Northrop Grumman Corp ($NOC) Q1 2026 Earnings Call

Thanks, Todd. Good morning everyone and thanks for joining us today. The Northrop Grumman team is proud of the work we do in support of the world's most important national security imperatives. As we are seeing in recent military operations, many of our systems are playing a critical role in successfully executing the mission and returning our service members home safely. We contribute enduring assets like the B-2 stealth bomber and the E-2D which continue to demonstrate tremendous value decades after their first flights. Our ISR and C2 systems provide the needed intelligence to plan and conduct successful operations across all domains and our munitions are instrumental to execute these missions. We share in the responsibility and urgency of our customers to provide our nation and allies with the best technologies in the world and we are increasingly focused on the speed with which we deliver them. With this goal in mind, we've been investing in our business for several years to build capability and capacity and provide the solutions at the scale our customers need to compete in this environment. In fact, in the last two years, we've opened over 20 new facilities and added more than 2 million square feet of manufacturing space across the United States. Since the beginning of 2026, we have agreed with our customers on plans to accelerate the Sentinel program, increase the rate at which we build the B-21, become a second source supplier of solid rocket motors on several programs, and ramp our rate of production on another handful of programs. And we're just getting started. We are in discussions on numerous additional opportunities to help achieve the department's goal for speed and scale. Central to all these agreements is our partnership with our customers as we transform the way we work together. Our teams are aligned in unprecedented ways to deliver on our commitments and enable our armed forces to win.

Earlier this morning, we released our first quarter results, which reflects strong demand, solid operating performance, and progress we are making on key programs. First quarter organic sales were up 5%, a great start to the year and consistent with our full-year expectations. Sales were largely driven by growth in our work on modernizing the triad, which is a top priority in the US national defense strategy. We had another quarter of solid bookings, reinforcing the foundation for continued growth over the coming quarters and into next year. Our results and our confidence in our outlook are supported by a robust demand environment driven by rising global defense budgets. Countries around the world are recognizing a fundamental shift in the geopolitical environment leading to global military spending rising approximately 40% over the past decade and it's expected to continue to rise as Western nations modernize and grow their forces. In the Middle East, particularly, there is a heightened sense of urgency for our solutions such as IBCS, GATOR, and counter-UAS solutions. In the US, a trillion dollars has been appropriated for defense in fiscal year 2026, and funding from this budget and reconciliation are starting to flow to industry. Earlier this month, the administration submitted a $1.5 trillion defense budget request for fiscal year 2027. The budget emphasizes modernization and represents a 44% increase over current funding levels. The budget proposal is made up of several components with a base budget of $1.1 trillion. The base budget alone compared with the FY26 base budget represents nearly a 30% increase and it sustains support for many of our key programs including B-21, Sentinel, IBCS, E-2D and numerous restricted programs. If enacted, the budget request for 2027 would bring spending to about 5% of GDP. And while this represents an increase to the 3% we've seen in recent years, it's closer to the levels we saw during the Cold War. We are encouraged by the strong bipartisan support for strengthening US defense budgets aligned to the global security challenges we are facing and we look forward to working with policymakers as they consider this budget request. In response to these high levels of global demand for our solutions, the administration is working closely with industry to provide clear long-term demand signals through structured production frameworks. So, let me share details of some of the agreements I referenced earlier in the call.

Our defense systems business growth is fueled by the growing demand for solid rocket motors, smart munitions, ammunition, and tactical missiles. We are a key SRM supplier of more than 15 systems including GMLRS, PRISM, Hellfire and AIM-9X among others and we are taking the necessary steps to qualify as a supplier on other high demand systems such as PAC-3. To position the company for this growing market, we invested more than $2 billion over the past several years in SRM and munition technologies and in modernizing our facilities. This proactive approach established a strong US manufacturing base with capacity available today to support our customers' growing demand for critical munitions. Our tactical SRM production capacity has already doubled and we have further expansion which will be completed by 2027. These modern production facilities provide us modular adaptable production lines that can produce multiple products allowing us to flex with demand. Overall, our weapons business is nearing 10% of total company sales and is positioned to grow at a pace well above the company average.

