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NORTHROP GRUMMAN CORP /DE/ (NOC)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 delivered a broad-based beat: Sales $10.35B (+9% q/q; +1% y/y) and diluted EPS $8.15, both above consensus, with EPS aided by a $1.04/share divestiture gain; segment operating margin expanded 100 bps y/y to 11.8% .
  • Guidance raised: FY25 segment operating income to $4.275–$4.375B, MTM-adjusted EPS to $25.00–$25.40, and free cash flow to $3.05–$3.35B; sales narrowed to $42.05–$42.25B .
  • Key operational drivers: Mission Systems strength (inventory liquidation on restricted award, airborne radar efficiencies), Defense Systems favorable EAC on Sentinel; Space Systems down on restricted program wind-down and NGI, but margin rate improved .
  • Capital returns and balance sheet: $700M returned in Q2 via buybacks/dividends; dividend lifted 12% to $2.31/quarter (22nd consecutive annual increase) .
  • Near-term stock catalysts: clarity on B-21 accelerated production arrangement and returns, continued Sentinel ramp and international demand, and Q3 higher tax-rate reset (~21% in Q3) impacting EPS trajectory .

What Went Well and What Went Wrong

What Went Well

  • Mission Systems: Sales +14% y/y and margin to 14.0%, driven by restricted award timing and improved airborne radar efficiencies; operating income +22% y/y .
  • Defense Systems: Margin rate improved to 12.7% on a $76M favorable EAC on Sentinel EMD linked to contract incentives; sales +7% y/y .
  • International: Sales +18% y/y, strong book-to-bill; “We continue to see growing demand globally for our broad range of product offerings” — Kathy Warden .

What Went Wrong

  • Space Systems: Sales -12% y/y on restricted space and NGI wind-down ($283M headwind); operating income -8% y/y despite margin rate lift to 10.6% .
  • Cash flow: Free cash flow down 42% y/y to $637M on $1.0B higher net cash taxes; operating cash flow $868M vs $1.425B prior year .
  • Tax headwind: FY25 ETR increased to “high 17%” due to R&D tax treatment; Q3 ETR ~21% to catch up year-to-date .

Financial Results

MetricQ4 2024Q1 2025Q2 2025
Sales ($USD Billions)$10.686 $9.468 $10.351
Diluted EPS ($)$8.66 $3.32 $8.15
Operating Margin %10.2% 6.1% 13.8%
Segment Operating Margin %11.2% 6.0% 11.8%
SegmentQ2 2024 Sales ($B)Q2 2025 Sales ($B)Q2 2024 OM %Q2 2025 OM %Q2 2025 Op Inc ($MM)
Aeronautics Systems$3.060 $3.114 10.2% 10.3% $321
Defense Systems$1.859 $1.991 10.3% 12.7% $253
Mission Systems$2.773 $3.157 13.0% 14.0% $441
Space Systems$3.002 $2.646 10.1% 10.6% $280
Intersegment Eliminations($0.476) ($0.557) ——($76)
Total$10.218 $10.351 10.7% 13.8% $1,425
KPIsQ4 2024Q1 2025Q2 2025
Net Awards ($B)$17.3 $10.8 $7.4
Total Backlog ($B)$91.468 $92.797 $89.737
Operating Cash Flow ($MM)$2,578 ($1,565) $868
Capex ($MM)$816 $256 $231
Free Cash Flow ($MM)$1,762 ($1,821) $637
Weighted Avg Diluted Shares (MM)145.9 144.9 144.0

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Sales ($B)FY 2025$42.00–$42.50 (4/22/25) $42.05–$42.25 (7/22/25) Narrowed
Segment Operating Income ($MM)FY 2025$4,200–$4,350 (4/22/25) $4,275–$4,375 (7/22/25) Raised
MTM-adjusted EPS ($)FY 2025$24.95–$25.35 (4/22/25) $25.00–$25.40 (7/22/25) Raised
Free Cash Flow ($MM)FY 2025$2,850–$3,250 (4/22/25) $3,050–$3,350 (7/22/25) Raised
Effective Tax RateFY 2025Low–mid 17% (1/30/25) High 17%; Q3 ~21% catch-up (7/22/25) Raised
Corporate Unallocated Expense ($MM)Q3–Q4 2025—~$100 in both Q3 and Q4 (timing/state taxes) Set
Aeronautics Sales / OM%FY 2025Low $13B; Low–Mid 6% (4/22/25) Low $13B; Low–Mid 6% (7/22/25) Maintained
Defense Systems OM%FY 2025Mid–High 9% (4/22/25) Mid 10% (7/22/25) Raised
Mission Systems Sales / OM%FY 2025~$12B; Mid 14% (4/22/25) Low–Mid $12B; Mid 14% (7/22/25) Raised Sales
Space Systems Sales / OM%FY 2025~$11B; High 10% (4/22/25) Mid–High $10B; High 10% (7/22/25) Lowered Sales
Dividend per Quarter ($)Current Run-Rate—$2.31 (declared May 20, 2025; +12%) Raised

