Northrop Grumman Q1 2025 Earnings Report

Northrop Grumman EPS Results

• Actual EPS: $6.06
• Consensus EPS: $6.33
• Beat/Miss: Missed by -$0.27
• One Year Ago EPS: N/A

Northrop Grumman Revenue Results

• Actual Revenue: $9.47 billion
• Expected Revenue: $10.07 billion
• Beat/Miss: Missed by -$600.87 million
• YoY Revenue Growth: N/A

Northrop Grumman Announcement Details

• Quarter: Q1 2025
• Date: 4/22/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, April 22, 2025
• Conference Call Time: 9:30AM ET

Northrop Grumman (NYSE:NOC) operates as an aerospace and defense technology company in the United States, Asia/Pacific, Europe, and internationally. The company's Aeronautics Systems segment designs, develops, manufactures, integrates, and sustains aircraft systems. This segment also offers unmanned autonomous aircraft systems, including high-altitude long-endurance strategic ISR systems and vertical take-off and landing tactical ISR systems; and strategic long-range strike aircraft, tactical fighter and air dominance aircraft, and airborne battle management and command and control systems. Its Defense Systems segment designs, develops, integrates, and produces tactical weapons and missile defense solutions, and provides sustainment, modernization, and training services for manned and unmanned aircraft and electronics systems. It also offers integrated, all-domain command, and control battle management systems, precision strike weapons; high speed air-breathing and hypersonic systems; high-performance gun systems, ammunition, precision munitions and advanced fuzes; aircraft and mission systems logistics support, sustainment, operations and modernization; and warfighter training services. The company's Mission Systems segment offers command, control, communications and computers, intelligence, surveillance, and reconnaissance systems; radar, electro-optical/infrared and acoustic sensors; electronic warfare systems; advanced communications and network systems; cyber solutions; intelligence processing systems; navigation; and maritime power, propulsion, and payload launch systems. Its Space Systems segment offers satellites, spacecraft systems, subsystems, sensors, and payloads; ground systems; missile defense systems and interceptors; launch vehicles and related propulsion systems; and strategic missiles. Northrop Grumman Corporation was founded in 1939 and is based in Falls Church, Virginia.

Northrop Grumman Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to Northrop Grumman's First Quarter twenty twenty five Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. At this time, all participants are in a listen only mode. I would now like to turn the call over to your host, Mr.

[Operator]

Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed.

[Todd Ernst, Vice President, Investor Relations at Northrop Grumman]

Thanks, Josh, and good morning, everyone. Before we start today, matters discussed on today's call, including guidance and outlooks for 2025 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward looking statements pursuant to safe harbor provisions of federal securities laws. Forward looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially.

[Todd Ernst, Vice President, Investor Relations at Northrop Grumman]

Today's call will include non GAAP financial measures that are reconciled to our GAAP results in our earnings release. In addition, we'll refer to a presentation that is posted to our Investor Relations website. On the call today are Kathy Warden, our Chair, CEO and President and Ken Kruse, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Thanks, Todd. Good morning, everyone. Thank you for joining us today for our first quarter earnings conference call. A lot has happened since our last call in January, so we're looking forward to providing you an update on the quarter and our expectations for the year. We are operating in a rapidly evolving world, and we are managing through a dynamic U.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

S. Defense budget environment, with a first of its kind full year continuing resolution. Within this environment, we continue to see strong demand signals from our global customers, resulting in another record backlog in the first quarter of $92,800,000,000 and that's inclusive of strong international bookings. As we indicated in mid February, we've experienced delays in certain awards, which resulted in a slower sales ramp in the first quarter than we previously anticipated. We expect this to improve throughout the year.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Margin rates, setting aside the B21 adjustment, were in line with expectations. We have updated our 2025 financial guidance, and we are reaffirming our outlook for sales and free cash flow. With a growing backlog and progress on award timing, we have confidence in achieving our outlook and remain focused on delivering transformative capabilities for our customers. I'd like to take a minute to discuss the B-twenty '1 profit adjustment made in the quarter. As you saw in the earnings release, we recognized an additional four seventy seven million dollars pretax loss.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

This is largely relating to higher manufacturing costs, primarily resulting from a process change we made to enable a higher production rate, as well as increases in the projected material costs, some of which are related to macroeconomic impacts on material prices. While I'm disappointed with this financial impact, we continue to make solid progress on the program, demonstrating performance objectives through tests, and we are progressing through the first two lots of production. With significant learning behind us, we are ready to deliver the Air Force this highly capable strategic deterrent. During the quarter, we continued to make significant progress on other key programs as well. On Sentinel, the U.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

S. Air Force and Northrop Grumman completed a successful static fire test of the Stage I solid rocket motor for the missile in March. This critical milestone for the weapon system further validates the motor's design and paves the way for the production and deployment of a safe, secure, and reliable strategic deterrent. We are also continuing to work with the customer to identify cost and schedule efficiencies as they evaluate requirements to balance capability, affordability, and schedule for the program. In January, the U.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