In addition to a focus on munitions, we and the Department of War remain committed to accelerating the triad modernization for Sentinel. We are working closely with the Air Force and making significant progress advancing missile development, command and control systems, and maturing the design and construction approach. In March, we broke ground on a prototype of the Sentinel launch silo tube, which will validate the structural design and construction approach, a key enabler to accelerate fielding. We expect to reach the Milestone B decision later this year, first flight in 2027 and initial operating capability in the early 2030s. We expect strong growth from Sentinel throughout the year as we ramp up on the new baseline with the program already delivering double-digit growth in the first quarter.

On the B-21 program, we are moving through testing at an aggressive pace, including aerial refueling trials beginning earlier this month. We are on a path through both testing and production for B-21 to arrive at Ellsworth Air Force Base in 2027. Consistent with this progress, we received the Lot 4 LRIP award in the first quarter, closely following the Lot 3 award received in Q4 last year. As previously announced, we finalized an agreement with the Air Force to increase the annual production rate of the B-21 by 25%. This agreement demonstrates the strong operational requirements for the platform and confidence in our team to accelerate the delivery of this next generation capability for the warfighter. The production ramp up will be supported by customer funding included in last year's reconciliation package alongside approximately $2.5 billion of company funded investment primarily for new facilities. These investments will be phased in over multiple years. Importantly, this agreement accelerates production for our customer, enhances the program's long-term economics, and creates the potential for a larger program of record. We're pleased to have this agreement in place and excited for this transformative technology to begin arriving on Air Force bases next year.

In another area of our portfolio, widespread adoption of ballistic missiles and drones by potential adversaries are reinforcing the urgent need for air and missile defense capabilities. Demand in this area has been exceptionally strong and today our missile defense business accounts for nearly 10% of company sales. Northrop Grumman is well positioned to capitalize on significant opportunities such as Golden Dome as well as other program areas. Our advanced interceptors, sensor systems, and command and control technologies remain critical to strengthening layered defense architectures. Shortly after the close of the quarter, we secured an award to accelerate development of the Glide Phase Interceptor, bringing the total contract value to $1.3 billion. GPI is designed to intercept hypersonic missiles that can evade traditional missile defense systems, a critical capability given the proliferation of hypersonic weapons.

Before concluding, I'd like to highlight our role in the historic Artemis II launch. It's a reflection of the diversity of our space business, which extends across a wide range of missions. Two Northrop Grumman-built solid rocket motors generated an astounding 7.2 million pounds of thrust, over 75% of the rocket's total thrust, to propel the SLS rocket and the astronauts on their journey around the moon. We are incredibly proud of our team, and I'd like to congratulate NASA and the Artemis II crew on a successful mission. In summary, we continue to see an opportunity environment. Our investments in our business, rigor and program execution and speed with which we are bringing innovative solutions to our customers gives us confidence in our position today and into the next decade. When coupled with our strong backlog and unprecedented opportunity set, we're optimistic we can continue growing our business and creating value for all of our stakeholders. I'll now ask John to cover our first quarter financial results. John.

Yes Rob. So we expect $200 million or so of capex this year and that's why we reflected that increase in our capex guidance for 2026. As we've said before, we do expect the majority of the capital expenditure to happen in the 27, 28, 29 time frame and largely be completed this decade. The additional capacity that's coming online does give us a meaningful increase in throughput which will generate revenue over the life of the program. But as I've just stated, it takes a while for us to get that capacity online. So you should expect the revenue profile to follow the production facility completion.

And on the B-2, sorry, why it's not like the B-2, why it's not like the B-2 in terms of this contract, we have a committed quantity on the contract and we know that the Air Force is considering increasing the program of record. As we sit here today, that decision hasn't been taken, but we do believe that there is strong support by the administration for this capability that manifests itself in their commitment to the triad modernization in the US national defense strategy. And we believe that it is a reflection over multiple administrations of the need for this platform as an effective deterrent and as we've seen recently with the B-2 in conducting of military operation.

Thank you. So for the Sentinel program, in partnership with the Air Force, in this past quarter, we have agreed to an acceleration of the program that would have completion of Milestone B later this year and then would allow us to move forward with the program as I said to first flight in 2027 and an initial operating capability early in the 2030s. We are doing a series of things together with the Air Force to enable this schedule acceleration. One I mentioned that got started in the quarter is a prototype of the missile's launch silo and that will help us to understand and further increase the fidelity of our design for the silo itself. But that's just one example of numerous things that are happening across the program to mature the design and progress toward that first flight milestone that I talked about in 2027.

