Northrop Grumman Corporation (NOC) FY2025 10-K and Q3 FY2026 10-Q Summary

Business

From the FY2025 10-K, accession 0001133421-26-000003.

Northrop Grumman is an aerospace and defense technology company that designs, builds and sustains military aircraft, space systems, missiles and missile defense, solid rocket motors, munitions, sensors, electronic warfare, communications and cyber systems. It sells mainly to the U.S. Department of War (DoW) and the intelligence community. The U.S. government accounted for 84 percent of 2025 sales, down from 87 percent in 2024 and 86 percent in 2023. International customers, including foreign military sales contracted through the U.S. government, bought $5.99 billion of the $41.95 billion total, and other customers $781 million. Most revenue comes from long-term development, production and sustainment contracts. In 2025, cost-type contracts produced $20.94 billion of sales (50 percent) and fixed-price contracts $21.01 billion (50 percent). Revenue is recognized mostly over time on a cost-to-cost basis, so sales tend to follow costs incurred across the contract portfolio.

The company reports four segments. Each has a large share of classified ("restricted") work that it cannot discuss publicly, although the financial statements include it.

• Aeronautics Systems (2025 sales $12.99 billion, operating income $813 million; about 40 percent restricted) builds military aircraft. Its main programs are the B-21 Raider long-range strike aircraft (development and production), B-2 Spirit modernization and sustainment, the E-130J TACAMO nuclear command-and-control aircraft for the U.S. Navy, fuselage production for the F-35 and F/A-18, the E-2D Advanced Hawkeye, the MQ-4C Triton and RQ-4 Global Hawk uncrewed surveillance aircraft, and sustainment of many fleets. Effective January 1, 2025, the Strike and Surveillance Aircraft Solutions unit moved into this segment from Defense Systems.
• Defense Systems (2025 sales $8.00 billion, operating income $871 million; less than 5 percent restricted) covers strategic deterrence, tactical weapons and missile defense. Its programs include the Sentinel intercontinental ballistic missile engineering and manufacturing development (EMD) program, the Integrated Battle Command System (IBCS) for the U.S. Army and Poland, medium- and large-caliber ammunition, GMLRS rocket propulsion and warheads, the AARGM and AARGM-ER missiles, the Stand-In Attack Weapon (SiAW) for the F-35, scramjet propulsion for the Hypersonic Attack Cruise Missile, precision guidance kits, and solid rocket motors for PrSM and SM-3.
• Mission Systems (2025 sales $12.51 billion, operating income $1.83 billion; about 30 percent restricted) makes radars, electro-optical/infrared sensors, C4ISR, electronic warfare, communications, microelectronics, navigation, marine power and propulsion, and cyber systems. Its programs include F-35 fire-control radar, the Distributed Aperture System and CNI avionics, the SABR radar for F-16s, G/ATOR, SEWIP Block III, power and propulsion for Virginia- and Columbia-class submarines, the MESA radar on the E-7, aircraft infrared countermeasures, the LITENING targeting pod and EGI-M navigation.
• Space Systems (2025 sales $10.77 billion, operating income $1.18 billion; about 45 percent restricted) builds satellites, payloads, ground systems, missile-defense interceptors and launch propulsion. Its programs include the GEM 63/63XL solid rocket boosters for Atlas V and Vulcan, the Space Development Agency Tracking and Transport layers, the Glide Phase Interceptor, the Cygnus resupply spacecraft for NASA, Ground-based Midcourse Defense, the HALO module for NASA's Lunar Gateway, Next-Gen OPIR Polar satellites, SLS boosters and solid rocket motors for the Trident II missile.

Competitors include Boeing, General Dynamics, L3Harris, Lockheed Martin and RTX, as well as a growing number of new entrants. The company often works as both a competitor and a subcontractor to the same firms. Backlog was $95.7 billion at December 31, 2025, against $91.5 billion a year earlier. The company had about 95,000 employees and hired about 7,500 in 2025. About 4,300 employees are covered by 15 collective agreements.

The current shape of the company comes from a series of acquisitions: Grumman (1994), Westinghouse's defense electronics business (1996), Litton and Newport News (2001), TRW (2002) and Orbital ATK (2018), which brought in space, launch and missile propulsion. It also exited businesses: shipbuilding through the 2011 spin-off of Huntington Ingalls, IT services through a 2021 sale to Veritas Capital, and most of its Immersive Mission Solutions training business, sold in May 2025 for $333 million in cash.

