Northrop Grumman Corp. 2026 Q3 Earnings Call

Mr. Sinclair, please proceed. Good morning, and welcome to Northrop Grumman's third quarter 2026 conference call.

Before we begin, please note that matters discussed on today's call, including guidance and outlooks for 2026 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements under the 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, which may cause actual company results to differ materially. Today's call will also include non-GAAP financial measures, which are reconciled to our GAAP results in the earnings release. Additionally, we will reference a presentation that has been posted on our investor relations website. Joining us on the call today are Kathy Warden, our Chair, CEO, and President, and John Greene, our CFO. With that, I'll now turn the call over to Kathy.

Thanks, Randy, and good morning, everyone. Northrop Grumman's third quarter results reflect strong and disciplined execution across the company. We're delivering on our commitments, and we're doing it with innovation and urgency. Our execution is based on an enduring strategy and adaptive approach, meeting our customers' needs through technology innovation, a laser focus on performance, and value-driven capital deployment. Guided by that strategy, we've deliberately and continuously shaped our portfolio to align with our customers' top priorities, and I'm confident our investments and industry-leading performance will enable durable sales and earnings growth for the foreseeable future. As the threat environment evolves, maintaining America's advantage requires significant and balanced investment in both the attritable mass that supports resilience and the exquisite capabilities that remain the backbone of deterrence and power projection.

In a complex world with growing needs for solutions that scale and perform in contested environments, our customers continue to turn to Northrop Grumman. We have leading roles in the strategic triad, space superiority, microelectronics, and homeland defense. We also offer innovative and cost-effective solutions in emerging market segments, including counter-UAS and autonomous systems. We are investing to rapidly expand our munitions and missile capacity to meet operational needs and increased demand. Our company's portfolio breadth, matched with our execution, turns strategic alignment into delivered capability and value creation, as demonstrated in our third quarter results. In the quarter, our book-to-bill was 1.5 times, which drove a new record backlog of $110 billion, reflecting robust demand and years of durable sales. Performance across the portfolio was exceptional, with a segment operating margin rate over 12%.

These outcomes are built on disciplined program execution, and our team continues to deliver many significant accomplishments. On Sentinel, all aspects of the program are progressing as planned as we complete multiple tests and achieve our milestones on this complex development effort. In the quarter, we completed the first full vertical assembly of an inert missile at Vandenberg Space Force Base and gained approval from the U.S. Air Force on Sentinel design maturity for first flight to proceed in 2027. This program is a key growth driver this year and throughout the 2030s as we complete the development and transition into production. In Space Systems, we provide space vehicles and ground systems for the Space Development Agency's proliferated warfighter space architecture.

We recently launched and deployed our first 21 satellites for the Tranche 1 Transport Layer, a critical step in the execution of unparalleled space-based communication for the U.S. Space Force. In the next six months, we expect a sustained cadence of launches with nearly 50 of our 150 satellites planned for deployment to support transport and tracking missions. Across our company, we see a sustainable and profitable growth trajectory. As John will share in more detail, we are exceeding our own expectations and increasing our 2026 guidance for segment operating income, margin rate, and earnings per share. We expect to drive that momentum into 2027 as we ramp B-21 testing and production, advance Sentinel, continue our leadership in national security space, and meet increased demand for missile and munitions production.

Our confidence in program execution is reflected in our 2027 outlook, where we expect to accelerate growth and expand margins and cash to offset increased capital investments for the B-21 acceleration, maintaining our previously communicated cash flow range. Beyond 2027, we expect growth to again accelerate and margins to further expand as we ramp on franchise programs, increase production volumes, and grow international sales. Our outlook reflects both the depth and promise of our premier portfolio with new sources of growth already taking shape. One example of our response to growing market demand is Raid Hunter, our latest addition to our counter-UAS portfolio. Raid Hunter is a cost-effective product line that is designed to close a critical short-range defense gap as drone swarms and cruise missiles become more common.

