Northrop Grumman Stock

Hello. Good morning, everyone. I'm Kristine Liwag, Morgan Stanley's Head of Aerospace and Defense Equity Research. I'm very, very excited to host our next panel with Kathy Warden, Chairman and CEO of Northrop Grumman. Kathy, welcome.

Thank you, Kristine. It's great to be back with you.

So as you guys know, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. So with that, Kathy, I'm very excited for you to come back here at Laguna. So maybe I'll pass it on to you for some opening remarks.

Yes. Well, let me start, too, with a couple of disclosures. First, I am likely to make forward-looking statements throughout the conversation, and those have inherent uncertainties and risks, so please refer to our SEC filings, which you can find on the Northrop Grumman website for a full list and discussion of those risks.

Just want to start by saying that we are in a very robust demand environment. When Kristine and I were together here a year ago, I believe I characterized it as the most robust I've seen in the 20-plus years that I've been in the industry. And as I sit here today, that environment is translating into backlog and awards for our company not just in the United States, but with our allies around the globe. We have a record backlog once again. We continue to build on that backlog with franchise programs like the B-21 and Sentinel as they scale through development and into production, but we're also adding market share in munitions as they accelerate, and we grow our footprint on those weapons.

We are growing in national security space, which you know is becoming an increasing imperative for the U.S. and allies to not only have situational awareness in space, but to be able to conduct operations there, and that business is also growing double digits. So just a number of catalysts within our company and broad-based growth across all 4 of our operating segments.

We also, as we are shifting from more development work to more production work, seeing tailwinds to margin that come as we mature the products and are able to have the tailwinds of mix that we've talked about before. And international, as it grows, is also providing tailwinds to our margin profile. So as we execute the strategy that we have been executing for the last several years, we really are at a point where these catalysts in our business are starting to translate into more value creation through the decade. And I would say we are as optimistic as ever about the robust bipartisan support in the U.S. for national security spending, the fact that our programs are supported in the base budget that the President submitted to the Congress and that we are also seeing this robust international environment.

So with that backdrop, I know you want to explore several areas that I've just touched on in our portfolio. So I'll turn it back to you, Kristine.

Thank you, Kathy. So maybe touching on the demand environment. You talked about the robust demand, but if we could pivot to the funding dynamics, right? The House and the Senate Armed Services Committee and the House of Appropriations Committee, they've each backed that $1.1 trillion budget for the fiscal year '27 base, and it's good to see that your programs are funded there. But that said, the reconciliation request, supplemental, and now we're in a continuing resolution. These are all areas of uncertainty for the funding levels. Can you talk about how much of Northrop's growth is driven by the base budget outlook versus the contingents and reconciliation? And how do we think about the risks to your business if the CR is extended for longer? And I think historically, it's around 90 to 100 days on average.

Yes. So our programs are largely supported in the base budget and fully funded there. They aren't split between base and reconciliation like some other areas. And so we see what is in reconciliation largely as upside to the outlook that we have been providing for the company's growth. And as we also look at the base budget and how well our programs are supported, it's an indication of that enduring and sustainable demand signal for those programs that they are included in base. Now we do believe that there is room for some of the reconciliation and supplemental priorities to be funded in addition to the base budget. But to your point, we think that's unlikely to happen in the near term. So again, having our programs in base will allow us to continue to fully execute those programs on their current profile.

The continuing resolution, of course, both the House and the Senate have agreed to extend funding through continuing resolution in early December. It is unlikely, we believe, that a budget will be passed at that time. So likely that the CR will be further extended. But this is something that our industry has become accustomed to.

It's not good for national security. We need timely appropriations. It does cost the government more when we have these extended periods of continuing resolution. But at the end of the day, as we look at our programs, we have the funding we need to continue to work and believe that's the case even into early next year.

That's really helpful, Kathy. So on B-21, you've said that the Air Force's analysis of a larger B-21 program extending beyond 100 aircraft, it should conclude by year-end. So first, where does that stand now? Do you have indications of what the Air Force may be leaning towards? And then also separately, when we think about margins, Aeronautics margins moved up to 10.3% in Q2, and you've got a full year mid- to high 9% guidance for the segment. How much of that improvement is B-21-specific versus the mature production programs? What are the puts and takes in the Aeronautics segment when we think about margins?

Well, let me start with the B-21. We, of course, earlier this year, came to an agreement with the Air Force to accelerate the rate at which we are building the aircraft, and we are in the process of facilitizing to do that. That then positions the government to consider increasing the overall program of record, meaning how many aircraft they will buy as part of the program. And I don't want to get ahead of them. They are conducting that analysis now. I do expect them to share their conclusions with the Congress later this year, and of course, with all of us.

At the same time, to your point, we are progressing B-21 through development. We have also started low-rate initial production on the program, and I'm really pleased with the performance as is our customer, the U.S. Air Force, they continue to share very positive progress as the program is being tested and meeting its test points, which then positions us to move to producibility knowing that we have a design in this aircraft that delivers the capability that our Air Force needs. They also look at this as a multifunctional aircraft.

So originally, as part of the Triad, it was an aircraft that was designed to meet part of the nuclear triad mission, but it can do so much more. And that really is the basis for the Air Force now looking at their whole force structure and seeing the B-21 as a platform that they can use for other missions. And so we feel that this program of record expansion is a reflection indeed of that long-term demand signal for the platform.

The AS portfolio, our Aeronautics segment, is performing exceptionally well on our mature production programs as well. So when you asked about the margin profile in that business, while the B-21 is doing well and in alignment with our estimate complete for the program, it is really those other mature production programs that are generating the higher-than-anticipated margins in the segment this year.

Great. And do you anticipate that these programs will continue to be a tailwind in the second half?

We do. So we had increased our segment level margin guidance, as you know, and we just continue to see that team step up and deliver.

Great. Now moving to the multiyear and solid rocket motors, which is a topic du jour. So you've identified 10 multiyear agreements in total with roughly $10 billion of opportunity over the next 7 years. And you've also been qualified as the second source supplier for the solid rocket motors and the PAC-3. So as these definitize, how should we think about the opportunity set, how quickly can you move? What's the budget visibility and funding for these multiyears? And also, when can you provide more color regarding the 8 agreements beyond the PAC-3 and the THAAD?

So let me unpack the 10-part question around the 10-part munitions acceleration that we have. We have numerous opportunities in the munitions acceleration space. You noted PAC-3, and we are far along in discussions with Lockheed Martin as -- to being the solid rocket motor provider for a portion of their buy. And we first had to qualify. That is complete. Now we are in the process of ramping production and meeting increasingly higher targets for delivery. We are feeling very good about how that's progressing and simultaneously working our way through contract negotiations.

That is a model of what we are doing on a number of weapon systems. In some cases, we are looking to qualify as just a solid rocket motor provider. In others, we produce seekers, cases, nozzles, fuses, so we are really a multiproduct line contributor to munitions of all types and sizes. And so we are taking this opportunity to work with partners we have not worked with before, show them the products we have and define what our path is to gaining share on those weapons. There are 10 agreements, about 8 weapons that we are in active discussions with various clients on.

And by the way, Kathy, I think from our Lockheed session earlier today, I mean, they're talking about 2x, 3x, 5x. I mean these are very high volume multipliers. So when you think about the CapEx requirements that you have to make, can you share your views on what kind of investments you have to do if these things materialize into definitive agreements?

Yes. Just to take you back a handful of years, you will recall that we acquired Orbital ATK in 2019. And as part of our getting into the weapons business in a more earnest way, we began to invest in that business. We were building out capacity because we saw the opportunity coming. We didn't see it at 3 or 4x. But we saw the opportunity to gain share on what's -- where Orbital ATK did not have a presence and that is Northrop Grumman, we had more to offer than just rocket motors.

And so that strategy has been in place for a while. We started the investment before we got on contract and what it has allowed us to do is come at these opportunities with a running start. We have built 2 additional plants where we can build solid rocket motors. We have 2 others that are nearing completion for production capacity. And that is what now we can bring to the table when we talk to companies like Lockheed Martin about fulfilling this much higher demand signal that they've been given and it's opening their aperture to new suppliers like us. So it's really a win-win. And having made that investment is what got us to the table, now ramping through the facilities that we have is going to allow us to gain share over these next couple of years.

Very helpful color. So on Sentinel, Sentinel backlog grew to $7.6 billion in the last quarter. You've talked about targeting a milestone B by year-end. What's there left to do before you reach this milestone? And also, are there other milestones we should keep in mind before initial operating capability of Sentinel?

Yes. Largely, what has happened in the last 12 months is we've matured the design. The Air Force has made important decisions and selections around the operating model for this weapon system, and it has allowed us to move forward on all 3 segments of this weapon system. One, of course, is the missile itself, where just this week, we showed all of the missile stacked. So all the components of the missile are built, and we have integrated them for the first time. We are planning its first test next year in 2027, which is earlier than was anticipated. We are really working in close partnership with the Air Force to accelerate this program to the extent possible knowing how important that it is.

The other 2 components constructing the missile silos and command and control for the weapon system are also progressing very well. And now it's really just about executing over these next few years to complete the development program, finish the testing and move into production in the 2030.

Great. Now Kathy, on Mission Systems, I'm going to be honest here. That's probably one of the hardest segments for analysts, and I'm sure the rest of The Street to model for Northrop Grumman. So can you share with us your vision, what is the strategic vision for Mission Systems? And then also, any color you could provide regarding revenue trajectory, margin trajectory, free cash flow profile of this segment would be really helpful.

It, I am sure, is one of the toughest portfolios to model because it, very much, is a product line business of microelectronics that go into all types of platforms from undersea to outer space. And we are often a supplier, not a prime. We develop things like radars, electronic warfare suite, communication suites, but then they go on to platforms in an integrated fashion. But the value that, that segment provides, it is our highest margin business. It has the highest return on invested capital because it's not one of our more capital-intensive businesses, but we do invest more in R&D in that business than any other. And we do that in conjunction, oftentimes, with partners. So other companies who are progressing the state of the art in microelectronics or working with partners to integrate those electronics onto their platforms.

And that has been a great source of value creation, not just for our shareholders, but as you look inside our company, we are vertically integrated in segments where microelectronics can make our platforms even more capable and we have the ability to inside the company, have that teaming and engineering integration.

So that is the value of the segment from a perspective of the company. For our customers, this really does give them the edge. Operating in the electronic spectrum is often times today the difference between survivability and range, things that are very important to our customers. So innovating in this segment is about giving the U.S. and the allies the capabilities they need to compete.

Great. Thank you. Switching gears to Marine. So Marine Systems, especially nuclear propulsion for submarines, came up this quarter as a key growth driver. How big of a piece of Mission Systems could that become as those programs continue to ramp? And how should we think about Northrop Grumman in the Marine space? It's not typically where we think you guys are?

So we do provide propulsion systems for nuclear-class submarines. And as you know, this is a growing area. The business for us today is over $1 billion, but we do see it as a key growth driver as those platforms scale over the next decade in production. And we are working on increasing our rate of production to keep pace with the shipbuilders. We see this business as, again, a provider of a capability that is game-changing for the submarine. And even though we are not the prime integrator, our technology is very tightly integrated into the sub, and we have been a good partner in this business for decades. It's not one that we talk a lot about, as you said, but it is one that's very important to our nation and that our company has invested in to ensure that we stay at the leading edge.

Great. I mean just to confirm, right, the volumes that we're talking about, you're going from 1.3 ships to potentially 2 to 3, right? I mean, these are 2 to 3x volume increase.

I mean it's basically doubling, yes, yes.

Great. So on the national security space, in the second quarter, you talked about to over -- it's now 15% of total company revenue. You're tracking to more than $7 billion this year, growing high single digits with a backlog of above $16 billion. So what's driving this growth? And is it more space resiliency, it's about missile defense build-out? Is it restricted awards? And how durable is this? How should we think about the SDA tranches as they mature and start converting to more steady production? I know that's also a multipart question, but all national security space related.

Our national security space portfolio, as you said, growing rapidly because space is being recapitalized in every dimension, and it has become a war-fighting domain. So when you look at our space resiliency and space superiority portfolios, those are the fastest growing. We can't talk a lot about that because as you note, it is restricted and most of it classified work. But just think about everything that you would have in the air domain, everything you would need in the land domain, increasingly, as more countries are operating in space, you will also need in the space domain from surveillance to communications that are secured to satellites that can maneuver and operate in that contested environment.

So we are a company that is participating in that space and having great success. And that is what's fueling the growth. When you look at U.S. space budgets, they are yet another tipping point to high growth over the next several years, as outlined in this year's President's budget. So we see this is an enduring areas of space budgets have been growing consistently as one of the fastest elements of the U.S. national security budget. And this President's budget submission reflects that once again, and it's what gives us the optimism that we will continue to see the higher growth rates in that segment of our space business.

Great. Thank you, Kathy. Switching gears to Golden Dome. And Golden Dome has evolved a lot in the last year. I think there's a lot of also discussion about funding for Golden Dome. But you're on the C2 team. You've been selected for the space-based interceptors. How should we think about Golden Dome as an opportunity? This seems to be an opportunity that's funded by the reconciliation budget. How much visibility do you have in terms of that budget growth? Do you think it gets funded? And also, how does this fit within the Northrop Grumman portfolio?

Golden Dome is a collection of programs, as you note, some of which are mature, already in production and an additional mission for those programs, basically. And so those are ones that we're going to be able to fulfill more quickly, get on contract and provide in the time frame that Golden Dome has to deliver initial operating capability by 2028. These are programs like fire control systems, I think, in our portfolio, IBCS, or radars in our portfolio, I think the G/ATOR radar that we developed for the Marine Corps. These are hot production lines, and we are just being asked to add quantities that then get contributed to a Golden Dome architecture.

But there are other things like the Glide Phase Interceptor that we are developing that have a longer development timeline and will eventually become part of a Golden Dome architecture. There are satellites that we are building that were being contracted prior to Golden Dome being defined as an architecture but play essential roles in areas like missile tracking and missile warning to protect the homeland. So those programs are seeing increased demand that would contribute to Golden Dome and have Golden Dome as a source of funding. And then finally, there are things like space-based interceptors that we are also participating in that there's more of a technological leap to be made. We feel confident that the technology is maturing to where we can offer those capabilities, but we are in the development phase on those programs.

Great. Now switching gears to a different topic, the new defense tech entrants. And I think this is also a focus for investors because if you look at valuation of Northrop Grumman stock and you look at private valuations of some of the defense tech companies. There seems to be an investor view that it's a net zero-sum game, either the new or the incumbents. How do you think about this evolving space? Where do you think Northrop fits in there? And how do you think about these new entrants and their evolving role into the ecosystem?

The word you use is the word I use, which is it is an ecosystem. And in this industry, we have been partnering with other companies that one day, you're a competitor and the next day, a collaborator because that's what we do to bring the best solution forward to the U.S. government. And when we do that, it really relies on an ecosystem. And we have grown and built the portfolio that we have today, not because Northrop Grumman has all the best ideas, but because we can partner well and bring teammates with us and we also can be a good partner and teammates.

That is not something that is defined by your size or how long you've been in the industry, it's defined by your performance. And so we have focused as a company on being a technology leader, bringing innovative technology to the ecosystem, being able to scale that technology so we can produce it quickly and in the quantities that make a difference for our customers, and we continue to have that role in the ecosystem.

New entrants will come. Some will succeed in doing that same thing. Others will not. And our job is to vet our partners to make sure that we're bringing to our team, the companies that have real technical credibility and I feel like our company is very well positioned to do that because we have a strong engineering and technical pedigree in the company that both operates at the prime level, but also as a supplier where we deeply know the technologies that we build.

And so Kathy, I think for some of the new entrants, a lot of them are more on the lower-end type of portfolio and your portfolio historically is in the very, very high end. How do you think the demand environment changes? Do you think that the enduring demand for the high end persists? And where does Northrop want to be in that ecosystem?

I think what you heard a few years ago was a new discussion about affordable mass and how important that is for us as a nation to have a higher quantity of lower cost capabilities to complement the more exquisite systems that we have in the portfolio today. That is the case. It is not an either/or. And if you talk to policymakers and decision-makers in government, they acknowledge the vast majority of dollars will go to those more exquisite capabilities because they're necessary. They are the backbone of our strategic deterrent. They are what is providing differentiated capability when we go and conduct military operations around the globe, it's what makes them successful.

It's what makes us more capable than any country in the world to project power at a point of our choosing and successfully deliver on those operations. So you need that, but we would all agree you also don't need everything to utilize an expensive exquisite solutions. So it is an ecosystem of capability. And Northrop can produce both. And that's our focus and our goal.

We are not just the developer of exquisite. We can do affordable mass, and we have solutions that are proving that out in the battlefield today. Our differentiation is performance. If you contract with us, you will get a very capable system at the price point that's necessary to deliver the mass you need, and that's what we are focused on delivering.

Thank you, Kathy. On performance, you've described margin expansion as a 3-part story, performance, digital -- digital-driven cost efficiency, a mix shift towards fixed-price and more international work, which are better for mix. What do you see the most opportunity to expand in margins? How do you think about margin trajectory? And also, again, when we look back in the last quarter, you had some charges on the GEM 63XL program and also the SiAW. How mature are the risk retirements there? And could you foresee other additional charges and other programs as we go through the year?

So generally, the performance across the portfolio has been very solid. We are performing with net EAC adjustments to the positive, meaning more programs are outperforming the estimates than underperforming the estimates. And with a high development mix, we're quite proud of the segment operating performance that we have across the company.

Now with that said, when you are taking on technical risk, and I said, our differentiation is performance. We take on hard things, but then we figure out how to produce them. And once we do, we get the reward for having done so in the higher margins that come with those programs.

We are in the midst of development on several things, and we have encountered risks, but when you look net portfolio-wide, really pleased at where we are. Any given quarter, there might be a program event. But when you look holistically at the portfolio, performance is solid. For those 2 programs specifically, we are well into reviewing those as we do, I do every month, but we do financially once a quarter to ensure that our estimate completes are up to date. And we're feeling good about where those programs are. And when we look across the portfolio, as I said, still feel very good about performance.

Great. Now on free cash flow, which is also a big area of investor focus. CapEx is running about 4.5% of revenue. And you said that for 2027 and also for 2028 and you've confirmed for 2026, $3.1 billion to $3.5 billion in free cash flow despite your higher B-21 spend. So how are you thinking about weighing incremental capacity investments right now, especially when we see such a large demand that aren't just your normal growth, but multiples of growth across the different vectors you've discussed versus returning cash to shareholders? And by the way, on that shareholder return, there seems to be an administration pushback there for defense contractors returning cash to shareholders. How do you balance the two? And then also, how do you think about -- and does that calculus change if you get the B-21 acceleration beyond the 100? And should you win the F/A-XX, like, how do we think about those dynamics?

Well, our strategy has remained to first invest when we see good opportunities where that investment can translate into long-term demand and profitable returns. And so we are going to continue to do that. We have signaled that over the next couple of years, we expect CapEx to remain elevated around 4.5% of sales, and that reflects the investment that we've committed to in B-21, many of the other areas that I've outlined over the last half hour of growth that we see in things like national security space, munitions acceleration. We are continuing to pursue new business. So to the extent that a new large franchise program comes into the portfolio, that is an area we would invest in. But with that said, we are also seeing tailing off of investments needed because of the facilitation that we've been doing over the last 3 to 5 years in many of these areas. And so we naturally see that 4% to 4.5% range that we've been operating in as supportive for our growth agenda in the company.

And when we no longer see a robust demand environment, we would, obviously, modulate that as we've done in the past. We, though, are continuing to focus on paying competitive dividend. And to the extent that then we have capital left over, would return that to shareholders. So the strategy has not changed.

Great. On international, you've set a goal of a $10 billion of -- growing -- you're doubling your annual international sales to $10 billion by 2031. But when we look at orders you've gotten, I mean, even in this quarter alone, you have the Kuwait IBCS authorization. You've got the new Australia solid rocket motor facility. NATO seems to be interested in Triton. Where is that $10 billion weighted? And could you potentially see the demand exceeding that target that you've provided?

We could see it exceeding. Munitions is the top, probably 1, 2 and 3, where we see growth, tactical missiles and ammunition inclusive of what we would provide for Counter-UAS support. And so that area we expect to be the fastest growing for our international portfolio, but also areas like command and control, understanding the battle space. We see our Aeronautics platforms being extended in production largely through international orders, that's E-2D, Triton, for instance. So it's broad-based, but the areas of highest growth are dealing with the regional conflicts that we see, the restockpiling of munitions and just the preparation of the battle space for regional conflict.

Great. Well, thank you very much for your time, Kathy. And before we end, I'd like to hear, do you have any closing remarks, and please don't scare us too much?

No, I wouldn't. Look, our portfolio is positioned to stay at the leading edge, and that is for the benefit of our customers so that they have what they need to be successful in conducting their operations. And while we are seeing this as a very robust demand environment, we continuously are investing in this company to make sure that we keep the technological edge for the U.S. and our allies. We are proud to be part of missions like strategic deterrence, and bringing our military home safely, but also in peacetime to support the understanding of the geopolitics and what's happening around the world so that we are best informed as a nation and best protected. And I can't say enough about the Northrop Grumman employees, the men and women who come to work every day serving that mission. So thanks for giving me the opportunity to do that.

Well, thank you very much, Kathy. This concludes our presentation with Northrop Grumman.

Good day, and thank you ladies and gentlemen, and welcome to Northrop Grumman's Second Quarter 2026 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. [Operator Instructions]

I would now like to turn the call over to your host, Mr. Adam Barr, Head of Investor Relations. Mr. Barr, please proceed.

Good morning, and welcome to Northrop Grumman's Second 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 refer to a presentation that has been posted to 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, Adam. Good morning, everyone, and thank you for joining us on our second quarter 2026 earnings call. As we celebrate America's 250th birthday, we are reminded of the importance of our work in support of preserving freedom and protecting our way of life. It was a moment of pride for our Northrop Grumman team when the B2 flew over our nation's capital on July 4, a symbol of American strength and ingenuity. It was also a powerful reminder that many of our technologies have transformed the aerospace and defense industry. From the world's fastest microchip and the James Webb Space Telescope to our signature flying wing technology that epitomizes the B2 and B-21 stealth bombers. Today, we operate with a sense of urgency to get these technologies into the hands of our customers with the quality they depend on and the speed to meet today's dynamic threat environment.

Our Northrop Grumman team is embracing a call to action from our nation's leadership. We are partnering with our customers to more rapidly develop and deliver the next generation of capabilities while scaling and investing in advanced factories to increase production rates and volumes.

We are fully aligned with the U.S. government priorities and see significant opportunity and increased demand for our portfolio. There is bipartisan support for defense investment to maintain our nation's competitive edge. Congress is making progress on fiscal year 2027 authorization and appropriations. The House of Senate Armed Services Committees and the House Appropriations Committee each supported $1.1 trillion in the base budget for the Department of War, an increase of nearly 10% from the fiscal year 2026.

Additionally, the administration recently submitted a supplemental request for $67 billion for the Department of War to fund recent operational costs, replenishment of weapons and enhancements to military readiness. Congress is considering the supplemental and the administration's $350 billion reconciliation package, which is intended to expand and modernize the nation's military capabilities by investing in priority programs, and the U.S. defense industrial base.

While Congress and the administration are still working through the legislative process, Northrop Grumman's core programs remain well supported in the base budget request, which provides us continued confidence in our growth outlook.

Around the world, there are unprecedented levels of defense investment as allies accelerate their modernization efforts. Increased global defense spending represents a powerful commitment to our collective security and a recognition of the global threat landscape. At the NATO Summit a few weeks ago, our allies pledged $50 billion in additional investments, including a commitment for Northrop Grumman's Triton autonomous aircraft. In the Middle East, modern missile defense systems remain an essential priority for ensuring national security.

Momentum continues to build in numerous countries to acquire our IBCS system which is proven and operational today. This includes Kuwait, who in May received authorization from the State Department for 6 IBCS systems. And in Australia, we were selected to establish an in-country solid rocket motor manufacturing facility. These announcements from the second quarter underscore the breadth of international demand for our production-ready systems.

As highlighted in this morning's second quarter release, Northrop Grumman's financial performance reflects continued strong results. We delivered $20 billion in net awards in the quarter, driving a book-to-bill ratio of 1.84x. Backlog continues to grow, including a new record high of $105 billion. And we expect continued strong bookings for the remainder of the year as well as increased momentum in government outlays. These dynamics strengthen our confidence and outlook for accelerating sales growth in the second half of the year. Sales increased by 5%, supported by growth in all 4 of our segments. And operating performance has been solid throughout the business.

We did have lower operating margin rates in DS and space this quarter due to two programs with negative EAC adjustments. At space, we progressed on the root cause investigation on the GEM 63XL program, and we are implementing corrective actions to address the anomaly we experienced on a launch in the first quarter. These include a component redesign, which has now been proven in a successful static fire test. We expect to begin delivering the redesign motors by the end of the year. This additional work and the needed material are reflected in our updated EAC position.

