance and have a few updates at the segment level. We continue to project a book-to-bill ratio close to one times for the year. Note, we expect a higher ratio at AS, DS, and MS, and a lower ratio at SPACE, given all the backlog growth that has generated in recent years and flattening U.S. space budgets. At the company level, we expect our second quarter sales and segment margin volume to be roughly in line with the strong Q1 results, with modest expansion in the second half. We expect the quarterly profiles to vary at the segment level, so I'll take a moment to provide some additional color. First, DS and MS sales and margin dollars are expected to ramp throughout the year, generally consistent with prior year patterns.
Restricted programs in MS continue to expand, and the DS weapons business has significant demand that Kathy described, which should lead to further second half growth. Our margin rate guidance was adjusted slightly higher at DS and slightly lower at MS, reflecting our Q1 performance and latest expectations for the remainder of the year. At Aeronautics, we are increasing our sales guidance to the mid $11million to reflect our strong Q1 results and our latest projections for B-21 sales timing. But the quarterly sales profile is projected to be different this year than it was in 2023. The timing of materials volume primarily on F-35 and B-21 drove additional Q1 sales, so we would expect a flatter profile through the remaining quarters. As our full year guidance indicates, AS margin rates are expected to be lower in subsequent quarters based on business mix and the strength of Q1 EAC adjustments.
For the full year, we continue to expect margins in the mid-9% range. And at SPACE, we are lowering our sales guidance to the low to mid $14 billion which roughly reflects 3% annual growth. Sales volume is now expected to trend lower over the remaining quarters of 2024 reflecting the NGI decision and the contract termination and restricted space that we noted last quarter. This is expected to be partially offset by continued growth in Sentinel and the SDA portfolio. Below the segment line, we are reaffirming our company level guidance reflecting the strength of our broad portfolio. We continue to expect corporate and allocated cost to be weighted towards the second half of the year consistent with prior years. Interest expense will also be higher in future quarters due to the additional debt issuance in Q1 and we continue to project an effective tax rate around 17%.
As we’ve noted before, we are monitoring any changes in tax legislation and any updates in our tax appeals processes that by their nature they are not factored into our guidance. And as a reminder, we completed a $2.5 billion debt offering at attractive rates shortly after the filing our 10-K. The proceeds will be used in part to retire $1.5 billion of notes that are maturing in January 2025 as well as for general corporate purposes including share repurchases. We initiated a $1 billion accelerated share repurchase in Q1 which is now nearly complete. In total, including our open market purchases, our Q1 repurchases were $1.2 billion. For the full year, we have increased our expectations for share repurchases to greater than $2 billion. We also remain committed to providing a strong and growing dividend.
Our capital deployment plans are enabled by our ability to generate strong and predictable cash flows in our diverse and durable portfolio. We continue to project industry leading investments in our business to support our customers while returning excess cash to shareholders. We are confident that this business strategy will create value for all our stakeholders. In summary, we are off to a great start to the year and we remain upbeat about our long-term outlook. And with that, let’s open the call for questions.
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