S. Army awarded us a nearly $500,000,000 contract for IBCS. Under this award, Northrop Grumman will expand software development and include additional AI and model based systems engineering capabilities to allow more rapid integration for the Army and our international partners. Earlier this month, we announced the opening of a state of the art production and integration facility in Alabama to support accelerated modernization plans for air and missile defense systems, including IBCS. With this investment, it doubles the size of the previous facility footprint, leverages Northrop Grumman digital ecosystem, and gives us the ability to scale production and field new capabilities at speed.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Also, we received a nearly $300,000,000 in awards in the first quarter from the U. S. Navy to produce two additional Triton aircraft and associated support services. We are also making good progress on delivering Tritons to Australia. The first of four was delivered last year, and the second and third aircraft have completed testing with the US Navy prior to delivery to the Royal Australian Air Force this year.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Triton is playing a critical role surveilling high priority areas of interest in multiple regions. And it was just announced last week that TRITON will soon be deployed from Southern Japan to commence surveillance and information gathering operations. I'd like to take the next few minutes to provide our view of the market outlook for both the industry in general and Northrop Grumman more specifically. For our industry, demand ultimately stems from the global threat environment. Over the past decade, this environment has grown increasingly complex with the reemergence of peer adversaries, making the pace of innovation and production crucial for deterrence.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

As a result, our global customers are increasing their investments in national security. In The US, we continue to see signs that defense spending will increase, driven by a few ongoing developments. The first is finalization of a continuing resolution for the 2025 defense budget. This CR comes with several provisions that set it apart from previous ones, the most notable of which are an increase in the top line over FY24 and increased flexibility with spending accounts. Meanwhile, there is a potential for additional funding through the reconciliation process, which could add up to $150,000,000,000 to the defense budget to be allocated over multiple years.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Both the House and the Senate have passed initial legislation that lays the groundwork for this additional funding. We believe much of this will be used to support investments to maintain our nation's edge against evolving global threats. Lastly, the administration continues to prepare their fiscal year twenty twenty six budget request, and we are encouraged by recent commentary that suggests a continued strong commitment to national security funding at levels higher than prior projections. The administration has highlighted key priority areas such as the Triad, missile defense, and weapons systems, all of which are aligned to core capabilities of Northrop Grumman. Additionally, the significant increase in defense investment outside The US is leading to a growing pipeline of requests for our products across Europe, Asia Pacific, and The Middle East.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

As countries seek to protect their sovereign territories and deter aggression. In Q1, our international sales represented approximately 14% of total sales. We have broadened our customer base, increased the number of products that we can sell internationally, and established new partnerships globally to enhance our addressable market. As a result, we continue to see opportunities to increase our international sales over the coming years, and we are making steady progress in this area, with a first quarter international book to bill of 1.45 times and international sales up 11% in the quarter. International bookings were driven in part by over $1,000,000,000 in international awards admission system.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Also in the quarter, Poland signed a seven forty five million dollars letter of acceptance for 200 ARGEM ER missiles, adding to the growth potential for our Defense Systems business. We continue to see a broad pipeline of opportunities in the areas of air and missile defense, airborne ISR and C2 systems, and ammunition across multiple markets, including newly emerging opportunities in The Middle East. Our strategy is to compete and win in global markets through technology differentiation, bringing innovation and capability beyond what commercial alternatives can provide. To further our ability to innovate and deliver, we invested $13,500,000,000 in R and D and infrastructure over the last five years. As a result, we now have the ability to scale, design, and produce while fielding new capabilities at speed.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

We also have a track record of delivering defense technology that stays ahead of the pacing threat. For example, our technology is inside 90 of U. S. National security space satellites. We're a leader in low observable technology, having produced the first stealth bomber, the B-two, and now its successor, the B-twenty one.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

We've delivered more than 1,300,000 solid rocket motors, and we are a leader in vision systems where we produce over a million secure microchips per year, some of which are a thousand times faster than the microchips in your smartphone. As we look to the future, we are leveraging our own hardware and software capabilities to develop the next generation of systems, and we're also partnering with leading companies in areas such as AI to ensure our customers have the most advanced capabilities in the world. In conclusion, given our key franchise programs, record backlog, strong competitive position, and global market dynamics, we continue to project significant potential ahead. Our focus remains on our strategy of driving innovation, expanding our market presence, and optimizing performance to deliver profitable, sustainable growth. We are committed to our long term vision of creating value for our shareholders, meeting our customer needs, and staying ahead in an ever evolving global market landscape.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

So, that, I'm going to turn the call over to Ken to discuss our first quarter results and our updated guidance. Ken?

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Thank you, Kathy, and good morning, everyone. I'll begin by covering our top line results on slide four in our earnings deck. First quarter sales were $9,500,000,000 down 7% compared to the prior year and included two less working days compared to Q1 twenty twenty four. Sales in the quarter were also impacted by multiple contracting delays and timing of material receipts. This sales profile was contemplated in our expectations that we shared in February.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

However, as Kathy outlined, we updated our estimates to complete the LRIP phase of the B-twenty one program late in the quarter, which lowered sales by nearly $100,000,000 As a result, Q1 sales were slightly below our expectations. However, we are still on the path to achieve our full year sales guidance. In total, aeronautics sales were down 8% year over year due to lower B-twenty one sales and timing of production and material on mature programs, including F-thirty five. DS first quarter sales increased by $68,000,000 or 4%, primarily due to the continued ramp on the Sentinel program and higher volume on certain military ammunition programs. Mission Systems sales continued to expand, up $148,000,000 driven by numerous programs throughout their portfolio.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Higher sales on SABER, EW, international ground based radar, and marine programs all contributed to the 6% growth. And space sales were lower primarily due to the previously communicated wind down of work on two programs, which totaled approximately $230,000,000 of year over year headwinds, as well as from lower volume on CRF and FPA satellite programs. Moving to the bottom line. Our first quarter segment operating income results are shown on slide five. As previously discussed, AS adjusted their estimate to complete the LRIP phase of the B-twenty one program.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