At DS, we continue to invest in our strategy to design and produce tactical missiles. We are executing this strategy through investments in two related programs, Stand In Attack Weapon or SiAW for the U.S. Air Force and AARGM Extended Range for the Navy. In the quarter, we recognized higher projected costs to complete qualification testing on SiAW.

Despite the negative performance reflected on GEM 63XL and SiAW in the quarter, we are confident in our team's ability to complete qualification and successfully deliver these products. They each provide necessary capability for our customers and represent billions of dollars of potential sales at accretive margins over the next decade.

Based on our strong Q2 results and accelerating momentum, we are increasing our financial guidance for 2026. Robust bookings are continuing, and we now expect a full year book-to-bill ratio of at least 1.25x. Sales are now projected at $44 billion at the midpoint, which is over 5% organic growth. We are maintaining our expectations for segment margin performance, and we raised EPS estimates by $1.20.

Our rapidly expanding backlog provides a strong foundation for growth this year and beyond. I highlighted new international opportunities a few minutes ago, which support our multiyear goal to double annual international sales to $10 billion by 2031.

Now I'd like to spend a few minutes outlining developments from this quarter, which further bolster our U.S. growth outlook. We continue to make progress on the Sentinel program in partnership with the Air Force. This led to further definitization and authorization for us to execute additional elements of the program plan resulting in a $7.6 billion increase in program backlog.

During the second quarter, we achieved contract incentives, which improved overall profitability and deliver program milestones as scheduled. Let me share a few important examples of this progress.

We completed an acoustic test of the Sentinel missile which validated the system can withstand the intense conditions of a silo launch, another crucial step towards achieving first flight of the integrated missile, which is expected in 2027. The solid rocket motors for the first 5 flight tests are already in production. And last week, we broke ground on yet another advanced facility at our campus in Utah, adding to the existing 1.1 million square feet of existing space, which was purpose-built for Sentinel. This new facility will support the production phase, which starts later this decade.

We are seeing firsthand the Department of War embrace the use of multiyear agreements to achieve some of its top priorities, particularly on tactical missile programs. When you couple our proven performance as a supplier of solid rocket motors, with the additional production capacity we've already brought online, we're positioned to be a qualified rocket motor provider on new programs.

Last month, we completed qualification activities to become a supplier on PAC-3, and we reached a $2 billion framework agreement with the Department of War and Lockheed Martin. We expect the PAC-3 SRM production awards later this year.

In total, we have 10 multiyear agreements for missile acceleration in work across the portfolio with up to $10 billion of sales opportunity over the next 7 years. These agreements provide a clear demand signal to industry and Northrop Grumman while delivering a greater value and efficiency for our customers.

Another area of increasing budget priority is national security space. Modern Warfare is driving demand in this market with every service now depending on space-based capabilities lead to historic increases to the U.S. space budget.

Today, our national security space backlog stands at over $16 billion with programs like GPI, GWS and restricted efforts. For the full year, our national security space business is projected to grow high single digits and generate over $7 billion in sales, accounting for more than 15% of company revenues, driven by areas like space security, space resilience and missile defense.

The proven innovative solutions we develop for government customers grounded in our engineering expertise and mission knowledge are also being applied to commercial opportunities like our in-space satellite servicing. As part of our satellite servicing portfolio, we have developed the first commercial robotics spacecraft capable of repairing, relocating and servicing satellites in geosynchronous orbit via two robotic arms. It can also install life extension jetpacks on to other satellites for government or commercial customers, prolonging their useful life for up to 8 years.

The spacecraft is known as the Mission Robotic Vehicle, or MRV, and our first MRV is scheduled to launch later today weather permitting.

Before I turn the call over to John, I want to emphasize that we continue to see an opportunity-rich environment for our company. We're investing in our business, bringing continued rigor and program execution discipline for which we're known, and we're moving with speed to bring innovative solutions to our customers. These innovations are core to the security of our nation, the protection of our allies and the preservation of freedom for generations to come. With growing demand, a robust backlog and disciplined execution, we are confident in our ability to deliver accelerated growth and enduring value for all our stakeholders.

So with that, I'll ask John to provide a detailed review of our quarterly results and forward guidance.

Thank you, Kathy, and good morning, everyone. I'll begin by covering the company's second quarter financial results summarized on Slide 4. Overall, it was a solid quarter with increasing momentum. The robust demand environment we outlined on our last call continues to be converted into new bookings and sales. Second quarter awards totaled $20 billion, driving backlog up 17% year-over-year to $105 billion. Sales in the quarter accelerated to $10.9 billion with sequential sales up 10% and year-over-year sales up 5%.

Segment operating income decreased slightly compared to the prior year. Keep in mind, the second quarter of 2025 benefited from a $76 million favorable EAC adjustment on Sentinel. Earnings per share was $7.68, benefiting from a lower effective tax rate. Capital expenditures totaled $302 million and continue to ramp as we invest to expand our facilities to support customer demand. And Q2 adjusted free cash flow was nearly $1 billion, a significant increase compared to the prior year.

Turning to segment performance. I'll start with Aeronautics on Slide 5. AS delivered outstanding operational performance in the second quarter with double-digit sales and margin growth. Sales increased 13%, driven by higher volumes on B-21, TACAMO and mature production programs. On the bottom line, AS delivered a margin rate of 10.3% driven by strong performance across production and sustainment program.

Turning to DS. Second quarter sales increased 5% and 7% on an organic basis. Higher sales were driven by the continued ramp on Sentinel and missile defense programs. Operating margin was 7.5%. Strong performance across the portfolio was partially offset by a $68 million unfavorable adjustment on SiAW related to an increase in projected cost to support the design and qualification of the system. Apart from SiAW, the rest of the DS portfolio contributed an OM rate of 11% in the second quarter which gives us confidence in delivering improved returns in the second half. Backlog at DS increased to nearly $35 billion, driven by an increase of $7.6 billion on Sentinel.

Our Mission Systems business continued to generate outstanding bottom line performance with strong execution across the portfolio. Sales were up 3% in the quarter, supported by higher volume on marine programs, F-35 sensors and increases on restricted airborne radar programs. Margin rates improved to 15.4% driven by strong performance and higher net favorable EAC adjustments across the business. And at Space, sales increased by 4% driven by higher volume on NASA's commercial resupply service mission and missile defense programs.

Second quarter operating margins were 8.6%. This included an unfavorable EAC adjustment on GEM 63XL related to increases in the estimated cost and quantity of materials needed to complete the program. The rest of the space portfolio contributed an OM rate of over 11%, supporting our ability to deliver second half results north of 11%.

On Slide 9, you'll see our second quarter diluted EPS was $7.68. The prior period included a benefit of $1.04 associated with the training services divestiture. Normalizing for this transaction, Q2 EPS increased by $0.57. This improvement was largely driven by the remeasurement of uncertain tax positions given recent developments with the IRS and from a gain associated with the sale of an equity investment.

Turning to company level guidance on Slide 10. As Kathy outlined earlier in the call, we are increasing our sales guidance to a range of $43.75 billion to $44.25 billion. This outlook reflects a second half step-up in sales that is similar to the profile we experienced last year. With this in mind, we anticipate mid- to high single-digit year-over-year sales growth in Q3.

We are increasing our mark-to-market adjusted EPS guidance to a range of $28.60 to $29.10, an increase of $1.20. This reflects solid segment performance in the second half and an effective tax rate of mid-14%.

We are reaffirming our outlook for segment operating income, which we are confident will improve in the second half, and we are reaffirming our guidance range for adjusted free cash flow of $3.1 billion to $3.5 billion. Adjusted free cash flow includes several hundred million dollars we expect to collect this year from the B-21 asset sale. This event accelerated cash receipts associated with the sale but shifted other payments on the program out beyond this year. Net-net, it doesn't change our expectations for 2026 cash under program for the company.

Our adjusted free cash flow non-GAAP metric is consistent with our prior treatment from a few years ago when we had a similar event. We continue to expect $1.85 billion of CapEx in 2026. And as we previously shared, we expect CapEx investments of around 4.5% of sales in 2027 and 2028 as we invest in infrastructure to support the B-21 production ramp.

Turning to segment level guidance. At AS, we are increasing both our top and bottom line estimates for the year. We now anticipate sales of approximately $14 billion. This outlook reflects higher B-21 sales as the program continues to ramp as well as higher volumes on mature production programs. On the bottom line, we are raising AS operating margin rate to the mid- to high 9% range, reflecting strong performance in the first half of the year and continued positive expectations for the second half.

For DS, we are maintaining our outlook for sales in the mid- to high $8 billion range and margins of approximately 10%. Second half revenues are expected to step up more than $700 million, driven by higher ammunition sales and production timings in our weapons portfolio as well as continued growth in Sentinel and IBCS.

Second half margin rates are expected to improve to over 11%, consistent with our first half performance, excluding EACs associated with our missile prime investments. At Mission Systems, we are maintaining our guidance of high $12 billion in 2026 sales while raising our margin rate expectations to approximately 15%. This outlook is underpinned by a sequential second half sales increase of more than $600 million, driven by higher sales volumes on production programs and new awards.

Turning to space. We continue to expect approximately $11 billion in sales for the year. Following the pattern and the other businesses, second half sales are expected to increase significantly. This growth is primarily driven by higher volumes on national security space programs, new awards and improved performance on GEM 63XL.

On the bottom line, we are lowering our expectation for margin rate to the low 10% range to reflect the margin pressure experienced to date. Performance remains strong across the majority of the space portfolio, and we're confident in delivering improved second half performance.

Our last guidance update for the quarter relates to intersegment eliminations, which we expect to be approximately $2.7 billion, driven by increased volumes of restricted work at MS and Sentinel support in the Space segment. We anticipate the intersegment OM rate to be in the mid-13% range.

In summary, building on the momentum established in the first half, we remain on track to deliver on our updated full year projections. Our confidence is underpinned by the enduring demand for our capabilities, record backlog and alignment of our portfolio to global defense priorities. We've made significant investments in our business that position the company for accelerated growth, and we continue to be disciplined in our capital deployment strategy, creating value for all of our stakeholders.

With that, let's open the call for Q&A.

[Operator Instructions] And our first question comes from Ron Epstein with Bank of America.

Kathy, John and Todd, congrats on the quarter. This is Andrew on for Ron. Just unpacking the tax impact from the quarter. Is the $1.20 EPS increase in the updated full year guidance driven entirely by a combination of lower taxes in the quarter and higher sales expectations for the year?

Yes. Thanks for the call. I'll take it. This is John, by the way. So the tax had an impact on the quarter, certainly. But the higher EPS for the year will be driven by sales execution, increasing sales, strong second half margins, certainly a tax benefit, and we're going to continue to kind of manage the operating cost in the business to ensure that we're as efficient as possible. So it's a balance of factors, certainly in the current quarter as we did -- as we did make that adjustment to the uncertain tax position, it did pull forward benefit. But really, what we're trying to get across on this call is the operations are strong, and we expect to deliver a really strong second half of the year.

Got you. That's very helpful color. And I guess just pivoting in a different direction here. Relating to the unfavorable EACs on standing attack weapon, what exactly is driving the higher expected development costs on that program?

Andrew, as we mature production on the AARGM-ER program, which is the basis of the technology for Stand In Attack Weapon, we have had some delays in testing that have resulted in a flow-through to the schedule for design and qualification on the Stand In Attack Weapon. So we look at those programs collectively as part of our tactical missile growth strategy. And we've been investing in more resources to the team, including better integration lab facilities so that we can accelerate through the testing and to be able to deliver these capabilities. They're very much in high demand on programs for the U.S. Navy, the other for the U.S. Air Force, and we have international customers that are looking to get these missiles in their hands. So we want to make sure that we're doing everything we can to drive through the performance challenges and deliver.

Our next question comes from Seth Seifman with JPMorgan.

Maybe a little bit bigger picture question about investment. Northrop's invested, I think, more than peers over the past decade. Can you talk a little bit more about the returns you've seen on that investment. How it kind of compared to your targets? And how you think about the return on investment for the increased CapEx moving forward? And maybe how that compares to what you've looked for historically?

So I'll start. I look at the investments that we've made in the last several years as both investing in capability for new product lines we've talked about two already this morning, GEM 63XL and Stand In Attack Weapon are good examples of those investments in capability, but also what we've invested in programs like the B-21, our offerings for Golden Dome, all really position us for that increased top line growth that we are starting to see. And as I talked about earlier on the call, we now expect book to bill this year to be 1.25. You see that it's a direct correlation to the investments that we have made in capability.

We also have been investing in capacity, and that has positioned us to win work that we otherwise wouldn't have been in a position to deliver upon. Good examples of that are our ammunitions portfolio. I talked about having qualified on PAC-3 MSE, but we also have production capacity so that we can start building right away that allows us to pull those revenues in sooner than we otherwise would had we not made those investments. So we are consistently investing with discipline making sure that we have strong business cases that those that are coming to fruition. Our programs are not without technical risk. But once we get through development, having that production in place is serving us well to generate strong returns and accelerate the revenue and return.

Great. Great. And maybe just one more detailed question about HALO. I think the release mentioned some revenue pressure from that program. Is that related to timing? Or is that related to the NASA decision to move away from gateway? And if that's the case, are there further sales pressure from HALO expected that we should be aware of?

So as you noted, NASA is moving away from their original gateway plans. We are working with NASA to take the technology that we were developing under HALO program and still have that contribute to their future gateway plans. And so we are in the process of restructuring the contract to do that. It will reduced revenue this year, as we outlined in our filings, but it will extend it over a longer period of time as we work deliverables into the new NASA plan.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Maybe then just on the last line of questioning. Can you talk about you recently completed qualification activities on solid [indiscernible] for PAC-3 -- maybe on PAC-3 and more broadly on the missile framework, how you're thinking about the timing? Is that in line with plans? How we think about capacity expansion? And how that impacts profitability?

Yes, Sheila. So as I noted, we first needed to get through qualification, which we did in this quarter. We have production capacity, and we are starting to build. And we are doing that even ahead of definitized contract later this year so that we can support the increased demand for the program. We do expect be definitized for a larger production contract later this year as the funding becomes available through the appropriations from the FY '27 budget.

Got it. And as we think about within DS, as you think about your drivers in the second half, it's mainly Sentinel and the weapons program coming into fruition?

Yes. Although I will say that we are seeing strength in top line across all 4 of our business as you compare first half to second half. Some of that is just the natural seasonality of the businesses that we last year. We have achieved 5% growth in each of the first 2 quarters over last year and expect that same trend in the second half to get to the midpoint of our guidance of 5%. But as you know, last year, it was an accelerating growth through the year, and we are expecting that same trend to occur this year.

Our next question comes from Gavin Parsons with UBS.

Kathy, on B-21, as you progress sort of expanding the production capacity there. Have you had any additional conversations with customers about increasing the program of record beyond 100 units?

The agreement we reached with the Air Force does allow them to consider accelerating production into a larger program of record. And we are working with them in that analysis. They are undertaking it now. I expect that by year-end, they will come to a conclusion on that, and we'll certainly keep you updated.

Okay. And then on Aero margins, can you just give us a little bit more detail on if that strength has been better B-21 performance, legacy programs and mix of both?

Yes. Thank you. It's been a mix. Certainly, B-21, there's been good execution throughout the year. So that's been enabler to ensure the overall program profitability remains on a direction that's headed north. And then mature production programs, EACs have been favorable across the board. So what I would say is kind of the manufacturing processes and delivering to key milestones has been strong within this segment, which has enabled margins to be stable and on an upward trend.

Our next question comes from John Godyn with Citi.

This is Jeremy Jason on for John Godyn. I just kind of wanted to ask -- so since we last spoke, we saw the largest IPO in history. So from a space perspective, what's your overall broad assessment of demand for space as it relates to defense?

Thanks, Jeremy. So in my prepared remarks, I talked a bit about our space business and the fact that particularly with national security space, inclusive of our space resiliency offerings, our intelligence surveillance and reconnaissance efforts as well as missile defense. We are seeing that as one of the strongest areas, not only of U.S. budget growth but also our own projected growth as we look out through the remainder of this year and into net. And we see it growing to be a more sizable part of our overall portfolio, generating about 15% of the revenues for the company as that area grows double digit. So we definitely see that space as a marketplace in the U.S. is growing. I will also note, we are starting to see increased demand internationally for space as well. Different offerings there, obviously, from an export perspective, but we have a growing pipeline outside the U.S. for our space portfolio too.

Awesome. That's really, really helpful. And as a quick follow-up, can you go over your plans for MRV and your involvement in these more commercial markets?

Yes. So our MRV offering as part of our larger satellite servicing market that we have been operating in to provide life extension to satellites. This offering brings robotic arms that allow us to do more servicing operations satellites. We expect both commercial and government clients to be interested in this capability because as I noted, it's about extending the life of these high-value assets and being able to do that and reduce maintenance and replenishment costs. So this is an area where we have taken a commercial model, meaning we've invested, we will deploy the capability. And in 2027, it will become operational. It takes us a while to get it into the right orbit and to test it and begin servicing, but we next year, expect this a part of our service offerings.

Our next question comes from Scott Deuschle with Deutsche Bank.

Kathy, would you be able to share any details with respect to what your market share on this upcoming PAC-3 contract might look like? Is this a small share position you're pursuing? Or do you see a path for Northrop to play a substantial role in this program?

So Scott, at first, because we are a brand-new supplier, we will start at a smaller scale, and that will grow over time. I'm not at liberty to share exact quantities with you. But just sufficient to say we are focused on performing in these early production deliveries and believe that in doing so, that will gain us the credibility to continue to scale.

Okay. And then John, consensus is forecasting about a 7% revenue CAGR at Defense Systems over the next 3 years. I guess just as you look across the segment, across all of these awards you got this quarter, the gross initial IBCS international, do you see a path to deliver growth better than that 7%?

Yes. So I'm going to talk about the current year and then try to refrain from giving too many details on the outer years largely because we've work through the strategic plan, and we've got some more details to do to kind of firm out the outer years. But what I will say is the execution in the quarter on the strong book-to-bill, the execution last year on the book-to-bill and the marquee program, Sentinel B-21, weapons demand all provide growth drivers that should enable the company over time to accelerate revenue relative to what it's done historically.

Our next question comes from David Strauss with Wells Fargo.

I guess a follow-up there. Kathy, I think in some recent public forums, you've spoken of an acceleration in growth that space next year as well as MS, where the growth is relatively low this year. So taking that with what I would assume to be pretty strong growth still at DS and as we move into '27. I mean is it possible that revenue growth could be in the high single-digit range next year?

So -- as John said, we're going to refrain from putting a number around 2027 growth. But we are outlining reasons for optimism. You heard in the call the book-to-bill of 1.25. We've talked about the international growth being double digit. We have spoken about not only those tailwinds to top line but also tailwinds to margin as we start to shift mix away from mostly development to more production, and those being the key drivers of our higher-margin performing businesses this year. So really a lot to be optimistic about as we look forward to 2027. And I will also note the budget for the U.S. has our program very well supported in the base budget. So we're not dependent on significant supplemental or incremental funding above the base budget to drive that growth into 2027.

Okay. And then as a follow-up, I guess, pivoting over on the free cash flow side, I think you've obviously highlighted -- a little bit higher CapEx profile than maybe you were thinking a bit ago when you originally gave the '27, '28 forecast for free cash flow. If you could just update us kind of on your thoughts there and whether that prior guidance holds even with the higher CapEx profile?

Yes. Thanks for that. So I'm going to go back to kind of operating cash flows first and talk about that. So from '23 through the current year, operating cash flows have increased about 30%. So the business continues to generate cash and a great deal of cash quarter-over-quarter as we look at the outer years in terms of free cash flows. So what we tried to do is give a view on CapEx, that 4.5% of sales. We're going to continue to work that and manage that in order to turn that operating cash flow into free cash flow. So the '27 and '28 numbers and then beyond, we're going to continue to refine that through this quarter and then we'll be prepared to give a view third quarter and then an updated view in the fourth quarter.

I do want the audience to recognize that we understand how important free cash flow is for our investors. And the fact that we use that free cash flow effectively. We're investing to support our customers' demand right now and we'll continue to do that. And at the right time, we will begin to evaluate the CapEx spend to make sure didn't make sense. But right now, first and foremost, is continue to invest to meet the demand signals that we're seeing.

Our next question comes from Matt Akers with BNP Paribas.

Kathy, I wanted to ask about unmanned demand. We saw the recent order from NATO for Triton. Just curious what you're seeing there and that could be a contributor to -- trying to double the international business as you talked about.

Yes. We are very pleased that NATO has expressed interest in buying up to 5 Triton. We expect to work with them throughout the remainder of this year to get on contract next. And we see this as endorsement for products like Triton that are mature production programs that we can deliver off of our production line with relative speed and being able to support a very important mission of surveillance in the high north. We do see our unmanned systems continuing to contribute to our overall company, international growth, but we have numerous growth drivers internationally. I talked on this call about munitions, IBCS. We have talked also about other platforms like E-2D, manned platforms that are driving international demand at the moment. So it really is a broad-based set of international offerings that we see driving that overall growth that I spoke to earlier on the call.

Yes. Great. And if I could do one more, I guess, is it possible to give us any update on what's going on with Golden Dome? And I know you guys are working on the space-based interceptors, but any thoughts on how that's going? And I don't know if it's possible to quantify how much that's contributing for this year?

So Golden Dome, as you know, is a collection of programs that create our Homeland missile defense architecture. And so it is a series of competitions as well as sole source additions to contracts that we already have in place. We started to see reconciliation dollars be allocated earlier this year. I spoke to that in our first quarter call that, that was somewhat slow coming into the year, it opened up as we entered into the second quarter, and we are seeing those funds be put on to contract. We expect that, that will continue to be the case and that we will see more selection decisions and contract actions throughout the remainder of this year and into early next. The revenues from Golden Dome related activity will continue to scale.

Our next question comes from Justin Lang with Morgan Stanley.

This is Justin on for Kristine this morning. I wanted to ask one on the microelectronics business. Kathy, you've given some great color in the past around this business and the work you're doing at the foundry. So I was just hoping you could update us on how that business is faring and how the growth outlook there might compare to the rest of the MS portfolio given both internal and external demand?

Yes. Thanks for the question. So we do continue to -- in that business offer both solutions for government and commercial customers. We are experiencing some program life cycle dynamics. So growth in that business has been lower this year, particularly in our restricted microelectronics area, but we expect demand to increase over time, as we've spoken about, this is an important enabler not only to our products where we vertically integrate these electronics into offerings in MS space into aeronautics as well as weapon systems in DS, but also where we sell them to other customers to rely on them for secure processing in a wide range of product lines. So that underlying demand that is fueling the microelectronics business is still robust. It's just a bit of a temporary year-over-year comp are after growing very strongly last year, growing less so this year.

Our next question comes from Scott Mikus with Melius Research.

John, I just had a quick question. I appreciate the color on what gives you line of sight to low 11% margins at both DS and space in the second half of this year. Is that low 11% margin rate for both those segments, the right jumping off point for 2027?

Yes. we're focused on 2027, and I get it. I will say this that the businesses have really strong backlogs. We're working through kind of the one program issue at DS, you pull that out and those margins are about 11%. And then we've given a fair amount of detail on the rest of the segment. So I'm not going to suggest how exactly you model. But what I will say is we have confidence in the execution capabilities of the firm and the ability to continue to drive strong margins through the second half of this year and into next year.

Okay. And then a quick one for Kathy. On MRV, you probably can't provide quantitative terms here. But just from a qualitative perspective, what's the potential market for an offensive version of that spacecraft that could be used to disable adversary satellites?

I appreciate the question. I will leave it up to the U.S. government to decide how that capability might fulfill mission objectives that they have in that regard. But certainly, it's our objective to offer our clients options for technology deployment and for them to determine policy for when and how they might deploy that technology.

Our next question comes from Andre Madrid with BTIG.

I know you mentioned Marine as a growth driver mission systems. This is not part of the business that I think often gets highlighted. Looking at also recent M&A activity amongst peers in this space, what more can you share about your marine business today and maybe where it's going? Is this a mission area in which you might look to invest more organically or inorganically?

So we do have exposure to multiple aspects of the marine marketplace. The one that we talk about most is the work we're doing on propulsion for the modernization of the nuclear and -- And that is the biggest growth driver in our Marine business and expect it to continue to be so as we move through what are the early stages just delivering on our first low-rate initial production units to scale that over time and continue to produce throughout this and the next decade. So we are really pleased that, that set of programs has come out of development and now is in production. Our team is executing very well to drive schedule improvement and be able to improve our overall performance, that's our margins on that business, and we expect it not only to be a key growth driver, but also a key performance driver for the foreseeable future.

Got it. Got it. It's really helpful. And then maybe broadening to the international pipeline. Can you give us more color there? I know you mentioned the Kuwait order. Maybe how is the Middle East looking as a broader market? And on that same note, are you seeing any meaningful reforms occurring around the FMS process that could hopefully speed that up?

