Kathy Warden

Chair, Chief Executive Officer & President, Northrop Grumman Corp

Northrop Grumman Corp ($NOC) Q3 2025 Earnings Call

🎥 Nov 01, 2025 📺 Castify Earnings Call ⏱ 58m

NOC - Earnings call Q3 2025.

About Kathy Warden

On Northrop Grumman's Q2 FY26 earnings call, Kathy Warden highlighted progress on the Sentinel missile program, including an acoustic test validating the system's ability to withstand silo launch conditions, with first flight expected in 2027 and solid rocket motors for the first five flight tests already in production. She noted that the company broke ground on an additional facility in Utah to support the production phase later this decade. Warden stated that the Department of War is increasingly using multi-year agreements for tactical missile programs, and that Northrop Grumman, with its solid rocket motor production capacity, is positioned to be a qualified provider on new programs, having completed qualification for the PAC-3 program and reached a $2 billion framework agreement with the Department of War and Lockheed Martin. Warden also discussed the company's space business, describing it as one of the strongest areas of U.S. budget growth and projecting it will generate about 15% of company revenues with double-digit growth, while noting increasing international demand for space offerings. Regarding the MRV (Mission Robotic Vehicle) satellite servicing offering, she said it provides robotic arms for servicing operations and expects both commercial and government demand. On the B-21 program, Warden said an agreement with the Air Force allows consideration of accelerating production into a larger program of record, with analysis underway and a conclusion expected by year end.

Source: AI-verified profile updated from Kathy Warden's recent appearances. Browse all interviews →

Transcript (100 segments)

Bella0:00

Good day, ladies and gentlemen, and welcome to Northrop Grumman's third quarter 2025 conference call. Today's call is being recorded. My name is Bella, and I will be your conference 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. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed.

Todd Ernst0:25

Thanks, Bella, and good morning, everyone, and welcome to Northrop Grumman's third quarter 2025 conference call. Before we start, 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. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. In addition, we will 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 Krous, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

Kathy Warden1:19

Thanks, Todd. Good morning, everyone, and thank you for joining our call. Disciplined execution of our business strategy has continued to position us well as global defense demand grows and our customers transform the way they acquire capability. We continue to prioritize providing technology leadership to our customers through innovation in both the way we do business and the capabilities we deliver. In doing so, we are building a strong backlog of future business. We are also performing well on our current programs, building the capacity for sustainable growth, and transforming our operations by embracing digital technologies to deliver with speed, quality, and affordability. The Northrop Grumman team delivered another strong quarter of performance amidst a dynamic global environment. We achieved mid-single-digit growth, expanded our segment operating margin, and grew free cash flow year-over-year. These results are aligned to our long-term financial outlook. The investments we have been making in capacity and capability over the last 6 years enables us to deliver with urgency against our customers' highest priorities. In fact, we achieved an exceptionally strong book-to-bill of 1.17 in the quarter. Our organic growth rate was 5% year-over-year, and our international growth rate was 32%. It is also worth noting that apart from our space segment, where we continue to have a challenging compare related to the wind-down of two large programs, revenue growth was approximately 9%. Despite strong growth in the quarter, we are revising our full-year revenue guidance down due to delayed timing on certain awards and programs. In addition, the team delivered another outstanding quarter of operating performance. Segment operating margin increased to 12.3% in Q3, which drove a 10% year-over-year increase in earnings per share. We also increased our free cash flow by 72% year-over-year and are on track to meet our full-year guidance.