This gun-based air defense system combines our proven Bushmaster chain gun technology and new precision-guided 50-millimeter ammunition to deliver powerful protection against high-volume raids. We are receiving clear demand signals for Raid Hunter from key allies and expect it to drive incremental growth for an already rapidly growing Defense Systems portfolio. We also definitized the Virginia-class Block VI submarine procurement for an additional 12 shipsets of main propulsion units and ship service turbine generators. The award value adds $1.4 billion to backlog, supporting our partnership with the Navy through 2032. Additionally, we had multiple competitive strategic award wins in our restricted space portfolio associated with our leadership role in space sensing and superiority. Each advancement adds to breadth in future growth vectors, and we are investing and delivering products to capture it. We deploy capital with discipline, investing first to profitably grow and meet our customers' needs.

In the last 3 months, we've opened or expanded facilities in Utah, Maryland, Arizona, and Florida, adding over 1 million square feet of manufacturing and engineering space and creating more than 2,000 new jobs at these sites. These investments support key customers' priorities, including the accelerated production of the B-21 Raider, increased capacity for solid rocket motors and hypersonic propulsion systems, advanced space system design and manufacturing, and aircraft design and manufacturing. Each is a continuation of our strategy to invest and perform. Today, our investments have provided the capacity necessary to deliver durable growth as we expand our product offerings and capacity. Staying ahead of tomorrow's threats takes leadership and technology, and this quarter, we extended that leadership in several areas. In Aeronautics, Talon Blue completed its first fully autonomous flight with the aircraft handling taxi, takeoff, flight maneuvers, and landing on its own.

Designed and built in 24 months, Talon Blue demonstrates how we're accelerating modular design with manufacturing innovations to deliver real results with speed. After the successful test flight, we used Talon Blue to rapidly test and mature new autonomous capabilities, moving them into the field faster and at lower cost. Building on 7 decades of autonomous leadership, we expect this product line to be a competitive entry in a market with clear growing demand signals, both in the U.S. and internationally. We also introduced FORTITUDE™, a significant advancement in microelectronics technology. This single chip, the size of a grain of rice, uses patented technology to deliver up to 3 times the power and 20 times the signal quality of comparable solutions in the market today. It can replace dozens of individual components while reducing the weight and power demands of the system it serves.

It's a capability with broad application from radar to GPS, electronic warfare, and future 6G networks, and we're building it for both defense and commercial applications. FORTITUDE™ is just one example of our unmatched microelectronics capability. For more than a decade, we've leveraged our expertise in cutting-edge semiconductors and our secure U.S. foundries to pioneer leading quantum computing technologies. Today, we see a significant opportunity to scale this transformative technology for commercial and government customers. To fully realize its potential, we are actively evaluating strategic alternatives and believe we are uniquely positioned to lead in this field. We'll share more details on our approach to scale this capability in the coming months. Turning to the budget and starting with the U.S., we remain optimistic about the strong bipartisan support in Congress for national security.

We are operating under a continuing resolution, and we're hopeful that an agreement for appropriations will be reached in the coming months. We understand how to navigate this environment, and we've done so effectively in the past. Importantly, our portfolio includes a set of prioritized growth drivers firmly anchored in the U.S. base budget request, including full coverage of our prime program and solid support across the rest of our business. As a result, we believe we're relatively insulated from incremental funding uncertainty, leaving us well-positioned and confident in our outlook. Globally, we continue to witness unprecedented levels of demand for defense capabilities. Allied defense budgets are in the midst of a multi-year secular upswing, and we are responding by providing a range of ready-now capabilities, including munitions, missile defense, sensors, as well as crewed and uncrewed aircraft.

These demand signals give us confidence in our goal to double international sales by 2031. In closing, I am proud of our team and our ability to execute and innovate with speed. This quarter extended our reputation for driving performance through a strategy fundamentally aligned to our customers' priorities. For decades, Northrop Grumman has been solving the world's most difficult challenges, including those that require staying ahead of advanced and evolving adversaries. While we continue to adapt and innovate, the core of our advantage is in the technology leadership and our portfolio that underpins deterrence and power projection. We will continue to deliver unmatched capabilities that serve to protect the United States and our allies around the world. That is why I am excited about our future and confident in our performance trajectory in the years ahead.