The total loss provision was $477,000,000 across the five LRIP lots, which had the effect of lowering our company Q1 segment operating margin rate to 6%. At DS, first quarter twenty twenty five segment operating income grew by 15%, and their margin rate improved to 9.9%. This improvement was driven by higher volume, improved performance, and an increase in net favorable EACs. Admission Systems, quarter one operating margin decreased 4% due to lower volume on certain fixed price restricted production programs and investments made in connection with restricted business opportunities. These reductions were partially offset by higher net EAC adjustments.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

And at Space, first quarter segment operating income was driven by lower sales volume, partially offset by improved program performance. Notably, Space's net favorable EACs improved to $29,000,000 in Q1, leading to an 11% operating margin rate. Outside of the B-twenty one adjustment, segment operating income was consistent with the first quarter of twenty twenty four, and net favorable EACs were higher by over 30% year over year. This performance is driven by disciplined program execution and our focus on driving cost efficiencies in our business. Moving to year over year EPS compare on slide six.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Earnings per share were lower primarily due to the adjustment on B-twenty one, which totaled $2.74 per share on an after tax basis. Lower sales volume and, as expected, higher corporate unallocated expense also contributed to the combined $0.25 of year over year headwind. Before covering our updated guidance for 2025, I want to take a moment to talk about Q1 cash flow. Consistent with our seasonal pattern and expectations, first quarter results reflected a usage of cash. Operating cash outflow of $1,500,000,000 reflected an increase in vendor payments as well as lower billings and collections compared to our prior year.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

We also invested nearly $300,000,000 in capital expenditures during the period. We continue to expect cash flow to gradually ramp throughout the year, with the largest quarter of cash generation in Q4 consistent with our historical performance. And from a capital deployment perspective, we repaid $1,500,000,000 of notes that matured in January, as we indicated on our Q4 earnings call. We also returned nearly $800,000,000 to shareholders in the form of dividends and share repurchases. Turning to company guidance on slide seven.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

We continue to expect $42,000,000,000 to $42,500,000,000 in 2025 sales, representing 3% to 4% organic growth. Looking forward, we expect mid single digit sequential growth in Q2, followed by sales ramp in the second half of the year, driven by awards booked in Q4 twenty twenty four, the timing of subcontractor deliveries and material receipts, as well as from new program awards. With respect to evolving trade policy, the vast majority of our supply chain is sourced from domestic suppliers. After a thorough review of our supply chain, we have a good understanding of the risk areas and are taking mitigation actions where possible to address them. Full year segment operating income and EPS guidance have been updated to reflect the B21 adjustment, which also had the effect of lowering our estimated tax rate for the year to high 16%.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

And we are reaffirming our twenty twenty five free cash flow guidance range of $2,850,000,000 to $3,250,000,000 At the segment level, we are reaffirming our sales expectation at each of our segments. We continue to expect mid single digit growth at AF and MS, driven by continued ramp on B21, Takimo, and multiple programs across our diverse MS portfolio. We expect DS will achieve double digit organic sales growth this year, driven by IBCS backlog, Sentinel, and higher volume in our weapons business. The divestiture of the training service business is on track to close mid year. Assume early Q3 for your modeling purposes.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

And we continue to project space sales of roughly $11,000,000,000 enabled by continued production on existing programs and new competitive wins in the restricted domain. We have updated our OM rate expectations at AS and now expect an OM rate of low to mid 6%. We are reaffirming our margin rate expectations for the other segments and with each projected to increase from twenty twenty four actual results. We expect a gradual ramp in overall segment margin rates over the coming quarters driven by MS. This profile is enabled by continued strong program performance, execution of cost saving initiatives and seasonal volume shifts to higher margin production programs later in the year.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

To conclude, our portfolio is well aligned to customer priorities, and we will continue to drive efficiencies, manage risk, and elevate performance to deliver profitable growth over the long term. This will enable us to execute our capital deployment strategy, which prioritizes investing in innovation and capacity to meet our customer needs while returning cash to shareholders. With that, we are ready to begin Q and A.

[Operator]

Thank Our first question comes from Christine Lewag with Morgan Stanley. You may proceed.

[Kristine Liwag, Analyst at Morgan Stanley]

Hey, good morning, everyone.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Good morning, Christine. Welcome back.

