Northrop Grumman Corp. 10-Q Summary
Business Context and Reporting Period
Company: Northrop Grumman Corporation (NOC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2026
Business Overview: A leading global aerospace and defense technology company providing products and services primarily to the U.S. Department of War (DoW) and intelligence community. Operations are organized into four segments: Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems.
Key Financial Metrics
| ($ in millions, except per share) | Q2 2026 | Q2 2025 | YTD 2026 | YTD 2025 |
|---|---|---|---|---|
| Total Sales | $10,876 | $10,351 | $20,757 | $19,819 |
| Operating Income | $1,096 | $1,425 | $2,085 | $1,998 |
| Operating Margin | 10.1% | 13.8% | 10.0% | 10.1% |
| Net Earnings | $1,094 | $1,174 | $1,969 | $1,655 |
| Diluted EPS | $7.68 | $8.15 | $13.83 | $11.45 |
| Cash & Equivalents (End of Period) | $2,307 (as of June 30, 2026) | |||
| Long-Term Debt (Net) | $14,428 (as of June 30, 2026) | |||
| Backlog | $104.7 billion (as of June 30, 2026) |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 5% year-over-year (YTD) driven by higher volume in Aeronautics Systems (B-21, TACAMO), Defense Systems (Sentinel, IBCS), and Mission Systems.
- Operating Income Volatility: Q2 operating income decreased 23% primarily due to the absence of a $231 million gain on the sale of the training services business recorded in Q2 2025. YTD operating income increased 4% due to higher segment performance and the absence of a prior-year B-21 loss provision.
- Tax Rate Reduction: The effective tax rate dropped significantly to 6.3% in Q2 2026 (from 17.7% in Q2 2025) and 10.4% YTD (from 17.5% YTD 2025). This was driven by the remeasurement of uncertain tax positions (UTPs) and favorable IRS guidance on the Corporate Alternative Minimum Tax (CAMT).
- Segment Performance:
- Aeronautics Systems: Sales up 15% YTD; Operating income up 383% YTD due to the absence of prior-year B-21 loss provisions.
- Defense Systems: Operating income down 21% YTD due to unfavorable Estimate-at-Completion (EAC) adjustments on the Stand-in Attack Weapon (SiAW) program.
- Space Systems: Operating income down 16% YTD due to unfavorable EAC adjustments on the Graphite Epoxy Motor (GEM) 63XL program.
Guidance, Outlook, and Risks
- B-21 Program: Management reached an agreement with the U.S. Air Force to expand production capacity and increase the aircraft production rate. While a $1.0 billion loss accrual remains, the company expects improved returns on future Low-Rate Initial Production (LRIP) and Not-to-Exceed (NTE) lots.
- Sentinel Program: The program was certified for continuation following a Nunn-McCurdy breach review. A $7.6 billion increase in backlog was recorded in Q2 2026 following the definition of the restructured execution plan.
- Divestiture: The company completed the sale of the Immersive Mission Solutions (IMS) training services business in May 2025 for $333 million.
- Capital Allocation: The company increased its quarterly dividend by 7% to $2.47 per share. Share repurchases were minimal in Q2 2026 ($68 million YTD), with $2.5 billion remaining under the current authorization.
- Risks:
- Government Funding: Dependence on U.S. government appropriations and potential impacts of debt ceiling debates or government shutdowns.
- Contract Performance: Risks related to cost growth, supply chain disruptions, and labor shortages affecting EAC adjustments.
- Legal/Regulatory: Ongoing investigations regarding CAS pension expense interest rate assumptions (DOJ criminal inquiry closed; civil inquiry and DCMA inquiry ongoing) and environmental remediation at the Bethpage site.
Investor Verification Checklist
- B-21 Profitability: Verify the timeline and financial impact of the production rate increase agreement and the remaining $1.0 billion loss accrual.
- Tax Position: Confirm the sustainability of the reduced effective tax rate following the remeasurement of uncertain tax positions and CAMT guidance.
- EAC Adjustments: Monitor future quarters for further unfavorable adjustments on the GEM 63XL and SiAW programs.
- Backlog Conversion: Assess the conversion rate of the $104.7 billion backlog, noting that 35% is expected to be recognized in the next 12 months.
- Legal Exposure: Track the resolution of the ongoing DCMA inquiry regarding pension expense interest rate assumptions and the Bethpage environmental litigation.