In the quarter, we made significant strides across multiple programs to position our company for the future. Last month, the second B-21 aircraft entered flight test, another significant milestone for the program as we continue to gain momentum. This starts a new phase of the test program, transitioning from general flight performance evaluation to integrating weapons and mission systems. Our testing campaign also involves multiple B-21 aircraft undergoing ground tests prior to flying, which is validating performance and minimizing risk. With the progress we've made, we remain on track to receive the LRP Lot 3 and Lot 5 advanced procurement awards later this year. We continue discussions with the Air Force on the framework for an agreement to accelerate the B-21 production rate. If an agreement is reached, as previously disclosed, we expect to deploy additional investment to achieve the increased rate with the opportunity to earn improved returns. We've also made important progress on missile defense programs that can support emerging requirements. In the quarter, we received a multi-billion dollar extension on the Ground-Based Midcourse Defense Weapon Systems contract. This contract award extends our period of performance through 2030 to provide new GMD capability. GWS is an integrated system designed to protect the US from long-range ballistic missile threats. System enhancements include integrating the next-generation interceptor into the GMD system, updating launch equipment, and advancing the communication capabilities between the GWS and the interceptor fleet. In addition, IBCS continues to be an effective and ready-now solution to meet the global air and missile defense mission. In this quarter, IBCS successfully completed live-fire testing events for both Poland and the US Army customers, continuing its record of strong performance in operational tests. With these latest events, IBCS is now 32 for 32 in successful flight tests. We are also advancing the capability to introduce cloud and mobile technologies into IBCS, as well as enhanced artificial intelligence. We have demonstrated our ability to rapidly adapt to changing mission requirements, adding new operations capabilities through software in a matter of hours to effectively defeat evolving threats. I have previously outlined the investments we've made in solid rocket motor capacity and capabilities over the last several years. Leveraging those investments in the quarter, our GEM 63 XL rocket boosters played a crucial role in powering a ULA Vulcan rocket that delivered the third batch of Amazon Kuiper satellites to orbit. With additional launches in backlog, the Kuiper program is poised to be a key growth driver for the company going forward. Additionally, we've self-funded investments in tactical solid rocket motor capabilities that have enabled us to pursue and win second-source opportunities. Recently, we were selected by the Navy as a second supplier for the SM-6 missile. This is one of several initiatives, including the 21-inch motor award that we discussed on our last call, that we've undertaken to enhance our SRM competitiveness and broaden our market presence. There are many notable accomplishments from the quarter, but let me now take a step back for a moment and talk about the transformation that is underway in the Department of War and how they acquire capability and what they seek from an industry partner like Northrop Grumman. I noted earlier that we are innovating both in the capabilities we deliver and the ways we work. We are bringing proposals forward to accelerate our programs, embrace new technology, and partner more effectively. We also continue to invest in American factories and workers, where we design and build the most advanced systems and technologies in support of our nation's warfighters. Over the past 2 years, we've allocated over 4% of our sales towards capital expenditures, well above industry averages. This investment is essential in providing the capacity to meet demand for next-generation aircraft capabilities, ramping up production in munitions and propulsion, laying the foundation for significant growth in microelectronics, and expanding production facilities to deliver hundreds of satellites and aircraft. We have also invested over $2 billion in the infrastructure and development of our enterprise-wide digital ecosystem that continues to yield phenomenal results as we test and prove that digital models have extremely high correlation with the physical products we are delivering. This is game-changing for the way we design, build, and produce our products. It opens paths for more affordable solutions for our customers and more predictable and improved returns for our shareholders. And as we look even further over the horizon to 5 or 10 years into the future and beyond, our team of world-class engineers is undertaking research and development and pushing technology boundaries today that will support our competitiveness tomorrow. Over the past 2 years, we've invested over $2.1 billion in IRAD to maintain our technology leadership and for continuous innovation to disrupt the market and ourselves with the objective of maintaining long-term sustainable advantage for our warfighters and policymakers. As I mentioned earlier, we are exploring creative ways to bring solutions to market faster and focusing on priority areas such as the development and fielding of multi-function sensors, new and innovative ways to incorporate AI into our solutions, and developing fielding new smarter weapon systems that bring unmatched superiority on the battlefield, to name just a few. The trends we are seeing in the US are also true in the international market. Our allies are committed to modernizing their armed forces and investing in deterrent capabilities. And the current geopolitical environment has increased the urgency for them to act now. This is being reflected in a significant increase in defense spending that is expected to carry well into the next decade. Allied nations are prioritizing investments in air and missile defense, ground-based radars, airborne ISR, and other advanced weapon systems to enhance their ability to deter and defend against conflict. This growing demand presents substantial opportunities for our company, and we are well-positioned to deliver solutions that meet the evolving needs of our customers worldwide. These factors contributed to our international sales growing 20% year-to-date. Before I turn to 2026, let me address the US government shutdown. It is unclear how long it might persist, but we are hopeful it will be resolved in the near term. Assuming it is, we do not anticipate any significant impact on our financial results. In the meantime, we remain focused on executing our programs and delivering on our commitments. Looking longer term, there continues to be strong bipartisan support for national security priorities with robust levels of investment provided through reconciliation and being considered for FY26 appropriations. We believe this continued commitment to funding will result in a long tail of demand as resources are allocated and invested into the industrial base. Our confidence in these underlying trends reaffirms our outlook and positions us well for sustained growth. As we look ahead to the new year, I'd like to take a moment to provide with you with some color on how we're thinking about 2026. We expect mid-single-digit organic sales growth supported by growth in all four of our segments. This top-line growth will, in turn, enable us to also grow segment operating income. We expect a segment OM rate in the low to mid-11% range. Lastly, as we look at cash, we are reaffirming our existing outlook range for 2026 free cash flow of $3.1 billion to $3.5 billion. I'd note that these estimates are not inclusive of a potential win on F-26 or an acceleration of the B-21 production rate. And as usual, we plan to provide formal guidance during our Q4 earnings call in January. So, in summary, I'd like to emphasize our unwavering commitment to our technology-focused business strategy, which continues to drive our profitable growth. We're experiencing an unprecedented demand environment, and our capital deployment strategy is enabling us to meet this demand and prepare us for opportunities in the future. As we move forward, our primary focus remains disciplined execution of our strategy and creating lasting value for both our customers and our shareholders. So, now, let me hand it over to Ken to provide more detail on the quarter's financial results.