Earnings Call Themes & Trends

TopicQ4 2024 (Previous)Q1 2025 (Previous)Q2 2025 (Current)Trend
B-21 production ramp & returnsTransition to production; LRIP awards; margin dilution manageable in AS $477M LRIP loss provision to enable accelerated ramp; majority cash impact in 2026–2028 Discussions to accelerate ramp; $4.5B reconciliation funding for capacity; aim for improved returns on LRIP/NTE lots Acceleration progressing; returns likely higher
Sentinel (GBSD) restructure/performanceSegment moved to DS; DS growth driven by Sentinel Static fire test, restructure work with USAF; DS margins improving Positive EAC on Sentinel EMD; work resumed on command/launch; confidence in incentives Execution improving; margin tailwind
International demandExpect faster growth than U.S. in 2025; strong book-to-bill International sales +11% q/q; pipeline across IBCS, E-2D, Triton, munitions International sales +18% y/y in Q2; multi-billion opportunities in Europe/Middle East Accelerating
AI/autonomy & technologyMicroelectronics leadership; digital manufacturing and cost-out ($200M) AI partnerships (e.g., NVIDIA); IBCS AI integration; digital ecosystem Beacon autonomous mission test bed; 500k autonomous flight hours leveraged Expanding initiatives
Tax/policy & macroFY25 ETR low–mid 17%; defense budget support Tariffs risk limited; CR/reconciliation supportive R&D tax changes raise ETR (high 17% FY; ~21% in Q3); ~$200M multi-year cash tax benefit EPS headwind; cash tailwind

Management Commentary

  • “We delivered a strong second quarter… revenue increased 9% compared to the first quarter… segment operating margin [was] 11.8%… we are increasing our guidance for segment operating income, earnings per share, and free cash flow.” — Kathy Warden .
  • “Defense Systems had a standout quarter… margin rate improving to 12.7%… driven by a favorable EAC adjustment on the Sentinel program.” — Ken Crews .
  • “We are in discussions with the Air Force regarding the potential for an accelerated production ramp on [B-21]… with the opportunity to earn improved returns on the LRIP and NTE production lots.” — Kathy Warden .
  • “International sales grew by 18% year over year… strong international book-to-bill for aircraft, weapons, missile defense, and airborne systems.” — Kathy Warden .
  • “We now expect a tax rate of high 17% for the year… an effective Q3 tax rate of approximately 21%.” — Ken Crews .

Q&A Highlights

  • B-21 acceleration and economics: Management expects any accelerated ramp to entail company investment but also improved returns on LRIP/NTE lots; clarity anticipated in coming months .
  • Sentinel surprise positive EAC: Confidence improved following restructure agreements and lifted work pause on command/launch; DS margin uplift driven by incentives .
  • International pipeline: Broad-based across IBCS, weapons (AARGM/AARGM-ER), E-2D, Triton; expectation for multi-year double-digit growth .
  • Tax impacts: Revised R&D credit treatment lifts ETR; ~$200M expected multi-year cash benefit; ~+$50M P&L ETR impact .
  • Capex and solid rocket motors: Investments driving capacity from 13k to 25k units by 2029; supports DS tactical weapons growth .

Estimates Context

MetricQ4 2024 Consensus*Q4 2024 ActualQ1 2025 Consensus*Q1 2025 ActualQ2 2025 Consensus*Q2 2025 Actual
Revenue ($USD Billions)$10.969*$10.686 $9.948*$9.468 $10.092*$10.351
Primary EPS ($)$6.345*$6.39 $6.263*$3.32 $6.795*$8.15

Values retrieved from S&P Global.*

Implications:

  • Q2 beat on both revenue and EPS; EPS aided by a $1.04/share divestiture benefit and stronger segment performance .
  • Q1 materially missed EPS due to B-21 LRIP loss provision ($2.74/share after-tax) as the company repositioned for accelerated production .

Key Takeaways for Investors

  • Q2 quality beat with margin expansion; Mission Systems and Defense Systems performance offsets Space headwinds; guidance raised across EPS, segment OI, and FCF .
  • Watch B-21 acceleration agreement terms: outcome should clarify returns across LRIP/NTE lots and capital needs; potential upside to medium-term profitability .
  • Sentinel momentum is turning into earnings: favorable EAC and resumed command/launch work support DS margin trajectory .
  • International demand is an increasingly material driver (18% y/y in Q2) across sensors, aircraft, missile defense, and munitions—sustained backlog conversion expected .
  • Near-term EPS optics: Q3 ETR step-up (~21%) will dampen quarterly EPS even as operations remain strong; FY ETR now “high 17%” .
  • Cash generation accelerates into Q4: seasonality, inventory liquidations (especially Aeronautics), milestone payments, and tax changes underpin the raised FCF outlook .
  • Capital deployment remains shareholder-friendly: dividend raised to $2.31/quarter and continued buybacks; disciplined balance sheet (May $1.0B notes priced) offers flexibility .

Notes and Cross-References

  • EPS mix: Q2 diluted EPS includes ~$1.04/share after-tax benefit from the training services divestiture; segment OM benefited from favorable EACs (Sentinel, airborne radar) .
  • Space Systems context: y/y decline driven by restricted/NGI wind-down; margin rate improved on net EACs .
  • Backlog: Down sequentially to $89.7B on Q2 awards timing; still near-record levels supporting multi-year growth .