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Northrop Grumman Corp. Q1 2026 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2026. Northrop Grumman Corporation is a leading global aerospace and defense technology company, primarily serving the U.S. Department of War (DoW) and intelligence community. The company operates through four segments: Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems. Notably, the company completed the divestiture of its Immersive Mission Solutions (IMS) training services business in May 2025; therefore, Q1 2026 results are fully organic compared to Q1 2025, which included IMS sales prior to the sale date.

Key Financial Metrics

Liquidity: The company maintains a $3.0 billion revolving credit facility and a commercial paper program. As of March 31, 2026, $500 million in commercial paper was outstanding. Net cash used in operating activities was $1.656 billion, consistent with historical seasonal patterns where cash conversion is weighted toward the second half of the year.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 4% ($413 million) year-over-year. Organic sales grew 5% after adjusting for the prior year's divested training services business.
• Profitability Surge: Operating income increased 73% ($416 million). This was primarily driven by the absence of a $477 million B-21 loss provision recorded in Q1 2025.
• Segment Performance:
  • Aeronautics Systems: Sales up 17% and operating income turned from a loss of $183 million to a profit of $305 million, largely due to the absence of the prior year B-21 loss and increased B-21 production volume.
  • Mission Systems: Operating income up 20% to $433 million, driven by higher margins and favorable EAC adjustments.
  • Space Systems: Sales down 3% and operating income down 17%, impacted by the wind-down of the Next Generation Interceptor (NGI) program and a $71 million unfavorable EAC adjustment on the GEM 63XL program due to a launch anomaly.
• Tax Rate: The effective tax rate decreased to 15.0% from 16.8%, aided by higher research credits and a $19 million benefit from new IRS guidance on the Corporate Alternative Minimum Tax (CAMT).

Guidance, Outlook, and Risks

Management Commentary: Management highlighted a dynamic global security environment driving demand for defense capabilities. The company reached an agreement with the U.S. Air Force to expand B-21 production capacity, expecting to invest approximately $2.5 billion over multiple years. The Sentinel program remains under restructure following a Nunn-McCurdy breach review, with no significant changes to estimated profitability in Q1 2026.

Unusual Items:

• B-21 Program: A $157 million net unfavorable EAC adjustment was recorded on the first four LRIP lots due to higher estimated production costs, partially offset by a reduction in the loss contingency accrual on the remainder of the program. A remaining loss accrual of $1.0 billion is included in current liabilities.
• GEM 63XL: A $71 million unfavorable EAC adjustment was recorded due to a solid rocket motor anomaly during a Q1 2026 launch.

Risks and Contingencies:

• Government Funding: Risks related to U.S. budget priorities, debt ceiling debates, and potential government shutdowns (a partial shutdown was in effect regarding DHS at the time of filing).
• Legal/Regulatory: Ongoing DOJ and DCMA investigations regarding CAS pension expense interest rate assumptions. The company cannot currently estimate the potential loss range but notes it could be material.
• Environmental: Continued remediation costs at the Bethpage, NY site, with accrued costs of $561 million and reasonably possible future costs of $402 million.

Investor Verification Checklist

• B-21 Loss Accrual: Verify the remaining $1.0 billion loss accrual and the impact of the new production rate agreement on future margins.
• Space Systems Anomaly: Assess the long-term financial impact of the GEM 63XL launch failure and corrective actions.
• Government Investigations: Monitor the status of the DOJ/DCMA inquiries into pension accounting assumptions for potential future charges.
• Backlog Conversion: Confirm the $95.6 billion backlog and the expected revenue recognition timeline (35% in next 12 months).
• Share Repurchases: Note the $2.5 billion remaining under the 2024 repurchase program and the reduction in repurchase activity in Q1 2026 compared to Q1 2025.