Yes. So we announced the Kuwait order, as you said, for the 6 systems in this quarter. We also have a letter of request in from UAE and Qatar for our IBCS system and we're in discussions with multiple other Middle East countries. All of this is a result of the importance of missile defense as demonstrated in the recent conflicts for cruise missiles and drone, both detection and interception and of course, the IBCS product line is designed for that exact short- and medium-range integrated air and missile defense mission. So we expect that to continue.

With regard to how quickly we're able to progress FMS cases, we've seen a real improvement there. FMS cases are being approved at a much more rapid rate. We're significantly ahead of what we experienced in prior years. And I appreciate the focus that this administration has put on the cross agency work that goes into expediting those FMS cases.

Our next question comes from Peter Arment with Baird.

Kathy, on the Defense Systems, EAC adjustment and investment spending on tactical missiles, I mean, how do you handicap kind of the cost growth from here? I mean would you characterize it like we're in the mid-innings, late innings and just confidence around the double-digit margin guidance for the second half of the year for DS?

Yes. So I appreciate the question. And we have brought in independent resources to really shore up our assumptions that sit behind that EAC. So I do have confidence that we have a plan that is executable and the team in place. We've added resources, as I said earlier, not just people resources, but infrastructure to allow us to execute that plan, and we have had agreements with our customer that gives me confidence that we are in lockstep with them on what needs to be delivered. So those risks being well understood is generally the key to being able to have confidence in the go-forward plan and the estimated cost, and we are there. With that said, we are not done the qualification until we are, there is risk, but we will continue to keep you updated. And I feel very confident that we have a good plan to execute.

Our next question comes from Gautam Khanna with TD Cowen.

I was wondering if you could elaborate on the $10 billion of SRM opportunity over 7 years. And how we should think about the company's protection against inflation, how we should think about pricing on that as you price out so long and what that might mean for the profitability of that business over time?

Yes. Gautam, thank you for the question. Those negotiations are ahead of us. What we have now is a set of opportunities, and we are working with our respective Department of War and prime customers to identify what those negotiation points of price and fee will be and the investments that we need to make and the recovery of those over time. The framework agreements lay out a construct for those. And then as we work through this year, and as I noted, probably even into early next as funding becomes available, we'll work through the finer points to definitize contracts. I assure you, we will work with discipline as we do on all of our contracts. In many cases, we have invested so that we have capacity available now. And we have gotten through qualification, which means we understand what we need to build, and these will look more like mature production programs, but we will ensure that we incorporate any risk that we have into our assumptions for pricing.

And our final question comes from Myles Walton with Wolfe Research.

John, I just wanted to ask about the size of the positive adjustment on Sentinel in the quarter. Was that effectively offset by the higher investment in AARGM, and that's why we should be thinking about the 11% ex the standing weapon?

That's good analysis is what I would say on that. So it wasn't material enough to break out separately. So we don't want to create a precedent on identifying low dollar items because it's just probably won't stop. So we kept to the precedent, but as you described, a good way to think about it.

Okay. And then, Kathy, on space, the largest new start program in the fiscal '27 submission was space-based AMTI, and then SpaceX subsequently, you quickly got a $4 billion award on that program. Can you describe where Northrop is planning to compete either as a prime or a supplier within space-based AMTI or GMTI space based?

So as you know, it is an attractive segment of the market where we do have capability. We are looking at future tranches of requirements that we would be able to be responsive to won't get out ahead of ourselves on any decisions with regard to bids at this point, but it is a market that we believe we have opportunity to play in.

Well, thank you all for joining our call today. As you've heard from both John and I, we see the robust demand for our products around the globe, and we are optimistic. As we sit here today, the U.S. budgets will continue to fully support our program. We are also confident that we are on a path for improved margin performance in the second half, and we recognize how important that is. Our team is fully committed to addressing the 2 program items that we spoke about today and delivering strong performance on those in the second half while continuing the excellent performance that we have in the rest of the portfolio with company margins nearing high 11s without those two EAC adjustments, and that performance needs to continue, and we are committed to making it. so that we can drive the increase in sales and EPS that we've committed to in our updated guide.

So thanks again for joining our call. John and Adam look forward, as always, to following up with you on any additional questions that you have.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Okay. Good morning. I'm Doug Harned, Bernstein's Global aerospace and defense analyst. I'm thrilled to have back with us, again, Kathy Warden, Chairman and CEO of Northrop Grumman, and we're going to go sort of straight into Q&A here.

Great. Thanks, Doug. It's great to be back with you. Just before we get started, I do want to remind everyone that I may make forward-looking statements, and those statements have inherent risks. Those risks are outlined in our SEC filings, which you can find on the Northrop Grumman website.

And Doug, I would just say a lot has happened since I was here with you on this stage a year ago. We are certainly living in a dynamic and complex environment in the national security space that has led to an increased demand both from the United States and our allies for the kinds of capabilities that Northrop Grumman provides, and we've seen that result in robust backlog growth. We are projecting mid-single-digit sales this year with acceleration into next. And we have really intentionally focused on building with speed and laying in capacity necessary to produce at scale.

This is what we are hearing from our customers. We are being responsive to that proactively. And you will see that we continue to invest in our business to position ourselves for that growth. We have a lot of opportunities. I'm sure your questions will lead us into discussions about what those opportunities are. And we hope today to provide some clarity also on our capital deployment plans to support investment in those opportunities and others.

Great. Thanks, Kathy. I want to start with the budget because we've got a President's budget submitted $1.5 trillion. We -- it's unclear where this is going to come out. It's going to go through Congress. But maybe as a start, can you tell us how you think about the budget process? How we get from this proposal to a reality? What some of the factors are? I mean, I know you're in discussions with lots of people involved in this. And then how you, in Northrop Grumman, manage through the uncertainty?

So the base budget of $1.15 trillion that the President submitted to the Congress very much supports the programs in the Northrop Grumman portfolio that are the basis for our guidance this year and our expected acceleration of sales into next year. And I've been spending a good amount of time on the Hill, talking to members of the House and the Senate about their reaction to that budget and their expectations for its passage. And I would say there continues to be strong bipartisan support for national security spending increases and that $1.15 trillion is in the range of what was expected.

And as it flows through markup, we'll see more details, but I feel positive that the base budget that provides the funding necessary for Northrop Grumman programs to continue to execute against their acceleration plans is going to be well supported.

Well, you mentioned a lot's happened since we were here a year ago. A lot's happened in the last several months. One of this is war in Iran. So we've used a huge amount of munitions. We've also had a high Op tempo. When you think of what's happened there, how does that play into how you're looking at this year and next year, perhaps in terms of demand?

We are certainly seeing immediate demand uptick for support and sustainment to ongoing military operations, operations that are happening at a tempo that I haven't seen in a very long time. And this is across our entire portfolio. What's often talked about are the munitions that are being depleted and needing to replenish those. And certainly, this year's reconciliation focuses on large sums of resource to build more munitions more quickly, and we are offering our capabilities and capacity in that regard. And being taken up on that offer by both the primes who build tactical missiles as well as the Department of War.

We are clearly recognizing the urgency to work there. But we are seeing it too with aircraft that are being flown far more than they were anticipated to fly. So for the E-2D, which has been central both in operations in Venezuela and Iran, the Navy has requested an additional 12 aircraft just as a result of this increased Op tempo and the need for the capabilities that the E-2D provides. We are seeing that broadly across the Northrop Grumman portfolio. And those resources likely will come from reconciliation bill or potentially a supplemental outside of the base.

Now one other aspect of the war in Iran and the war in Ukraine has been the growth in asymmetric warfare with use of low-cost drones, a lot of different things here than we've seen in past conflicts. The administration has been encouraging spending money or plans to spend money on bringing in new suppliers of drones. When you look at this universe, both unmanned systems and Counter-UAS, how does Northrop Grumman play in all that?

We play in both marketplaces. Oftentimes drones are thought of as very low-cost high quantity. That's not a segment of the market that we play in, but we definitely play in the mid and upper ends of that marketplace as we do in most areas of defense equipment. We foresee that, that market will continue to grow, and we are offering low-cost options in everything from missiles to Counter-UAS and low-cost interceptors, which we believe will be an increasing part of the defense inventory over time, even though right now, it's largely about building more of our weapons that are already in production so that we can very quickly replenish. We know that over time, the desire is to get to weapons that have a lower cost point and can counter a $1,000 drone with a $1,000 interceptor rather than a $3 million interceptor.

Well, I mean how -- but also as part of this, there's been this encouragement and openness to bring in a lot of new players into this mix. And there are almost countless of them now. How does -- in the knowing that there seems to be sort of a bias in the administration toward this, how does Northrop Grumman deal with this and compete effectively?

We still choose to compete in areas where we have the most competitive differentiation. Often that's technical differentiation. Sometimes it's about the scale at which we can manage complex programs and deliver hundreds, if not thousands of them. Those are areas where we thrive. But that does not mean that we can't scale our operations. So an example of this is our Counter-UAS solution. It is basically taking product lines that we have today with guided munitions, canon-based launchers and offering an alternative to down a drone with a $1,000 option versus, as I said, $3 million interceptor. This is matching the sophistication -- low sophistication of a threat with a solution that is also much more affordable and deployable.

So these are things a company of our size and scale can and does do with the engineering talent and the manufacturing capacity we have, but we also can scale up and build very exquisite systems like the B-21, which is an asset that provides capability no other asset in the world provides. We think that it will continue to be the case that the U.S. and our allies need a mix. It's not one or the other, it's both, and it's just a matter of what will be the mix of these higher end and lower end, more expensive and more affordable solutions.

You mentioned the B-21, I'd like to move over to Aeronautics and talk about the B-21. We've heard positive statements from the Air Force on performance, on schedule and I think as we have talked before, I can't remember a major combat aircraft program that has -- seemed to have gone so smoothly this way. A couple of things. One is you have taken a couple of charges on it. Maybe you could explain a little bit about what's happened there? Should we have concerns that you could start to run into problems we've seen in all these old, less successful development efforts?

Well, Doug, I appreciate the recognition of how the program is going. That doesn't happen by chance. It has been a lot of hard work. We've had a great partner in the U.S. Air Force and the way they've worked with us in industry. We have an excellent industry team, engineers that I would put up against any in the world in terms of their capability to design this aircraft and then to build it and meet those requirements the first time, and that's what we are demonstrating in tests. And then as a company, we had the foresight to invest to make sure that we were putting resources toward the program to buy down risk through the development phase to smoothly transition into production, and that is indeed what is happening.

So a lot of effort has gone into making the B-21, the success that it is both by the Air Force and by the Northrop Grumman team. We do, as we move through the completion of the test program and into production, look forward to the opportunity to build these faster, and that's the agreement that we have now come to with the Air Force, which also opens up the opportunity for them to potentially buy even more. So that's what to look for as we continue to progress through this year and really proud of how the performance has demonstrated, not just the value of the B-21 and military commanders who have looked at the B-21 are requesting more of them because they see it as game-changing in their ability to conduct operations in their theater.

And the pilots who are flying it say it is an exceptional aircraft, so we're really proud of that.

But is there -- when you look at some of the cost issues because you have had a couple of CACs. What's been behind that? And is that anything that we should be concerned about because you always worry when you see one, you might see more?

Right. We've had two charges on the program and two different drivers for each. The first was recognizing the high levels of inflation that had not been anticipated when we initially did the contract. That was the largest of the charges that we took as a result of the pandemic. We all, not fondly, but recognize and remember the time of high inflationary pressures that we had to incorporate into our cost estimates as we would be building these aircraft over the coming years. And so that was the reason behind the first charge. The program was performing very well.

The second was investment that we put into the program to position ourselves to accelerate rate and a learning that happened in our manufacturing process that did result in a charge. No program is going to be perfect. And so we had that learning, it resulted in some rework and we took that charge. For a program of this size, complexity and duration, this program is performing exceptionally well. But any program of this size does carry with it risk, especially as you move into production for the first time.

But we are retiring those risks with each passing day as the aircraft tests well, and we get through build processes, we are feeling very positive about our ability to continue to deliver on our estimates.

Well, one of the things I know when you talked about investment that's so important is the Air Force's desire to accelerate production, get this airplane out-fielded sooner. And then there's a second piece, which is would the program of record be increased? How do you think about those two things in terms of your capital investments and the time line for revenue growth?

The capital investments that we've now committed to and we've disclosed about $2.5 billion additional is to facilitize for building at the increased rate. And as we and the Air Force have been talking about for months now, that increased rate allows them to consider how they meet mission requirements and how many aircraft they would want to build to do that. So they are undertaking that analysis now. And certainly, our ability to build faster is a positive factor in those evaluations.

And how -- I mean, can you give us -- is it possible to give us any sense of what that revenue trajectory will be? I know it's hard with a program like this.

Yes and hard because as you're acknowledging many of the aspects of the program like the actual build rate are classified facts. But what I can share is that we do expect as a result of acceleration for there to be a step-up in annual sales associated with that faster build rate after we lay in the infrastructure, that's a couple of years out. But even so, as we expend the resources to prepare for that ramp, we are seeing some modest step-up in revenue on the program. We also expect the overall business case for the program to improve with the prospects of building more of those profitable aircraft providing a solid return on this investment that we have committed.

And it's a win-win as all of these partnerships should be. We are getting better returns for our shareholders and the government wants that. But at the same time, they are getting an aircraft that is extremely capable and it's going to be able to be fielded faster.

The TACAMO program is an interesting one right now. It's growing. Maybe you could help us understand a little bit about the size of that and what you see as the growth path forward.

So it's contributing a couple of hundred million of growth each year last and this year as it scales through its development phase, will transition into production in a couple of years. A really important program that supports the Nuclear Command and Control Mission for the United States, and we are building out the mission systems and the aircraft to support that mission all through our aeronautics sector. It's development margins today as is typical, but as I said in a couple of years, transitions into production, so a nice tailwind for value creation.

And then still a big program for you is F-35 production. We're looking at that staying pretty flat at 156 for next several years, probably. When you look at your work, presumably, the production part is pretty flat. But do you see growth there when you look at upgrades? I mean, Block 4 has been pushed out. So how does that -- is that a flat program? Or are you getting enough sustainment work to...

It's a modest growth program because we are -- in our aeronautics business, we do the production of the center fuselage and some other ancillary support to the production program, but we also are growing the sustainment footprint, which is executed out of that business. In our Mission Systems business, we are supporting the Block 4 modernization. And so as part of that, we are seeing growth both to develop the next-generation systems and then as those transition into production.

Okay. Now you have a new unmanned entry, your CCA entry. Earlier, we heard Andrew while here. They talked about their CCA entry. Tell us about this, how you've competed on it? GA and Anduril got the first 2 increment ones and then now you've got a third, but help us understand this.

So look, we didn't do the investment with the intention of getting a CCA award. We did the investment to do two things. One, we know that the marketplace for combat collaborative aircraft is going to require a next generation of autonomy, and we had over 500,000 flying hours on autonomous vehicles between the Global Hawk, the Triton and other programs. And all of that experience allows us to build vehicle management systems, but also to create testbeds. And so we did that with something called Talon IQ. It is a manned aircraft, but it is a flying testbed basically for us to continue to advance autonomy.

And we have invited partners in to fly on that testbed and utilize their autonomy systems because if they have a more affordable or on point solution, we want to be able to embrace partners in that regard. So that was one part of the investment. The one that you're asking about is Talon Blue. That's actually the aircraft that we're building. It is an unmanned aircraft. And what we wanted to do was two things. Set out to show ourselves that we could build an autonomous aircraft at a much lower price point that still had a high level of mission capability.

And so we did that with a focus on the time line to design and build, with a focus on manufacturing processes and using more tech automation in the manufacturing process to shorten that cycle and to reduce things like part count that reduce complexity out of the aircraft. And we have met our objectives in that regard and ended up with an aircraft. And when we showed the Air Force, what we had done on our investments and where we were headed, they were impressed with what we had done and gave us a designator that allows us to fly that aircraft and test it on their ranges.

We are -- the YFQ-48A, and so our aircraft now will be able to demonstrate these capabilities. It will eventually lead us to market offerings for the Air Force, the Navy, the Army, the Marine Corps, international partners. Whether it's selected as the Air Force CCA, it was never our intent. Our intent was to create a product line because we believe this market has continued to evolve, and we want a mission-capable affordable option to offer. And so that's what we're doing.

Well, if I go back a couple of years and you look at the Aeronautics business, you had a number of mature programs that were declining and you -- we just -- the B-21 was starting to grow. Are we past all that? Are we at the point where we should expect good growth going forward and...

Yes. Any new technology area is met with wild enthusiasm at the beginning and then systems are fielded and there is a learning curve. And in this case, it's a user learning curve because we have very capable autonomous aircraft. But when a pilot sees that is displacing them or has to figure out what is the concept of operation for this aircraft, there is a learning curve that happens. And we have been on that journey with the services. We know what that looks like.

But to your point, I do think we are emerging out of that period where there will be more widespread adoption. That's why we're very serious about this market and continuing to play in it. We're not going to run the table. We're not going to be the only game in town. No one is. So this market, as it becomes bigger and more relevant, it's going to have multiple players, and we want to position Northrop to be one of them.

So if you look at margins now for aeronautics, you're kind of looking at kind of a 9%-ish type rate. Can that get up to 10%? And then you have the overhang of the B-21, but what's the potential to bring that up to 10% over the next few years?

We've been clear that AS can attain 10% margins and really two things need to happen. One is B-21 continue to progress on its current schedule for transitioning out of low rate initial production and into full rate production. And as that happens, margins will naturally improve. And the development mix, things like TACAMO also progressing into production. We'll put that portfolio back to where it has historically been, which is fixed price production being the heavy mix that has those higher margins.

Now of course, if we are to win another large development program, that would be -- it's something we would absolutely embrace. It would put some pressure on how quickly we get back to 10% because those do tend to have development margins, high single digits. But at the same time, we do expect that just B-21 and the mix alone there will transition us closer to that 10% mark.

Well, speaking of new development programs, F/A-XX, can you give us any insight into what's going on there? We've seen a lot of talk over the last several years and some money.

Yes. So the program was funded by the Congress in the FY '26 budget, and there is money and reconciliation. So there is funding for the government to proceed. And we most recently heard from Secretary Hegseth testifying before the House that there is support for the program to proceed and suggesting that an award would likely be done by the end of August. So that is the latest word from the department on the program.

So we may hear something in a couple of months. So let's go to Defense Systems, Sentinel. This has gone through a complex birthing history in a sense. Can you talk about where things stand today in terms of when IOC will happen, the Air Force's plan, how you're performing? There are so many pieces to this puzzle. Maybe you can help us with this.

This is another really positive step from where we were a year ago to where we are today on the program. The Air Force has designated a direct reporting program manager, General Dale White, who has come in and really worked with us and the Air Force team to establish a baseline that allows us to pull the schedule on the program earlier from what was established in the review just a couple of years ago and we are targeting cost reductions from that baseline coming out of the 2024 review.

These are really positive steps that are being obviously well received by all stakeholders. We are also performing well on the program. So we have achieved our milestones quarter-over-quarter, and that's been recognized by the Air Force, it is really solid industry team performance. We have built all the components of the missile and tested them individually. Now we'll be bringing that together in the full missile design, development and test program. We are going to be pad launching the first missile in 2027, which is earlier than we had anticipated.

And we have all aspects of the program moving at pace, including a prototype that we are building for the launch facilities, which is one of the key developmental areas of the program. So really pleased with how that team is performing. It's early innings. It's a complex development program. General White and I and the team have all eyes on to make sure that this important national security capability is fielded on our new schedule and costs, which will be finalized by the end of the year. That's when we reach what's called milestone B.

Now also in Defense Systems, so you're one of the leaders in solid rocket motors. How are you seeing the growth right now from -- on your existing platforms?

So we are both a tactical missile prime on a couple of programs, AARGM-ER and Stand In Attack weapon. Those are coming out of development. AARGM-ER, we've just delivered our first two low rate initial production units, and we will continue to scale that program. Stand In Attack weapon will go into testing next year and then into production. But as you said, the vast majority of our contribution to the tactical missile market is as a supplier. And we are a supplier on everything from nozzles to casings to seekers but solid rocket motors are often the component most talked about because of the need for more capacity.

We set out several years ago, invested Northrop Grumman funds to build that capacity with the anticipation of an opportunity to get qualified as a second source on many tactical missiles where we were not the current provider, including PAC-3. And we have recently signed an agreement with Lockheed Martin. I think Jim was on the stage talking about that yesterday, and we are near finally qualifying on that weapon. We are doing the same on other weapons so that we can offer this capacity that we have built to the primes and to the government to facilitate the acceleration that they are planning for 8 or 9 missile types.

I mean what -- so we've heard the discussions on missiles, the frameworks that Lockheed has been working through with the Pentagon on PAC-3, on THAAD, Raytheon, similarly on a whole set of programs, SM-3 and others. So when you look at those efforts, which are going to triple or quadruple production, how do you look at your growth as a key supporter for those programs and [indiscernible] included?

Well, that business has been our fast -- yes, it's been our fastest growing double-digit growth. We expect that to continue at least teens, if not into the 20s. And we are experiencing that growth on all dimensions, as I said. We are a supplier and where we're prime and the programs are transitioning into production or getting qualified. So that growth is all ahead of us. I would also say that's tactical missiles, our munitions business is also growing very rapidly, both U.S. and domestic and there we are a prime provider.

So we are seeing our Defense Systems business grow double digit and expect that to continue for the foreseeable future fueled largely by this munitions demand.

Well, in munitions, you mentioned export with my impression was that, say, Europe now was trying to do more in Europe than by U.S. Where is your export munitions demand coming from?

It's really broad-based. We aren't seeing it only come from Europe, but we are still supplying to Europe despite the dynamic that you just outlined. We are also doing coproduction in Europe, which satisfies that desire for some local content, but they are building to our designs. We are absolutely seeing the Middle East expand as a market with higher urgency as well, particularly in the recent months due to the Iran conflict and a desire to fast-track those export approvals and get capability, not just munitions, but homeland defense capabilities like our IBCS offering, which also sits inside of our Defense Systems portfolio.

Yes. On IBCS, you've talked about some very large dollar amounts of opportunities like $10 billion or something like that in terms of export. Where are you on that path, I guess, in terms of growing that business? How big can it be?

Right, still see very robust demand internationally, and we are now in full rate production for the U.S. Army. So we are fielding those systems as well and it is materializing as quickly as we have expanded the capacity to produce. So there too, we are running at full capacity in production. We have about a dozen nations that have submitted requests to the U.S. Army for export of that capability to them. We are already fielding in Poland.

We have been involved in some live fire exercises demonstrating the capability all across Europe, which is driving more demand. And as I said, we have 3 nations in the Middle East who have requested urgent capability response for it to be deployed there as well.

And also, this can play in the Golden Dome. How does it fit into the Golden Dome?

It fits nicely into the Golden Dome architecture as a short mid-range defense solution, and it can address any type of inbound threat. So it can track drones, missiles and it's going to pair what the threat is with the appropriate effector. So as we were talking earlier about this sensing a threat and pairing the appropriate response, both appropriate in terms of probability of intercept but also cost profile, a system like IBCS can -- has that intelligence built into it that can help that happen real time. So you only have seconds to determine what to field in response to an incoming drone or missile and the automation that IBCS provides allows that to happen.

If we go over to space, so space, you went through a little bit of a valley there with the cancellation of the classified contract. You did not win [ NCI ]. Now as you come out of that space, it's a high priority in this budget. It's probably going to be a high priority in almost every budget. The people I talk to, say, if we see any major conflict happen, it's going to start with cyber and space. So how would you characterize your growth opportunities in the Space business today?

The space market is very robust. And after 5 years, where we doubled the Space business, as you said, we had a valley with the pressure that those two programs that you noted put on the portfolio. We have those behind us as of the first quarter, which was the last quarter of year-over-year compared with the programs in our revenue profile, and we expect accelerating growth in the segment as a result. The U.S. budgets for space are exceptionally strong over the newly released [indiscernible] and our portfolio is well positioned to be responsive to those opportunities. So expect us to be back on a mid-single-digit or better growth trajectory for space going into next year.

Well in that, a couple of programs. Well, let me first say it's also important for Golden Dome, right?

Yes.

And how does it fit in there? I'm assuming space-based interceptors is a part.

Yes. Certainly, the government has released information about pursuing a team for C2 to support Golden Dome that we are on. They have shared that they've selected teams, including Northrop Grumman, to build space-based interceptors but also just broadly, the missile tracking and missile warning capability we are providing through the space development agency, that creates an architecture, our next-gen polar solution, which is missile tracking and missile warning for the polar region of the world. These capabilities will all contribute to that Golden Dome architecture.

And some of the things that are, again, related -- so many things relate to Golden Dome, so it's kind of hard to separate all this out. But we go to a couple of programs. So HBTSS, can you talk about where that stands? It's a critical program, hypersonic tracking system, so.

