Northrop Grumman Corporation Q3 FY2025 earnings call

• Disciplined execution of business strategy continues to position the company well amidst growing global defense demand. - Achieved mid-single-digit growth, expanded segment operating margin to 12.3% in Q3, and grew free cash flow year over year with a book to bill of 1.17. - B-21 aircraft: second aircraft entered flight test, on track for LRIP Lot three and Lot five awards, and in discussions with the Air Force for production rate acceleration. - Missile defense programs: received a multibillion-dollar extension on the GMD contract, IBCS completed live fire tests for Poland and the U.S. Army, and is 32 for 32 in successful flight tests. - International sales grew 20% year to date. - Invested over 4% of sales in capital expenditures and over $2.1 billion in IRAD to maintain technology leadership and drive innovation.

Aeronautics generated third-quarter sales of $3.1 billion, up 6% compared to the prior year. DS had sales of nearly $2.1 billion in Q3, accelerating to 14% growth year over year. Mission Systems saw double-digit sales growth driven by restricted microelectronic programs. Space Systems had Q3 sales of $2.7 billion, down mid-single digits year over year but poised to return to growth. Aeronautics contributed around [specific percentage not explicitly stated] of total revenue, DS around [specific percentage not explicitly stated], Mission Systems around [specific percentage not explicitly stated], and Space Systems around [specific percentage not explicitly stated].

• 2026 expects mid-single-digit organic sales growth supported by all four segments. - Segment operating income expected to grow, with segment OM rate in the low to mid 11% range. - Reaffirms 2026 free cash flow outlook range of $3.1 billion to $3.5 billion, not inclusive of potential wins on SAXX or acceleration of B-21 production rate. Formal guidance for Q4 will be provided in January.

• Government shutdown may impact ability to make decisions and receive program awards in a timely manner. - Program award delays due to new administration reviews, resource allocation processes, and governance, which were affected by the government shutdown.

Q: For the FAXX and the B-21 acceleration, can you provide more color on what that could mean for your 2026 outlook and what's included?

A: As noted, not included in 2026 outlook yet. FXX could be dilutive to earnings initially as it's development revenue (lower margin), but is cost-plus with reasonable returns expected long term. B-21 ramp not included in 2026 outlook, would be upside to revenue but require investment in CapEx, with long-term accretive potential if realized.

Q: Can you talk a little bit more about your sorting strategy for supply chain, especially rare earths?

A: Our team has two foundries in the U.S. designing, producing, and packaging microelectronics. We've mitigated rare earth dependency by securing supply chain sources. The U.S. government is working on additional domestic sources and partnerships with allies to create more supply sources for microelectronics.

Q: How is the B-21 production rate acceleration discussion going?

A: We're in active discussions with the customer for B-21 production rate acceleration. Dollars to support acceleration are in the reconciliation bill. Discussions were held up by the government shutdown, but we expect them to resume, and more clarity on acceleration may be available in the coming months.

Q: What's driving program award delays?

A: New administration takes time to allocate resources, conduct reviews, and govern. The government shutdown also impacted the government's ability to move quickly to make decisions and have the right resources available for program awards.