Northrop Grumman: Q2 Execution Fell Short But Outlook Little Changed

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Northrop Grumman: Q2 Execution Fell Short But Outlook Little Changed

n order to reach the 2025A 2026E 2027E

target of 11.2%. The Space and Defense businesses, which have seen charges Q1 3.32 6.14A

in 1H, should drive this expansion. Mgmt expressed strong confidence in its Q2 8.15 7.68A

cost estimates for missile programs (SiAW and AARGM) and for the GEM Q3 7.67 7.35

Q4 9.92 8.03

63XL motor and so we assume this will support the 2H margin outlook. FY 29.03 29.20 29.55

• Positive B-21 adjustment boosted Aero profit. The $157m of Q2 Style Exposure

Aeronautics profit from net EAC adjustments was the highest quarterly

amount we’ve seen in years and contributed ~40% of that segment’s overall

profit. An unquantified portion of this came from reversing losses on B-21 lots

1-4, though mgmt offset this with higher expected losses on lot 5. Overall then,

expected LRIP losses are unchanged, but because lots 1-4 are under contract,

changes in cost estimates run through the P&L, whereas for lot 5, which is not

yet contracted, they affect only the balance sheet. This looks like the inverse

of Q1, when mgmt noted $157m of cost growth on lots 1-4, offset by reduced

lot 5 loss expectations. Most of these changes look related to the B-21

acceleration agreement Northrop and the Air Force reached in Q1 and further

complicating the P&L is the Q1 sale of a B-21 test asset to the USAF. Got all

that? We’re not sure we do either. The last note here is that without EACs, Q2

Aeronautics profitability was quite weak — following a strong Q1, ex EACs

— and we are not sure what that weakness reflects. Guidance implies a mid-to-

high 9% margin in 2H, in line with 2026 guidance and so it appears mgmt is

looking for some normalization.

• We assume growth will accelerate beyond this year.