Northrop Grumman Corporation (NOC) Earnings

Management highlights

- Demand & Market Environment • Bipartisan US defense budget support: FY2027 base budget for the Department of War is proposed at $1.1 trillion, a ~10% increase over FY2026, plus a $67 billion supplemental request for operational costs and weapon replenishment and a $350 billion reconciliation package for industrial base and capability modernization. Northrop Grumman core programs remain well supported in the base budget. • Global defense investment is growing: NATO allies pledged $50 billion in additional defense investments, including commitment for Northrop Grumman Triton autonomous aircraft. Demand for missile defense systems (including IBCS) is strong in the Middle East, with Kuwait approved for 6 IBCS systems. Northrop Grumman was selected to build an in-country solid rocket motor manufacturing facility in Australia. • The company targets doubling annual international sales to $10 billion by 2031. - Program Milestones • Record backlog of $105 billion as of Q2 end, up 17% year-over-year, with $20 billion in net Q2 awards for a book-to-bill ratio of 1.84x. The Sentinel program added $7.6 billion to backlog after further definitization, completed a successful acoustic test, and has solid rocket motors for the first 5 flight tests in production; first flight of the integrated missile is expected in 2027. A new advanced production facility for Sentinel broke ground in Utah. • Completed qualification to become a solid rocket motor supplier for PAC-3, and reached a $2 billion framework agreement with the Department of War and Lockheed Martin; production awards are expected later in 2026. The company holds 10 multiyear missile acceleration agreements with up to $10 billion in total sales opportunity over the next 7 years. • National security space backlog is over $16 billion, with full year 2026 sales projected to grow high single digits to over $7 billion, accounting for more than 15% of total company revenue. The first Mission Robotic Vehicle (MRV) for commercial in-orbit satellite servicing is scheduled to launch at the end of Q2, and will become operational in 2027. • GEM 63XL: Completed a successful static fire test of the redesigned component to resolve the Q1 launch anomaly; redesigned motors are expected to begin delivery by the end of 2026. The cost of corrective actions is reflected in the updated EAC adjustment for the quarter. • SAW: Higher projected qualification testing costs led to an unfavorable EAC adjustment in the quarter; the program is tied to the ARGEM ER Navy tactical missile program, and the company added resources and infrastructure to resolve delays and complete development. Both programs represent billions in potential future sales at accretive margins. - Financial Performance • Q2 EPS was $7.68, which benefited from a lower effective tax rate driven by remeasurement of uncertain tax positions and an equity investment sale gain. Adjusted free cash flow was nearly $1 billion, a significant increase year-over-year. Q2 capital expenditures were $320 million, and continue ramping to support production expansion.

Guidance

- Full year 2026 sales guidance increased to a range of $43.75 to $44.25 billion, with 5% organic year-over-year growth projected at the midpoint. A second half sales step-up (similar to the 2025 profile) is expected, with mid-to-high single digit year-over-year sales growth projected for Q3 2026. - Full year 2026 adjusted EPS guidance increased by $1.20 to a range of $28.60 to $29.10, reflecting stronger second half performance and a projected mid-14% effective tax rate. Segment operating income guidance is reaffirmed, with margins expected to improve in the second half. - Full year 2026 adjusted free cash flow guidance is maintained at $3.1 billion to $3.5 billion, including several hundred million in expected receipts from the B-21 asset sale. 2026 capital expenditure guidance remains $1.85 billion, with 2027 and 2028 CapEx expected to be ~4.5% of sales to support B-21 production ramp. - Segment-level guidance updates: Aeronautics sales and margin guidance raised to ~$14 billion sales and mid-to-high 9% operating margin. Defense Systems sales guidance maintained at mid-to-high $8 billion with ~10% full year operating margin (second half margins expected to exceed 11% excluding development EAC adjustments). Mission Systems sales guidance maintained at high $12 billion, with full year margin guidance raised to ~15%. Space sales guidance maintained at ~$11 billion, with full year margin guidance lowered to low 10% to reflect year-to-date margin pressure, with second half margins expected to improve. - Full year 2026 book-to-bill ratio is expected to be at least 1.25x, up from prior guidance.