[Kristine Liwag, Analyst at Morgan Stanley]

Thank you. So so, Kathy, maybe on the b '21, what milestones should we watch for to track the risk retirement of the program? And regarding the macro environment that you put in for the charges, how should we think about this regarding tariffs? Could there be risks that you could see further charges on the program?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Thanks, Christine. So, let me start by talking about the phases of the program and where we are in performance. We are completing the EMD phase of the program and are in the stages of tests that prove out the objectives of the aircraft being met through those performance test milestones, and the government has released information as we progress through the test program to help provide some transparency that the aircraft is performing in line with the model performance and the test objective. We also have started low rate initial production and as we've talked about, we are working through the first two lots of production in LRIP and we had even started long lead up through lot four. So, we've built a good bit of experience now in building the aircraft and as we have progressed through the build process, we made the determination, working with the Air Force, to reduce risk as we scale to the program of record, which will happen at the end of LRIP, and even to position us now to ramp above the program of record.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

And those manufacturing changes and associated costs that we talked about being reflected this quarter are a result of that learning in the process of scaling. But it's good to have that learning now understood and behind us before we ramp further through LRIP and then eventually into full rate production. We also have the sustainment and modernization still ahead on the program. We've talked in previous calls about having started some work on modernization and we are building out the capability to train and sustain on the aircraft as well. So, those will fit gradually phase in over these next several years.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

And there isn't change based on what we're reporting this quarter in that profile for the program.

[Kristine Liwag, Analyst at Morgan Stanley]

Great, thank you Kathy. And maybe I could follow-up on AI. You mentioned earlier that you're seeing opportunities there. Can you provide more color on where you see Northrop Grumman's strategic strengths are in AI versus commercial players or new disruptive players? How much of a game changer are your capabilities in this?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Yes, so we have been investing in artificial intelligence as it's known today, for decades we've been incorporating the concepts of distilling large amounts of information through automation into actionable software that helps enable a user to do everything from flying an aircraft with our autonomous aircraft to distilling large amounts of information for targeting to helping to assimilate situational awareness and make decisions on how to pair sensors and shooters like with the IDCS program, which I mentioned in my prepared remarks. All of these applications of artificial intelligence help us to make our sensors, our software more valuable for the user and to do more in short periods of time to prepare that information for the user to act more quickly. So, that is a mission expertise that we possess and the building of that software and the integration of artificial intelligence techniques is something that our team understands how to do. But, as that technology matures, we absolutely can partner with other companies who are investing usually for commercial applications and bring their platforms in to facilitate our software development, and that's largely what we're doing in the partnerships that we have with companies like Nvidia.

[Kristine Liwag, Analyst at Morgan Stanley]

Great, thank you very much.

[Operator]

Thank you. Our next question comes from Robert Sallard with Vertical Research. You may proceed.

[Robert Stallard, Partner at Vertical Research Partners]

Thanks so much. Good morning.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Good morning.

[Robert Stallard, Partner at Vertical Research Partners]

Kathy, in your prepared remarks, you noted that it's a pretty unstable situation with your U. S. Customer at the moment. Do you gave us the expectation that you hope things or expect things to improve from here? But some of the commentary from the Pentagon suggests that there's going to be significant head counts, there's obviously still the potential risk of the Doge.

[Robert Stallard, Partner at Vertical Research Partners]

So what gives you the confidence that this situation, this process problem is going to improve from here?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Well, Rob. There definitely is uncertainty in the environment and it's in multiple forms. The one that I referred to in my prepared remarks was delays in getting new awards and those decisions being made. What I would say is we are starting to see those award decisions move forward and that was the reason for my comments that we expect that to improve here in the second quarter and throughout the year. We are not seeing direct impact from the government's reduction of personnel in our ability to still deliver on program and get through the milestones that we have on program.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

We are watching that. Certainly, we want to make sure that the government oversight is sufficient and there, but I also believe there is room for efficiencies and we expect that in some ways the government will be able to continue their work even if they experience less personnel. Finally, I would just say that we are looking toward the budget to provide clarity on the administration's priorities, but what we are hearing is that there is strong alignment to the areas of capability that Northrop provides, and we also are expecting the increases in top line that I talked about in my prepared remarks. So, we'll be watching all of that closely as it unfolds over the coming months.

[Robert Stallard, Partner at Vertical Research Partners]

Okay, thanks, Kathy. Just a quick one for Ken. On the B21 EAC adjustment, what's the anticipated cash impact from this? Is it basically the same number, but spread over time?

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Yes. So the right way to think about the cash impact due to the incremental charge is no material impact to 2025. Of the incremental charge, it will be spread primarily through '26, '20 '7, and '28.

[Robert Stallard, Partner at Vertical Research Partners]

Thank you very much.

[Operator]

Thank you. Our next question comes from Ronald Epstein with Bank of America. You may proceed.

[Ronald Epstein, MD - Aerospace & Defense at Bank of America Merrill Lynch]

Hey, yeah. Good morning. Yeah. If we can dig a little deeper on b '21, if we peel back the onion, what 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, right? I mean I think we've all watched the industry for a while and it seems like these charges tend to have a tail and that's the big fear.

[Ronald Epstein, MD - Aerospace & Defense at Bank of America Merrill Lynch]

So are we going to get one of these every year? I mean, how should we think about it and be confident that this is it?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

The drivers of the charge were related to a process change and that process change supports the accelerated production rates that I referenced. And so, in that way, it's a very defined change, and we now understand and have the learning from making that change, and that's not something we will need to do again. This positions us to ramp to the quantities needed in full rate production, and even as I noted, we can ramp beyond the quantities in the program of record, which is something that we and the government decided was important for the optionality to support the scenarios that they have been looking at to increase the current build rate. The second part of the charge that I mentioned is related to the quantity of general procurement materials as well as the price. And there, we had underestimated the amount of consumption of those materials as well as the price increase that we are seeing.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

And so, in many ways, this is a reflection of the macroeconomic environment coupled with the learning that comes through building the aircraft now having multiple under our belt and the adjustment this quarter has the benefit now of having those first two lots progressing through production. So, we don't expect these learnings to repeat themselves, but of course we've been transparent that there remain both risks and opportunities on the program as we complete the first five LROPs. Most of the change that we have experienced and that have resulted in now the close to $2,000,000,000 of charges on the program are due to inflationary factors, and so we have done our best to execute well on what we can control and at the same time reflect those macroeconomic risks in our EAC. So, we have updated those, but we will continue to monitor and mitigate those inflationary pressures as we experience them.