Risk factors

From the FY2025 10-K, accession 0001133421-26-000003. The third-quarter 2026 10-Q adds no new risk factors and refers back to the 10-K.

• Dependence on one customer. The U.S. government provided 84 percent of 2025 sales. It can delay, modify or cancel programs, end contracts for its own convenience, or issue stop-work orders. Programs whose costs run over can trigger Nunn-McCurdy reviews, which can lead to restructuring or termination. New contract terms tied to underperformance, insufficient investment or slow production could bar the company from buying back shares or paying dividends for a period. A recent executive order on defense contractors seeks to address underperformance and production speed and to limit share repurchases and dividends.
• Appropriations, continuing resolutions and shutdowns. Programs are funded incrementally, and the company is at risk for costs it incurs above the funds obligated to a contract. Continuing resolutions can block new starts. A prolonged shutdown or a breach of the debt ceiling could delay payments and stop work.
• Contract estimates and fixed-price risk. About half of 2025 sales came from fixed-price contracts. Customers increasingly want fixed prices for development and low-rate production work, where costs are hardest to estimate. Inflation, labor and supply-chain problems, and technical problems can raise estimated costs and produce charges. The B-21 low-rate production options, which are largely fixed price, have produced about $2.0 billion of cumulative losses (see MD&A). Requests for equitable adjustment and claims may not recover the overruns.
• Competition. Acquisition reform, commercial procurement and Other Transaction Authority awards help new entrants and startups with lower costs. They can also shift development cost to contractors, and protest rights against such awards are more limited. Lost bid protests can reverse awards.
• Legal and regulatory exposure. The company is routinely audited by DCAA, DCMA and the DoW Inspector General. Findings can lead to disallowed costs, withheld payments, or suspension and debarment. The 10-K's litigation note describes the DCMA and Department of Justice inquiries into the company's CAS pension interest-rate assumptions and the Bethpage, New York environmental litigation; their 2026 status is under Legal matters below.
• Environmental liabilities. The company carries remediation obligations for legacy sites and faces bodily-injury and property-damage claims. It may also be held responsible for operations it divested or spun off.
• Tax. Audits of research-credit positions could result in tax that differs materially from what has been accrued. The company may also face tax challenges related to Orbital ATK and its former Vista Outdoor spin-off.
• Cyber and physical security. Nation-state attacks, ransomware and AI-enabled attacks have hit the company and will continue. Disclosure obligations are growing, and national-security considerations can limit what the company may disclose. Threats to facilities and executives are also cited.
• Suppliers and materials. Problems at suppliers have hurt performance before, and the company expects to keep supporting some of them. Supply of microelectronics is critical, and some components have only one supplier or one domestic supplier. Tariffs and import restrictions can cut off inputs.
• Workforce. The company has to hire and keep cleared engineering talent against defense, commercial and startup competitors. An executive order on executive pay at defense contractors could make it harder to retain senior talent.
• International business. Foreign sales depend on U.S. export authorizations and Foreign Military Sales policy. They often carry offset and local-content obligations with penalties, and partners and joint ventures expose the company to their conduct.
• Innovation and product performance. Success depends on digital transformation and integrating AI. Products can fail at launch or in flight, and some satellite contracts require fees to be forfeited if a system fails early.
• Hazardous operations. The company works with energetic and explosive materials, nuclear-related activities and space launches. Accidents can cause deaths, property damage and environmental harm, and indemnification under Public Law 85-804, the Price-Anderson Act and similar laws may not cover the loss.
• Insurance. Insurers are cutting limits and raising prices in the space insurance market, and some have left it. An uninsured mission failure would fall on the company.
• Pension. Pension and retiree-benefit obligations move with asset returns and discount rates. Pension costs are recovered on government contracts at different times than they are expensed.
• Impairment. Goodwill was about 34 percent of total assets at December 31, 2025. About $600 million of property, plant and equipment in the commercial space business cannot be charged to government contracts and so carries more recovery risk.

Management's discussion: fiscal 2025

From the FY2025 10-K, accession 0001133421-26-000003.

2025 sales rose 2 percent to $41.95 billion. Excluding the divested training business, organic sales rose 3 percent to $41.84 billion. Mission Systems added $1.1 billion, mainly from restricted airborne radar, marine systems and international ground-based radar. Defense Systems added $603 million, led by Sentinel, ammunition and IBCS, net of a $192 million loss of training-business sales. Aeronautics Systems added $596 million, led by F-35 and TACAMO. These gains were partly offset by a $960 million decline at Space Systems, $738 million of it from the wind-down of work on the restricted space and Next Generation Interceptor (NGI) programs.