Yes. So we were involved in the contract to prototype a system that we fielded and have the learning carried forward that we are incorporating into other solutions that now are being bid as part of different contract types and architectures. So we are still very much involved in that missile tracking missile warning and supportive of identifying and tracking hypersonic but HBTSS and its prior configuration isn't the way we're taking that capability forward.

Okay. And then on the SDA tracking layer, so you're in tranche 3, you were now in tranche 2, you were in tranche 1, tranche 3. I mean how does that all work? How do...

Every tranche has different requirements. And so we look at how competitive we are. And sometimes we bid, sometimes we don't, sometimes we win, sometimes we don't. But our overall track record across the 3 tranches, so for transport and tracking layer, we've been successful to the tune of 150 satellites in backlog. So we feel really good about how we're positioned relative not only to the competition, but where we have won, what we're developing and the positioning that gives us for future tranches.

Because to your earlier point, these satellites are built with shorter expected life and will need to be replenished over time. They will continue to be upgraded as the threat environment progresses and so we're pleased to be operating both in transport and tracking and to have this many satellites in backlog that give us scale to continue to be competitive.

Well, how -- so can you help us understand how this is all going to eventually play out? Because we've got 150 satellites here. On the traditional side, Lockheed Martin, L3 Harris, they've also quite a bit, then you've got new players like Sierra and Rocket Lab, and they've got satellites. What is the end game here? What is this going to look like? How is this capability sort of shared? And how do you differentiate yourself?

Yes. With each tranche, there are new requirements. And so we differentiate ourselves on technical capability, just like we do any other area of our business, and we need to be able to offer that at a competitive price point so that we can ultimately win that, that trade of what you're providing and value is what the cost reflects and we've been able to successfully do that. I think the end game doesn't look very different than it is today. The government is going to want an ecosystem of players. We're each going to prioritize certain areas where we're more or less competitive.

So it will be different companies that win on different tranches. But at the end of the day, a healthy, robust industrial base with multiple companies that can come to these competitions and prevail and have good business cases that deliver return to our shareholders is the desired end game by industry and the customer.

But is -- and this is just my personal challenge in understanding it. But you'll end up with a constellation up there. And you've got a lot of different contractors. Isn't there ultimately some scale advantage if someone can provide a capability? Are you -- or does it turn out to be more a build-to-print operation? I mean I'm trying to picture how you have all of these varied companies all participating.

I mean, clearly, there's a scale advantage, but there's also an advantage to having a competitive and resilient ecosystem. And so the government wants both and they will have a balanced approach to get both. And that's no different than if you think about the air domain. There are a lot of different aircraft up there built by different people. The government still can use them in a coordinated fashion and conduct missions. And I think that's the way the space force is looking at it as well.

Okay. And do you see any difference when you're competing in these against the new entrants versus your traditional peers?

No, not really. It's very much about, as I said, the technical cost trade-off as it should be. And the new entrants have to be able to do that just like the large companies, and we keep each other honest, right, in terms of bidding to what we can actually perform. And I think that's the challenge that the government has always had and will continue to have separating the wheat from the chaff in terms of what companies can actually deliver and which can't and that we all have to prove ourselves every day.

So if we jump over to Mission Systems. This is a business that is absolutely impossible to model. So you got many, many programs in there. But I know it's also one that you have stressed is really differentiated. Could you talk about that differentiation and how we in this room should think about what the growth trajectory would be for that?

Yes. Highly diversified business, most profitable business in our company, and it's because of the very capable technology that is fueling systems in every domain, space, air, land, sea, subsurface. And those systems at their core are microelectronics that are used in radars, electronic warfare, communications, and it's really about the power of the very small micro processing that we build in our foundries in that business. I'd love to get the multiples that chip companies are getting right now because we basically are doing the same thing, but for government application.

In many ways, we look at that business as the fuel for differentiation of these large platforms, both ones that we build and other companies build by giving them an advantage in seeing further, detecting faster, jamming other systems. This really often is the asymmetric advantage that our military has. It's through the mission systems that we're providing.

Should we think of this as kind of a mid-single-digit growth business? Is it...

Yes. Last year, it was more like 10%. This year, we're expecting it to be a little below, mid-single digit. But if you look over the last 5 years, this business has consistently been in that mid-single-digit range with this environment being very opportunity-rich, we expect it to be at least mid-single digits next year.

In Q1, you had 15% margins, which is a little better than normal. Can you do that sustainably 15%?

Absolutely. This business has performed at that level before. We've had a good bit of development work in the business, which is great because that means we're fueling production growth into the future. As that mix shifts more toward production, it provides tailwinds to margin and that's some of what you're seeing in that business. Our cost plus development work is starting to creep down a little. Our fixed price development going up and that's going to continue to provide margin tailwinds to support that 15%.

So if we put all this together, can you update us on your free cash flow outlook?

Yes. So I know this is an area that [indiscernible] are trying to model. So coming out of our first quarter, we framed the investments that we're making in the B-21. We updated our CapEx projection this year and added about $200 million, but we kept our free cash flow guidance intact. That's important to note. So even though we have committed to spend more in 2026, we did not come off of our free cash flow guidance for the year. As we look out over '27 and '28, these increased investments due to both B-21 and this opportunity-rich environment that we've talked to you about, we expect CapEx as a percent of revenue to be around 4.5%.

We are continuing to see strong growth in our operating cash as a result of top line growth, good margin performance, the margin tailwinds that we've talked about, as we look out over the next couple of years, very strong cash generation in this business with a slight uptick in what we are expecting to spend in CapEx, still very solid free cash flow, and we will update you on specific free cash flow guidance later in the year, as we always do, for 2027. But for '27 and '28, CapEx you can model about 4.5% of revenue, which is just a slight tick up from where we are this year.

This includes the B21?

It includes the B21. It includes the munitions acceleration. It includes what we have framed supporting the growth that we've committed to the department.

And does that -- if we look kind of out into the future, should we think of this as a period of investment where if we go out 4 or 5 years, I mean other things may come up and you'll invest in that. But right now, is it -- this is sort of an unusual bump up for a few years and then that may moderate unless something else comes along.

Right. We have found ourselves in the position of a very opportunity-rich environment, which we have translated into nice growth in this business. And so we see the opportunity to continue to smartly invest in the business to generate that profitable growth. Great setup in this company as you look out into the 2030s with B-21, Sentinel transitioning into production. Many of the smaller programs that we've talked about in space and microelectronics and certainly, the munitions ramp that we talked about, fueling defense systems.

We are sitting on a tremendous set of growth opportunities. We want to invest in the capacity to deliver on those to accelerate in some cases like B-21, the realization of those sales and margins. This is all positive for our investors. And we still see the ability to do that with about 4.5% of our revenues invested back into CapEx. We think this is a really good setup for our shareholders. And it certainly leans into what we've committed to our customers, which is making sure we're investing in our business to supply their needs.

And anything you can say on cash deployment beyond the CapEx?

Yes. Our capital deployment strategy remains the same. We first are going to prioritize the investment to be responsive to the department, and we've done that. And in many ways, we were ahead of our peers investing at a higher rate so that we have capacity that we're bringing online now. And our customers are thanking us for that for having the commitment and the foresight to do these investments so that we have the capacity in place and we can commit to accelerated deliveries. And we are proud of having done that. We see the whole industry moving in that direction now, and we are going to continue to have that be our top priority.

We are also committed to paying a competitive dividend. Our Board just increased our dividend 7%, which is in line with our operating cash increase year-over-year. And we will continue to look at returning cash to shareholders, if we don't have better uses for it, with high return opportunities in response to our customers' needs.

Well, great. Well, I think we're out of time here, but Kathy, thank you very much.

Thank you.

Good day, ladies and gentlemen, and welcome to Northrop Grumman's First Quarter 2026 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed.

Good morning, and welcome to Northrop Grumman's First Quarter 2026 Conference Call.

Before we start, 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 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'll refer to a presentation that is posted to our Investors Relations website.

On today's call are Kathy Warden, our Chair, CEO and President; and John Greene, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

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 B2 Stealth Bomber and the E-2D, which continue to demonstrate tremendous value decades after their first flight.

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 that the scale our customers need to compete in this environment. In fact, in the last 2 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 U.S. 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, GATR and counter UAS solutions. In the U.S., $1 trillion 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 FY '26 base budget represents nearly a 30% increase, and it sustained 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 U.S. 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 with 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 Gimmlers, 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 [indiscernible].

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 U.S. 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 for both testing and production for B-21 to arrive at Ellsworth Air Force Base in 2027. Consistent with this progress, we received a 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 war fighter. 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 spaces 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-rich 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?

Thank you, Kathy, and good morning, everyone. I'll start with our first quarter segment results on Slide 4. We continue to experience robust demand for our products and capabilities. Awards totaled $9.8 billion in Q1, and we ended the period with $96 million in backlog. First quarter sales were $9.9 billion, up 4% year-over-year. Organic sales increased 5%. On the bottom line, segment operating income increased to over $1 billion and segment margins improved to 10.8%.

First quarter results were driven by higher sales and improved performance in Aeronautic Systems. AS sales increased by 17%, driven by higher sales on B-21 and other restricted programs. TACAMO sales were also higher as the program continues to ramp. Higher sales on B-21 reflected the inclusion of the agreement with the Air Force to expand production capacity, which I'll address in a moment. The sales increases were partially offset by lower volume on F/A-18.

On the bottom line, first quarter AS operating margins improved to 9.3%. The increase was driven by the absence of the B-21 loss provision booked in the first quarter of 2025. As Kathy mentioned, we are pleased to have an agreement in place to increase the production rate on the B-21 program. To support the acceleration of aircraft deliveries, we agreed to sell an aircraft to the Air Force that was previously planned to be utilized as a company-owned test asset. The asset sale accelerated revenue into the quarter but does not change the total number of aircraft we expect to deliver on the LRIP phase of the program.

Additionally, after reviewing our profitability estimates on the LRIP phase of the program, which now includes the agreement, there were no significant changes to the EAC. We had some increased production costs on earlier lots, which were offset by improved profitability on the remainder of the program. With the agreement in place, we are accelerating the program and have an opportunity to earn improved returns over a multiyear period.

Moving to DS Q1 sales increased 5% year-over-year. Organic sales increased 10%. This was driven by higher volume on Sentinel as the program continues to ramp. Sales were also higher due to increased volume on tactical solid rocket motors and Integrated Battle Command programs. First quarter operating margins at DS were solid at 9.7%.

Mission Systems first quarter sales increased by 2%, driven by increased volume on restricted airborne radar and marine programs. These increases were partially offset by lower volume on Sabre and electronic warfare programs. MS operating income increased by 20%, driven by a higher level of net favorable earnings adjustments. This increased their first quarter OM rate to 15.1%.

In the Space segment, first quarter sales and operating income were down compared to the prior year. This was driven by two factors: First, the NGI program recognized $98 million in the first quarter sales last year as part of the contract closeout. This created a year-over-year headwind in Q1 this year. Secondly, we recognized an unfavorable earnings adjustment of $71 million on the GEM 63XL program. This adjustment lowered sales and operating income in the period. Performance elsewhere in the space portfolio was strong with growth on FDA programs and restricted space.

Turning to earnings per share on Slide 5. First quarter diluted EPS was $6.14, up substantially compared to the prior year. This was driven by higher sales and segment operating income, partially offset by lower net pension income. In terms of cash flow, the first quarter reflected a use of approximately $1.8 billion, in line with the prior year. Consistent with our historical patterns, we expect cash flows to ramp throughout the year with the most significant cash generation in Q4. We expect CapEx to follow the same pattern as we continue to invest to support the strong demand environment and our future growth.

As I indicated on the fourth quarter call, we repaid $527 million of fixed rate debt in Q1. We ended the quarter with over $2 billion of cash on the balance sheet.

Turning to our 2026 guidance. We are reaffirming our outlook for sales, earnings and cash. We ended the first quarter with positive momentum and continue to expect full year results within the existing guidance ranges. This includes full year sales between $43.5 billion and $44 billion. We continue to expect sales to accelerate throughout the year, similar to the cadence in 2025. For the second quarter, we expect high single-digit sequential sales growth. And for the full year, we continue to expect broad-based sales growth across the portfolio.

Segment operating income guidance reflects continued strong performance and a low to mid-11% margin rate. Margins are expected to improve over the course of the year, driven by strong performance, production timing and mix. Our capital deployment strategy remains focused on driving growth, reinvesting in the business to scale capacity and maximizing shareholder value. This includes an additional $200 million we expect to invest this year to support the increased production capacity on B-21. As a result, we now expect $1.85 billion in 2026 capital expenditures.

However, we are maintaining the free cash flow guidance range of $3.1 billion to $3.5 billion, given the increased capital investments, we are working to offset the free cash flow impacts.

To summarize, we continue to generate strong financial results I'm confident that we are well positioned for continued profitable growth and value creation. Before we open the call for questions, I'd like to take a moment to congratulate Todd on his upcoming retirement at the end of this month. We appreciate his contribution over the past 7 years. Todd has been a highly valued team member and a trusted business partner. We wish him well as he embarks on the next chapter.

With that, let's open the call for your questions.

[Operator Instructions] Our first question comes from Robert Stallard with Vertical Research.

First of all, thanks, Todd, for all your help over the years. It's been much appreciated. And then second, on the B-21, Kathy, you've got this 25% production capacity situation sorted out now. I was wondering if you could give us some idea of how the timeline progresses here in terms of Northrop Grumman spending on CapEx and then how the production flows through? And also, if you've got protections in here against a B2 star curtailment?

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 timeframe 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 B2 -- sorry, why it's not like B2?

It's not like the B2. 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 U.S. National Defense strategy. And we believe that it is a reflection of multiple administrations of the need for this platform as an effective deterrent and as we've seen recently with the B2 in conducting a military operation.

Our next question comes from Gautam Khanna with TD Securities.

Yes. I was just wondering if you could elaborate on some of the Sentinel developments that you mentioned on IOC and how that program is progressing with respect to timing? And congrats to Todd as well.

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 the schedule acceleration. One, I mentioned that got started in the quarter is a prototype of the missile 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 towards that first flight milestone that I talked about in 2027.

Our next question comes from Peter Arment with Baird.

Congrats, Todd. Kathy, thanks for the color on international. Just maybe if we could just click on that a little bit. You're up 20% in 2025. Just a lot has changed in the last few months. Can you talk a little bit about opportunities? Is there anything on international that can be pulled to the left? I know you're expecting a healthy book-to-bill of over 1 this year. Just any dynamics there that can accelerate the timing?

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 way 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.

Got it. And just as a follow-up, you mentioned missile defense is roughly 10% of your overall revenue mix today. Can you talk a little bit about opportunities in the counter drone solution area? Obviously, we've seen a lot of focus on lower-cost solutions. How do we think about with Northrop positioned there?

Yes. 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 FAD 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 U.S. and international. And so we expect the international contribution to be greater even than the domestic in Counter UAS solution. 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.

Our next question comes from Mariana Perez Mora with Bank of America.

Congratulations, Todd. So my question is going to be around Space Systems. Apart from the GEM 63 impact, are there any programs that you could see at a kind of like negative EAC type of approach? And how that could affect the underlying margins for this segment going forward, particularly as we think about like what you just mentioned before, the strength on like missile defense and all the MDA programs, the GPI award you got, but also some changes at NASA on Gateway?

Mariana, thanks. This is John. I'll take that. So the space sector is actually performing pretty darn well. The book-to-bill very, very strong, came in last year at about 1.3 and so that sets the business up for future sales. Now you do know that the cycle is a little longer in the space business [Technical Difficulty]. In terms of kind of specifics on the EAC. So we took a look at GEM 63, our best estimate of what we thought the cost impact of that would be.

And as we look through the rest of the portfolio, we were comfortable in the quarter that there wasn't anything else significant that gave rise to any significant negative or positive EACs. So overall, we have strong margins, and the business was able -- it was actually able to close some of that pressure with GEM 63 EAC put onto the portfolio.

Should we expect that margin strength to remain for the remainder of the year at Space? And how should we think about margin trends, I don't know, 3, 5 years from now?

Yes. So in terms of for the rest of the year, yes, we're comfortable with the position. As you noted, we didn't pull off the guide on margin, and that's because we feel like there's strength in the portfolio. As we look forward, that whole arena is evolving significantly. What I would say is you take a look at the technology and the risk associated with it over time, it should command a higher margin rate, but it will be subject to the competitive environment and capacity that's available.

Our next question comes from Kristine Liwag with Morgan Stanley.

Todd, congrats on your retirement. So maybe a high-level question. Kathy, when you look at the backlog of $96 billion, it's near record providing sales coverage for over 2 years. And so mid-single-digit growth seems reasonable in a more normal environment. But in the past few years, you've called out, there's urgency now in the geopolitical environment, and it seems like things continue to deteriorate. We're seeing the Pentagon seek out new players. And the White House had called out potentially firing up the freedom forge auto industry to increase capacity. Can you talk and give more color about how you think about overall output for Northrop Grumman? Where are the areas of bottleneck? And what has to happen for the company to deliver on double-digit growth?

Sure, Kristine. So we are seeing an opportunity-rich environment to sites. 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 digits. 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.

Super helpful. And if I could follow up on one of the programs that potentially could materialize this year. The Chief of Naval Operations said yesterday that 1 of the 2 companies signed for the SAXX contract lacks the capacity to deliver the fighter on time. So with the potential down select in August for this program, can you discuss how you're thinking about Northrop's positioning on this and if you are selected, how should we think about the potential upside to 2026 outlook? And to your point, on the funding for the program, is the funding for this program player provide upside potentially for 2026?

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 FX, and it would be a top priority for our company to do so.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Thank you, Todd, for everything over the years. Kathy, in your prepared remarks, you gave us a lot of color on the growth drivers of the missile. You said missile defense is 10%, weapons at 10%. Can you maybe also size B21 and Sentinel? And how do we think about these 4 growth drivers from both a revenue and earnings perspective?

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 towards that 10% of revenue over time. The 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.

Can you maybe talk about just the growth you expect in weapons and missile defense? How do we think about those and just the EBIT growth as well, if you can?

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 weapons integrator that we expect to grow over time as programs like AARGM-ER and [indiscernible] attack wean mature into production.

And so that part of the portfolio today in aggregate is also about 10%, but we expect it to be one of the fastest growers, as I said, and have proportionately become larger over these next several years. The growth rate will be somewhat dependent on how many new programs we add to the portfolio.

Maybe just a little more context on that. So most of that work is in our Defense Systems business, and you could see the guide that we provided at the beginning of this year in terms of the growth that we'll see there. So approaching 10%. And Sentinel as Kathy said, about 6% of total sales, it's about 1/3 of the sales in the Defense Systems guide. So that will help you triangulate what we think the drivers are there and then also support the acceleration of potential growth into the future.

And she also asked developed 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.

Our next question comes from Seth Seifman with JPMorgan.

Wanted to ask on B-21 and the impact of the production agreement. I think you mentioned some pluses and minuses in terms of the estimate. I know you've noted before that the agreement could potentially lead to higher profitability on the LRIP units. Should we assume that, that higher profitability on the LRIP units and reverse load charges is something that's still a possibility depending on company performance over the next several years? Or should we be thinking about the increased profitability coming more on the NTE units and beyond?

Yes. So I'll take that one. So as you look at the program, first, the agreement we reached with the Air Force was a great outcome for both the company and the customer. As that agreement plays out, a portion of that certainly, a good portion of it will be subject to our execution on the LRIP phase. And based on how it came together, there was no meaningful change in the overall EAC. So there was some increased production costs that was offset with increased profitability in later phases of the program, so positive overall.

What we believe will be the case is as the program matures, our manufacturing capability will continue to improve, production rates certainly improve, and it gives us an opportunity to expand margins and hopefully sales with the increased rate of production.

Okay. Great. Great. And then just as a follow-up, I guess, after this year, there's probably $2 billion plus of B-21 CapEx over '27, '28, '29. When we think about the 2028 cash flow target, you were able to offset the impact of the incremental B-21 CapEx this year, but it's obviously significant in the future, how should we think about the ability to offset that?

Yes. So that's a substantial investment. So what we did do is we guided and held our 2026 cash flow guidance. We intentionally didn't give guidance on '27 or '28 for two reasons: Large awards outstanding that we're going to -- one of which we'll hear at the hopefully sometime in the third quarter. And then also the investment we're making, the $2.5 billion investment we're making that will play out. The lion's share of that will be in '27 and '28. So as we roll things forward, we'll take a look at what the free cash flow looks like.

But not to be lost on the audience is the cash generation power of this business, and it will continue to generate substantial free cash flows and the investment will be subject to the opportunities we see.

Our next question comes from Richard Safran with Seaport Research Partners.

Todd, congrats to you. This question, it could be for either for Kathy or John. Could you talk generally about the contracting environment overall? I'm wondering if you're seeing more favorable environment. Specifically, are you seeing, for example, contracts or revised contract language with award or incentive fees or other incentives for good execution? And if so, I'm wondering what -- if you could talk a little bit about what you think that might mean for margins and cash?

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 nontraditional contracting mechanism.

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.

Our next question comes from Scott Mikus with Melius Research.

The backlogs for you and your peers are already elevated and it seems like a lot of the reconciliation funding from One Big Beautiful Bill is yet to be put on contract. We also could have a $1.5 trillion defense budget, another supplemental for operation Epic Fury. The demand signals are great, but are we starting to see European customers become wary about ordering equipment from U.S. companies, given that they can't actually be 100% certain when they'll receive the equipment?

Scott, there's definitely a desire for European countries to buy U.S. products 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 U.S. companies to be able to deliver, particularly given the increased demand from the U.S. and the priority 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 to you about the 20 facilities that we have opened in the last 24 months, the over 2 million square foot 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 U.S. commitments or European commitments, we can and are supplying demand for both, and we foresee the ability to continue to do that.

Okay. And then the administration has also talked about trying to increase significantly the number of space-related FMS approvals. Are you starting to see the administration speed up that process? And are you engaged with international customers about building a pipeline of opportunities for your Space Systems segment?

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 4 segments, but it's growing, and we expect 5, 10 years from now, international to be a key contributor to our Space business just as it is in our other 3 segments.

Congrats, Todd, on the retirement.

Our next question comes from Scott Deuschle with Deutsche Bank.

John, is the customer providing any incremental cash advances or working capital support to help offset some of these increased capital investments in the B-21 program?

Let me answer the question this way that we're making significant investment to support the program and the customer is making significant investments to support the program. So the cash flow timing related to the program loosely will align with the investment rate, but there's certainly components of it that will not. So that's probably about as much details I can get into on the nature of the cash flows related to the program, given the classified nature of the contract and the program itself.

And I'll just add that the deal improves the economics for the program for the government and Northrop Grumman. When we look at the return on invested capital over the life of this program, this deal has improved that outlook. And for the government, we are able to produce and deliver capability faster. So in our view and the Air Force's view, this is a win-win, both contributing and both benefiting.

Okay. And Kathy, for the life of the program, do you see the ROIC now meaningfully above your cost of capital?

We do.

Okay. And then, Kathy, there's been some news reports stating that many F-35 aircraft are delivering without radars. So I was wondering if you could give us an update on that program and our performance has been tracking more recently on your F-35 radar production line?

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 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 tests 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.

Our next question comes from Andre Madrid with BTIG.

Congrats, Todd. I wanted to ask on -- in the past couple of months, we saw you guys got tapped to support the C2 layer of whatever the Golden Dome initiative ends up looking like. I mean, what additional color can you give there? And how might that eventually materialize in the financials as we progress in the coming quarters and years?

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 [indiscernible] 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.

Got it. Got it. Appreciate it. Maybe pivoting to the YFQ48. I mean a lot of shots on goal there. There's a lot of CCA opportunities, whether it be with the Navy, Air Force, Marine Corps, you name it. I guess just a status check there. Where are we in bidding for those? Where are you in bidding for those opportunities? And I guess, what are your expectations as we move forward?

So as you know, we are pursuing a number of opportunities with the Air Force. We were given the YFQ48 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 Mustaq Air offering. And we -- 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 and talent, both Talen Blue, the aircraft and Talen IQ, formerly known as Beacon to test and mature vehicle management systems in 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 3 services who are pursuing CCAs and put our best foot forward for offerings in their next competition.

Josh, we have time for one more question?

And our last question comes from Matt Akers with BNP.

Congrats, Todd, on the retirement. Kathy, I was wondering if you could touch on the classified restricted portion of your business just because it's a big chunk that's sort of difficult for us to track, and based on what you're seeing, based on the budget request, do you think that grows faster or slower than kind of the other part of your business?

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 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 7 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. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

We're very excited to have Kathy Warden, CEO of Northrop Grumman with us for a great discussion on all things defense. Kathy, the way that I've been kicking these things off, I always pass to the executive. If you want to make any introductory opening comments, anything you want to bring to light and then we'll dig right in.

