NORTHROP GRUMMAN CORP /DE/ Q1 FY2025 earnings call

• Record backlog of $92.8 billion in the first quarter, inclusive of strong international bookings. - Recognized an additional $477 million pretax loss on the B-21 due to higher manufacturing costs and increased material costs. - Sentinel completed a successful static fire test of the stage one solid rocket motor. - Received nearly $500 million contract for IBCS and opened a state-of-the-art production and integration facility in Alabama. - Received nearly $300 million in awards from the U.S. Navy to produce two additional Triton aircraft. - International sales up 11% in the quarter with a book-to-bill of 1.45 times, and Poland signed a $745 million letter of acceptance for 200 Argum ER missiles. - Invested $13.5 billion in R&D and infrastructure, with technology leadership in multiple areas like national security space satellites, low observable technology, etc.

Aeronautic: Year-over-year sales down 8% due to lower B-21 sales and timing of production/material on mature programs like F-35. DS: First-quarter sales increased by $68 million or 4% primarily due to the continued ramp on the Sentinel program and higher volume on certain military ammunition programs. Mission system: Sales continue to expand up $148 million, driven by 6% growth from numerous programs including Sabre, EW, international ground-based radar, and marine programs. Space: Sales lower primarily due to wind down of work on two programs (approx. $230 million year-over-year headwinds) and lower volume on CRS and FDA satellite programs.

• Expect 2025 sales of $42 billion to $42.5 billion, representing 3% to 4% organic growth. - Anticipate mid-single-digit sequential growth in Q2, with sales ramp in the second half driven by awards booked in Q4 2024, subcontractor deliveries, material receipts, and new program awards. - Updated full-year segment operating income and EPS guidance due to B-21 adjustment, with free cash flow guidance reaffirmed at $2.85 billion to $3.25 billion. - Segmental expectations: Aeronautic and Mission system mid-single-digit growth, DS double-digit organic sales growth, Space sales roughly $11 billion.

• B-21 program faces risks of higher manufacturing costs and material price increases. - Uncertainty in the U.S. defense budget environment. - Supply chain risks from trade policy and macroeconomic impacts.

Q: On the B-21, what milestone should we watch for to track the risk retirement of the program? And regarding the macro environment, how should we think about this regarding tariffs? Could there be a risk that you could see further charges on the program?

A: Kathy Warden said we are completing the EMD phase and watching performance test milestones. Tariffs have little impact as most costs are covered under contracts with the US government, and no further charges expected due to defined learning and no repeat of changes.

Q: Can you provide more color on where you see Northrop Grumman Corporation's strategic strengths are in AI versus commercial players or new disruptive players? How much of a game-changer are your capabilities in this?

A: Kathy Warden said AI has been incorporated for decades in applications like autonomous aircraft and targeting, with mission expertise and software integration as strategic strengths, being a game-changer in making sensors and software more valuable for users.

Q: On the B-21 EAC adjustment, what's the anticipated cash impact from this? Is it basically the same number but spread over time?

A: Ken Crews said no material impact to 2025, with the incremental charge spread primarily through 2026, 2027, and 2028.

Q: If we dig a little deeper on the B-21. If we peel back the onion, what changed from a quarter ago to now to make you feel like you had to do this now? And I guess that gets at how confident can we be that this is it?

A: Kathy Warden said drivers were process change for accelerated production and underestimated material consumption/price increase, with learning now behind us and no repeat expected.

Q: On Sentinel, how confident should we feel about the profitability on that given the potential changes to that program?

A: Kathy Warden said Sentinel is a cost-plus program, and they are working with the Air Force on restructuring to reduce cost and schedule, but not yet estimated LRIP cost.

Q: How do we think about the tariff impact on the overall Northrop Grumman Corporation portfolio and just international relationships how that changes your potential opportunity set under the current administration?

A: Kathy Warden said less than 5% of supply chain is direct sourced, most costs covered under contracts, and monitoring closely with action to mitigate risks.

Q: Ken, are you reiterating the previous free cash flow targets for 2026, 2027, and 2028?

A: Ken Crews said holding the guidance ranges, with majority impact in 2026-2028 but within the ranges.