Operating income rose 3 percent to $4.51 billion, a 10.8 percent margin. The increase included the $231 million pre-tax gain on the training-business sale and a $218 million increase in the FAS/CAS pension adjustment. These offset a $167 million fall in segment operating income to $4.38 billion, which cut the segment margin to 10.4 percent from 11.1 percent. The main cause was a $477 million first-quarter loss provision on the B-21 low-rate initial production (LRIP) phase, which pushed Aeronautics Systems' margin down to 6.3 percent. Margins improved at Defense Systems (10.9 percent, including a $76 million favorable Sentinel adjustment), Mission Systems (14.6 percent) and Space Systems (11.0 percent). Net estimate-at-completion (EAC) adjustments were $209 million, against $350 million in 2024.

Net earnings were $4.18 billion, almost unchanged from 2024. They included a $527 million mark-to-market pension benefit, driven by 11.3 percent plan-asset returns against a 7.5 percent assumption. Diluted EPS rose 3 percent to $29.08, and MTM-adjusted EPS was $26.34. The effective tax rate rose to 17.5 percent from 16.8 percent, partly because the One Big Beautiful Bill Act (OBBBA) reduced research credits.

Operating cash flow rose 8 percent to $4.76 billion. Capital expenditures fell to $1.45 billion, and free cash flow rose 26 percent to $3.31 billion. Buybacks and dividends returned $2.9 billion, against $3.7 billion in 2024. Net awards were $46.3 billion. The largest were $14.8 billion of restricted programs, $3.3 billion for F-35, $2.5 billion for GEM 63, $1.8 billion for Ground-based Midcourse Defense and $1.3 billion for Virginia-class submarines.

B-21. The 2015 contract covers cost-type EMD plus five largely fixed-price LRIP options, for a baseline of 21 aircraft. Not-to-exceed pricing covers additional aircraft up to unit 40, at a higher average price with economic price adjustment. The company recognized a $1.56 billion loss across the LRIP options in the fourth quarter of 2023 and another $477 million in the first quarter of 2025. At year-end 2025 it was discussing an accelerated production rate with the Air Force, which it expected would require investment in exchange for better returns.

Sentinel. The $13.3 billion EMD contract, awarded in 2020, went through a Nunn-McCurdy breach review in 2024. The program was certified to continue and was ordered restructured, mainly because of the cost of the command-and-launch infrastructure. The restructure includes a new acquisition strategy, a new baseline and a new Milestone B approval. The Production and Deployment phases have not yet been priced.

Environment and balance sheet. The OBBBA, enacted July 4, 2025, allocated about $150 billion to defense, available for obligation through September 2029. A government shutdown ran from October 1 to November 12, 2025. At year-end the company had $4.4 billion of cash, a $3.0 billion revolving credit facility with nothing drawn, $15.7 billion of long-term debt, $23.9 billion of purchase obligations and $1.6 billion of provisions for uncertain tax positions. It issued $1.0 billion of senior notes in May 2025.

Current quarter: third quarter 2026

From the Q3 2026 10-Q, accession 0001133421-26-000038, and the October 20, 2026 earnings release, accession 0001133421-26-000037.

Results

Third-quarter sales rose 7 percent, or $699 million, to $11.12 billion, with growth at all four sectors. Operating income rose 2 percent to $1.27 billion. The operating margin fell to 11.4 percent from 11.9 percent, mainly because the FAS/CAS pension adjustment fell $52 million as CAS pension expense declined. Segment operating income rose 5 percent to $1.35 billion. The segment margin was 12.1 percent, against 12.3 percent a year earlier, when a $68 million favorable adjustment in Mission Systems' restricted microelectronics portfolio lifted the comparison. Net EAC adjustments were $221 million, against $81 million.

The effective tax rate fell to 13.4 percent from 16.9 percent because research credits were higher ($112 million in the quarter). Net earnings rose 2 percent to $1.12 billion, and diluted EPS rose to $7.89 from $7.67. Other income fell $86 million because the prior-year quarter included gains on marketable securities.