Great. Thank you, John. It's terrific to be here with you again this morning. I do want to start by making some safe harbor statements. We are likely to discuss forward-looking statements. Those statements have inherent risks and uncertainties. For a full disclosure of those risks and uncertainties, you can reference our SEC filings on the Northrop Grumman website. But now let me get to the fun stuff.

We are in an unprecedented demand cycle within defense, not just within the United States, but globally. And it appears that this is going to be a sustaining demand signal. So as a company, we have been focused on performance and investment. And this is not a new strategy for Northrop Grumman. We have been investing in our business over several years to build up the capabilities and capacity that the U.S. and our allies need to compete in this environment. As a result, we have seen strong top line growth, and we expect that to continue.

Our 2026 guidance calls for mid-single-digit growth. We are seeing expanding margins and we expect that to continue again this year with low to mid-11% segment operating margins, and we have seen expanding free cash flow, and continued again this year to reaffirm our free cash flow guidance in the case of this year, $3.1 billion to $3.5 billion. So very much see a business that is leaning in, in this demand environment and able to perform and execute on our contractual commitments, while also investing to scale our programs and support the delivery expectations of our customers.

We are working on some of the world's most important capabilities, particularly in the area of deterrence, and we're often most known for that technology leadership position. But we also are remaining agile in developing new capabilities, ones that can scale both in cost and fast delivery so that our customers have the capability they need sooner. And we'll talk about some of those examples today that span everything from munitions to unmanned aircraft to missile defense technologies. So we really feel like we've got a portfolio that is purpose built for this moment in the world and proud to be participating to the extent that we are and see growth ahead.

That's fantastic. I appreciate that. We share in your bullishness on defense. We've got this moniker megatrends, things like space, missile defense and other things we'll talk about. It sounds like you're well aligned with that. But can you walk us through some of the more specific big picture tailwinds and themes that you're most excited about for Northrop specifically?

Well, I noted that we play an important role in all three legs of the nation's strategic triad and that, that capability is being recapitalized. It's an important focus for our company. You noted the expansive growth that we've seen in space across all domains. Communications, missile tracking and warning, ISR, and that continues to grow and the recapitalization of the nation's space assets. But I'm equally excited about the things that we do in solid rocket motors, supporting a significant expansion in tactical missile production capability and capacity for the nation and our allies.

And our missile defense capabilities, which, of course, are even more important in the U.S. Homeland now with a focus on building a Golden Dome for the United States. But are equally important to nations around the world seeking to protect their own home land, particularly in Europe, we've seen much stronger demand for the capabilities that we bring in that arena. And our missile defense capabilities are growing and coming up on about 10% of revenue. So even though we're not often thought of in that space, it is a space that is significant for our portfolio.

Excellent. And before we dive into the segments, you had made the comment that it's a very performance-oriented organization. We have this Trump executive order that's been out there, DOW performance reviews. What do you expect to come from that? And any sort of reaction?

Well, I believe the executive order very much is aligned to getting the industry to be responsive to the urgency that the administration feels for developing and delivering capability and meeting commitments. And that's how I define performance, to deliver on the commitments that you make. And we work hard every day to put in the discipline in our organization and in our operations so that we can execute on those commitments while doing very hard things. Because the nation relies on advancing the state of technology so that we can outpace adversaries, and that's an important aspect of what we do.

And at the same time, if the capability can't be delivered in a timely and relevant fashion, it's not going to serve our nation. So we feel a strong sense of responsibility to do that, and we believe that's what the administration is asking of us and our industry peers. We are investing to make that happen.

I think the most important aspect of the conversations I have with the administration is when we can point to the investments that we've made and how that is positioning us to perform and execute well in this environment. But also to recognize that we need to continue to transform, that this environment calls for us to be more responsive to move at pace, and we are making changes in our organization to do that while still maintaining the discipline that makes us good at what we do.

Makes a lot of sense. Maybe we can dive into some of the segments here. Kick it off with AS or aeronautic systems. We obviously can't talk about aeronautics without discussing the B-21. Could we just start with an update on the program and how it's performing?

Yes. The program continues to perform exceedingly well as we now have more assets in test. We are progressing through the test program and demonstrating the key performance points of the aircraft. It is performing even better than we modeled, and the early stage of performance on this program has been exceptional. We are also focused on transitioning into production and scaling production. I've talked about the work we are currently doing with the Air Force to create a framework agreement for accelerating the rate at which we build the aircraft. I am still optimistic that we will have that agreement in place by the end of this quarter. And then we will collectively with the Air Force, smooth out make the investments necessary to scale production even further on the program.

That last point. Maybe you could just elaborate on that. In the world of a potentially accelerating defense budget backdrop, can you just remind us how you framed the outlook? And is there a case to be made for even more upside over time?

So as I talked about on our last quarterly earnings call, we expect to invest in the capital necessary to support an additional build rate on the program. And I estimate that between $2 billion and $3 billion of investment that we would make to support that accelerated rate of build. The government is also bringing resources to the table to support that acceleration, and we are in the process of nailing down the exact time line and contributions in this framework agreement that I referenced. We do expect that it will improve our returns over the long term on the program, particularly as we get into later lots of the program and accelerate revenue, of course, as we build faster.

Ultimately, it improves the return that we would make on this program if we perform in accordance with this plan to ramp in the time line that we've estimated. This is good for the government and for our investors because building faster allows us to accelerate, as I said, those long-term returns on the program. It also supports consideration for a larger program of record, which the Air Force is evaluating. And of course, that would be contingent on our ability to build at a faster rate. So all of these things increase my confidence that we will be positioned to offer the government what they want is more aircraft faster.

That's fantastic. That was a great overview of the B-21. Basically, similar questions on the F-35. Could you give us an update on what do we have to look forward to there?

Yes. We continue to perform well on the F-35 program. Of course, we build the center fuselage for the body of the aircraft, and we are well into production. We just celebrated delivering our 1,500th center fuselage for that airframe. And we are focused on continuing to build at our max capacity to support the program overall.

We are looking at a fairly steady and modest growth rate because we are already building at capacity in that area for production. But sustainment continues to grow on the program and modernization dollars are supporting some modest growth both in Aeronautics and in our Mission Systems sector. Our focus there because it's a mature production program is all about performance. Its delivering to schedule, delivering to our cost targets and being able to have a mature production program that is delivering high-quality product at a high rate. We're delivering 156 a year.

Can we talk a bit about unmanned? I feel like Northrop's unmanned portfolio, we're hearing about it more and more on the conference calls, Project Talon and the partnership with Kratos, anything else you'd like to elaborate on unmanned?

Well, this is a good example where we have a legacy predominantly in providing unmanned aircraft for the surveillance and reconnaissance. And now as the U.S. Air Force and Navy are looking at having a combat collaborative aircraft, one that can work alongside fighter aircraft, that's a different mission set. We're bringing our decades of experience, the hundreds of thousands of flight hours that we already have, and the data that comes from those experiences, and packaging that not only into our own offerings. But as we noted with our Talon IQ, we have created a test bed that we bring other companies, autonomy software in, fire control software and look at how it's going to perform on the aircraft based on our experience with vehicle management systems.

And that's really an asset, not just to us but to the government to have that ability to integrate partners into an ecosystem. As we see this area mature, we are participating on multiple programs. We participate with the Air Force and just got a designator for our Talon aircraft so that we can continue to test and expand on the design for that aircraft. We're working with the Navy on a program, and we announced our award from the Marine Corps alongside Kratos with their Valkyrie platform to deliver for something they call MUX TACAIR.

So we take very much a portfolio approach as we think about our unmanned product lines. There are building blocks that we are working on, both with the aircraft and the systems that go on the aircraft. And we can configure those differently based on how requirements evolve across multiple services in the U.S., but also see those then as products that we can take to the global market, which is in its infancy, but certainly the demand signal there is real.

Yes. And I know it's early, but 6th gen fighters are coming up more and more. Can you just help us think about the opportunities in front of Northrop for 6th Gen?

Yes. So we are actively pursuing the Navy's 6th generation fighter program. We are in competition now and performing on a risk reduction program for the Navy. We are hopeful that award will happen within the next 12 months. And we are continuing to position ourselves to be prepared to hit the ground running and execute on that program. We have high confidence in our offering and our teammates.

Yes, it sounds like quite a lot of growth opportunities in Aeronautics. If we could just move to Defense Systems. I'd love to chat a bit more about Sentinel. Obviously, Northrop is playing a critical role in modernizing the nuclear triad. Maybe you could just talk about where the program stands today? And to the extent we're close to any agreement with the Air Force on restructuring the program?

Well, just yesterday, General White, who leads the Sentinel program, along with a few others, announced that he expects the restructure to be complete later this year and gave credit to the entire team, Air Force and industry, for the work that has progressed over these last couple of years to position him with confidence to complete the restructure and commit to initial operating capability being delivered in the early 2030s, which is an acceleration from what the government had estimated coming out of the review a year ago. So we are very positive about the working relationship that we have with the Air Force and our industry team to drive through these next phases of the development program.

We are in early tests on many components of the missile system. We're making good progress on the command and control arm of the system and defining its design. And we are doing some early prototyping that will begin at our Promontory facility this month on the missile silo work itself. So really phenomenal progress being made on all elements of that weapon system that are leading to the confidence in our cost and schedule estimates for the program.

That's fantastic. And in the earlier remarks, you mentioned missile defense, missile technology, perhaps being an underappreciated opportunity for Northrop. Can you just remind us what percentage of it is the portfolio and maybe elaborate on the growth outlook there?

It's a little under 10% of the portfolio today and growing. And we see that growth coming in many dimensions. There is a space layer, there's a ground layer. And when you think about what each of those layers need to contain its sensing of incoming missiles or other unmanned objects like aircraft or underwater craft. It is the ability to then detect and control that asset until you can intercept it and all of that work, whether it's the interceptor itself, the tracking layer, or the command and control supporting the fires that intercept the missile are areas that we perform in, in each of the layers of the architecture.

So I'm painting a picture for you that suggests we have a broad set of capabilities to bring to any solution. Whether that's the U.S. government's homeland defense now under the Golden Dome umbrella, or whether that is our allies, who are also looking to protect their borders against very similar threats. And we have a couple of product lines that you've heard us talk about, IBCS is one. Think of that as near and mid-course intercept solution. It does the missile defense tracking layer. It then integrates sensors to identify those threats and then pairs them with the appropriate kinetic effector to intercept that incoming threat.

We are able to scale that solution for our U.S. defense, but also for partners abroad. And it's a program now that's in production. So it's mature. Its being built, and we are ahead of schedule on the build, so we can actually deploy these fairly rapidly.

Yes. That's fantastic. Just continuing to step through the segments, Mission Systems. Can we just talk about that a little bit more? On the last call, you mentioned opportunities in restricted content, F-35 in international radars as big growth drivers. Maybe you could just elaborate a little bit more on the sustainability of revenue growth in this segment. And particularly if the budget continues to accelerate, what opportunities can we look forward to?

Mission Systems has been a consistent grower in that mid-single-digit range, and it had a particularly strong year last year with 10% growth. We're looking at low single digits this year, just a result of timing as programs are phased, but returning to that mid-single-digit growth next year. So really strong, steady demand, and it's coming from many sources. As you noted, the recapitalization of 4th and 5th gen, mainly aircraft, and the drive for increased capability in the mission systems on those platforms, both in the U.S. and abroad. It's being driven by component level demand like microelectronics that go into many of the products we build and that others build for space, for airborne assets.

We also support systems in shipbuilding that are a key part of that Mission Systems growth, particularly this year and over the next several. So it is a wide capability portfolio that stretches every domain from space to undersea and is involved in keeping pace with advanced threats even for -- especially for self protection on those vehicles, or the identification and fire control of radars and EW systems that support survivability of the platform.

It's also the highest margin segment. Maybe we can talk a little bit about what drives those outsized margins and how sustainable they are?

What drives those outsized margins largely is the rich technology content. We spend more as a percent of sales in R&D in that segment than any other to stay in front of the advanced threat, which then creates a higher return opportunity on those programs. But we also perform well across product lines to drive cost out of the manufacturing process and continue to improve the operational performance in the segment. And then finally, mix. We have more fixed price work, generally speaking, in that portfolio than cost plus. And we have more international content, both of which are tailwind to margins.

Now I will say in that segment over the last couple of years because of that strong demand I just spoke of, we have had more development work. So our mix has been more weighted toward cost plus contracts than usual. And over the next several years, we expect that to shift again, toward a predominance of fixed price, which will be a tailwind to margin, seeing us creep up even above the mid-14 where we're performing.

So it sounds like even if we expect revenue growth to accelerate over the next few years, margins are not going to go down. In fact, there could be some upside?

We expect there to be more tailwinds than headwinds to margin.

Okay. Got it. And then moving on to Space. Obviously, a very exciting segment for you guys. We've nearly lapped some of the top line headwinds from restricted programs, NGI wind down. Does the return to growth in 2026 signal kind of a durable inflection for this business?

We believe so. As you noted, the year-over-year headwinds that we experienced last year were largely related to two contracts, and those are behind us as we enter into 2026. As a matter of fact, fourth quarter of 2025, we saw 5% growth in that business. So we did return to growth just as we expected we would late last year.

As we come into this year, there is a significant backlog in that business already that supports the growth this year and beyond, but we also have a number of opportunities that are yet to be captured. Areas like Golden Dome are heavily weighted toward our space portfolio. We have a growing launch business in our space portfolio as more assets, both for the U.S. government as well as commercial customers are launching and scaling over these next several years. That is a key growth driver for us. And then finally, what we call restricted space, but think of it as the recapitalization of assets the U.S. government relies on to support space-based surveillance, communications and other missions. That also is growing rapidly over these next several years and it's well supported in President's budget.

Yes. Maybe we could dig into each of those, just starting off with Golden Dome. Obviously, an enormous opportunity for the industry. How would you frame the opportunity from here?

So there isn't a lot in the public domain about the Golden Dome architecture, but the government is making very good progress in decomposing that architecture into specific programs that we are pursuing or already supporting. And it is a multifaceted effort, as you would expect. It relies both on existing capabilities being scaled, as well as new development efforts. And we are excited about the contribution that we can play across many areas. And we're being selective in what we pursue and where we support. But we also are ensuring that we are thinking differently and creatively, not only in the solutions that we're bringing forward, but in the ways that we're partnering with the government to move quickly because that is a key focus within Golden Dome that we'd be able to field capability quickly and scale it over time.

And on launch. Obviously, launch cadence is expected to accelerate meaningfully. Can you just talk about your capabilities there and how you're playing that theme?

Yes. We have been investing in the capacity necessary. There isn't a lot of new design work that's needed here as much as it is scaling to build more of these very large rocket motors faster, given the high level of demand for launch cadence. And as I noted, more of that demand is coming in these next couple of years from the commercial market as communication satellites primarily are being launched in and put into orbit. But that infrastructure also supports our government scaling necessary for programs like Sentinel and other large rocket motor capabilities like Conventional Prompt Strike and the like, which will scale more towards the end of this decade and early into the next.

And you -- and finally, you mentioned restricted space. And I don't know what you can talk about restricted space, obviously, but how would you discuss that growth opportunity?

It really is about recapitalizing assets in space, recognizing that a decade ago, space was not a contested domain. If you put an asset there, it was safe and it would operate under the conditions that you would expect for long periods of time, undergraded and not at risk. That's not the case anymore. So particularly in the area of resiliency there are new requirements that have come into those architectures and most of the assets in space for any purpose are being recapitalized to reflect what those new operating conditions are, and we have a set of capabilities that are highly relevant in that world.

And it sounds like when we put it all together, the idea of durable revenue growth in space for many years to come is how you would look at the world?

Yes. I believe that Space is a domain is going to become as integral to war fighting plans, if not more so than any other domain. And as a result, you've seen us stand up of a Space Force, but we are still in the early days of really building out the concept of operations for how space is integrated into every operation that we conduct as a nation and increasingly, our allies will also look to have space domain support for what they do. So today, this is largely a U.S. play. But I believe the international market will also be a growth driver over the next 10 to 15 years.

That's fantastic color. Maybe we could just talk about a few topics that span multiple segments. International is a good starting point. It's no secret that international demand is particularly robust. Can you just talk about the areas of Northrop's portfolio that are resonating internationally, in particular and where we see upside tailwinds?

Yes. I would say munitions is #1, 2 and 3 in terms of what is resonating internationally as our allies work to replenish stockpiles of munitions, either because they have supported Ukraine or they just recognize that they themselves need more. We also are seeing missile defense. I talked earlier about the IBCS product line and the interest that there is globally for that product line.

And then there are assets in our portfolio that has become the workhorse of surveillance assets, particularly in support of the Ukrainians and European allies having intelligence as to Russian operations, things like E-2D and the Triton platform. So we are seeing increased demand, particularly in Europe for those platforms that are mature production platforms.

And then finally, I mentioned the emerging areas like unmanned aircraft or space, where there isn't a high level of program specificity, but there is a high level of interest and demand signal that we are engaging on so that we can convert those to opportunities in the 3- to 5-year time horizon. So we very much think about our international portfolio as building out product lines and building blocks that can be exported and support sustainable international growth.

I often talk about the fact that when I became CEO, we had very few products that we could export, and we have tripled the number of product lines that we now have out in the marketplace, and that's what's leading to this very strong growth backlog generation in international. We want that to continue. So we're already thinking about what is going to drive that growth in the 2030s, because it takes that long in international to really position yourselves to have an exportable product and the market demand materialize.

We've talked about so many growth opportunities. And in the earlier comments, you were talking about desire to invest. Can we talk about the CapEx outlook? And where are the areas where it could be pressed a little bit higher if growth opportunities come through?

So we increased our CapEx outlook this year, and we did that because we saw demand coming from things like the B-21 accelerated build, the munitions ramp that we are seeing across many weapon systems, and the international demand materializing for things like IBCS and munitions. At the same time, we have a large number of opportunities that are either awaiting award or we are seeing more clarity emerge on what the government buy plan will be that we would likely need to invest in. That's things like the Navy's future fighter or Golden Dome specific opportunities. And we are prepared and want to be in a position where we can increase our investment profile if those things materialize, and if we are afforded the opportunity to perform on them.

So that's why we are thinking about capital deployment very much in the way we have, which is first invest in our business, pay a competitive dividend and return excess cash to shareholders. But at this point, we don't think there will be that excess because we see so many opportunities to invest in the work of our customers and that are in the long-term interest of our shareholders.

Yes. No, that makes a lot of sense. It sounds like to the extent CapEx goes higher from here, there's plenty of growth supporting that.

That's right.

Okay. And you made the comment on buybacks, dividends. I just wanted to just revisit that topic in light of the executive order and what you're talking about with the growth opportunities. The buyback is paused. And I think you mentioned on the last call that the Board would review the dividend policy. Maybe you could just elaborate on those?

Right. So we have long focused on paying a competitive dividend when we have the resources to do so. And as I just outlined, this is an opportunity-rich environment. We see opportunity to invest more and get favorable returns on that investment than we have in the past. And so we are looking to do that. But with that said, we know how important our dividend is to our investors, and we have positioned ourselves to be able to do both. To invest in all of the opportunities that we see and are being asked to support, and we feel really proud of our track record there and our ability with our plans this year to continue to do that and still pay a competitive dividend.

So our Board did just approve our quarterly dividend last week, and that is a reflection of us outlining for them and feeling confident that we are aligned to our customers' interest and our shareholders' interest when we invest first in the business and pay a competitive dividend.

Okay. And will there be capacity for at least a reasonable degree of dividend growth? Or are we more talking about a flat dividend?

Well, just as I've told investors, we are looking at the set of opportunities that we are pursuing and how those progress before we lay out any future year cash flow targets, we are going to hold on any further capital outlay commitments until we have clear view. We don't normally even discuss the dividend increases until our May meeting. So there's time between here and there that we expect to have further clarity and then we'll discuss that with the Board. But it will be the same disciplined process that I just outlined that we use every year.

Okay. That makes sense. It sounds like we're moving into a world where the dividend is safe and a lot of the excess cash, perhaps all of it is going into CapEx, and we'll have more visibility on the growth opportunities behind that, hopefully, in the next few months. Can we talk about -- sort of another thing that's going on is co-investment, the government with defense companies. And maybe the best example out there or the most interesting example out there that's topical right now is what happened with LHX in the Missile Solution structure. I wanted to just sort of take your temperature on that, get your reaction to that. Is there any learning from that? And is there anything about that might be appropriate for Northrop?

Well, as we look at the solid rocket motor business that we own, we have been investing in it to build the capacity that presumes us now to scale as is being requested. And so we believe that we are the best party to make that investment. We have not entertained any discussion with the government to make that investment and certainly no discussion about equity in our company, or the model that has been utilized and communicated by L3Harris.

I think you'll see different companies take different approaches to this in different segments of the markets. But for us, in that segment of the market, we see enough long-term demand that we felt comfortable making that investment and positioning our company and managing that within our portfolio, and also appreciate the work there in tactical solid rocket motors has very much an interplay with our strategic missiles business, which sits in a different part of our company. There's just a lot of strategic synergy in those parts of our portfolio that we want to maintain an ownership structure of.

Okay. Are there any other pros and cons to elaborate on with these sort of structures? It sounds like you're really seeing a lot of benefit toward keeping everything in-house.

We certainly work in the supply chain to ensure that our suppliers also have the resources they need. And in some of those cases, there may be an interest for those companies to take investment directly from the government. We're facilitating those conversations with the Office of Strategic Capital. Just because we as a large company see that strategic synergy across the portfolio and are choosing one model doesn't mean that other companies won't use a different model. We want to make sure the entire ecosystem is healthy and that we can get the supply of materials and parts that we need as well. And so we are looking at the pros and cons of those models. And as I said, right answer may be different for certain companies.

Got it. That's very helpful. And then finally, I just wanted to talk about M&A. The portfolio at large. You've described the backdrop as opportunity rich. Many of the other companies we're talking to today agree with that. In some cases, that might lead to M&A to beef up capability or fill technology gaps. I was hoping to just get your perspective on that.

Yes. We have a portfolio management process that we use within the company to understand what we believe is going to be most important in our customers' portfolios 5, 10 years, and then we work ourselves back to the portfolio we have. And we think about our options fulfilling any strategic gaps that we have. It was what led us to make the acquisition of Orbital ATK and wanting to increase both our space portfolio and enter into the weapons business at that point in time. And we've done that successfully.

Our strategy since then has been to build on those parts of our portfolio through organic investment. And as I've talked about, we've done that successfully. We are constantly looking at that question and entertaining what is in the marketplace that could potentially be additive to our portfolio. We also, though, look at divestiture and where we aren't the best owner, and we'd be better taking the capital proceeds and putting them back into the remaining part of our business. We've done that with the IT Services divestiture and our Training Services business divestiture most recently.

So we will stay active in that portfolio space. Right now, we do not see a gap that we believe needs to be filled through M&A. The portfolio expansion that we are interested in doing we believe can be done both from a capability perspective by investing R&D into ourselves. And from a capacity perspective, investing CapEx as we're doing to build out the plant and equipment that we need to perform.

What we've heard from some other companies is that the CapEx outlook and investment outlook may be supplemented with M&A. It sounds to me like what you guys are talking about is that the organic growth opportunities are so significant that it's going to be much more levered with company-specific CapEx?

That's right. I mean that's always a lower-risk proposition if you believe that you can invest internally and get similar outcomes. And that's where we are right now because we have a portfolio that's not only very diverse but also very well aligned to where we expect the demand signal to be for the next decade.

That makes a lot of sense. And then just on divestitures, any pruning, anything that makes sense there?

Nothing significant. We have done what we thought were the clear value-creating divestitures. We largely now have divested all of the services-related aspects of our portfolio and we're left with a portfolio that's rich and technology deep as both prime and supplier in many areas. And our biggest challenge is figuring out where to place our bets because we can operate in so many different areas, and smart resource allocation within the company. And we feel like we're doing that well today and don't feel the need to divest any part of our portfolio to retain the focus that we have in the right areas.

Okay. Fantastic. It looks like we're almost just about out of time. I just give you the floor for any concluding thoughts.

Well, I would simply bring you back to a couple of themes. We've talked throughout the last 35 minutes about this being an unprecedented demand environment. I've also shared that our company's focus is leaning into that demand environment by investing, anticipating our customers' needs and focusing on the performance and execution rigor that our company is known for to deliver, not just for our customers, but for our investors. And we are maintaining that focus into this environment.

And finally, that our capital deployment strategy is responsive to what the administration is asking but it is reflective of a balanced approach that recognizes we can do both. We can perform for our customers and lean in on their demand signals and invest appropriately, and support what our investors require to stay interested in investing in this part of the industry. So thank you for your time and attention today.

Thanks, Kathy. Truly appreciate it.

Good day, ladies and gentlemen, and welcome to Northrop Grumman's Fourth Quarter 2025 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. [Operator Instructions]

I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed.

Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's Fourth Quarter 2025 Conference Call.