Ken Krous14:03

Thank you, Kathy, and good morning, everyone. As you just heard from Kathy, we delivered another strong quarter of financial performance. Let's begin on slide four, which shows our top-line results for the quarter. Third quarter sales were $10.4 billion, up 4% compared to the prior year, and up 5% on an organic basis. We continue to expect further acceleration in Q4 with all segments returning to growth, both sequentially and on a year-over-year comparison. Aeronautics generated third quarter sales of $3.1 billion, up 6% compared to the prior year. Higher sales were driven by the ramp on T-50 and higher volume on F-35 program, partially offset by lower sales on FA-18 as the program winds down. Sales at DS were exceptionally strong in Q3, accelerating to nearly $2.1 billion. Sales were higher across the DS portfolio, including on ammunition and weapons programs, IBCS, and Sentinel. In total, DS sales grew by 14% compared to Q3 of last year and by 19% organically. Mission Systems continues to deliver unmatched technological innovation at a rapid rate. This is reflected by further growth on restricted microelectronic programs in Q3, which led the segment to another quarter of double-digit sales growth. Sales were also higher at Marine Systems and on international programs, building on the strong momentum from the first half of the year. And at Space Systems, Q3 sales grew on a sequential basis again this quarter, rising to $2.7 billion. On a year-over-year basis, sales were down mid-single digits as expected, and we have now nearly lapped the top-line headwinds we've been experiencing on two programs for the past 18 months. Looking forward, we believe that Space is poised to return to growth given our positioning and opportunities in this arena. Moving to the bottom line on slide five, operational performance was outstanding again in quarter three. Segment operating income increased by 11% year-over-year, and our segment operating margin rate increased 80 basis points to 12.3%. AS operating income dollars were relatively flat compared to a year ago, and operating margin rate was 9.7%. This was driven by strong operating performance on mature production programs, as well as lower net profitability adjustments. As we do every quarter, we reviewed our estimate to complete the LRIP phase of the B-21 program and made no significant changes to the previously recognized loss. However, we experienced higher than expected cost to produce the EMD flight test aircraft, which increased our estimate to manufacture the LRIP units. This increase was largely offset by a reduction in our expected loss on remaining LRIP lots due to a contract restructure that occurred during the quarter. Turning to DS, quarter three margins improved 11.4% driven by strong operational performance and higher net favorable EAC adjustments. While the Q2 margin outperformance was driven by Sentinel, this quarter's strength was broad-based with higher margin rates in each of the business areas. Mission Systems operating income increased 32%. And their Q3 segment OM rate increased nearly 300 basis points to 16.7%. This performance was enabled by intentional steps this team has taken to drive efficiencies, mitigate risk, and increase factory utilization, which drove a $68 million favorable EAC adjustment in the restricted advanced microelectronics portfolio. And Space Systems also had a solid quarter of operational performance, generating an operating margin rate of 11%. These strong bottom line results drove higher earnings per share as shown on slide six. Third quarter diluted earnings per share were $7.67, an increase of 10% compared to Q3 of 2024. In addition to strong segment results, mark-to-market gains on marketable securities increased by 35 cents compared to Q3 of last year. These benefits, along with higher net pension income, were partially offset by higher corporate unallocated expenses and a higher federal tax rate as previously disclosed. As we reflect on our performance to date and expectations for Q4, we have a few updates to our company-level guidance as shown on slide seven. For sales, we are adjusting our outlook to a range of $41.7 billion to $41.9 billion, reflecting approximately 8% Q4 growth at the midpoint. We continue to expect a ramp in Q4 sales in all four segments, but at a slightly lower rate compared to our prior expectations. Importantly, we are maintaining our segment operating income dollar guidance range despite the lower sales volume. This results in a segment OM rate that is roughly 10 basis points higher than our prior guidance at the midpoint, and is a testament to the team's continued focus on disciplined program execution and driving efficiencies throughout the business. Moving to earnings per share, we are increasing our guidance by 65 cents, now to a range of $25.65 to $26.05. The increase is driven by several factors. First, we are lowering our expectations for other corporate unallocated expenses to $250 million, a reduction of $30 million driven by lower unallowable costs. Secondly, we have slight revisions to our expectations for pension income and the effective tax rate, each providing a modest boost to EPS. And as I mentioned, we experienced a return on marketable securities in the quarter which totaled roughly $80 million. Given market volatility, we have not assumed the entire Q3 gain in our full year guidance expectations. Rounding out our company level guidance is cash flow. We are reaffirming our free cash flow expectations of $3.05 billion to $3.35 billion. Third quarter free cash flow of $1.3 billion was well ahead of the past few years and we continue to expect the largest quarter of cash generation in the fourth quarter consistent with our seasonal pattern. In addition, the unique factors driving year-end cash as outlined during the Q2 call remain intact including lower Q4 cash tax payments, higher milestone payments, and inventory liquidations at AS. For the year, our guidance represents 22% annual free cash flow growth at the midpoint making a third consecutive year free cash flow growth greater than 20%. Turning to segment level guidance on slide eight, we are reaffirming our top line guidance for DS and space as they performed in line with our expectations in Q3 and we have not changed our view on their sales ramp in Q4. For aeronautics, we are lowering top line guidance to the high $12 billion range as we outlined on our Q2 earnings call, the second half ramp at AS is based on higher B-21 volume, ramp on new program wins including Tacamo, and normal production volume that is heavily weighted towards the end of the year. And while all these factors remain intact, we are projecting a modestly lower sales level due to delayed timing on certain programs. In addition, we are increasing our expectations for intercompany sales driven by higher activity on restricted programs throughout the portfolio. These are partially offset by an increase to our sales guidance expectations at MS based on the strength of their year-to-date results and expectations for continued growth in Q4. As a result, we now expect MS sales in the mid $12 billion range. With respect to segment operating margin rates, we have one update this quarter related to DS. As I mentioned, they delivered another strong quarter of operational performance and as a result, we are increasing the OM rate expectation to the high 10% range. Before concluding my prepared remarks, I wanted to build on Cathy's comments regarding our 2026 outlook. First, sales growth next year is expected to be more balanced across each of the segments with each contributing to growth. Secondly, operating income is expected to grow compared to 2025 and we don't anticipate a repeat of the large EAC adjustments we experienced this year on B-21, Sentinel, and microelectronics. Adjusting for these items, our outlook for low to mid 11% margins would represent an increase compared to 2025. I'd also like to share our latest projections for 2026 net pension income based on current market conditions. As we typically do this time of year, we've included a 2026 pension income sensitivity grid on slide 10. Year-to-date through September, asset returns were just north of 9% slightly better than our initial expectations and discount rates were down 25 basis points. This combination will result in a modest increase to 2026 net pension income compared to our prior projections depending on where we end the year. Importantly, our pension plans remain fully funded and we continue to project minimal cash contributions over the next several years. So in conclusion, we believe we are well positioned for a broad range of new opportunities. We remain focused on growing our business, delivering strong operational performance, and generating cash flows that allow us to execute our business strategy. With that, let's open the call for Q&A.