The four segments' third-quarter results:

• Aeronautics Systems: sales rose 14 percent to $3.58 billion. F-35 added $195 million from material timing and sustainment, and B-21 sales and B-2 sustainment also grew. Operating income rose 24 percent to $377 million, and the margin rose to 10.5 percent from 9.7 percent on favorable adjustments on mature production and sustainment programs.
• Defense Systems: sales rose 12 percent to $2.31 billion. Sentinel added $180 million, and GMLRS ER and tactical solid rocket motors also grew, while ammunition volume fell. Operating income rose 7 percent to $250 million, but the margin slipped to 10.8 percent from 11.4 percent as the mix shifted toward cost-type work.
• Mission Systems: sales rose 2 percent to $3.16 billion on restricted airborne radar and marine systems, partly offset by lower restricted microelectronics volume. Operating income fell 3 percent to $500 million, and the margin fell to 15.8 percent from 16.7 percent against the prior-year favorable adjustment.
• Space Systems: sales rose 2 percent to $2.75 billion as restricted space programs ramped up, despite $136 million less from Commercial Resupply missions because of launch timing. Operating income rose 5 percent to $312 million, and the margin rose to 11.3 percent from 11.0 percent on a shift toward fixed-price content.

For the nine months, sales rose 5 percent to $31.88 billion and operating income rose 4 percent to $3.35 billion. Net earnings rose 12 percent to $3.09 billion, and diluted EPS rose 14 percent to $21.72. Segment operating income rose 17 percent to $3.58 billion, and the segment margin rose to 11.2 percent from 10.1 percent. The main reason was that Aeronautics Systems' operating income more than doubled, to $1.04 billion from $443 million, without a repeat of the 2025 B-21 loss provision. Defense Systems and Space Systems lost ground over the nine months:

• Defense Systems' margin fell to 9.4 percent from 11.4 percent, after a $68 million unfavorable SiAW adjustment in the second quarter and without the prior year's favorable Sentinel adjustment.
• Space Systems' margin fell to 9.8 percent from 10.9 percent, after unfavorable GEM 63XL adjustments of $71 million in the first quarter and $91 million in the second.

The year-to-date tax rate was 11.5 percent, against 17.2 percent. It reflected a $115 million second-quarter remeasurement of unrecognized tax benefits, made as the company moved toward resolving prior returns and refund claims with the IRS, plus a $19 million benefit from IRS Notice 2026-7 on the corporate alternative minimum tax.

Program developments

• B-21 rate increase. In the first quarter of 2026, the company agreed with the U.S. Air Force to expand B-21 production capacity and raise the production rate. It still expects to invest about $2.5 billion over several years and has the opportunity to earn better returns on the LRIP and not-to-exceed lots. Not-to-exceed pricing now covers two additional lots. Cumulative LRIP losses stand at about $2.0 billion, with a remaining loss accrual of $1.0 billion at September 30, 2026. In the first quarter of 2026, a $157 million net unfavorable adjustment on the first four LRIP lots was offset by a lower loss accrual on the rest of the program, and the company made no significant change in the third quarter. As part of the agreement, the company sold the Air Force an aircraft it had planned to keep as a test asset. It received $371 million in the third quarter and reported the proceeds as an investing cash inflow, because the aircraft's cost had originally been recorded as capital spending.
• Sentinel. Joint work with the Air Force in the second and third quarters included requirements and design maturation, risk reduction, and options to field initial capability sooner. This work authorized more of the program execution plan and added $9.4 billion to program backlog. The quarter's awards included $2.0 billion for Sentinel. The company made no significant change to its profitability estimate.

Backlog and awards

Backlog reached a record $109.6 billion at September 30, 2026, up 15 percent from $95.7 billion at year-end. Funded backlog was $50.1 billion. Defense Systems' backlog rose 31 percent to $36.5 billion. Third-quarter net awards were $16.4 billion, a 1.5 book-to-bill ratio. The largest were $4.6 billion of restricted programs, $2.0 billion for Sentinel, $1.4 billion for Virginia-class submarines, $1.3 billion for F-35 and $1.0 billion for E-2. Year-to-date net awards were $46.2 billion. The company expects to recognize about 35 percent of backlog as revenue within 12 months and about 55 percent within 24 months.

Cash flow and capital

Third-quarter operating cash flow rose 12 percent to $1.75 billion on better trade working capital. Year-to-date operating cash flow was $1.37 billion, against $860 million, mainly because cash tax payments were lower. Adjusted free cash flow was $1.81 billion for the quarter and $965 million for the nine months, against $72 million a year earlier. This measure, which the company now uses in place of free cash flow, adds back proceeds from equipment sales to customers. It includes the $371 million from the B-21 test aircraft.