Peter, we see the opportunity to accelerate timing on international in areas where urgency has increased over the last couple of months. I specifically called out in my remarks the Middle East where clearly the conflict with Iran has created a heightened sense of urgency and we are seeing those opportunities move to the left. With that said, we see high demand for products that we produce across the entire globe, including Europe. And so our team is working in any ways possible to accelerate demand and turning that demand into sales. What we see though is international does tend to have a longer cycle than domestic. That has not changed just in terms of the steps we must go through to get that demand signal translated into contract. So we are working with the department on a number of things that help to accelerate export approval. We are looking at aggregating international demand. Those are all positive steps forward in the way the process is working that could lead to acceleration. But I largely see those things impacting us beyond this year.

Thanks, Peter. Yeah, we have opportunities in the counter drone, including low-cost solutions that are based off of work we've been doing in that arena for a number of years. Programs like our FAAD C2 program and even IBCS is effective in connecting sensors and shooters in that counter drone space. We have seen as I have shared before an increase in demand both from the US and international and so we expect the international contribution to be greater even than the domestic in counter-UAS solutions. We see that developing over the next couple of years. We are already seeing some revenue today in that space and as I noted now nearly 10% of the company sales is in missile defense which is a significant increase from where we were just a few years ago.

Sure Christine. So we are seeing an opportunity rich environment. As I said, it's only the first quarter of 2026 and we now are just starting to see reconciliation dollars flow into our contracts. Our performance this quarter was in line with our full-year guide of mid-single digit. But to your question, if we were to see a higher sales growth, it would come from our bidding on numerous new opportunities. We would expect to continue to see a high competitive win rate on those opportunities. We'd also need to see an accelerated ramp on the demand for our missile components. I talked about solid rocket motors earlier on the call. We have the capacity. We need to get that on contract and start producing. We need to convert our international pipeline to sales as I also referenced earlier in response to Peter's question. And our suppliers need to be able to scale with us. And we are doing the work to remove those bottlenecks in our supply chain. First by identifying them, second by helping those suppliers to resource their own scaling and to have the capacity that we need from them. So we're of course working on all of these strategies to increase our growth rate beyond the mid-single digits. I have a lot of confidence in our longer term outlook for sales based on the growing backlog as you've said and the opportunity to add to that backlog this year. I think the real question is timing. When do we reach that inflection point and it's based on all of the factors that I just shared with you.

Yes. As you know this is a good example of one of those competitive opportunities I just mentioned and we do expect the department to make an award selection in the third quarter. We are confident in our ability to deliver our solution to the Navy. We and our suppliers are prepared to bring the workforce and infrastructure that's needed to execute the program and our track record on B-21 demonstrates that ability to deliver a complex aircraft on schedule. Regarding the financials, we'd expect upside to the sales and earnings from our current guidance. If we are entrusted to build the F/A-XX, then it would be a top priority for our company to do so.

Sure. Let me start with Sentinel. The program is about 6 to 7% of company revenue today and we expect it to grow low double digits this year which is in line with how it performed in the first quarter. We then expect it to continue to grow annually. So growing toward that 10% of revenue over time. The next real inflection point for the program is when we start to have long lead for production, which we expect later this decade. For the B-21 program, it is nearing 10% of revenue. And with this accelerated production rate, we expect that it will likely over the next several years begin to exceed 10% of company revenue and certainly sets the program up for enduring growth as well.

Yes. So for weapons, we have said we expect that to continue to be one of if not the fastest growing segment of our business. It is a set of opportunities that we have on the munitions where we are currently qualified to provide components like solid rocket motors. It's also our prime position as weapons integrator that we expect to grow over time as programs like AGM-ER and Stand-in Attack Weapon mature into production. And so that part of the portfolio today and aggregate is also about 10% but we expect it to be one of the fastest growers as I said and proportionally become larger over these next several years. The growth rate will be somewhat dependent on how many new programs we add to the portfolio.

And you also asked about margins. The margin profile on Sentinel, B-21 and our weapons portfolio are all expected to increase as we move into production because as I stated obviously all of them are in various stages of development at the moment.