Bella23:48

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We do request for today's session that you please limit to one question and one follow up. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christine Liwag with Morgan Stanley. Your line is now open. Please go ahead.

Christine Liwag24:18

Hi, good morning everyone. Cathy, for the FAXX and the B-21 acceleration, can you provide more color on what that could mean for your 2026 outlook and what's included?

Kathy Warden24:36

So Christine, as I noted in my comments, we at this point have not included either in our 2026 outlook. FAXX clearly would come with increased revenue from what we have provided in that outlook. We expect that it would be somewhat diluted to overall company earnings just because it would be development revenue which tends to be lower margin than our overall. But it is a cost plus program, so we expect reasonable return if we were to win that program and it would require some investment. So the CAPEX we would determine based on our profile to build out and prepare for execution. Over the long run, we expect if we were to win that program that it would be accretive to the company and we very much look forward to the opportunity. On B-21 ramp, similar circumstances, we have not included that in our outlook. It would be upside to revenue. It would increase our amount of sales which in the early days as you know on production are at the zero margin and we would expect to need to invest in that ramp through CAPEX. But again, over the long term as we've said before, we would expect to have increased returns to offset the cost of that additional investment and so we would update our guidance if and when we have clarity on either of those opportunities.

Christine Liwag26:11

Great, super helpful. And for a follow up, can I ask something about the supply chain? Rare earths continue to be a watch item for the industry. Can you talk a little bit more about your sourcing strategy, how to mitigate supply chain risks, and if there any watch items that could potentially affect your 2026 outlook?

Kathy Warden26:30

Yes. Fortunately, our team has the two foundries in the United States where we design, produce, and package microelectronics. So our dependency there on rare earths has been mitigated by looking through our supply chain and getting well ahead of our sources of supply to ensure that we can produce those electronics. We are very pleased that the US government is actively working to set up additional sources of supply including in the US and working partnerships with our allies for them to also invest in these capabilities in their country. This will just create more sources for us to draw upon and make the US more competitive in being able to provide these microelectronics for national security purposes into the future.

Bella27:31

Your next question comes from the line of Ron Epstein with Bank of America Merrill Lynch. Please go ahead.

Ron Epstein27:40

Yeah, hey good morning all. Hey Cathy, can you maybe pull back the curtain a little bit more on B-21? I mean, how is it going with potential increase in the build rate on that aircraft and so on and so forth? Because if that were to play out, it is material for you guys.

Kathy Warden28:02

Yes. So we are in active discussions with the customer that would enable that acceleration of production rate and as I noted in our Q2 call, that the dollars to support that acceleration are included in the reconciliation bill. So the actual production rates, the timing, and ultimately the outcome of those negotiations with the Air Force would define what that financial profile looks like. It's too early for me to speculate on that. We are in the midst of those discussions. They've been held up a bit because of

The government shutdown and the availability of resources to continue those discussions during this time, but we expect those to resume and we still expect that in the coming months we would have more clarity on what that acceleration might look like.