Segment performance

1. Aeronautics (AS): Q2 sales grew 13% year-over-year, driven by higher volumes on the B-21, Takamo, and mature production programs. Q2 operating margin was 10.3%, with strong performance across production and sustainment. For full year 2026, sales are expected to reach approximately $14 billion, with an operating margin in the mid-to-high 9% range. AS contributes ~32% of total 2026 projected company revenue. 2. Defense Systems (DS): Organic Q2 sales increased 2% year-over-year, driven by ramp up on the Sentinel program and missile defense programs. Q2 operating margin was 7.5%, which included a $68 million unfavorable EAC adjustment for the Stand-in Attack Weapon (SAW) program; excluding SAW, the DS portfolio delivered an 11% operating margin. DS backlog grew to nearly $35 billion, including a $7.6 billion increase from the Sentinel program. For full year 2026, sales are projected in the mid-to-high $8 billion range (~18% of total projected 2026 revenue) with an operating margin of approximately 10%. 3. Mission Systems (MS): Q2 sales increased 3% year-over-year, supported by higher volumes on marine programs, F-35 sensors, and restricted airborne radar programs. Q2 operating margin improved to 15.4% driven by strong execution and net favorable EAC adjustments across the portfolio. For full year 2026, sales are expected to be in the high $12 billion range (~28% of total projected 2026 revenue) with an operating margin of approximately 15%. 4. Space: Q2 sales increased 4% year-over-year, driven by higher volumes on NASA's commercial resupply service missions and missile defense programs. Q2 operating margin was 8.6%, which included an unfavorable EAC adjustment for the GEM 63XL program; excluding this adjustment, the remainder of the Space portfolio delivered an operating margin over 11%. For full year 2026, sales are expected to be approximately $11 billion (~25% of total projected 2026 revenue), with an operating margin in the low 10% range. Total company Q2 2026 sales were $10.9 billion, up 5% year-over-year.

Risks & headwinds

- Technical and cost risk remains on the GEM 63XL (Space) and Stand-in Attack Weapon (SAW, Defense Systems) programs, which resulted in unfavorable EAC adjustments in Q2 2026. While corrective action plans are in place, qualification is not yet complete, and further cost adjustments cannot be ruled out. - Legislative process for the FY2027 defense budget, supplemental funding, and reconciliation package is still ongoing, creating near-term uncertainty for future award timing. - Contract definitization for the $10 billion multi-year solid rocket motor opportunity pipeline has not yet been completed, leaving price and profitability for these programs uncertain until negotiations conclude. - The HALO space program contract is being restructured following NASA's change to original Gateway plans, which will reduce 2026 revenue and extend program timelines. - All forward-looking performance is subject to general market and regulatory risks associated with defense contracting, including changing customer requirements, budget delays, and export policy changes.

Analyst Q&A

• Q: Is the $1.20 2026 EPS guidance increase entirely driven by lower taxes and higher sales? What is driving higher SAW development costs? /

  A: The EPS increase reflects a balance of factors: lower taxes (from the Q2 uncertain tax position adjustment pull-forward), but primarily stronger operational performance, higher sales, and strong expected second half margins. Higher SAW costs stem from testing delays on the related ARGEM ER program that flowed through to SAW's design and qualification schedule. The company has added extra resources and infrastructure to accelerate testing and deliver these high-demand tactical missile programs to US and international customers.

• Q: What returns have you seen on past investments, and how do you assess new CapEx returns compared to historical targets? What is driving HALO program revenue pressure? /

  A: Past investments have positioned the company to capture new demand: new product investments like GEM 63XL and SAW, plus production capacity investments in munitions, have directly driven the current 1.25x full year book-to-bill ratio. Investments in production capacity allowed the company to win PAC-3 work it would not have been able to support otherwise. HALO revenue pressure is tied to NASA's decision to move away from its original Gateway plans; the contract is being restructured to use existing HALO technology in the revised plan, reducing 2026 revenue and extending the program timeline.

• Q: Will the Air Force expand the B-21 program of record beyond 100 units, and what is driving Aeronautics margin strength? /

  A: The existing B-21 contract allows the Air Force to consider accelerating production and expanding the program of record, and the service is currently conducting analysis with a conclusion expected by year end. Aeronautics margin strength comes from a mix of strong execution on the B-21 program, which has kept overall profitability on track, and favorable EAC adjustments across all mature production programs, driven by strong manufacturing performance and on-schedule milestone delivery.

• Q: Is there a path for Defense Systems to deliver better than 7% revenue CAGR over the next three years? Could 2027 total revenue growth reach high single digits? /

  A: Strong current book-to-bill performance, marquee programs like Sentinel and B-21, and robust global demand for weapons and missile defense provide growth drivers that should enable faster historical revenue growth over time. While the company declined to provide a specific 2027 growth number, it cited multiple tailwinds: 1.25x 2026 book-to-bill, double-digit international growth, and a mix shift from development to higher-margin production, with all core programs well supported in the base US defense budget.

• Q: What is the market outlook for the commercial satellite servicing MRV, including potential offensive military applications? /

  A: MRV offers robotic on-orbit servicing to extend the life of high-value government and commercial satellites, reducing asset replacement costs. The first mission launches at the end of Q2 and will enter operational service in 2027. It is up to the US government to determine if this capability will be used for offensive adversary satellite operations; Northrop Grumman provides the technology and leaves policy and mission deployment decisions to government customers.