[Ronald Epstein, MD - Aerospace & Defense at Bank of America Merrill Lynch]

Got it, got it. Then, maybe as follow-up on Sentinel, it's another program that's kind of made some headlines. How confident should we feel about the profitability on that given the potential changes to that program?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

On Sentinel, we continue to progress well through the development phase of the program, and we, as I said, have progressed in design maturation and even testing of the missile, and so we continue to grow in confidence in the design of the system that we are building. We are partnering with the DoD and the Air Force to restructure the program. And as part of that restructuring, we are working with the Air Force on options to reduce the overall cost and schedule on the program and have identified opportunities to them to do so. What we look at in that restructuring is to ensure that the changes in requirements are adequately reflected in the design and ultimately in the contract and we'll be working to do that with the government. I will just remind you that Sentinel is a cost plus program and we have not yet estimated the cost associated with LRIP from a contractual standpoint.

[Ronald Epstein, MD - Aerospace & Defense at Bank of America Merrill Lynch]

Got it. Alright, thank you very much.

[Operator]

Yes. Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed.

[Sheila Kahyaoglu, Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group]

Good morning, Kathy and Ken and Todd. Maybe just a broader question, again, starting out with tariffs because it's been a hot topic this morning. How do we think about the tariff impact on the overall Northrop portfolio and just international relationships, how that changes your potential opportunity set under the current administration?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Sheila, let me start with what we believe to be the impact of tariffs on our portfolio. We do directly source a small part of our supply chain, about 5% of our total spend, so less than a billion dollars annually and it's from countries outside of The US, primarily in Europe. When we look at the second and third tiers of our supply chain, we have purchasing agreements in place with the vast majority of those that extend over a long period of time, and we have done an assessment and believe that most of the costs that we might incur due to trade policy are incorporated and covered under our contracts with the US government. So, we do not see at this point in time a significant risk to our company related to the trade policies as we understand them today. We're going to continue to monitor that closely, and we're already taking actions to account for and mitigate the risks that we do see, particularly in availability of certain components that we need for delivering on our program.

[Sheila Kahyaoglu, Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group]

Great. And maybe if I could ask one specific question on MS margins, just at 12.9% in the quarter, they lag the midpoint of your guidance of mid-14s. How do we think about the drivers of that? You mentioned investments and mix of microelectronics. So how do we think about the improvement in MS profitability?

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Sure. Thanks for the question, Sheila. So as we mentioned in my prepared remarks, we made an investment that would generate significant value over the long term, while repaying the initial investment cost plus our required rate of return. That was known. So we knew of that when we put our guidance forward at the mid 14% range.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

So as we think forward with Mission Systems, what is driving the margin profile in the future is the ramp, particularly on their mature accretive margin programs throughout the year as well as Mission Systems is making significant progress on efficiencies in the business. And so, as we harvest those efficiencies, it will impact our rates, which then flow through to the programs driving that improved margin profile in the second half of the year.

[Sheila Kahyaoglu, Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group]

Thank you.

[Operator]

Thank you. Our next question comes from Scott Dushal with Deutsche Bank. You may proceed.

[Scott Deuschle, Director - Aerospace & Defense Equity Research at Deutsche Bank]

Hey, good morning.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Good morning. Good morning.

[Scott Deuschle, Director - Aerospace & Defense Equity Research at Deutsche Bank]

Ken, are you reiterating the previous free cash flow targets for 2026, '20 '20 '7 and 2028?

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Yes. So let me touch on that is we are at this moment holding the guidance ranges that we provided or the multi year guidance ranges for cash flow. And we are absolutely focused on performance and rationalizing investments to execute within those ranges. Scott.

[Scott Deuschle, Director - Aerospace & Defense Equity Research at Deutsche Bank]

Okay, and 2028 still good for the 4,000,000,000 Or

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Yes. At this point, we're holding all guidance.

[Scott Deuschle, Director - Aerospace & Defense Equity Research at Deutsche Bank]

Okay. And then just on this, for 2026 and 2027, would it be reasonable to think that you're biased toward the lower end of the prior range given these extra B21 costs? Or are there mitigating offsets that we should be mindful of?

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Permade is the majority of the impact is '26, '20 '7 and '28. But I want to highlight the fact that we are over those periods. Right? When we put the ranges together, we account for various risk and opportunities and we are off working and executing to mitigate risk maximize opportunities to be within those ranges.

[Scott Deuschle, Director - Aerospace & Defense Equity Research at Deutsche Bank]

Thank you.

[Operator]

Thank you.

[Operator]

Our next question comes from Seth Seifman with JPMorgan. You may proceed.

[Seth Seifman, Executive Director at JP Morgan]

Hey, thanks very much, and good morning.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Good morning.