Ron Epstein28:58

Got you. And then maybe as a quick follow-on, in your prepared remarks you talked about some program award delays. What's driving that because the administration's been pushing hard for speed on acquisition, so just curious where that's coming from.

Kathy Warden29:14

Yeah. I think with any new administration, it takes time to come in and make determinations of where to allocate resources and then to do the appropriate reviews and governance to make those decisions. We are certainly seeing in recent weeks the government shutdown having some impact on the government's ability to move quickly to make decisions and have the right resources available. So we're all hopeful that the shutdown can come to a quick resolution and that we can resume on some of these important decisions that would open up the spend plans and ultimate awards that will come from the government as they seek to move forward quickly.

Ron Epstein30:00

Got it. All right, thank you very much.

Operator30:06

Your next question comes from the line of Seth Seifman with JP Morgan. Please go ahead.

Seth Seifman30:12

Hey, thanks very much and good morning. Kathy, I wonder if you could talk a little bit about the opportunity in Golden Dome and missile defense in space. You've been doing some work with the SDA, but if you could talk about the state of maturity and state of technology on missile warning satellites and if you see the current tracking layer SDA or HBTS as the nucleus of what's ultimately going to drive missile warning for Golden Dome or is it going to come from elsewhere?

Kathy Warden30:58

Well, let me start by saying that we're very pleased to see the urgency the administration is placing on protecting the homeland and the set of opportunities that creates. It's a very broad-based set of opportunities. The architecture and spend plan for Golden Dome are not public, so I won't comment on those specifically, but we do understand the challenges of creating a missile defense both warning layer and that of interceptors that would defend the homeland and we are providing some high fidelity operational analysis that can help the customer understand those requirements as well as ourselves as we define what our offerings might look like. We see this being a number of components to an architecture that range from existing programs where there may be additional opportunity to new programs and I think you'll see more clarity coming from the department as they share more information on that architecture and spend plan in the coming months.

Seth Seifman32:07

Okay, great. Thanks. And then just as a quicker follow-up, you mentioned earlier if the government shutdown ends relatively soon, we shouldn't see much impact, but sometimes it seems like we're at unusual times. At what point does the duration of the shutdown become more of a concern in terms of something where we might see an impact?

Kathy Warden32:30

Yeah, as I mentioned, the guidance that we updated for 2025 includes what we can foresee including some of the delays that we talked about on program awards and timing. But at the same time, we are assuming that this only goes a few more weeks, say around mid-November. If it goes beyond that, we may start to see some additional delays in getting funding on contract or even delays in receiving payment before year end that could impact our cash flows for the year. We don't anticipate that at this time, but it's certainly something we're watching and so we're very hopeful as I said that the government will agree to reopen soon even if under a continuing resolution.

Seth Seifman33:17

Okay, thanks very much.

Kathy Warden33:19

Thank you.

Operator33:22

Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Sheila Kahyaoglu33:29

Good morning and thank you. Kathy, maybe if we could talk about the Aeronautics outlook for '25. It seems down slightly, but B-21 award timing seems unchanged. So what was the shift there and what was delayed in terms of certain awards and how do we think about that ramp in '26? And just on B-21, how do we think about the free cash flow impact as it relates to CapEx in '26?

Ken Krous33:55

Good morning Sheila, this is Ken. I'll take that one. In terms of Aeronautics and the drivers across the 2025 sales profile, it was really timing of production activities. So don't view it as lost sales, but just timing of sales. The other aspect is B-21 as we made the adjustment the top line implications regarding percentage of completion method. That created some additional top line headwinds for both the quarter and the year. As we think about 2026, we continue to see the strength in B-21 continuing to be a grower and a contributor to Aeronautics' growth. In terms of the free cash flow with B-21, again we're holding our overall guidance for 2026. When we think about the future in cash flow, we'll provide more clarity because as Kathy mentioned, we are in the midst of multiple discussions that will ultimately determine the cash flow of the program and that will be driven by as we come to conclusions and understanding if we do on the ramp and rate discussions.

Sheila Kahyaoglu35:03

Okay, thank you.

Operator35:07

Your next question comes from the line of Ken Herbert with RBC. Please go ahead.

Ken Herbert35:15

Yeah, hi good morning Kathy and Ken. I wanted to ask on IBCS. Kathy, you continue to call out success with that program. Obviously it sounds like it's ramping in Poland. You've got some installations ramping here. How do you think about that program and the growth into '26 in particular, but then also we're hearing that that program in particular is very well suited perhaps for some of the Golden Dome applications. Can you just comment on those discussions and how you view IBCS in particular with that opportunity?

Kathy Warden35:48

Yes, we are very bullish on IBCS growth opportunities both domestically as you pointed out. It is a system that is able to integrate disparate sensors and kinetic effectors to enable visibility of the battlefield and then to provide us the fire control system that has application for protecting our homeland just as it has application for international partners in that same vein. So we've talked previously about having over a dozen countries now that have expressed varying levels of interest in the program particularly as we look at the success that we've now demonstrated in Poland as I spoke about in our comments today. That is a live fire example of how IBCS can be used in a homeland protection scenario. And of course the US has forward deployed the system and I talked about the operational tests that it has performed for forward deployment in both INDOPACOM and the European theater.

