Northrop Grumman Corporation (NOC) Earnings

Management highlights

- Northrop Grumman team proud of work supporting national security imperatives, with systems like B-2 stealth bomber and E-2D playing critical roles. - Invested in business for several years, opened over 20 new facilities and added over 2 million square feet of manufacturing space. - Agreed with customers to accelerate Sentinel program, increase B-21 build rate, become second source supplier of solid rocket motors, and ramp production on several programs. - First quarter organic sales up 5%, solid bookings, driven by modernizing the triad work. - Global defense budgets rising, with U.S. fiscal year 2026 defense appropriation and 2027 budget request emphasizing modernization. - Munitions business nearing 10% of total company sales and positioned to grow above average. - Sentinel program making progress, broke ground on prototype launch silo tube, expects Milestone B later this year, first flight 2027, IOC early 2030s. - B-21 program moving through testing, including aerial refueling trials, received Lot 4 ELRIC award, production rate increased by 25%. - Missile defense business accounts for nearly 10% of company sales, with strong demand for air and missile defense capabilities. - Role in Artemis II launch, with Northrop Grumman-built solid rocket motors contributing significantly.

Guidance

- Reaffirming 2026 outlook for sales, earnings, and cash. - Full-year sales expected between $43.5 billion and $44 billion, with sales expected to accelerate throughout the year. - Segment operating income guidance reflects low to mid 11% margin rate, expected to improve over the year. - Capital deployment strategy focused on driving growth, reinvesting, and maximizing shareholder value, with $200 million of capex expected in 2026 for B-21, and maintaining free cash flow guidance range of $3.1 to $3.5 billion.

Segment performance

Aeronautic Systems (AS): Q1 sales up 17% driven by B21 and other restricted programs; operating margins improved to 9.3%. Defense Systems (DS): Q1 sales up 5% year-over-year, organic sales up 10% due to higher volume on Sentinel, tactical solid rocket motors, and integrated battle command programs; operating margins 9.7%. Mission Systems (MS): Q1 sales up 2%, operating income up 20% with OM rate at 15.1%. Space segment: Q1 sales and operating income down due to NGI program closeout and unfavorable earnings adjustment on GEN63 XL program, but other parts of space portfolio strong.

Risks & headwinds

- Geopolitical uncertainties may cause actual results to differ from forward-looking statements. - Sensitivity of European customers to U.S. companies' delivery timelines and potential preference for local products. - Classified nature of some contracts and programs may limit ability to provide detailed information. - Risks associated with development and production milestones for certain programs, such as F-35 radar production line.

Analyst Q&A

• Q: Robert Stallard asked about B21 capex timeline and protections against B2 style curtailment.

  A: Kathy said expect ~$200 million capex in 2026, majority in 2027-2029, committed quantity on contract, Air Force considering increasing program of record.

• Q: Gautam Khanna asked about Sentinel developments.

  A: Sentinel program to have Milestone B later this year, first flight 2027, IOC early 2030s, working with Air Force on acceleration including prototype launch silo tube.

• Q: Peter Arment asked about international opportunities and counter drone solutions.

  A: International opportunities in Middle East moving to left, working on export approval and aggregating demand; counter drone solutions include low cost ones like FADC2, IBCS effective, international contribution expected greater than domestic.

• Q: Mariana Perez-Mora asked about space systems EAC and margin trends.

  A: John said space sector book to build strong, GEM 63 impact, no significant other negative EACs, margin strength expected to remain, technology to command higher margin rate over time.

• Q: Christine Levi asked about backlogs, output bottlenecks, and double-digit growth.

  A: Kathy said opportunity-rich environment, need to bid on new opportunities, accelerate missile components demand, convert international pipeline to sales, work on supply chain bottlenecks.

• Q: Seth Seifman asked about P21 production agreement impact and cash flow.

  A: John said agreement had no meaningful change in overall EAC, program maturing will improve manufacturing capability and margins; cash flow guidance held, lion's share of B21 capex in 2027-2028, business has cash generation power.

• Q: Richard Safran asked about contracting environment.

  A: Rich said department engaged with industry positively, using OTAs, desire to reduce costs and place incentives for early delivery.

• Q: Scott Mikus asked about European customer sensitivity and space FMS approvals.

  A: Scott said Northrop Grumman has capacity to meet U.S. and European demands, engaged with international customers on space capabilities, pipeline growing.

• Q: Scott Dushall asked about B21 cash advances and ROAC.

  A: John said cash flow timing aligns with investment rate, deal improves ROAC for government and company; Kathy said ROAC now meaningfully above cost of capital. Also asked about F-35 radar production line, Kathy said working on development and production, facility built for acceleration.

• Q: Andre Madrid asked about Golden Dome C2 layer and YFQ-48 opportunities.

  A: Kathy said selected for C2 layer development, pursuing YFQ-48 and other CCA opportunities, with unmanned experience and milestones reached.

• Q: Matt Akers asked about classified restricted business growth.

  A: Kathy said restricted business may grow more in line with other parts of portfolio, both parts seeing growth.