[Seth Seifman, Executive Director at JP Morgan]

Not sure how specific it's possible to get on B-twenty one, but if we think about 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?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Seth, I can't quantify because of classification of the program what relates exactly to the process change versus procurement material, but the first is larger than the second, which is why from a disclosure we talk about them in that order. In response to your question of whether we would have made that process change if not for the need to reduce risk as we scaled to the program of record and then ultimately to position us to grow beyond the program of record, we would not have made those changes at this time if not for those considerations. But, we are glad that we have made them, because that learning only would have compounded if we would have waited later in the program and had a higher production volume. We also believe that providing this optionality to the government now, as they are looking at force structure, was an important enabler to their derisking of options beyond the program of record. So, I don't at all regret that we did this and that we did it now, and it is a good thing for the program overall to have this learning behind us.

[Seth Seifman, Executive Director at JP Morgan]

Okay, great. I'll leave it there for this morning. Thanks very much.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Thank you.

[Operator]

Thank you. Our next question comes from Michael Ciarmoli with Truist Securities. You may proceed.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

Hey, good morning, guys. Thanks for taking the question. Just I hate to do it, but to stay on the B21. Kathy, was the process change at the request of the customer working with them to ramp faster and ultimately deliver above the current stated volume? And just on the consumption of material, was that I think you called out that you had more consumption material.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

Was that more just kind of thinking about scrap and waste in the process?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Yes. So we did make the decision jointly with the Air Force to make the process changes, and as I said, it really was to reduce risk as we scaled to the program of record and to provide for options beyond the program of record. The Air Force is continuing to evaluate those options, and we'll look for more information as the budget request is finalized. In part of your question, you also are asking about whether we saw some of the material cost increases as a result of scrap and rework. To some degree, it's really about the consumption of the material necessary in the build process, but some of that absolutely is the amount of scrap and waste that we have in the process and the estimates that we made on that early in the program versus actual performance.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

Got it. Helpful. And just if I may, I think previously you called out maybe $200,000,000 in supply costs that have been removed. I mean, how are you thinking about that number, with the evolution of tariffs and potentially tighter access to materials? Does that $200,000,000 in cost continue to stay out of the system, you think?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

So, we've talked about $200,000,000 enterprise wide of cost efficient fees and we do see a path to keep that cost out of the system and continue to build on it. We are driving cost out not just through supplier engagement in constructing more efficient supplier utilization and pricing, but also through things like facility optimization, the implementation of our digital ecosystem, which is driving rework out of our system. And so those things are the bigger driver of that $200,000,000 cost efficiency, but certainly supplier efficiency is part of it and we don't expect that to be impacted by tariff.

[Scott Deuschle, Director - Aerospace & Defense Equity Research at Deutsche Bank]

Great. Thanks, guys. Appreciate it.

[Operator]

Thank you. Our next question comes from Doug Harned with Bernstein. You may proceed.

[Douglas Harned, Managing Director at Bernstein]

Thank you. Good morning.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Good morning.

[Douglas Harned, Managing Director at Bernstein]

On

[Douglas Harned, Managing Director at Bernstein]

the B-twenty one, 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 19 airplanes, which you've talked about before? Then also as you think about a larger program of record, I mean the Air Force has talked about 100 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 see that? Have there been announcements, or should we expect something in the budget?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Yes, Doug. So, let me answer the first part of your question first about the NTE units. So, bottom line up front, we continue to expect the NTE aircraft to be profitable. The loss largely relates to those higher manufacturing costs that I talked about from the process change we made, and that near term disruption in the associated costs will not extend into the NTE units, and we actually expect these changes will positively impact our ability to deliver the NTE units profitably. The increases in projected cost and quantity of general procurement materials could negatively affect profitability of the units.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

When you think of the NTE aircraft overall, we do still expect those to be profitable. With regard to the Air Force messaging around increasing the quantity of B-21s and potentially the rate at which they are being built. That has been spoken about in congressional testimony, particularly from the users of B-twenty one think the combatant command that is looking toward what they would like to have for completing their mission, and there have been discussions about raising the quantity. And so that is the source that you can look to in open source to reflect that increased demand signal that we've been talking about.

[Douglas Harned, Managing Director at Bernstein]

And then just as a follow on, switching over to defense systems, you've talked about IBCS and the $10,000,000,000 potential international demand. Can you talk about how that's proceeding and how you see that now? When we should see that impact? Seems quite substantial and positive.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Yes, IBCS is being fielded for the US Army, including expansion of the mission to include the defense of Guam. We also have Poland, as you know, that is expanding their use of IBCS. We first started with their mid range air defense and now we're moving to their near range air defense, And we've talked before about a dozen countries who have expressed interest in procuring IBCS that are in various stages of maturity in the pipeline, but we are seeing great interest there, and we continue to add additional countries that are looking to IBCS as the baseline for their architecture. We also, as we have responded to Golden Dome requests for information, incorporated the capability of IBCS because its ability to integrate sensors and shooters is absolutely at the core of part of the underlayer for missile defense for the homeland in The US as well.

[Douglas Harned, Managing Director at Bernstein]

Very good, thank you.

[Operator]

Thank you. Our next question comes from Matt Akers with Wells Fargo. You may proceed.

