Studying Backlog at Northrop Grumman

Defense contractor Northrop Grumman ($NOC) filed its second-quarter earnings release on Tuesday, which gives us yet another chance to indulge in our favorite hobby — segment-level financial analysis!

In this instance, we wanted to look at order backlog. We’ve written previously about order backlog at defense contractors, comparing numbers among Northrop Grumman, Lockheed Martin, and RTX Corp. Today we wanted to focus specifically on funded versus unfunded backlog. 

As defined by Northrop, funded backlog represents firm orders for which an entity has authorized and appropriated funding; unfunded backlog are those orders that have been placed, but funding hasn’t yet been appropriated. 

Backlog is a valuable detail to know, since it helps analysts understand a defense contractor’s long-term revenue pipeline and the possible risks to it. Hence Northrop discloses its backlog by operating segment — but you do have to look for it; the information is tucked away on Page 14 of the earnings release, almost at the bottom. See Figure 1, below.

Our next question, however, was how that mix of funded and unfunded backlog has changed over time. So we used our “Export History” feature to, well, export the history of these data points. You can export the data history for four, eight, twelve, or all periods. We chose eight, which let us see the change in unfunded backlog by operating segment over the last two years. See Figure 2, below. 

As you can see, Northrop had a relatively huge pile of unfunded backlog in its space systems division that the company has been working off for two years. At the same time, however, unfunded backlog has piled up in Northrop’s three other operating divisions. 

That only gives us part of the picture, however. We still don’t know whether (a) unfunded backlog is rising over falling overall; and (b) how that change in unfunded backlog compares to any change in funded backlog.

No worries; we just ran the same exercise again, this time only tracking total unfunded and funded backlog. The result is Figure 3, below, and pay attention to the two trend lines for each category.

As you can see, unfunded backlog is going up, and it’s increasing at a rate faster than funded backlog.

That’s an important detail to know. It can help you sharpen your questions about how Northrop plans to address that issue (if at all), perhaps by focusing on certain operating segments more than others or on courting public officials to accelerate the appropriations process. 

Regardless, that granular detail brings to the surface many new questions you can ask Northrop. These charts, by the way, took us all of about 15 minutes to assemble. The information is there. You just need Calcbench to help you pull it out and put it into context.