Ken Herbert37:00

Can you talk about when we could expect other incremental orders internationally in particular as you talk to those 12 countries?

Kathy Warden37:08

Yeah, we expect those to phase in over a multi-year period, but starting in 2026 and we do expect IBCS to be a significant double-digit growth driver for us in next year's outlook.

Ken Herbert37:23

Great, thank you Kathy.

Kathy Warden37:25

Thank you.

Operator37:28

Your next question comes from the line of Scott Deuschle with Deutsche Bank. Please go ahead.

Scott Deuschle37:36

Hey, good morning.

Kathy Warden37:37

Good morning Scott.

Scott Deuschle37:39

Ken, could you give any quantitative detail on the two B-21 financial items in the quarter between the higher EMD test costs and the contract restructure? It sounds like it was close to zero on the net amount, but just curious how large the gross numbers were for each of those two items.

Ken Krous37:53

Yes Scott, you're correct. In terms of the cost growth that we baked in from lessons learned on the B-21 LRIP offset by the restructure activity, it is from a materiality perspective very low number. So it essentially washes themselves.

Scott Deuschle38:13

Okay, and then Kathy, sorry if I missed this, but can you give us any sense for how international book to bill has trended on a year-to-date basis?

Kathy Warden38:20

Yes, international book to bill remains very solid as I noted. We have 20% sales growth year-to-date and our international book to bill coming into the year was 1.4 and this year Todd is...

Todd Ernst38:41

So this year we started off at about 1.45 Scott and when you look at quarter two and quarter three, it is timing dependent. So overall we're roughly slightly lower than one, but we built a strong backlog last year that's leading to the growth this year. As Kathy mentioned, we had 20% year-over-year growth or year-to-date growth and then on top of that we had about 30% growth within the quarter alone.

Scott Deuschle39:09

Okay, great. Thank you very much.

Operator39:13

Your next question comes from the line of Rich Safran with Seaport. Please go ahead.

Rich Safran39:20

Good morning everyone. Thank you. So I think it was last month Secretary of Defense made some comments about requesting industry make significant capacity increases in missile production. I think this is going well beyond just Golden Dome. I'm sort of curious what this means for Northrop Grumman. Do you have any plans to undertake further capacity increases that might require incremental CapEx? And is there any timeline associated with planned increases?

Kathy Warden39:52

Yes, Rich. Thanks for the question. As I've outlined in a few of our calls over the last six quarters or so, we have already invested in expanding capacity. That includes for our tactical missile solid rocket motors, where we've more than doubled capacity and we are already breaking ground on another facility that would bring more capacity online in about 2 years. Right now, we have more capacity than we have orders. And so, we are in the process of being qualified on additional missile systems. As I talked about in today's call, we have been awarded a couple and we are in the process of qualification for a handful more. And those would utilize that capacity we've already brought online, but we foresee continued demand growth, which is why we've broken ground on yet another facility. In addition, we are building out our capacity for larger solid rocket motors. We've talked about that for multiple purposes, including US national security applications, but also commercial applications in space launch, as I spoke about today, with our GEM 63 XL rocket motors that are fueling the ULA launches for the Kuiper satellites. And so, we are already through a significant amount of Northrop Grumman funded investment in that capacity, but we do have some that you will see committed in our CapEx numbers '26 and '27 as well.

Rich Safran41:32

Okay. And then quickly here, I saw you made a bit of an announcement on Lumberjack and I'm wondering if you could discuss what the opportunity set for this program is, what's the domestic international potential and when this program might have an impact on the P&L.

Kathy Warden41:50

Yes, Lumberjack is an exciting new offering. We are developing that out of our mission systems segment and it is a ground launch opportunity for UAS. It has communications, sensors, it is targetable and we see this as an advancement of our small microelectronic processing capabilities and communication put onto an innovative platform that we've worked with partners to keep the cost very low and keep it competitive for what we see as the attritable market. We have introduced this capability. It's about a TRL six now and we are working to find our first customers for it, but we also see there to be international opportunity. We clearly need to go through export for the product line, but those are all steps ahead that we look to continue through 2025 into 2026.

Rich Safran43:02

Well, thank you very much for that.

Kathy Warden43:04

Thank you.

Operator43:06

Your next question comes from the line of Gavin Parsons with UBS. Please go ahead.

Gavin Parsons43:14

Thank you. Morning.

Kathy Warden43:16

Morning.

Gavin Parsons43:18

Kathy, you pointed out that you guys spend more on CapEx than most of your peers in the industry. Does that enable more than maybe mid-single-digit growth over the long term?

Kathy Warden43:29

We believe that it can. We certainly have invested with the intention of deriving significant growth and that has started to come to fruition in some of our segments. You saw Defense Mission Systems in particular with a very solid growth rate last year and this year and it is reflective of that investment I was just talking about, not only in the capacity for munitions and tactical missiles, but also the research and development that we're doing on new and innovative solutions or additions to solutions we already have like IBCS, the investments we're making in modernizing that. So, I think it's a good case study of where we have put that investment in and been able to generate those higher levels of growth and of course, we're working to do that across all of our segments.

