How Northrop fared through second quarter's COVID-19 stress test

Two broad unknowns for Northrop Grumman are far from its alone: the coronavirus pandemic and possible fiscal pressures that could put a lid on defense spending in future years.

One unknown directly tied to COVID-19 disruptions was how companies in the supply chains of Northrop and other larger defense hardware firms would fare. The Defense Department has observed multiple closures of such suppliers during the pandemic.

During Northrop’s second quarter earnings call Thursday, CEO Kathy Warden told investors the company has accelerated $500 million in payments on its own to suppliers so far.

That is one facet of Northrop’s two-fold approach, with the second piece seeing the company also flow “the full supplier benefit of higher progress payments to our suppliers," Warden said.

In March, DOD lifted the progress payment rates contractors receive in an effort to help those companies through any potential cash flow crunches.

As far as Northrop itself goes, the company’s second quarter results indicate they passed the stress test for at least that three-month period. Revenue climbed 5 percent to $8.9 billion from the same period last year and Northrop also claimed $14.8 billion in total awards for a book-to-bill ratio of 1.7 times sales. Total backlog is up 8 percent since the end of last year to $70 billion with $33.8 billion funded.

From there, Northrop raised its revenue guidance for this year to between $35.3 billion and $35.6 billion. Operating margin expectations are staying in the 10.8 percent-to-11 percent range.

But the outlook does come with this disclaimer (which nearly every contractor has given) that reads in part:

“The company's 2020 financial guidance reflects the impacts experienced to date from the global COVID-19 pandemic. However, the company cannot predict how the pandemic will evolve or what impact it will continue to have, and there can be no assurance that the company’s underlying assumptions are correct."

During the conference call, one analyst noted that Warden was not among the industry CEOs who signed letters addressed earlier this month to the Defense Department and White House budget office advocating for additional funds to cover the cost of reimbursing contractors for paid leave if some employees cannot get to their work sites.

“We did see that our impacts from COVID were less significant than we are seeing projected elsewhere,” Warden said. “Therefore we have continued to focus on that very issue, making these impacts as small as possible.”

Now what of the scenarios regarding a flat or declining defense budget? There is certainly the backlog that portends continued growth. Warden also pointed to Northrop’s focus on space and networking of weapons systems that are priorities in the National Defense Strategy, plus investments in research-and-development efforts and capital expenditures.

Where and how companies make R&D investments “will be an increasing part of the selection process that the government uses to determine the partners they will work with on a go forward basis,” Warden said.

“Those three elements of how we're executing gives me confidence that this business can continue to thrive even in a flat or slightly declining budget environment if, I think the primary if, is the threat vector continues to be aligned with what it is today and we expect that to be the case.”