Cash was $3.74 billion at September 30, 2026. Long-term debt was $14.43 billion, plus a $764 million current portion. In March 2026 the company repaid $270 million of 7.875 percent notes and $257 million of 7.75 percent notes at maturity, and it issued no new notes during the nine months. Nothing was drawn on the $3.0 billion revolving credit facility (which matures September 2030) or the $3.0 billion commercial paper program. The company bought back no shares in the third quarter and $68 million in the first nine months, leaving $2.5 billion of authorization. In May 2026 it raised the quarterly dividend 7 percent to $2.47 per share. In the second quarter it sold its stake in a public company for $107 million, with a $35 million gain.

Funding and policy environment

Full-year FY2026 appropriations were enacted on February 3, 2026, including about $859 billion for defense. The Administration's FY2027 request, released April 3, 2026, seeks $1.45 trillion for defense: $1.1 trillion in base discretionary funding and $350 billion in reconciliation funding. That is 44 percent, or $441 billion, above FY2026 enacted levels. A separate $88 billion FY2026 supplemental request includes $67 billion for operational costs of the Iran conflict and other defense priorities. A continuing resolution enacted on September 2, 2026 funds the government, including the DoW, through December 11, 2026, generally at FY2026 levels. It requires prior congressional approval for new multi-year contracts for military equipment.

Recent executive orders and DoW initiatives promote fixed-price contracting, target underperformance and production speed, and aim to reform contract accounting and supplier cost transparency. The company says the conflicts in Ukraine and Iran have raised allied demand for its products without significant direct financial harm. After the first-quarter 2026 Supreme Court decision striking down the tariffs imposed under the International Emergency Economic Powers Act (IEEPA), the U.S. announced new tariffs under other statutes. The company does not believe tariffs have had or will have a material adverse effect on its business.

Legal matters

On May 20, 2026, the Department of Justice confirmed that its Criminal Division had closed its inquiry into the interest-rate assumptions the company used for CAS pension costs. The related civil investigative demand and DCMA's interim determination of non-compliance remain open. The company considers a material adverse outcome reasonably possible but cannot estimate a range of loss.

In the Bethpage, New York cases, the court denied a motion on April 24, 2026 to lift the stay on individual lawsuits for some plaintiffs. On September 17, 2026, it deferred decisions on class certification and expert motions while the parties pursue mediation. Environmental remediation accruals were $554 million, with a further $403 million of reasonably possible costs. The company expects any such future costs to be recoverable through overhead charges on government contracts in a similar proportion to the $511 million of remediation costs already deferred.

2026 guidance

The October 20, 2026 release raised segment operating income and MTM-adjusted EPS guidance; the EPS range has now been raised twice this year. Sales and cash flow guidance stayed where they were:

• Sales: $43.75 billion to $44.25 billion. Unchanged from the July release, which had raised it from the January range of $43.5 billion to $44.0 billion.
• Segment operating income: $4.94 billion to $5.04 billion, up from $4.85 billion to $5.00 billion.
• MTM-adjusted EPS: $29.35 to $29.75, up from $28.60 to $29.10 in July and $27.40 to $27.90 in January.
• Adjusted free cash flow: $3.1 billion to $3.5 billion. The range is unchanged from January, although the measure was renamed from free cash flow in the July release.
• By segment:
  • Aeronautics Systems: about $14 billion of sales at a high-9 percent margin (previously mid-to-high 9 percent).
  • Defense Systems: mid-to-high $8 billion at about 10 percent.
  • Mission Systems: high $12 billion at a mid-15 percent margin (previously about 15 percent).
  • Space Systems: about $11 billion at a low-10 percent margin.
  • Intersegment eliminations: about ($2.7) billion.

The guidance does not assume a prolonged government shutdown or new spending limits.

Subsequent events

From the Q3 2026 10-Q, accession 0001133421-26-000038.

The third-quarter 10-Q has no subsequent-events note. It discloses no acquisition, divestiture, debt issuance, borrowing or repayment, or litigation resolution after September 30, 2026. The only later developments in the filings are the October 20, 2026 guidance update described above and the share count of 142,064,489 shares outstanding at October 15, 2026. The continuing resolution described above expires on December 11, 2026.