Gavin Parsons44:25

Great. Thank you.

Operator44:28

Your next question comes from the line of Rob Spingarn with Vertical Research. Please go ahead.

Rob Spingarn44:36

Thanks very much. Good morning.

Kathy Warden44:37

Morning.

Rob Spingarn44:39

Kathy, I just wanted to follow up on your initial comments. One of the members of the administration had said recently that they thought that US defense companies should do a little more research and little fewer stock buybacks. I was wondering if this is essentially a trial balloon or whether there are active discussions with the customer about this.

Kathy Warden45:00

We certainly have discussions with the customer where they have shared their desire for industry to see the growth opportunities that would lead us to invest and that those would be profitable growth opportunities and we share in that sentiment and as I have shared with you today, I've also shared with the leaders in the Department of War that we have been doing that. That those higher levels of investment above industry average were because we saw that same vision that if we invested, we would have greater opportunity for growth and returns. And so, I've articulated that we have a number of discussions underway, the B-21 acceleration and other new areas that that is the core of the conversation that we and I believe my industry peers are having with the Department.

Rob Spingarn45:54

Okay. Then a quick follow up to that though, I may be wrong, but it would appear that they knew that they would be perhaps putting some restrictions around returns to shareholders. How would you feel about that?

Kathy Warden46:06

We have not had any discussions with members of the administration that would suggest that that is their intent. I think that we all are aligned, meaning my company and our customers, that the best mechanism is to incentivize that investment through the opportunities for a clear demand signal that reflects in sales growth and increased returns and that if those conditions exist, it is in our best interest and we will continue to do what we have done, which is invest in that future.

Rob Spingarn46:43

Okay, that's great. Thank you very much.

Operator46:46

Your next question comes from the line of Scott Mikus with Melius Research. Please go ahead.

Scott Mikus46:53

Morning, Kathy and Ken. Just a quick question on B-21. You kind of referenced that the reconciliation funding, I think there's 4.5 billion there, is for the acceleration of the production rate. So, just to be clear, would actually increasing the program of record to 150 or 200 units be a completely separate negotiation potentially with additional financial benefits for the firm?

Kathy Warden47:18

Yes, that would be a separate discussion. A decision has not yet been made by the Department and if it were to be made, then it would factor into an additional look at what the long-term opportunity is on the program.

Scott Mikus47:35

Okay, thanks. I'll stick with one.

Kathy Warden47:36

Great. Thank you.

Operator47:40

Your next question comes from the line of Myles Walton with Wolfe Research. Please go ahead.

Myles Walton47:46

Thanks. Good morning, still. In terms of the fourth quarter implied sequential revenue growth, looks like Aeronautics carrying most of that load. Are there extra working days in the fourth quarter that may be helping overall double-digit sequential revenue growth and or within Aeronautics, is there something that you think releases here in the fourth quarter that maybe wasn't releasing in the third quarter?

Ken Krous48:10

So, to answer your question around additional working days, there is one additional working day in Q4. However, that's not the primary driver. As we discussed in my prepared remarks and even last quarter, the real growth that is driving the ramp for Aeronautics is driven really by three factors. The first one is with the awards that we discussed in our prepared remarks, there will be inventory liquidations that drive that increased revenue. At the same time, just natural progression program wins and production like TacMO and then the last factor is going to be on their mature production programs, just real timing associated with supplier performance and material deliveries. And so, yes, while there is an extra working day, it's really driven by the three factors that I mentioned.

Myles Walton49:00

Okay. And no impact from the Boeing strike or anything like that on F-18?

Ken Krous49:04

No impacts.

Myles Walton49:06

Okay, great. Thank you.

Ken Krous49:07

You're welcome.

Operator49:09

Your next question comes from the line of Peter Arment with Baird. Please go ahead.

Peter Arment49:16

Yeah, good morning, Kathy and Ken. Kathy, could you give us an update on just kind of the long-term production ramp plans in solid rocket motors? I know you've kind of been investing quite a bit there, but there's also a lot of defense sort of tech upstarts or space tech upstarts and just how those upstarts are factoring into your plans or whether they're just on different levels in terms of the solid rocket motor output. Thanks.

Kathy Warden49:44

Yeah, Peter. I would say that we are focused on qualifying ourselves to be a provider on weapons where we have not historically been a provider. And that capacity investment that I mentioned earlier in the call is enabling us to be ready now as those decisions are made to bring our production online. For many of the other companies that are looking to enter this space, it's going to take them time to build the capacity to get qualified on these weapons and to enter the space. So, our focus has been to continue to be ahead in being able to provide optionality to the Department of War as well as our primes who are looking for additional sources of supply.

Peter Arment50:35

Appreciate it. Just a quick follow-up. On B-21, just to be clear, is lot three in your 2026 guidance? We know it's not in '25, correct?

