On april 25 northrop reported 1q18 eps that were up

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On April 25, Northrop reported 1Q18 EPS that were up 14% from the prior year and once again above the consensus estimate. Revenue increased 5% to $6.7 billion. Segment operating income rose 3%, as the operating margin narrowed by 30 basis points to 11.3%. Adjusted EPS rose 14% to $4.21, topping the consensus forecast of $3.64. Along with the 1Q results, management raised guidance for 2018 EPS. Management now expects EPS of $15.40-$15.65, up from the prior forecast of $15.00-$15.25. It expects revenue to grow 5% to $27.0 billion; the segment operating margin to remain steady in the 12% range; and free cash flow to total $2.0-$2.3 billion. The company grows through acquisitions as well as organically. In September 2017, Northrop announced plans to acquire Orbital ATK (OA: HOLD) for $9.2 billion. Northrop Grumman plans to establish Orbital ATK as a new, fourth business segment after the deal closes, which is expected in the first half of 2018. On a pro forma 2017 basis, Northrop Grumman expects the business to have sales of $29.5-$30.0 billion based on current guidance. It expects the transaction to be accretive to EPS and free cash flow per share in the first full year after the closing, and to generate annual pretax cost savings of $150 million by 2020. Management plans to update its guidance following the closing. EARNINGS & GROWTH ANALYSIS Northrop Grumman has three reporting segments: Aerospace Systems (45% of 1Q sales), which includes military aircraft and space systems; Mission Systems (40%), such as control rooms and cyber solutions; and Technology Services (15%), such as logistics, systems security and fraud detection. We provide business updates and outlooks for these segments below. In Aerospace Systems, 1Q revenue rose 10% year-over-year, driven by higher volume in the F-35 and E-2D manned aircraft programs, as well as in autonomous systems programs (Triton, Fire Scout) and space programs. The segment operating margin narrowed 40 basis points to 10.4% due to a difficult comparison. Looking ahead, we expect mid- to high single-digit sales growth in 2018, driven by growth in manned aircraft, autonomous systems and space programs. We expect segment margins to remain near 10% as the sales mix shifts slightly toward lower-margin development contracts. Mission Systems saw 3% growth in 1Q revenue, reflecting higher volume in Sensors and Processing programs. Cyber sales were lower. The operating margin rose 10 basis points to 12.0%. Margins in this group are expected to recover to the 13.0% range in 2018 and to be the highest of all segments. We are modeling 2018 sales of $11.5 billion, implying low single-digit growth. Technology Services recorded a 4% decrease in 1Q revenue, reflecting lower volume in System Modernization and Services, offset by growth in Global Logistics and Modernization programs. The segment operating margin dipped 10 basis points to 10.7%. This segment is expected to be the company’s least profitable, with a full-year margin of approximately 10% in 2018.
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