Q: If we think about the quantifying the portion of the charge related to the process charge versus the portion related to higher cost. And also would the process charge have been made if there was not an intention to create some optionality about moving to a higher production rate?

A: Kathy Warden said first part of charge larger than procurement material, process change made for risk reduction and optionality for government, glad to have done it now.

Q: On the B-21, if we look beyond the five initial LRIPs here, I guess, first, the changes that you're talking about and the costs that are coming through. Should we expect any impact in the next nineteen airplanes, which you've talked about before? And then also as you think about the larger program of record, I mean, the Air Force has talked about a hundred airplanes, but I have to if I think back, I can't remember in the last thirty years that we saw a major aircraft procurement program actually end up increasing beyond the initial program of record. So is there somewhere we would we would see that? Are there have there been announcements, or should we expect something in the budget?

A: Kathy Warden said expect NTE aircraft to be profitable, process change positively impact profitability, and Air Force has discussed increasing quantity for force structure.

Q: On defense systems, you've talked about IVCS and ten billion dollar potential international demand. Can you talk about how that's proceeding and how you see that now? When do we should see that impact?

A: Kathy Warden said IVCS being fielded for US Army and expanding, with interest from dozen countries and countries looking to IDCS as baseline, and progress on Argum and stand-in attack weapon exports.

Q: You had mentioned at a conference in the quarter that there had been, you know, some instances of contracts maybe taking a little bit longer to get signed during the quarter. Could you give us kind of a quick update to that? Is that something you're still seeing or is that dynamic improved a little bit?

A: Kathy Warden said contracts are progressing through review, expected to be awarded this quarter and second half, in all four segments.

Q: Maybe for Ken. I'm not sure. In January, I know you were looking for flat year-on-year sales growth in the quarter, and then in February, you updated that and then you came in below it. And I hear you on the EAC for the B-21. And you sort of alluded to some slowing progress in getting orders under contract. But doesn't sound like those orders are under contract yet, and you're looking for another decline year-on-year in the second quarter. So I guess what gives the confidence for that mid-teens acceleration you need in the second half of the year if bookings aren't in your hand and you've kind of seen what you've seen in the first quarter?

A: Ken Crews said ramp in second half driven by large awards at end of 2024, timing of materials, backlog growth, and new competitive awards in space.

Q: Kathy, you called out I think, 14% of sales internationally in the first quarter. With all the strong bookings, are you how should we think about now maybe any upward momentum on international either as a mix in 2025 or just absolute growth off those sales this year?

A: Kathy Warden said international sales up 11% in quarter, book-to-bill 1.45 times, broad-based in defense systems with interest in IDCS, Argum, stand-in attack weapon, and aircraft platforms like E-2D and Triton.

Q: Have your assumptions at all changed on F-35 international sales this year into 2026 as a result of any of the more recent commentary on that program?

A: Kathy Warden said expectations unchanged, continue producing at max rate of 156 aircraft.

Q: On B-21, this process change, that you've put in place to allow for accelerated production or higher clients, whatever it may be. Isn't this something the Air Force should pay for, and will they ultimately pay for it? It's just they can't pay for it given the current contract structure that you're working under. And second one, if you could NGAD F-47, could you talk about what role, if any, you have on the Boeing aircraft?

A: Kathy Warden said decision for change in best interest of nation and shareholders, and on NGAD, can't disclose specific info but committed to supplying mission systems.

Q: Any update on timing on FAXX?

A: Kathy Warden said no update, Navy remains committed, expect news soon.

Q: Morning. Cash, quick question. Defense Systems, it looks like there was an explosion at a plant in Utah. That produces solid rocket motors. So I'm just wondering how you're thinking about that in terms of the outlook at the yes. Is there any potential impact to stand and attack weapon or Argum ER?

A: Kathy Warden said explosion in space business, no impact to Sentinel or other programs as it's not related to defense systems programs like Argum, Argum ER, or stand-in attack weapon.

Q: DOD has highlighted a lot of need for investment in space. So is there a possibility that the classified space program that was canceled could end up being restarted under this new administration?

A: Kathy Warden said requirements drive programs, so if requirement remains, programs could be reevaluated and restarted, but current year expectations don't reflect that.