Before we start, 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 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; John Greene, our CFO; and Ken Crews, our CFO, prior to January 7.

At this time, I'd like to turn the call over to Kathy. Kathy?

Thanks, Todd. Good morning, and thank you for joining our fourth quarter and full year 2025 earnings call. The Northrop Grumman team delivered another quarter of strong operating results, generating the highest quarterly sales growth of 2025 and exceeding expectations across our key performance metrics. Throughout the year, we kept a disciplined approach in executing our strategy, remaining true to our technology leadership and ensuring our company moves at the speed of relevance, particularly as our customers transform the way they acquire defense capabilities. This business strategy includes our capital deployment plan, which prioritizes investments in value-creating growth opportunities, of which there are many in this current environment.

Northrop Grumman's portfolio is aligned to what U.S. and international customers need right now, and we see a clear path to continued solid growth in the future. We ended the year with over $95 billion in backlog, a new company record, driven by over $46 billion in net awards in 2025. Our backlog has grown by nearly $20 billion since 2021, and our 5-year average book-to-bill ratio has been 1.1x.

Our 2025 sales and EPS both exceeded the high end of our guidance range and free cash flow was $3.3 billion for the year. This represents a 26% increase in free cash flow compared to 2024, the third consecutive year of at least 25% growth. This strong performance provides momentum for our company in an increased demand environment and gives us continued confidence in our outlook. This confidence is rooted in our conviction that we have a talented engineering and operations team and a portfolio uniquely designed to deliver the capabilities needed by our U.S. and international customers.

In the U.S., we are aligned with the administration's and Congress' focus on expanding American manufacturing capabilities and capacity on critical programs and ensuring technological superiority. We have purposefully built and shaped our portfolio with a focus on our customers' demand signals. We are a leader in developing and delivering advanced and often considered exquisite capabilities, which are at the core of U.S. war fighting today. However, we have also demonstrated that we can design and develop more affordable solutions that can be produced in mass and fielded quickly.

One example of this is high-volume space assets that we are building for the space development agency, including our fourth quarter award for 18 Tranche 3 Tracking Layer satellites, which brings our total SDA satellite backlog to 150. Our missile tracking solution leverages our broad set of missile defense capabilities to provide global detection, warning and tracking of hypersonic weapons and advanced missiles from the earliest stages of launch through interception.

Protecting the Homeland is a top priority for the Trump administration as outlined in the recently released national defense strategy. In alignment with the Department of Ford's focus on acquisition transformation, we are transforming Northrop Grumman. We are moving with urgency and proactively bringing innovative solutions to our customers. An example of this includes the latest advancements in our uncrude portfolio, the first of which is Project Talon, an evolution of our collaborative combat aircraft Increment 1 design that strikes a balance between capability and affordability. Project Talon was designed and built in under 24 months.

To accelerate the development, we leveraged our autonomous test bed ecosystem, Beacon, which is now known as Talon IQ. Project Talon built on Northrop Grumman 7 decades of experience with advanced battle-tested unfed systems. In December, the same month that we unveiled it, the U.S. Air Force awarded our aircraft with a designator the YFQ48A. This is only the third CCA platform to have this type of designation. Beyond the interest the Air Force has shown in this system, we also believe Talon will have broad global appeal.

I want to highlight a second example in our uncrude market, which speaks to our partnership approach. We team with Kratos to develop a collaborative combat aircraft for the marine and received a $231 million award late last year. The expeditionary uncrewed aircraft combines our vast experience in multifunction mission systems with Kratos' proven platform, We've completed more than 20 successful demonstrations in operationally environment, and we are working to rapidly field this capability to work alongside crude fighters.

Our focus extends well beyond developing the next generation of space and airborne uncrude platforms. We are equally dedicated to scaling our operations across our portfolio to meet rapidly increasing demand, including critical areas like munitions. To address the growth in munitions, we have made significant investments to expand capacity for existing programs and in support of second source initiative. Since 2021, we have successfully doubled our production capacity for tactical solid rocket motors at our ABL facility in West Virginia, and are now advancing efforts to further increase that capacity by another 50%, effectively tripling our tactical SRM production capabilities at that facility by early 2027. And we are making similar investments to expand capacity at our Elkton, Maryland site to triple capacity there by 2030. This proactive approach places us in a strong position as the weapons market continues to expand.

On one end of the spectrum, we are developing cost-effective solutions that can be quickly designed, produced and deployed at scale. On the other end of the spectrum, we are also developing and producing unmatched strategic deterrence assets for our nation. This includes executing on normal -- numerous programs in the restricted arena which comprises over 30% of our business. It also encompasses emerging areas and space, which has evolved into a war fighting domain. Safe security or capabilities to protect space assets represents a tremendous growth opportunity for our company given our proven technology and experience in this domain. And these capabilities are fundamental and maintaining the most advanced military in the world. And of course, our contribution to strategic deterrence also includes our work on modernization of the Triad.

Regarding status of our work on the Triad, the B-21 program is meeting key milestones including first flight of the second aircraft in 2025. In the fourth quarter, as expected, we were awarded the LRIP Lot 3 contract as well as advanced procurement funding for Lot 5. We continue to work closely with the Air Force on plans to increase the production rate of the program. Our priority is to establish a mutually beneficial agreement that accelerates the delivery of this game-changing capability to our nation. Funding for this acceleration has been approved as part of the reconciliation bill, and I am optimistic that we will come to an agreement with the Air Force this quarter.

We also continue to make progress on Sentinel, advancing key aspects while partnering with the Air Force to restructure the program. In addition, to continued progress on the missile, we are maturing to launch silo design and moving forward with prototyping activities in the command and launch segment of the program.

In the United States, our customers are turning to industry to move beyond traditional business models, breakdown bureaucracy and increased deliveries of capabilities at a faster pace. Importantly, they have swapped this request with funding, and this creates an immense opportunity for Northrop Grumman. We are encouraged by the recent $1.5 trillion FY '27 budget recommendation which indicates the potential for historic growth in defense spending. And in support of this approach, we are bringing proposals forward to accelerate our program, embrace new ways of working and partner more effectively with our customers.

Our company is well aligned with the administration and Congress' focus on speed, capacity and performance, all in support of National Defense. We are hopeful that FY '26 defense appropriations will be completed soon, and we see strong support for the capabilities we deliver to the war fighter in the bill moving through Congress now. We also expect reconciliation investments to move forward this year.

Internationally, we are experiencing strong momentum as Allied nations increasingly invest in enhancing their national security capabilities. Our international growth strategy focuses on both exporting products manufactured in the United States and forming industrial partnerships to develop indigenous capabilities in these nations. We are successfully executing this strategy with international sales growing by 20% in 2025.

Demand signals remain strong, and we anticipate continued growth in 2026 and beyond. The global appetite for our technology is fueling this demand, particularly in air and missile defense system, advanced munitions, radars and a diverse array of airborne capabilities. We've now received formal requests to acquire IBCS from over 20 countries and we are seeing notable progress on multiple other opportunities, including ground-based radars where we are expecting contracts from customers in the Americas, Middle East and Asia Pacific.

The robust global demand environment supports our 2026 guidance, which is consistent with the outlook we provided to you in October. We're positioned to deliver another strong year of sales and margin growth enabling our ability to generate cash and invest in our business. As a result, we expect to increase capital expenditures this year. Our focus will be on a variety of high-impact value-generating initiatives in areas such as solid rocket motors, missile defense, advanced technologies and restricted capabilities. These investments are intended to create long-term value for both our customers and shareholders by delivering advanced solutions quickly, enabling our military to maintain its competitive edge.

2025 was a strong year for our company, and we are well positioned to continue this success into 2026 and beyond. I'd like to thank the entire Northrop Grumman team for their contributions to our results and your dedication to our customers. We are proud of the impact our products have on global peace and stability and we share the sense of responsibility and urgency our customers have to provide our nation and allies the best products in the world.

Before turning the call over to Ken, I want to welcome John Greene, who joined our team as CFO earlier this month. John is an experienced CFO and has a proven track record of driving growth and operational excellence and I look forward to working with him. I also want to extend my deepest gratitude to Ken for his leadership and significant contributions during his more than 20-year career with Northrop Grumman. He was instrumental to our strong finish to 2025, and he has ensured a smooth transition to John.

Thank you, Ken. And I'll turn the call over to you.

Good morning, everyone, and thank you, Kathy. Today, I'll walk you through our 2025 results, after which John will discuss our outlook for 2026. 2025 marks another year of strong financial performance, reflecting robust demand for Northrop Grumman capabilities and our continued focus on operational excellence.

I will begin with top line results on Slide 5. Fourth quarter sales were $11.7 billion, up 10% compared to the prior year. On a sequential basis, Q4 sales accelerated 12%, consistent with the expectations we outlined on prior earnings calls with Q4 representing 28% of our full year sales volume. Aeronautics Systems was the fastest-growing segment in the fourth quarter with sales of $3.9 billion, up 18% compared to the prior year. The increase was driven by material timing on the F-35 program, continued ramp on TACAMO and higher volume on the B-21 program, enabled by the liquidation of inventory associated with LRIP Lot 3 and Lot 5 advanced procurement awards received in the quarter.

At DS, Q4 sales grew by 7% on a GAAP basis, 12% organically, with broad-based growth throughout their portfolio. This included higher volume, producing solid rocket motors for the guided multiple launch rocket system, higher sales in the missile defense portfolio, primarily IBCS and an increase on Sentinel as the program continues to ramp.

Mission Systems achieved double-digit growth in Q4 driven by strong production volume on restricted programs, F-35, SEWIP and international radar systems. And as we expected, the Space segment returned to growth in the period with sales up 5% compared to fourth quarter of last year. Higher sales were driven by increased production of GEM 63 motors for Amazon's project Leo and increased volume on certain restricted programs. In total, 2025 sales were $42 billion, up 3% organically compared to the prior year and above the high end of the guidance range we provided in Q3.

Moving to bottom line on Slide 6. Strong operational performance continued in Q4 with segment operating income up 10% year-over-year and a segment operating margin rate of 11.2%. AS operating income increased by 20%, driven by higher sales volume and sound program execution.

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This is supported by strength across all 4 business segments and builds upon our disciplined execution and market demand. We expect Q1 sales to be up low single digits, partially driven by fewer working days in the quarter. Growth is expected to accelerate throughout the year, similar to the cadence experienced in 2025. On the bottom line, we remain focused on disciplined program execution and margin expansion over time, driven by cost efficiencies, operational leverage and mix.

2026 segment operating income is projected to be between $4.85 billion and $5 billion, reflecting continued strong performance in a low to mid-11% segment operating margin. 2026 mark-to-market adjustment -- adjusted earnings per share are expected between $27.40 and $27.90, up mid-single digits. This includes our latest estimate for pension income, an effective tax rate of low to mid-17% and $620 million in interest expense. We expect roughly $280 million in other unallocated corporate expenses in 2026, a level that is reflective of our normal run rate, excluding unique and extraordinary items. We are assuming our share count will remain relatively flat and 2026 free cash flow continues to be estimated between $3.1 billion and $3.5 billion. We are offsetting a higher capital spend outlook with strong operational cash flows.

Moving to segment level guidance on Slide 9. AS sales are expected to grow to mid-$13 billion. This growth is supported by increased volume on programs like B-21 and TACAMO, partially offset by lower materials volumes and stable production rates on the F-35 and E2 programs. We also expect a modest headwind on the F/A-18 program with the final production lot completed in the fourth quarter of 2025. Margins are projected to be low to mid 9%, reflecting the higher mix of development programs.

DS remains our fastest-growing segment with sales expected to rise in the low double digits organically to the mid to high $8 billion range. Growth will be broad-based, driven by strong demand across weapons, missile defense and strategic deterrence programs. Operating margins are expected to remain steady at around 10% comparable to the performance in 2025, absent the $76 million favorable EAC adjustment on Sentinel.

MS is projected to deliver sales in the high $12 billion range, building on double-digit growth in 2025 with broad-based demand across their diverse portfolio. Investments in digital technology and factory utilization continued to drive efficiency improvements with margins expected to improve further into the high 14% range this year. Space segment sales are expected to grow to approximately $11 billion in 2026. Growth drivers include higher sales on multiple restricted space and missile defense programs. We expect stable GEM 63 volumes and modest headwinds on NASA programs. Operating income is forecasted to be in the 11% range, consistent with the prior year. Lastly, intersegment eliminations are projected to be approximately $2.4 billion with a high 13% OM rate.

Turning to pension performance on Slide 10. 2025 ended on a strong note with asset returns of 11.3%, improving our funding status to 106%. This year, cash recoveries are forecasted at $245 million slightly lower than prior projections due to our favorable funding status. We expect to make minimal annual cash contributions over the next several years, consistent with prior guidance.

I'll end my prepared remarks with a few comments on capital deployment. First, $527 million of fixed-rate debt will mature in March and we intend to pay down the note with cash on hand. Our capital deployment strategy remains focused on driving growth and reinvesting in the business to maximize shareholder value. In 2026, capital expenditures are projected to be $1.65 billion, approximately 4% of total sales. This represents an increase compared to prior expectations based on the strong demand environment we see ahead. These investments will enhance production capacity and support the industrial base, ensuring we're positioned to deliver growth well into the future.

Before I close, I wanted to share some personal thoughts. I'm honored to join Northrop Grumman in support of its mission at such an important and exciting time. In the coming years, I look forward to working with this outstanding management team to execute on our strategy and deliver value for our stakeholders.

In summary, 2026 is shaping up to be another year of strong growth with continued momentum across our portfolio.

Before I open up the line for Q&A, I also want to thank Ken for his tremendous support during our transition.

With that, let's open the call for Q&A.

[Operator Instructions] Our first question comes from Ronald Epstein with Bank of America.

Kathy, if we could just pick up on your remarks -- in your prepared remarks on transforming Northrop Grumman. I mean how are you broadly thinking about our company with the breadth and depth and legacy of Northrop Grumman and how that jives with this push towards the nontraditionals? I mean you pointed out a couple of the CCA programs and unmanned stuff that you've done. But I mean kind of strategically broadly, how are you thinking about it? Because it seems like you all are doing quite well at it. But just if we could maybe however the cliche is double click on that or peel back the...

Yes. Thanks, Ron, for the question. As you said, we have been the way we are meeting our customers' needs. I talked about it somewhat in my prepared remarks how our strategy for technology leadership has not changed, but we are directing that talented engineering and operations team to be able to design products that can be fielded more quickly. We're balancing the need for performance with affordability and speed to market. And so we believe that we have all of the foundation to meet this moment, but we are directing that talent and that are more applicable to what this administration has a strong sense of urgency to do, which is field capability quickly.

And I'd also say that we have been investing. This is not something we've just started doing this year. As you know, we've been investing in our business to build capacity and capacity is critical to fueling capability quickly. And we have that capacity ready to go in many areas. I talked about solid rocket motors and how we have already doubled capacity, and we'll have tripled by early next year. I talked about the work that we are doing in space where we've gone from producing tens of satellites a year to hundreds. And we are also obviously looking to accelerate programs like B-21. And so across this entire portfolio, we have the opportunity to lean in to moving faster and we're organizing ourselves to be able to do that.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Kathy, maybe expanding on the Ron's question a little bit in your answer. The fiscal '27 budget provides a lot of money out there to be contracted and as you think about your '26 plan and thinking about the longer-term trajectory of growth, where do you see the biggest opportunities for acceleration? And how do you balance that with some of the investments that you need for that capacity?

Yes. Thank you, Sheila. We are absolutely taking a balanced approach to what we have incorporated into our guidance and what we still see as opportunity ahead. So what is incorporated into our guidance is where we see clear funding and where we have accumulated backlog or we have a high expectation of award. There are a few areas that we've specifically called out, like B-21 and Apex, where we have not incorporated that yet into our guidance. FX is the name that we use for Apex. So that is really how we are thinking about our 2026 guidance. There is a good bit of opportunity out there for our team to go capture in this opportunity-rich environment, but we have incorporated into our guidance what we clearly believe is headed toward contract already in our backlog.

Got it. So maybe my follow-up is, as we think about '26 growth in the mid-single-digit range, does it accelerate from there in '27 as we think about international coupled onto that?

We believe that it does based on what signals we are receiving regarding the FY '27 U.S. budget and the fact that we see continued acceleration of demand internationally. I spoke to a few of the areas of growth that we expect to see. We believe we will have a book-to-bill internationally well above one again this year, and that positions us for growth into 2027.

Our next question comes from Kristine Liwag with Morgan Stanley.

Maybe, Kathy, going back into the 2026 revenue outlook. Backlog is at a new record at $96 billion as you called out. And the midpoint of your outlook provides 4% year-over-year growth. Can you talk about what's driving the significant conservatism in your outlook? What are the key variables that convert more of this backlog into revenue? And can you size the B-21 and F/A-XX, that's not in your guidance if those contracts were to firm up, how could that change your '26 outlook?

So Kristine, you call it conservatism, I'll call it a balanced approach. It's a dynamic environment. And so as we look at 2026, we believe we have invested in the areas that will see significant growth in the coming years. Munitions, which I spoke to with our solid rocket motor capacity. Golden Dome and its associated opportunities for Homeland Defense. The F/A-XX program, our collaborative combat aircraft offerings yet, as we sit here in January, we have not yet seen those opportunities progress toward contract. And we believe that will happen over the next 24 months, the timing of that is what is much more difficult to predict as we sit here. And so in terms of translating into 2026 sales upside, we believe there is opportunity there, but difficult to put our finger on. As we look to 2027, we feel much more confident that those opportunities will lead to increasing sales. And we're taking the long view as we always have, both in how we think about investment, but also the long-term growth trajectory of the enterprise.

Our next question comes from Scott Deuschle, Deutsche Bank.

John or Ken, you got a big award on GEM 63 here in the quarter, but I believe in your prepared remarks for a flat volumes on that program. So can you just clarify why the volumes are flat on GEM 63 in light of that award -- and should we expect growth there to reaccelerate in 2027?

Yes. As you know -- Scott, this is Ken. Historically, this is an area where we've been investing in capacity. And so when we think about 2026, it will be flat year-over-year as we continue to expand that capacity. To your point, in 2027, we do expect GEM 63 to continue to grow. And over the long term, it will continue to be one of the growth drivers for our Space Systems segment on top of other activities, including the restricted space security.

Okay. And then, Kathy, sorry if I missed this, but if the B-21 acceleration of work hits in the quarter, should we think about that as being potentially additive to 2026 EBIT dollars or is it more of a wash in 2027?

So as we sit here today, we are still working through the finer points of that deal and its financial implications for the company. We do expect to invest $2 billion to $3 billion over a multiyear period. We do expect to have a better opportunity for returns on the program, again, over a multiyear period and we do expect accelerated revenue as a result, again, ramping over a multiyear period. So you won't see a tremendous amount of impact in 2026. The greater impact of all of those components that I just outlined will happen '27, '28 and somewhat into '29. So hopefully, that gives you a better sense for modeling.

Our next question comes from Robert Stallard with Vertical Research.

If I'm correct, I don't think your prepared comments had any mention whatsoever of dividends or buybacks. I was wondering if you could give us an update on what your thoughts are there, particularly given recent commentary from the U.S. government?

Yes, I'll be happy to take that. So when the team built a plan, we took a look at our capital allocation strategy and what we're seeing and what the team saw was robust opportunity to deliver future earnings through investment. So we made a decision to keep the share count flat and increase our spending on property, plant and equipment in order to build out the industrial base similar to what I commented in my prepared remarks. So the plan at this point is not to execute on additional buybacks beyond the end of this month, January. And the dividend plan will be agreed with the Board in the May time frame. So we expect associated with the second quarter earnings that we'll have an update on that.

Okay. And then a quick follow links into that. In terms of the growth going forward, how much of this is dependent on the supply chain? Are they pacing item here? And do you expect Northrop Grumman to have to invest its own money in the supply chain?

So as I mentioned, we are already partnering with our supply chain. As we look at capacity expansion, we do detailed operations planning with our supply chain. And in most cases, they are investing alongside of us. We do see areas that we work with the federal government that need to be shored up not just for our contracts, but more broadly, this tends to be at lower levels of the supply chain areas like raw materials including rare earths. And in those cases, the government often is directly engaging with those participants in the supply chain to address any shortages that we see. But most of the activity is through us and our direct work with our supply chain.

Our next question comes from Seth Seifman with JPMorgan.

Just wanted to maybe clarify on that last question. I mean I think the assumption is that Northrop will continue to be paying dividends, I assume, right?

Yes.

100%.

Yes. We're simply talking about the May time frame is when our Board looks at our annual increase in the dividend, and so it would be premature to speculate on that.

Okay. Okay. And then with regard to the remainder of the cash, I guess, if we -- let's say, $3.3 billion or so of cash and then we think about the dividend. And so probably left with about $2 billion, and I think you talked about repaying $0.5 billion of debt, well over $4 billion on the balance sheet. Do you anticipate holding more cash on the balance sheet? Do you anticipate that there might be opportunities that emerge within the year or shortly after that would require significantly more near-term capital investments? Or what would happen to the balance of this year's cash flow?

Yes. Yes, Seth, why don't I try to hit it, and then I'll get some support from Kathy. So -- in terms of the overall cash position of the company, we're in a situation where we see great opportunity to invest. So I mentioned the increase in the capital deployment, certainly some cash be allocated to that. We also -- as we look at our day-to-day cash position, I think there's an opportunity to maybe scale that up slightly given the growth of the business over the past 4 or 5 years. So we'll be looking at that. And then in the debt stack, there's some at least one note that the coupon is over 7%. So we'll take a look at the analysis around that. And see if it makes sense to deploy some cash that way. But the great thing is to summarize is the cash conversion cycle of the business is outstanding, and we'll have an opportunity to make smart decisions in terms of how we're going to deploy cash and make sure we're efficient with it.

Our next question comes from Gavin Parsons with UBS.

It looks like you're absorbing higher CapEx in your free cash flow guidance this year, but do you still have line of sight to $4 billion in 2028?

So Gavin, it's a little early to project 2028 at this point based on the set of opportunities that I mentioned earlier. So with B-21, if we are afforded the opportunity to accelerate that program, it will be good for our shareholders in terms of long-term revenue profile and earnings, but we will need to invest more in facilitizing for that acceleration. We also have a number of opportunities, and I shared some of those that can be award, we want to be in a position to have cash on hand to invest more in supporting those because, again, well aligned with the administration's priorities in home land defense, crude fighters and on crude vehicles to name just a few. And so as we look at those sets of opportunities likely being determined later this year into early 2027, that will really set our CapEx profile. And any increased sales and earnings that we would expect to achieve as a result of those opportunities flowing into the plan. So I would just simply tell you our capital deployment strategy has not changed, the discipline around where we choose to invest has not changed. And as we factor those new opportunities in, we'll update '27 and '28 accordingly.

Okay. Appreciate it. And do you mind clarifying the B-21 investment comment you made, the $2 billion to $3 billion, is that before or after an acceleration?

That is for the acceleration. So that's only if we agree to an acceleration, and it is over a multiyear period of time. So that's why I outlined for you. That would be our expectation for total investment to get to the accelerated rates.

Our next question comes from John Godyn with Citi.

I wanted to revisit the quarterly cadence and inorganic growth. I think I heard you say that it was going to accelerate throughout the year. That's on the back of a very big 4Q number, 10% organic growth. And I wanted to just square that up a bit and explore the possibility of maybe a stronger start to the year than a sharp decel because it seems like you've got a lot of momentum exiting the year.

We did have a lot of momentum exiting the year. There are a few factors that are contributing to that profile that we talked about, which will look similar to what we experienced in 2025. One is we did have a very strong Q4. And part of that was material timing and delivery, which naturally will not reoccur in the first quarter. The second and probably most material is that the enterprise level. We have 61 working days in the first quarter. That is a very low profile. Typically, our quarters have 62, 63 or even 64 days. This year, that profile climbs usually Q4 is our least number of working days, this year Q1, and then we recovered that in Q4. So those two things are primarily the driver for the profile this year, and we expect still to have a good growth quarter in the first quarter, just not as strong as what we expect to have later in the year.

That's really helpful. And if we just kind of think through that throughout the year, at the end of '26, you guys will be putting up the largest organic growth on the 10% comp this year. So the 2 year-over-year rate going to be quite dramatic. You've talked about positivity into '27, but it seems like you'd be exiting '26 with a lot of momentum and maybe the step up there could be quite significant. Is that the way to think about it at a high level?

It absolutely is. The backlog growth that I talked about in 2025 that takes time to ramp as we progress through the year in 2026, particularly our space business that had a very strong book-to-bill last year. Now we expect to see in the second half of 2026, those opportunities really ramp top line and carry that momentum into '27, but that is true across the portfolio.

Our next question comes from Myles Walton with Wolfe Research.