[Matthew Akers, Aerospace & Defense Research Analyst at Wells Fargo]

Guys. Good morning. Thanks for the question. Good morning. Kathy, you had mentioned at a conference in the quarter that there had been some instances of contracts maybe taking a little bit longer to get signed during the quarter.

[Matthew Akers, Aerospace & Defense Research Analyst at Wells Fargo]

Could you give us kind of a quick update to that? Is that something you're still seeing or has that dynamic improved a little bit?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

We have not seen those contracts get awarded yet. We are seeing them progress through the process of being reviewed and we hope ultimately decided and communicated. So, we are holding to the expectation that we will see some of those awards start to happen this quarter and certainly in the second half of the year.

[Matthew Akers, Aerospace & Defense Research Analyst at Wells Fargo]

Yeah, got it. And I guess any color you can add on what those contracts are specifically? Is that focused on one area of your business? Or I guess just anything else you can share?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

There are actually examples in all four segments of our business, large aircraft program in our aeronautics business, multiple space awards in restricted, particularly communications. We have in mission systems some restricted opportunities that we are anticipating will get awarded over the summer now. And in defense, it's largely munitions where we had a munitions contract we expected award in the first quarter and now are expecting to happen in the second or third quarter.

[Matthew Akers, Aerospace & Defense Research Analyst at Wells Fargo]

Got it. Okay. Thanks. I'll leave it there.

[Operator]

Thank

[Operator]

you. Our next question comes from Myles Walton with Wolfe Research. You may proceed.

[Myles Walton, Managing Director at Wolfe Research LLC]

Thanks. 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, updated that and then you came in below it. And I hear

[Myles Walton, Managing Director at Wolfe Research LLC]

you

[Myles Walton, Managing Director at Wolfe Research LLC]

on the EAC for the B21 and you sort of alluded to some slowing progress in getting orders under contract, but it 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 the bookings aren't in your hand and you've just kind of seen what you've seen in the first quarter?

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Yeah, so thank you for the question. I'll put it into three buckets in terms of what's driving the ramp in terms of the second half of the year. The first one is the large awards we received at the end of twenty twenty four and those fall in the lines of and IBCS as well as international activities early around ground based radars. Again, I'll reemphasize that's in our backlog. And so just from a natural timing progression, when you think about ramp up and timing of materials that will happen in the second half of the year.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

And then when we think about the natural as part of our original assumptions in terms of just our current backlog growing. We had planned ramps across restricted airborne sensors. We had planned ramps in terms of just timing on Sentinel, our weapon systems across multiple activities like ARGUM and stand in attack weapon, as well as timing on strike. And that's just a few examples. And again, that sales growth is driven by backlog.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

And then the other piece would be, which is primarily space is new competitive awards. And we do expect we believe we're well positioned for those. And we do expect to hear about those in the second quarter. And then that's what drives the remaining piece of the growth profile.

[Myles Walton, Managing Director at Wolfe Research LLC]

Okay. So it wasn't anything in the quarter that was turned off. There was no stop works or customer decision points that were turned off. It was simply a timing of receipt of contracts.

[Kenneth Crews, Corporate VP & CFO at Northrop Grumman]

Yes, it's just timing and then around the confidence pieces. When we think about it from a working capital in our inventory, once those gets awarded, we are able to reduce that working capital. So it's associated sales real time, which also gives us confidence in our profile.

[Myles Walton, Managing Director at Wolfe Research LLC]

Okay. All right. Thank you.

[Operator]

Thank you. Our next question comes from Ken Herbert with RBC Capital Markets. You may proceed.

[Ken Herbert, Managing Director at RBC Capital Markets]

Yeah. Hi. Good morning.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Good morning.

[Ken Herbert, Managing Director at RBC Capital Markets]

Hey, 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?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

We are starting to see a significant pipeline of demand translate into firm international bookings. I did talk about our international sales being up 11% in the quarter. Perhaps even more interesting for the long term is that our book to bill in 2024 was 1.4 times and it was 1.45 times in the first quarter. So, we see it coming across a number of areas. We've talked already about IDCS and the dozen or so countries that are expressing interest.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

We didn't talk as much, but certainly significant interest in ARGUM and stand in attack weapon. Both ARGEM and ARGEM Extended Range have been approved for export to a large number of countries and we are in various processes of getting those awards on contract. I mentioned one in my prepared remarks. And then we also are continuing to see growth on aircraft platforms like E-2D and Triton. So it's broad based in terms of where that international business is coming from, and yet we see a significant portion of it in our defense systems business.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

They have had double digit growth in international and with the pipeline that we have in their portfolio in particular, we expect that to continue.

[Ken Herbert, Managing Director at RBC Capital Markets]

Thank you. Have your assumptions at all changed on F-thirty five international sales this year or into 2026 as a result of any of the more recent commentary on that program?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Our expectations have not changed. The communications that we have had with the Prime are to continue producing at our max rate, which is the 156 aircraft. That's what we're on contract to do, and so that's what we continue to do, and so we don't anticipate any change.

[Ken Herbert, Managing Director at RBC Capital Markets]

Great, thank you.

[Operator]

Thank you. Our next question comes from David Strauss with Barclays. You may proceed.

[David Strauss, Managing Director - Aerospace & Defense Equity Research at Barclays]

Thanks. Good morning.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Good morning.