Rich. We are seeing the department engage with industry in several positive ways. One is the sense of urgency to get work on contract. Two is the desire to give a long-term sustained demand signal to industry and commitments around demand to both help us plan but also to drive down costs that come with change or production gaps if there isn't certainty of demand. The other area is just in the mechanisms for contracting themselves. We're seeing more use of OTAs and other non-traditional contracting mechanisms. All of these are positive for industry. And I don't see a desire by the department to push industry profitability down. It's quite the contrary to help reduce costs that benefit both the customer and industry profitability and place incentives on contracts to drive early delivery which again is in everyone's best interest. So I see a real alignment here and an opportunity for us to work with the department to create better economics for industry and the government.

Scott, there's definitely a desire for European countries to buy US product and we are still seeing robust demand there. There is a sensitivity to buy local if possible, if there is a comparable product that can meet the requirements and there is a sensitivity around timelines for US companies to be able to deliver particularly given the increased demand from the US and the priorities that we are placing on ensuring that we are delivering on those commitments. For the Northrop Grumman portfolio specifically we have been investing in capacity. I talked about the 20 facilities that we have opened in the last 24 months. The over 2 million square foot of manufacturing space that we've added. This gives us the capacity to do both. We are not finding ourselves needing to trade whether we can meet US commitments or European commitments. We can and are supplying demand for both and we foresee the ability to continue to do that.

We are engaged with international customers related to space capabilities and we see that pipeline growing. We have seen some contract awards. We in the quarter announced a relationship with a Hungarian company and are pursuing work there. So we are starting to see the maturation of that demand signal turning into pipeline and even contract award. I would say that it is the business that has the least international pipeline of our four segments. But it's growing and we expect five, ten years from now international to be a key contributor to our space business just as it is in our other three segments.

We do.

Sure. We're somewhat limited in what we can share with regard to the program given its classified nature. So I'm more going to refer to some of the comments that the Joint Program Office for the F-35 has made related to where we are. We are building an advanced radar and we are in the process in coordination with the JPO taking on concurrent development and production and this was a known risk when we started down this path to ensure that we could deliver the capability as quickly as possible. The JPO has stated plans to accelerate the production capacity to deliver the radars that meet the requirements and we are in the process of working with them. So we are continuing to work to complete the development which includes testing then quickly ramp production and one of the facilities I referenced earlier in the call is being built for the purpose of accelerating the production on this program in particular. And we've opened that facility, we have the tooling and are working to train the workforce. So we are ready to go as soon as we get through test milestones on the program and are already starting to produce. Beyond that the schedule specifically around the program and the modernization plans remain classified. The important takeaway is we are moving as expeditiously as possible to get this radar delivered because we understand what a game changer it is for the capability.

We were selected to be part of a broad set of companies that are developing the C2 layer and we're looking forward to contributing to a very aggressive timeline for both developing and demonstrating that capability. It is one of General Guetlein's top priorities and we are optimistic that we bring a lot of legacy experience and knowledge both in C2 and the understanding of layered defense in the missile defense arena to that team.

So, as you know, we are pursuing a number of opportunities with the Air Force. We were given the YFQ-48 designation so that we can continue to test our offering and that we are progressing toward Increment 2. We have also been awarded for the Marine Corps our MUX air offering and we have it's been announced as one of the participants in the Navy CCA program. So, a broad set of activities underway to take our unmanned experience, the over 500,000 flight hours that we have, the investments that we've made in Talon, both Talon Blue, the aircraft, and Talon IQ, formerly known as Beacon to test and mature vehicle management systems and autonomy and had some key milestones that we reached on that effort in this quarter that we announced as well and bring all of that expertise forward to all three services who are pursuing CCAs and put our best foot forward for offerings in their next competitions.

We had seen it growing faster than the other part of our business with the strong demand in munitions, missile defense, which are not part of our restricted portfolio. On a go forward basis, I could envision that the restricted business will grow more in line with the rest of the portfolio. I think the key takeaway is we see growth in both. And so it's a nice position to be in.

So, I just want to close the call by once again thanking our entire team for their contributions to national security and space exploration. Since the beginning of this year alone, we've boosted North American astronauts back to the proximity of the moon and we have helped our military in several operations in multiple regions across the globe return home safely after completing their missions. I know our team has been working tirelessly to support these efforts and I'm very proud of them. I would also like to recognize Todd. As many of you have mentioned, he's completing his final earnings call with us today. It's been my pleasure to work with him over the last seven years and we are glad that he chose NG as the place for the capstone for his career as he transitions into what is a well-deserved retirement. So congratulations Todd. Thank you all for joining us today. We look forward to continuing to engage with you throughout the quarter. And that concludes our call for today.