Kathy Warden50:46

So, the lot three award and the lot five advanced procurement is anticipated to be received in the fourth quarter of 2025. The vast majority of the expenditures or sales recognition would not start until 2026.

Peter Arment51:06

Thanks, Kathy. Appreciate it.

Kathy Warden51:08

Yep.

Operator51:10

Your next question comes from the line of Michael Shlum only with Truist Securities. Please go ahead.

Michael Shlum51:17

Hey, morning, guys. Thanks for taking the questions. Maybe just one question, two items. I guess Kathy on Beacon, it looks like the testing's ramping up there. You've got six partners now. So, just trying to think about how that impacts future financial performance, contributions to growth. And then maybe in the same vein on the microelectronics, looks like you're opening up some of your capacity for industry. Does that give a little bit more of a boost to Mission Systems margins going forward if you kind of soak up some of that excess overhead?

Kathy Warden51:53

Let me start with Beacon. We are very excited about this capability. It is opening up opportunities for us to partner and have demonstrated capability not only leveraging the platform work that we have been doing to demonstrate acceleration of our ability to build autonomous systems, but also the integration of the capabilities inside the platform that give it its mission capability. And that's what Beacon is helping us to do, to look at innovations in autonomy, weapons integration, mission systems integration, all of which then support a mission capable platform. And those investments that we are making are in alignment and in conjunction with partners as you mentioned and large numbers of partners. We are not at this stage picking winners. We're simply understanding the marketplace and the capabilities that we can bring to bear because we expect a number of new competitions in this space, including US services, the Air Force, the Navy, and now the Army, but also international partners that are looking to build upon their combat collaborative aircraft fleets. With regards to your second question around microelectronics, we have opened up our foundries to additional customers as more and more US companies are looking to have domestic sources. Our two foundries produce some of the most advanced microelectronics in the world and we are happy to offer that capacity more broadly. Since we have done that, we've had significant interest and so we are in the process of working through that pipeline. We already do about a billion dollars a year for sales to ourselves and existing customers largely in the national security space. So, we'd be building on that foundation as we move forward with additional customers, including commercial customers.

Michael Shlum54:01

Got it. Helpful. Thank you.

Kathy Warden54:03

Thank you.

Operator54:06

Your next question comes from the line of Doug Harned with Bernstein. Please go ahead.

Doug Harned54:12

Yes, thank you. Good morning.

Kathy Warden54:14

Morning, Doug.

Doug Harned54:16

So, can you give us an update on Sentinel? It's going through this whole restructuring process. You've talked about it before and basically trying to understand as the timing for IOC has moved back, how does that affect your thinking and when you would be going into production mode? And then also, are there any aspects of the restructuring or the issues they've had that tie to any Northrop Grumman performance? And then on the other side, does this open up potentially some opportunities for expanded work scope for you?

Kathy Warden54:59

There's a lot to unpack there. Let me start by saying that we are partnering with the Air Force on an execution framework to complete the restructure of the program. In the meantime, we are working on executing the program and there've been a number of key decisions that the Air Force has announced recently, like creating new silos rather than refurbishing Minuteman 3 silos or the resumption of work on the design of those silos. Those all have a positive impact on our ability to move cost and schedule more aggressively. We also in the program restructure are looking to establish a new program baseline, which will define the timing of events, including completion of the development program but when we would start production. And that's subject to future communications because it is in work as part of that restructure. But the important thing is that we continue to make good progress on the program. So, we had announced in this last quarter that we completed the full-scale qualification test of the stage two solid rocket motor that's part of the missile. We also just yesterday announced that we completed the critical design review for the Sentinel launch support system and that paves the way for all of our system build, test, and qualification that underpins the Sentinel program. So, we're really encouraged with how things are progressing both in alignment with the US government on how do we accelerate the program from the Nunn-McCurdy baseline, but also executing on the milestones that are right in front of us.

Doug Harned56:45

Because also there's some substantial new money coming in in the '26 budget. And is that funding that you expect would go more to Air Force, I'm probably using the wrong language here, but logistics, building out what the silo profile could look like. Or do you expect some of that money to be coming to Northrop Grumman and perhaps add to growth?

Kathy Warden57:11

On this program, we see likely both to need funding. The US government contribution stands well beyond the US Air Force in terms of support from the Army Corps of Engineers, for example, and other government entities. And so, they likely would need portions of that funding to support their work scope on the program. But we do expect the industry team also to support them in executing those funds that have been provided in reconciliation.

Doug Harned57:45

Very good. Thank you.

Operator57:46

All right. We're going to have to leave it there. I'll turn over to Kathy here for closing comments.

Kathy Warden57:49

Great. Well, thank you all for joining our call today. I'm pleased with the momentum we have rounding out 2025. Our focus will be on having a strong finish to the year and we really look forward to updating you again in the new year and providing some clear 2026 guidance in our call in January. So, until then, be safe.

Operator58:13

Ladies and gentlemen, thank you all for joining and you may now disconnect. Everyone, have a great day.