[David Strauss, Managing Director - Aerospace & Defense Equity Research at Barclays]

Kathy, one follow-up on B21 and then one follow-up to that. B21, this process change that you put in place to allow for accelerated production or higher quantities, 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?

[David Strauss, Managing Director - Aerospace & Defense Equity Research at Barclays]

That's my first one. And then second one, if you could, NGAD F-forty seven, could you talk about what role, if any, you have on the Boeing aircraft? Thanks.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Sure. So, look, we made the decision jointly with the Air Force to make the change, and we believe in the long run, it's not only in the best interest of national security and providing the Department of Defense the options that they need to have a force structure that meets their expanding requirements, but also for the profitability of the program over the long haul. And that's the decision framework that we operate within is to think about what is needed by the nation and our shareholders, not just each quarter, but over the long duration that this program will be adding value. In regard to our role on NGAD, given the classification of the program, we can't disclose any information specific to the program, but you know that we are a merchant supplier of mission systems and we remain fully committed to supplying those advanced capabilities for government customers and prime and that our sensors are easily scaled and reconfigurable for a wide application across a variety of platforms and domains and I'll simply leave it at that.

[David Strauss, Managing Director - Aerospace & Defense Equity Research at Barclays]

Okay. And any update on timing on FA XX?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

I do not have an update to provide to you. The Navy remains committed to the program, and we do expect to hear something soon.

[David Strauss, Managing Director - Aerospace & Defense Equity Research at Barclays]

Great. Thanks very much.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Thank you.

[Operator]

Thank you. Our next question comes from Scott Micas with Melius Research. You may proceed.

[Scott Mikus, Director – Aerospace, Defense & Space Research at Melius Research LLC]

Morning.

[Scott Mikus, Director – Aerospace, Defense & Space Research at Melius Research LLC]

Good morning. Quick question. Defense systems, it looks like there was an explosion at a plant in Utah that produces solid rock emitters. I'm just wondering how you're thinking about that in terms of the outlook at DS. Is there any potential impact to stand and attack weapon or ARGM ER?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Yes, thank you for the question. It is actually part of our space business. This is where we build the larger solid rocket motors, not the tactical ones that go into missiles, and so it was in Promontory, Utah, and it was a building that where we produce an ingredient to our solid rocket motor propellant, but we have other sources of supply outside of Northrop Grumman that will be able to provide us that ingredient, so we do not expect any impact to any of our programs. We've specifically been asked about Sentinel because Promontory is a production site for those solid rocket motors and there is not expected to be any impact to Sentinel or any other program and again it would be in our space business, not defense systems, There's absolutely no correlation to programs like ARGEM, ARGEM ER, or Stanton Attack Weapon.

[Scott Mikus, Director – Aerospace, Defense & Space Research at Melius Research LLC]

Okay, very helpful. Second question, DoD has highlighted a lot of need for investment in space. So is there a possibility that the classified space program that was cancelled could end up being restarted under this new administration?

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

You know, the requirements are what drives the need for development and fielding of capabilities, and so to the extent that the requirement has not gone away, we do believe that programs could be reevaluated and started under this administration to meet those requirements. Our current year expectations don't reflect that, but certainly we continue to provide information to the government to help them understand their options based for meeting those requirements.

[Scott Mikus, Director – Aerospace, Defense & Space Research at Melius Research LLC]

Thanks for taking my

[Scott Mikus, Director – Aerospace, Defense & Space Research at Melius Research LLC]

questions.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Sure.

[Todd Ernst, Vice President, Investor Relations at Northrop Grumman]

All right, we're going to

[Todd Ernst, Vice President, Investor Relations at Northrop Grumman]

have to leave it there.

[Kathy Warden, Chair, CEO & President at Northrop Grumman]

Great, well, let me wrap up by thanking you for participation in today's call. As you sensed, we are optimistic about the continued strong demand for our products, the growing global defense budgets that we see, and the solid execution of our team across the majority of the business. And while we are disappointed with the B-twenty one adjustment this quarter, the underlying business fundamentals in our company are strong and we continue to derisk the B-twenty one program through the investments that we're making. So, for the remainder of the year, we're going to continue to focus on adding to our backlog, improving profitability in our business segments, and generating the cash that fuels our deployment plan. We look forward to giving you another update in the second quarter and want to thank you again for joining today's call.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Participants

Executives

• Todd Ernst, Vice President, Investor Relations
• Kathy Warden, Chair, CEO & President
• Kenneth Crews, Corporate VP & CFO

Analysts

• Kristine Liwag, Analyst at Morgan Stanley
• Robert Stallard, Partner at Vertical Research Partners
• Ronald Epstein, MD - Aerospace & Defense at Bank of America Merrill Lynch
• Sheila Kahyaoglu, Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group
• Scott Deuschle, Director - Aerospace & Defense Equity Research at Deutsche Bank
• Seth Seifman, Executive Director at JP Morgan
• Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities
• Douglas Harned, Managing Director at Bernstein
• Matthew Akers, Aerospace & Defense Research Analyst at Wells Fargo
• Myles Walton, Managing Director at Wolfe Research LLC
• Ken Herbert, Managing Director at RBC Capital Markets
• David Strauss, Managing Director - Aerospace & Defense Equity Research at Barclays
• Scott Mikus, Director – Aerospace, Defense & Space Research at Melius Research LLC