I was curious, was there any net effect in the shutdown on the numbers, whether in the P&L or the cash flow statement in the fourth quarter? And then, Kathy, bigger picture, if suspending this belief that the defense budget did climb 50%, that kind of seismic shift would suggest maybe a seismic shift in a company strategy as well, perhaps. And so what, if anything, would you kind of revisit if you did have that level of step function in terms of positioning the portfolio, investing in the portfolio? And maybe just communicating what investors should be looking at period?

Miles, I'll answer the first part of that, and then I'll turn it over to Kathy. In terms of impact from shut down, no major impact from shutdown and that was reflected just due to the strong year-over-year growth in us exceeding the top end of our guidance range on sales, but then also the $3.3 billion of cash in Q4, creating that 26%. So overall, to the first part of your question, no material impact to 2025 based on the shutdown.

Myles, to answer the second part of your question, we are already thinking about this accelerated growth environment, certainly, $1.5 trillion defense budget would be a significant acceleration in national security spending, one unlike any we've seen before, but the things that we are doing as a company to prepare ourselves, moving with speed, building capacity preserving cash to ensure we can continue to deploy it back into the business to support this unprecedented growth opportunity, both in the U.S. and abroad, happening simultaneously, which is the most robust demand environment I've seen in my career. So it does have us thinking very differently, as I outlined both in my prepared remarks and in answer to Ron's question about how we're transforming the company. This organization is well positioned because we have been working towards this moment for years. But at the same time, there is more for us to do, and we are focused on our engineering and operations talent helping to design the right solution so that we can be competitive. We are focused on performing against all of our commitments to earn the right to win new business and then, of course, positioning ourselves with the capacity to deliver and to put that capacity to work.

Our next question comes from Ken Herbert with RBC.

Kathy, maybe just -- can you talk about what the guidance implies for international growth in 2026? And specifically, you've called out a number of quarters now, it seems like an accelerating opportunity for IBCS in particular. When could we maybe expect to see some contract announcements out that beyond, obviously, the customers you've already talked about?

Yes. So for international, we expect 2026 to be a particularly strong year in awards setting us up for 2027. As I noted in my prepared remarks about IBCS, we do have 20 countries that have expressed interest. We expect the U.S. and Poland to continue to expand deployments this year. And then we have another two or three that we expect to announce awards this year and then others to follow out of that pipeline of 20. What I will also say, though, is our international sales growth is widespread. So munitions is another area where we see significant growth and double digit and we expect that to continue. I noticed some airborne radar programs that we anticipate awards on this year. We won't see so much sales impacts in '26 from those. The awards will come this year and then sales more in '27. And we also see just our base business continue to ramp the content. So as we look at -- Triton, we have international ties in the pipeline that will feed those production lines as well.

Our next question comes from Richard Safran with Seaport Research Partners.

I just have one two-part question on backlog, if I might. Could you discuss the quarter-over-quarter changes in backlog at Space, which I think is roughly up about $2.3 billion. Kathy, was that all from the Constellation you mentioned in your opening remarks or was there anything else? Second part, and just to get specific on your remarks, given the strong bookings for the company in '25, book to bill of about 1.17x. Should the expectation be better than 1.17x for 2026, given your backlog growth comments and what you've been saying this morning?

So this is Ken. I'll take that question. The drivers of space backlog was threefold, really fourfold. It was -- we were able to secure the award for Gem 63, which is Amazon Project LEO which will take deliveries well into the 2030s. We were also successful from a competitive award on T3 track with the additional 18 satellites. We secured another launch for CRS and then we had significant growth in awards for -- on our restricted portfolio. And again, as you mentioned, very strong backlog, and that's two quarters in a row for space where they've been at 1.8x sales or greater, which positions us well for the long term. When we think about 2026, given the strong backlog and the fact that we have some large significant programs with existing backlog, you should anticipate that book-to-bill around onetime sales for 2026.

Our next question comes from Gautam Khanna with TD Cowen.

Congratulations, Ken. I wanted to just ask about your perspectives on LHX entered into this transaction with their missile portfolio and the government. You guys obviously have Orbital ATK. Does that transaction with LHX disadvantaged motion any way? And are there opportunities that you see within the portfolio for a similar type of government-led investment?

So we have been investing in our solid rocket motor capacity and we feel we are well positioned with the capacity that we've brought online to deliver on both our commitment and additional second source initiatives that the government has asked us be involved in. So we are funding that capacity investment. We're not in discussions with the government about an arrangement similar to what they've entered into with L3 Harris. And I would say that as we think about being positioned to compete, it's all about the munitions that you can support with your capacity. We feel good about that. It's a bunch of performance, we feel good about that. and it's about your commitment to continue to invest, and we have shown that we will do that. So we feel well positioned to compete for what is a very broad set of opportunities in this space. I think there's room for growth for many companies.

Our next question comes from Douglas Harned with Bernstein.

Sentinel, so the Services Committee has talked about now I sort of at the end of 2033. This has continued to push out, and I know a lot of this is related to Air Force infrastructure. But can you talk about how we should look at the trajectory for Sentinel revenues and then also ultimately margins since it has to affect the timing you're going from development into more fixed price work?

So Doug, as I've noted, we are in the middle of supporting the U.S. Air Force as they restructure the Sentinel program. And coming out of that, they will firm a schedule that both lock in new time ranges for milestone B, initial operating capability, final operating capability. And so I don't want to get ahead of the Air Force in talking about that. But certainly, as I have shared in the Air Force has as well. We are working to accelerate the time lines that were published coming out of the nonacute breach 2 years ago. So that is the goal, and we're making good progress to identifying options to do so. We still believe that the program will be in development for several years and not transitioning into production until later in the decade. And that production will very much be guided by the milestone achievement during development. So that has not changed from what we've been talking about. It doesn't really impact our guidance or outlook because our outlooks only go out a few years. And so we believe that, that transition to production is outside of that 2- to 3-year window at this point.

Okay. And then on Aeronautics. The margin guidance, the low to mid-single-digit guidance for this year was a little lower than I think many of us expected. And I know you talked about there being mix more development work. But when you think of the outlook for Aeronautics margins. I guess, first, what are the -- can you talk about the development work that is sort of weighing on that margin a little bit in the near term? And then should we still see the path to 10% margins in Aeronautics over the next few years?

So Doug, this is Ken. I'll take that question. When you look at the margin rate that we guided to for 2026, it's really driven by two factors. The first one is what's creating the growth for AS in 2026. It's B-21 where we know the margin profile on that were 0%, and then it's also driven by development programs like TACAMO. Our mature production activities with the higher rates are relatively stable and flat when you think about F-35 and E-2D. So that is creating more of the growth is driven by those development programs, driving that rate to the low to mid 9%.

When we think about long term, absolutely, as we have the opportunities to exit the LRIP activities on B-21 and as these other development programs shift to production, we do see AS being able to continue to create accretive margins and get back to that 10%, again over the long term.

All right, Josh, we're going to have to leave it there, and I'll turn it back over to Kathy for closing comments.

Great, Todd. So thanks. In closing, I just want to summarize that I am optimistic about the positioning of our company as we experience the significant growth in global demand. This team is committed to meeting the needs of our customers for robust and scalable solutions that can be deployed rapidly and provide the strategic deterrence and decisive advantage they need. And we're equally committed to turning those opportunities into value creation for our shareholders.

So thank you again for joining us on the call today. I also want to thank Ken as this is his last call with us, and the entire Northrop Grumman team for their service to the nation. Thanks, and have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Good morning, everyone. My name is Peter Arment, senior aerospace defense analyst here at Baird. We are delighted to have with us Northrop Grumman Corporation. With us from Northrop Grumman, we have Kathy Warden, who's Chair, CEO and President. Northrop Grumman is an $82 billion market cap company. It's had a terrific year, a strong 2025, recently reported 5% organic growth, healthy margin expansion, robust free cash flow growth, and they've highlighted some mid-single-digit organic growth. I think that's above peers for next year, and they're on a path to double their free cash flow by 2028.

I think, Kathy, thank you again for supporting the conference. Really appreciate it. Kathy is going to make a quick safe harbor statement, and then we'll jump into Q&A.

Thank you, Peter, for that introduction. It's terrific to be back with you again. I would like to remind you that I may make some forward-looking statements, and those come with risks and uncertainties. For more details on those risks and uncertainties, you can reference our SEC filings. And with that, you did a fantastic job of summarizing the company's performance through the year. We absolutely are looking for the government shutdown to get resolved this week and to head into the rest of the fourth quarter strong. I look forward to turning it over to you and answering any questions you have.

Yes. Well, so maybe we'll just start with the current landscape. I think maybe if you could set the stage kind of the big picture, how you're seeing from -- you just mentioned the shutdown, but also there's been a lot of memos that have been circulating coming out of the Pentagon and how actionable you see this. Maybe you could set the stage, stay the state from there.

Absolutely. There is a good bit of transformation going on within the Department of War. We are seeing new acquisition strategies, a focus on a national defense strategy that now is much more inclusive of a homeland security emphasis and the budget to go with that. And we are seeing a department that wants to move at speed with our industry partners. All of this to me is incredibly encouraging. We came into the year knowing that the demand environment was very strong, both in the U.S. and globally. And now what we're seeing is a department that is looking to make acquisition reform to help expend those dollars in the right ways more quickly and to partner with industry and open up the aperture for us to bring forward solutions to help them do that.

So it's an exciting time in the industry. As you know, there are a few things that we are working through the government shutdown. Certainly, as we talked a few weeks ago in our earnings call, we were looking forward to that getting resolved by this time so that we could see some of the delays that we were experiencing break free. We have seen some slow in payments. So we're looking to get that issue behind us as we complete this year. But we still believe that our guidance ranges hold with a resolution within these next few days and then 6 or so weeks left in the year to get that behind us.

As we look into 2026, though, a really optimistic outlook for the future, both in the U.S. and globally based on the strong demand signals that we're receiving.

That's great. So the demand signals are very powerful, both from domestic and international. But one of the other things that are also just we've seen a lot of growth in sort of the competitive landscape, whether it's attributable or expandable systems, gaining traction. And obviously, you've leaned in on a lot of things. I think there's -- but I'm wondering how you see some of those different things shaping the market.

Yes. Our portfolio is really well aligned to what both the U.S. and our allies need right now. The idea that each need to be able to protect the homeland and the work that we do from missile tracking to interceptors as well as the ability to command and control those assets to have good situational awareness of the threats that exist and how to mitigate those threats. We also have been building up, as you know, capacity in our solid rocket motor business, fuse heads -- fuses and warheads, all of which support the tremendous growth that we're seeing in tactical missiles. And we are at the core of all three legs of the triad being a prime on two of the three legs, which is key to strategic deterrence, which the U.S. provides for our partners around the globe. And so as you look at that complete portfolio, we already have significant work in backlog, over $90 billion of backlog in the company, and we have production awards on many of those areas that I just talked about that are still into the future. They're not in our backlog yet. They are future phases on existing programs.

So we see that clear pathway to continued solid growth. We have had approximately 5% growth a year for the last 6. It's obviously not been 5% each year, but on average, that compound annual growth has resulted in a 5% growth. And we see that mid-single-digit growth continuing even without some of the things that we've recently discussed that are additional upside opportunities for our company. For instance, the Navy Fighter Award that is still pending or the B-21 being produced faster. Those opportunities sit on top of that foundation that I just spoke to.

Yes. So Northrop Grumman, I mean, is involved in some exquisite programs, but you've also leaned in on some of these more attributable. I think one of the things that we saw like recently low-cost systems like Lumberjack. Maybe could you talk a little bit about like that, just like you kind of balancing the portfolio?

Yes. And it's a good point. We are balancing the portfolio. We are often thought of as an exquisite developer of technology, and we pride ourselves in that. And that technology sits at the core of many of the solutions that I've already mentioned, but it also can be scaled to more affordable solutions, and we have product lines that enable us to use the technology that we develop for more exquisite purposes, scale it down, and Lumberjack is a great example of that. It is a much lower cost system that can be added with payloads that provide the kind of configurable solution that both the U.S. and our allies need on the battle lines to be able to defend against lower cost threats. Today, very expensive weapons are being used to take down threats that are low cost that asymmetry is not sustainable. And so Lumberjack is a response to that. It gives you the affordability, the configurability against the threat that you are facing in a forward-deployed situation, and it's still leveraging that tech base that I talked about. So it is able to operate in high threat environments.

Great. Let's switch over to the international demand for a second just because it's -- Northrop, I think, for a long time, had a lower percentage of international, but that is changing quite a bit. In the most recent quarter, I think your international sales were up 32% for the quarter. They were up 20% year-to-date. And obviously, they've seen an uptick and what NATO's plans are? How are you thinking the structural changes are affecting Northrop for you?

Yes. We believe that those changes that we're seeing in Europe are going to sustain. And even as more European companies are able to build capabilities and scale those for capacity, the demand is outpacing the new entrants of supply. So we believe that U.S. companies are going to continue to see this market grow and our share grow. Certainly, our company is seeing that. We have a number of product lines that have significant interest that we are working to convert from pipeline into awards and sales over these next several years. But as you've noted, the results of that in this last 1.5 years have been very strong.

Our backlog internationally has outpaced our domestic and our growth rate, as you noted, has also outpaced. We see double-digit growth in that international business for the foreseeable future. And I would also say that it's not just Europe. The Middle East has really opened up as a marketplace, again, for the kinds of capabilities that we provide. We also -- I just got back from the President's visit with the Prime Minister in Japan, talking to the Japanese about how their increase in defense spending can be deployed, and they certainly have an appetite to continue to work with U.S. companies like ours.

Terrific. Big inflection and global demand for sure. Let's move over a little bit to maybe the couple of segments, Aeronautics and the always popular B-21 questions that you get. But you've invested heavily in digital engineering, advanced manufacturing for the B-21. How should we think about these innovations kind of translating into the long-term cost efficiency that you've kind of talked about in the past, the production scalability? And how do we think about that kind of cost management side of things?

We think about that every day, and it's not just isolated to the B-21. We are on a margin improvement path that has 3 major tenets to it. One is performance driving through the disruption that we saw during the pandemic and largely macroeconomic factors have now stabilized to where labor is solid. Our negotiations with our represented workforce have gone very well this year. And we have now longer-term agreements in place, CBUs in place. We also have seen that the labor market is more conducive to hiring across our whole spectrum of hiring needs from engineering to technicians on the manufacturing floor. So that has allowed us to really stabilize production lines and get back to the kind of productivity that we saw pre-pandemic.

The second element of our improvement plan was the investments that we're making in digital and the cost efficiencies that we're driving across the organization as a result of those investments. And those are both back office digital enablers as well as digital enablers on the factory floor in design, engineering and production. And we are seeing those on programs like the B-21 yield phenomenal results.

When we talk about how the airplane as it's now flying in test is matching the models, the predictive models that we had in design, that means you've reduced the possibility of rework. You are building your first unit to meet those criteria that's required and you don't have to do redesign, which is often very costly if it comes late in the program. And that's what's been yielding us the kind of performance that we're seeing on the B-21. But it's important to note, we've done that across the enterprise. We did not do that specifically for the B-21 program. We are doing it company-wide. So we are seeing those same results play out elsewhere as well.

And then, of course, the third piece of our strategy, we've already touched on a bit, and that's mix shift. As we have more international business that is accretive, generally margin-wise to the rest of the portfolio. And as we are moving out of cost-plus development toward more fixed-price production as our programs mature, that too is a tailwind to margin rate. So those three elements are very much a part of the strategy that we've been executing and they're executing as we expected them to.

Terrific. Maybe just for the audience, can you remind us on kind of the contract kind of update where kind of which stage the LRIP is in for B-21, including the number of units under contract and then the timing of Lot 3 award as well as the advanced procurement of Lot 5?

Yes. So to unpack the B-21 program, for those of you who don't follow it as closely as I do, which I hope none of you do, it really is a program that has three major phases. We are still completing the development phase, but we are in test, meaning we're getting toward the end of that development phase of the program. We have two aircraft flying. And as I just said, they're performing very well in test. We are already started on low rate initial production. And those are the lots that Peter was just referring to. We were under contract for the first 2 lots. We expect to be under contract for the third lot later this year and then about one a year. And those lots are what were priced in the original bid and those will be executing largely through the end of this decade. And then we move into higher rate production, that's outside of the original bid. Those are subject to future awards, also generally on that same time line, expecting about a lot a year to be awarded until we get to the program of record, which is 100 aircraft. Of course, there is some discussion by the department and the Air Force about wanting more. But right now, the program of record is 100.

Right. I was generally asked that, so I mean you're stealing my thunder, but I'll ask it a different way, 100. Is it that above 100, is it that they're increasing the mission capability or their mission opportunity for the B-21?

Yes. So the B-21 was already envisioned to be a multi-mission aircraft. Its primary mission is to be a bomber with access to environments that are very hard to penetrate because of enemy air defenses and to be able to carry both nuclear and conventional bombs. But it has tremendous sensor capability to be an ISR aircraft. Because of its penetrating nature, it can clear the way for less stealth platforms. And so it really can play more roles than just delivering a bomb for effect as the B2 just did, but the B2 really was designed just to be a bomber. And so -- as the Air Force begins to think about force structure and what they need, the idea of taking an aircraft like the B-21 that is now well through development and will be in production and is relatively affordable despite it being a more expensive platform and exquisite for the capability that the Air Force gets, it is much more affordable than previous versions of boomer aircraft, and so they're looking to leverage that. And we think it makes a lot of sense. We need to get into production, demonstrate the ramp on production and then we think this debates about how many are needed will come back to the...

Awesome. Thank you for that. Let's move over to Defense Systems. It could be the fastest-growing segment maybe in Northrop. You've talked a little bit about most recently in the third quarter, you had 250 basis point margin expansion. When we think about the margins as sustainability, but we also have a very big program in there with Sentinel, but you also have IBCS scaling up. So maybe talk about how you view that mix together?

Our Defense Systems segment really is that the cornerstone of many of the trends I've just talked about. Their international growth has been exceptional, and that's driven by the munitions demand increase around the globe that we've already referenced. They also have product lines like our Integrated Battle Command System that are in high demand from our partners for their homeland defense missions. It was originally designed for the Army to use and protect our bases that are forward deployed and our troops that are in harm's way, but it's other allies now look at how to protect their own homeland. It's an incredible solution. And of course, the U.S. under Golden Dome is looking at that solution as well for our homeland.

And so -- they are at the center of many of the trends we've talked about in addition to leading the Sentinel program, which is one of the three legs of the triad. So they're seeing growth across all dimensions of their portfolio. And they are seeing the mix shift over time as we progress through this decade to more high-volume product lines that come with those higher margins and more international work, which also creates those tailwinds. So we expect their growth to continue to be accretive to the overall corporation, one of our fastest growing segments, if not the fastest, and to continue on this trend of margin improvement as well.

Yes. So part of that is Sentinel moving from kind of cost plus eventually to fixed price. How do you see that transition? And when -- and I don't know if timing is something you have visibility on, but...

So it's still several years away before we would transition into production on the Sentinel program. We are in the development phase of the program. We are in the middle of a restructure with the Air Force, where we are working to accelerate the time line. And in accelerating the time line, we could see production move to the left from where it was coming out of the Nunn-McCurdy breach a year ago, but it's still several years away. In the meantime, we're working on many risk reduction activities and the reconciliation bill included about $2.5 billion of incremental funding for the Sentinel program to do that. And those risk reduction activities are actually what will help to build the confidence to pull some of those time lines left. This is a high priority for both our company and the Department of War. It's something that I talked to the Deputy Secretary about frequently.

I bet. All right. Let's move over to something a little more different, but on Mission System, but microelectronics, the foundries, I don't think a lot of people are aware of that business that's inside Northrop Grumman. Maybe you could talk a little bit about the foundry business, microelectronics business. How do you see that business evolving today?

This is an area where we have seen increased demand for our products that rely on our foundries. As we are growing our own product lines increasingly, we are miniaturizing our electronics, and that is part of our differentiation in the solutions we provide, whether in space, in the air or on the ground. But now what we're seeing is a desire for domestic source of microelectronics in other applications that have traditionally rely on foreign source. So today, we're already in 90% of the nation's national security satellites, not because Northrop builds all of those, many other companies do, but our foundries are providing the microelectronics that go into those satellites. And it's because of the pedigree of source and the specificity of what we're building in the U.S. We do everything from design to fab to packaging in those foundries.

Today, we're producing over 1 million microchips a year, so it's not a small business. But we certainly have invested hundreds of millions of dollars to expand that capacity, not just for our own needs, but as we've recently announced, we have opened up to support others as well. And we see a tremendous growth path as a result of the convergence of that trend I just noted of needing domestic supply for additional national security applications as well as our own demand.

Is there an opportunity to open up additional foundries? Or is it more just expanding what the base that you have?

So we certainly know how to build and run a foundry, and we know how to scale it. In terms of the business case, we have focused on those higher price point applications where people are willing to pay for the hardening that we do and the U.S. source, which is more expensive than foreign source. We will see that get to an equilibrium. It would be hard for me to sit here today and project how much of that demand is going to shift to the U.S. But we're confident enough that it's a tremendous growth opportunity for us that we have gone ahead and invested to build out that capacity. And we have two foundries, one on the East Coast and one in the West. They do slightly different things, different materials, but the point being both of them give that pedigree of U.S.-based source of supply.

Terrific. Let's move over to space and maybe -- and we can weave in Golden Dome on top of that. But you've been fighting a little bit of lower volumes, kind of some restricted work and NGI wind down. And there's also been some delays, obviously, SDA is kind of going through its own changes with Golden Dome and things. How do you think you can offset that with the space segment with some of those headwinds?

Space is an area where we have seen some specific headwinds, as you've noted, a couple of programs that we were not successful in capturing. And yet, we've also seen areas of tremendous growth in space resiliency and the modernization of new architectures in everything from missile tracking to ISR to communications. And so we are -- we saw a period of hyper growth. Our space business nearly doubled and now we are seeing a period of slower growth. But when you look at it over the longer term, and you zoom back and look from 2020 to 2030 over a decade, it hasn't been a steady growth, but it has -- it continues to likely be a very significant growth segment of our business. And it's in the areas that we think are going to be most enduring into the 2030s. We have transitioned our space business from low volume, handful of very exquisite satellites a year to where we are on order for 400 satellites this decade, and we are producing at that rate. And now over 60% of those satellites are lower cost, low Earth orbit resilient architecture assets. So our mix has shifted in a way that sets us very well going into the end of this decade and into the next based on the trends that we see in the space.

So related to space, so General Glynn hasn't come out with this architecture yet, but it should be up maybe at the end of the month or sometime maybe in December. How do you think Northrop plays in? I mean, obviously, you've got a very strong business in solid rocket motors, and it's a duopoly, but there's other players, too. But at the end of the day, how do you fit into the Golden Dome kind of architecture that's yet to be revealed?

Well, it's an important point that you make that the architecture has not been publicly released. So I won't comment on any specifics on it. But we have talked before about to provide homeland defense, there are some key attributes that an architecture would need. It needs a space layer to be able to identify, detect and track threats. It needs a set of interceptors to engage that threat. It requires command and control to be able to link our knowledge from disparate assets into a single operating picture to oversee the response to that threat and inform decision makers for their ability to engage and respond. And if you think of those major areas, Northrop Grumman has capability in each of those, but this is a big architecture. This is a significant undertaking. So my view is there is work for all comers in this area, and it will not be a single company or even a couple of companies that build out this architecture. It will be a large number of us in different pockets. And we're just fortunate to have a portfolio that is well positioned to help our country build out this capability at this moment.

Just maybe let's double click on the solid rocket motor side of things, just because you've been -- it's been a duopoly, but there has been a lot of upstarts, but the demand signals are obviously moving -- inflecting significantly higher. How do you see kind of the Northrop positioning against some of these upstarts that are coming in the solid rocket because there's a lot of kind of Silicon Valley dollars that are flowing and we see that. How do you think about that?

Yes. What I have said before and I still believe it to be true, is that it takes at least 3 years to start from a clean sheet design to get to producing solid rocket motors for a particular weapon system. Because one needs to build out the infrastructure. One needs to develop the capability, meaning the people who have the expertise, who have to design it, you have to qualify it. And today, that qualification happens one weapon system at a time. And so that is a multiyear process. And when I say 3 years, that's an expedited multiyear process because 5 years ago, I would have said 5. So even with the department wanting to move fast and new entrants investing and wanting to come into that space, it's going to take a little while.

In the meantime, Northrop has expanded our capacity. We are getting qualified on these weapons. We are becoming a second source where we aren't one today. And we have increased our market share where we are the source to be providing more of the solid rocket motors. My goal has been, and I think we've accomplished it now, we have showed the Department of War solid rocket motors are not a constraint in the supply chain. We have the capacity today. If we get qualified on additional missiles, we can provide the SRMs to support them at the growth rates that the department is talking about. And that's my focus.

So new entrants can come in. I'm not afraid of competition. Our company isn't afraid of competition. But our goal is to be positioned to take share now, perform, demonstrate, come down our cost curve, be very price competitive, and that's what we're on a path to do.

Thank you for that. The last couple of minutes here, let's talk a few numbers. Like when you think about margin outlook, when you think about the longer-term trajectory, how do you think of like what are the key drivers for you to get some margin expansion?

Yes. So I've talked about the key drivers for margin expansion, and they are performance, they are our digital transformation that drives cost efficiencies and they are our mix. What I foresee is that, that -- that trend in each of those 3 continues over the decade. Mix becomes the more important element of that shift towards the end of the decade.

Is that part of that because we've always tracked and you guys disclosed it all, the cost plus versus fixed price. Is that part of that mix that you're talking about changing?

That's part of the mix and then the international also is part of that mix. If you look at our disclosures, our international business tends to run a couple of hundred basis points above our average as a company. And so it too is accretive to our margin rate as we grow that as a percentage of our whole.

Great. And let's finish with free cash flow and capital deployment, and you've been very vocal and you're on a path to double your free cash flow, as I said in my opening comment. Talk maybe about a few of the key drivers you're seeing there to help you do that.

Yes. Well, we've met those commitments. We put those longer-range cash targets out a couple of years ago. And each year, we are hitting those commitments with 20% on average growth in our free cash flow year-over-year. We are expecting that few trends support that. One we just talked about as we increase our operating margins, that's contributing to increased free cash flow from operations, which we love. We also are on a path to reduce CapEx as a percentage of sales, not because we aren't going to continue to invest in the business, but we've been at a very elevated level for our industry. So we've been around 4%, which is double the industry average for the last several years. That's actually set us up quite well with this administration because we have been investing in our business. It's also set us up with the capacity I just talked about so that we can build out share now. But we don't have to continue to invest at that rate to support the business in our base book of business.

If we were to be very successful in new awards, capture a significant amount of Golden Dome, capture the Navy fighter program, accelerate the B-21 program. These would require increased CapEx, but they also would come with more operating cash. So those tend to offset each other as we think about the long term. So that's how we're thinking about the business and driving our free cash flow performance. And we have been hitting our marks for the last 3 years since we got those out and are committed to continue to do that.

I don't think anyone would complain about growth CapEx for sure. And then just on buybacks, can you just finish on that and where your thoughts on that?

Yes. We've been returning about 100% of our free cash flow to investors over the last couple of years. As we look -- and we've been doing that with that priority set that I talked about, investing first in ourselves. When we see the growth opportunities, that's always where we first want to put our resources. We have paid a competitive dividend, but we've also had double-digit increases in our dividend over the last several years and 22 consecutive dividend raises. So we are committed to continuing to pay a competitive dividend. And then with the excess share repurchase has been our way of returning that, and I expect that to continue.

Kathy, thank you so much for supporting the conference. Thank you, everyone. The breakout room is in the Oak Room next. Thanks so much, everyone.

Thank you for joining us.

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. [Operator Instructions]

I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed.

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 Crews, our CFO.

At this time, I'd like to turn the call over to Kathy. Kathy?

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 priority. 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 2 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 in our 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 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 investments to achieve the increased rate with the opportunity to earn improved returns.

We've also made important progress on missile defense program that can support emerging requirements. In the quarter, we received a multibillion-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 U.S. from long-range ballistic missile threats. System enhancements, including 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 U.S. 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 63XL rocket boosters played a crucial role in powering a ULA Vulcan Rocket that delivered the third at of Amazon Hyper satellites to orbit. With additional launches in backlog, the Hyper 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 plan that can 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 Ward and how they acquire capability and what they see 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 program. 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 war fighters. 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 product 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 war fighters 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 multifunction 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 themes we are seeing in the U.S. 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, broad-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 U.S. 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 FY '26 appropriation. 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 you with some color on how we're thinking about 2026. We expect mid-single-digit organic sales growth, supported by growth in all 4 of our segments. This top line growth will, in turn, enable us to also grow segment operating income. We expect the 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/A-XX 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 details on the quarter's financial results.

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 4, 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 of TACAMO and higher volume on F-35 program, partially offset by lower sales on F/A-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 2 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 5. Operational performance was outstanding again in quarter 3. 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 review 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 costs 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 3 margins improved to 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 operation margin rate of 11%.

These strong bottom line results drove higher earnings per share, as shown on Slide 6. 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 $0.35 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 7. 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 4 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 as 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 $0.65, 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 cost. 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 of free cash flow growth greater than 20%.

Turning to segment level guidance on Slide 8. 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 seasonally 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 1 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 Kathy'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.

[Operator Instructions] Your first question comes from the line of Kristine Liwag with Morgan Stanley.

Kathy, Ken, for the F/A-XX and the B-21 acceleration, can you provide more color on what that could mean for your 2026 outlook and what's included?

So Kristine, as I noted in my comments, we, at this point, have not included either in our 2026 outlook. F/A-XX clearly would come with increased revenue from what we have provided in that outlook. We expect that it would be somewhat dilutive 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 a 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 case as you know, on production are at the 0 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.

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

Yes. Fortunately, our team has the 2 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 U.S. government is actively working to set up additional sources of supply, including in the U.S. 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 U.S. more competitive and being able to provide these microelectronics for national security purposes into the future.

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

Kathy, can you maybe pull back the curtain a little bit more on B-21. I mean, how is it going with a 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.

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 the 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.

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 has been pushing hard for speed on acquisitions. So -- just curious where that's coming from.

Yes. 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 work on some of these important decisions that would open up the set of plans and ultimate awards that will come from the government as they seek to move forward quickly.

Your next question comes from the line of Seth Seifman man with JPMorgan.

Kathy, I wonder if you could talk a little bit about the opportunity in Golden Dome and missile defense in space. And you've been doing some work with the SDA, but if you could talk about the sort of the state of maturity and state of technology on missile readiness satellite or missile-warning satellites. And if you see the current kind of tracking layer SDA or HPPSS being kind of the nucleus of what's ultimately going to drive missile warning for Golden Dome? Or is it going to come from elsewhere?

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, 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 set 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.

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

Yes. 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 contracts, 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.

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

Kathy, maybe if we could talk about the Aero 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 recapture in '26? And just on B-21, how do we think about the free cash flow impact as it relates to CapEx in '26?

Sheila, this is Ken. I'll take that one. In terms of AS and the drivers across the 2025 sales profile, it was really -- it was timing of production activity. So don't view it as lost sales, but just timing of sales. The other aspect is on 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 -- a contributor to AES' 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 and cash flow is 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 in rate discussions.

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

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 in the '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?

Yes. We are very bullish on IBCS growth opportunities, both domestically. As you pointed out, it is a system that is able to integrate Barrett sensors and kinetic effectors to enable visibility of the battlefield and then to provide us a fire control system that has application for protecting our home land just as it has application for our 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 home land protection scenario. And of course, the U.S. has forward deployed the system, and I talked about the operational test that it has performed for forward deployment in both INDOPACOM and the European theater.

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

Yes. We expect those to phase in over a multiyear 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.

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

Ken, can you give any quantitative detail on the 2 B-21 financial items in the quarter between the higher EMD flight test costs and the contract restructure? It sounds like it was close to 0 on the net amount, but just curious how large the gross numbers were for those two items?

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

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?

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...

So this year, we started off at about 1.45, Scott. And when you look at quarter 2 and quarter 3, it is timing dependent. So overall, we're roughly slightly lower than 1, 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.

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

So I think it was last month's 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 was kind 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 time line associated with planned increases?

Yes, Rich, thanks for the question. As I've outlined in a few of our calls over the last 6 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 today's call, we have been awarded people, 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 U.S. national security applications, but also commercial applications in Space launch, as I spoke about today. with our GEM 63XL rocket motors that are fueling the ULA launches for the Kiper satellites. And so we are already through a significant amount of Northrop Grumman funded investments in that capacity, but we do have some that you will see committed in our CapEx numbers, '26 and '27 as well.

Okay. And then quickly here, I saw you made a bit of an announcement on Lumberjack, and I'm wondering if you 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?

Yes. Lumberjack is an exciting new offering. We are developing that out of our Mission Systems segment. And is a ground launch opportunity for counter-UAS. It is -- it has communication sensors. It is targetable. And we see this as an advancement of our small microelectronics processing capabilities and communication put on to an innovative platform that we've worked with partners for -- 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 6 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.

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

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?

We believe that it can. We certainly have invested with the intention of driving significant growth. And that has started to come to fruition. In some of our segments, you saw DS in particular, with a very solid growth rate last year ANSYS, and it is reflective of that investment. I was just talking about, not only in the capacity for munition and tactical missiles, but also the research and development that we're doing on new and innovative solutions for addition 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.

Your next question comes from the line of Rob Stallard with Vertical Research.

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 U.S. defense companies should do a little more research and a 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.

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 or 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, B-21 acceleration and other new areas that, that is the core of the conversation that we believe my industry peers are having with the department.

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

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.

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

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?

Yes. And that would be a separate discussion. That 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 with the long-term opportunity is on the program.

Your next question comes from the line of Myles Walton with Wolf Research.

In terms of the fourth quarter implied sequential revenue growth, it looks like Arrow is carrying most of that load. Are there extra working days in the fourth quarter that maybe help the 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?

So to answer your question around additional working days, there is 1 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 AS is driven really by 3 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 of new program wins in production like TACAMO. 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 3 factors that I mentioned.

Okay. And no impact from the Boeing strike or anything like that...

No, no impact.

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

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 looking -- 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 kind of -- those upstarts are factoring into kind of your plans or whether they're just on different levels in terms of the solid rocket motor output?

Yes. 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.

Appreciate it. And just a quick follow-up. On B-21, just to be clear, is Lot 3 in your 2026 guidance, we know it's not in '25, correct?

So the Lot 3 award and the Lot 5 advanced procurement is anticipated to be received in the fourth quarter of 2025. The vast majority of the expenditures, so sales recognition would not start until 2026.

Your next question comes from the line of Michael Ciarmoli with Truist Securities.

Maybe just one question, two items. I guess, Kathy, on Beacon, it looks like the testing is ramping up there. You've got 6 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, it looks like you're opening up some of your capacity for industry. Does that give a little bit more of a boost to MS margins going forward, if you kind of soak up some of that excess overhead?

Well, 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 gives us 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 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 U.S. services, the Air Force, the Navy and now the Army, but also international partners that are looking to build upon their combat collaborative aircraft fleet. .

With regard to your second question, around microelectronics, we have opened up our foundries to additional customers as more and more U.S. companies are looking to have domestic sources, our 2 foundries produced 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 $1 billion a year for sales to our cell 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.

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

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 tied in any Northrop Grumman performance? And then on the other side, does this open up potentially some opportunities for expanded work scope for you?

There's a lot to unpack there. Let me start by saying that we are partnering with the Air Force on an execution framework complete the restructure of the program. In the meantime, we are working on executing the program. And there have 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. 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 2 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 U.S. government on how do we accelerate the program from not McCurdy baseline, but also executing on the milestones that are right in front of us.

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?

On this program, we see likely both to need funding. The U.S. government contribution stands well beyond the U.S. 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 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.

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

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.

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

Okay. Great. So we'll get started. Hi, good morning. Welcome. I'm Morgan Stanley's Aerospace & Defense analyst, Kristine Liwag.

Very excited to host our next session with Northrop Grumman. Very excited to be on stage with Kathy Warden, Chairman or Chairwoman of the Board, CEO and President of Northrop Grumman.

Kathy, welcome, and thank you for being here.

Thanks, Kristine. It's great to be back with you again this year.

I am going to make a few opening statements. Before I do, I just want to remind you that I may make some forward-looking statements today, and those statements include risks and uncertainties. You can find more detail on those risks in our SEC filings on our website.

Just to kick things off, I want to share that it is a really exciting time to be in the defense industry. It is a dynamic environment, one that has stronger U.S. and global demand than we've seen in many decades as both the U.S. and our allies are recapitalizing and building out capabilities for both their sovereign defense as well as to project peace through strength.

And as we look at the portfolio that Northrop Grumman brings to that challenge, we have a very diverse portfolio. We have been investing to build capacity in that portfolio, over $13 billion of investment in R&D and CapEx over the last several years, which is positioning us now to be ready to deliver for our customers with the speed and the quality that they need.

As we project that into the end of the year, we're focused on performing on our commitments, but also positioning for a number of new exciting opportunities. And we'll talk some more about those today, areas like Golden Dome, the continued build-out of weapon systems, the nuclear triad where we are leading on 2 legs. And all of these areas have been very well supported in the Reconciliation Bill, which has added significant funding for U.S. priorities.

So I'm excited to be here today and to answer your questions about both the geopolitical environment and backdrop that we operate in as well as the Northrop Grumman portfolio.

Thank you, Kathy. And you know what you said about peace through strength, I think that's a very remarkable statement. And I'm glad that that's part of our strategy as a country. It's important to focus back on peace.

It is.

So I guess, going into the geopolitical environment and also the dynamism we have today, we're now 9 months into this new administration and there seems to have been significant changes occurring, how do you think about the changes occurring in this environment, the priorities of the administration? And how does this leave Northrop Grumman? Do you see the environment more positive or negative for the company?

We see a tremendous amount of consistency over the last decade in the priorities of the United States. Those consistencies include a focus on the buildup of capability by countries like China, the aggression of Russia, and being able again to deter potential adversaries from taking action that's not in the best interest of the U.S. and our allies. And really, as you noted, to have peace and stability around the globe. And so those priorities remain strong in this administration and a cornerstone of the national defense strategy that this administration is outlining.

But there are also some new areas of focus: the defending of the homeland and helping our allies to do the same. So Golden Dome, of course, is a manifestation of that in the U.S. But also working with our allies, particularly in Europe, to be able to build up their sovereign defense to protect their homelands as well. And so those areas are consistent, but higher priority as we sit here today than we would have envisioned 12 months or so ago, and they, therefore, represent new opportunities for companies like Northrop Grumman.

But at the same time, priorities around the triad recapitalization that have been and continue to be the cornerstone of U.S. spending are also central to our portfolio. So we are making sure that our company is able to move at the speed of relevance and focus on our operations to do so, that we have built out the capacity needed to be responsive to this increased demand environment, and that we are working with our allies, so a real focus on growing our international business to help our allies get access to some of these capabilities as well.

You called out Golden Dome. Can you give us more color regarding the opportunity set for Northrop on this program? How do you see this evolving?

We see Golden Dome as a multilayer architecture, and the different aspects of the capability needed will happen in different time frames. So let me unpack that for a moment.

There are some capabilities like regional defense that include integrated air and missile defense, counter-UAS systems and those are already available today. We are producing those types of capabilities often to be forward-deployed at military operating bases to defend our troops who are operating in those regions. And so the U.S. government has the optionality of just buying more of those existing programs to fulfill the needs in those areas of homeland defense.

But then there are also other areas like space-based interceptors where that capability does not exist today. Elements of it do, that will lead to mature technical offerings over time, but those are going to be more development programs, and so those will follow a more traditional acquisition path.

So I think all of this will happen in parallel. General Guetlein has been confirmed by the Senate to lead this effort in the U.S. He is working on an architecture which will provide more clarity on what will be acquired as well as the acquisition strategy of when and the funding applied to each of these streams of efforts.

But it's important to remember, it's not one big acquisition. This is many programs, some existing, some new, that will come together to fulfill needs of the homeland architecture.

That's very helpful color. Regarding the budget environment in the U.S., we're seeing the fiscal year '26 budget monetization could be up over 20%. We're also seeing significant budget increases from our European allies. How do you think about that environment? And what's the medium or longer-term growth outlook for Northrop? Do you see an opportunity to break out beyond your historical mid-single-digit growth outlook?

That opportunity certainly exists. And it was what I mentioned in my opening comments, that this really is an exciting time to be in the industry to make an impact that for multiple decades we've been working toward, but now the resources exist both within the U.S. and our allies that meaningfully change the trajectory of these modernization programs that are underway.

And so what we look to is some certainty that is likely to come as we get through this first budget cycle under the new administration. The Reconciliation Bill certainly provided significant resource and points to areas of our portfolio that we know are high priority, like the B-21, and the potential for ramping that program more quickly, the additional resources that were applied for the Sentinel program, about $2.5 billion, and other things in our portfolio that are benefactors of Reconciliation funding create that opportunity for ramp in the U.S.

But then there are also new programs. We're waiting for award. And as those are known, those could also create some upside for us as we look out over the next several years.

And then at the same time, you mentioned international. Our book-to-bill for international last year was 1.4, continues to be growing this year. Our business grew 18% international in the first half of the year. And we've said we expect that double-digit growth to continue. So we really are seeing tailwinds in both areas and continue to ensure that we are investing in the capacity that allows us to ramp as quickly as our customers need us to.

Kathy, on the fiscal year '26 proposal, we saw a pretty significant support for the B-21 and the Sentinel. And you've called out the monetization of the nuclear triad continues to be a priority for the U.S. government. Can you level-set us regarding these programs? How did their strategic value really change? Because there's a significant step-up in dollars. And then also, how do we think about the ramp of these programs in the coming years?

So B-21, as I talked about extensively on our second quarter call, we're in discussions with the Air Force to change the rate, increase the rate, at which we would build the aircraft. And that would create more resources being applied, first, to build the capacity to increase the ramp, and then over time, the annual profile of revenue for that program. And we expect those decisions to be made this year. So more to follow on that.

Sentinel is also receiving funds in Reconciliation, mainly over these next couple of years, to look at ways to accelerate the fielding of the capability. And that's everything from design trades that can allow us to move quickly through engineering phase of the program to risk reduction activities in the field, on the silos themselves. And all of that really just sets the stage for us to move more quickly as the program marches through this engineering and test phase of the program and into production in the early 2030s.

Great. And diving deeper into the -- sorry, in the B-21, you mentioned you've been in discussion with the Air Force to accelerate -- potentially accelerate the program. Can you help us understand the puts and takes and the financial implications for you should we see acceleration of the program without significant changes to the contract structure?

So part of the discussion is determining the program plan and what that rate would be and, therefore, what the resources required to facilitize to that rate would be. We do expect that that would result in investment that Northrop would need to make in capital. And we also expect that we would get the opportunity for increased returns, meaning incentives on the program to make that investment and hit certain milestones to achieve returns above the baseline program.

And so that's what we're working with the Air Force right now. And as I talked about on our second quarter call and as outlined in our disclosures, we expect to have some decisions on that this year that then we would reflect into updates to our outlook going forward for the program.

And shifting to the Sentinel. The Air Force has been talking about restructuring the program to take out costs. But in the quarter, you took a nice positive EAC adjustment, $76 million in the program. Can you talk to us about -- can you talk to us about the financial implications of this? How do we think about the risks of the program, especially when there are cost takeouts that need to be done in the program that's not part of your capabilities but still part of the entire Sentinel piece?

Yes. Well, part of our role in this phase of the program is to help the government think through their options for meeting the requirements of the program, that is the design that we are working. And through the restructure, because the cost particularly of construction had grown, there was a desire to see what design trades could be made to bring that cost back in.

That's what we are working through with the Air Force, and they are now working to make decisions about those requirements, trades and make design selection so that we can move that phase to finish the design and move on with the program.

This particularly affected the piece of the program that is in the operational field, what we call launch facilities. The missile development was moving along at pace. And so now we're bringing all of those pieces together for the full system design, and we will be able to make those important trades together at the system level and move forward.

So that's the real breakthrough that we had earlier in the year. It led us to have more certainty around what would happen during this restructure phase and beyond. And then that led to us reflecting that information in our estimate to complete in the second quarter and taking the opportunity and the profit pickup that came with that.

Great. Helpful context. And you highlighted already international sales was up 18% year-over-year. Can you talk more about the opportunity set? Which particular regions are you seeing the most demand? And also from your product portfolio, where are you seeing differentiation in your capabilities versus what's available in the market?

We are seeing our international growth come pretty holistically across the enterprise, with the exception of our space segment, which is still mostly U.S. We, in our Defense Systems, are seeing the most significant international growth, and it's largely in areas like integrated air and missile defense, as you would expect, as countries think about defending their homeland, having that situational awareness to be able to defend against short and medium range. Missile threat is paramount right now, and that's our IBCS product line.

But we also are in the business of both priming and supplying solid rocket motors for tactical missiles, where we have seen a step increase in demand signal coming out of our allies, particularly in Europe, for replenishment of weapons they provided to Ukraine as well as just their own stockpiling.

And then in addition, in our Mission Systems business, there is a recapitalization of sensors that is happening in all areas: radars, electronic warfare, self-protection systems for aircraft. And so our Mission Systems business is also seeing fairly significant backlog increase for international.

And in Aeronautics, it's specific to a couple of product lines, E-2D, Triton, where we are seeing increased requests for those capabilities as well.

And Kathy, how do you think about your go-to-market strategy for international customers? We've seen other primes also partner with the domestic champions. Do you plan to go to market as Northrop or find additional partners? And where do you see the opportunity set?

We absolutely are partnering. We needed to do 2 things. The first was have more products to export, and that was within our control and we worked over the last 7 years to build up our product portfolio of things that could be exported. And we have accomplished that objective.

Now we are in the process of defining partners, usually by product line and country, that are able to help us to integrate these capabilities into their sovereign offerings. IBCS is a terrific example of this. We always go to market with a partner because the product itself is about integrating the local sensors as well as their weapon systems into the IBCS architecture. And the companies best positioned to do that are the ones in that country who has either built or are operating those systems today. They bring that expertise to us, we're bringing the technology, and we're working hand-in-glove to deliver those. But for each country, it's a different partner because their local knowledge is so key.

So as we see international continue to pick up, at some point, what percent of the portfolio do you think will be international for Northrop? And then how are the financial profile of these international orders different from the domestic ones? Could we see potential margin expansion?

We do believe that our international growth will be a margin tailwind. The business is and, we expect, will continue to be accretive to our margins. And we have not set a goal for percentage of sales from international, but we have set a goal for international to continue to grow double digit and outpace our domestic business. So by definition, increasing our mix in international.

The reason we're not setting a goal is U.S. demand is also very strong and our company is very well positioned to go after it. So we want to see that part of our portfolio expand simultaneously. So we're really driving for above-market growth in both domestic and international.

And shifting gears, you realigned the strike and surveillance aircraft solutions business from Defense Systems to Aeronautic Systems earlier this year. And last year, you also realigned the Strategic Deterrent Systems division from Space to Defense. Can you talk about the rationale here, your approach to portfolio management and the benefits you're seeing from these recent restructuring activities?

So we don't restructure for just the purpose of moving pieces of the portfolio around. It has to have a strategic reason to do so. And when we were managing the portfolio and decided to sell our services businesses a couple of years ago, some of the sustainment to support work transferred outside of the company. And when we looked at what we retained, it was largely support to systems that Northrop Grumman builds and deploys. And so that sustainment expertise that was sitting in our Defense Systems business has synergy with our Aeronautics business. It's actually fielding these systems and modernizing them over time.

So for instance, B-2 sustainment is highly relevant to what we learn and then deploy into the B-21 upgrade as we go to deploy those and sustain them over time. So we wanted to bring those teams together. And that's what we did with the movement of that portfolio from our Defense Systems business into our Aeronautics. So now the whole life cycle of our air platforms resides in our Aeronautics business.

Likewise, when we were making that change, we made the decision to take our Sentinel program, which had been a direct report to me, and combine it with the rest of our Defense Systems business, because it's strategic missiles and the rest of that business is largely tactical missiles and integrated air and missile defense. So a very common set of technologies, albeit different sizes and applications, but we could leverage the engineering workforce across that entire portfolio by bringing it together.

So that's the reason behind those 2 particular moves. But more importantly, strategically, we only make those moves when we see that there is more benefit than the risk of disrupting and moving parts of the company around.

You've also divested the training business in your Defense Systems. Should we expect more pruning to come with the portfolio?

We constantly look at the portfolio to make sure we're the best owner of each part of it, that we have the portfolio we need to fulfill our customers' needs, not just today, but well into the future as we see the market shifting. The market has been fairly consistent over these recent years, as I talked about earlier in this discussion. So we don't see major gaps in our portfolio. We like what we have. We've been investing in it.

So you might see us continue to do some small pruning like we did with the training services business, but we don't see anything significant on the horizon that we would likely divest in, nor do we see M&A as a main driver for us over these next few years? Because we have such an opportunity-rich environment by spending that capital, investing in the capacity we need to seize the growth that I've already talked about.

Great. Regarding the F-35 -- I mean, we just had Lockheed at the previous panel. You're a significant subcontractor to the program, I've had a chance to visit Palmdale a few times; it's a pretty phenomenal facility. How are you thinking about the uncertainty regarding the buy order from the U.S. customer? And also for the international partners, there seems to be some hesitation, reconsidering of some orders, but then there are also new customers and new volumes at play. What's your outlook for the program? And how do you think about the revenue contribution of the F-35 to your portfolio?

We expect it to be relatively stable. A number of moving parts under the surface, obviously. We have the work that we do in production. It's largely driven by our aeronautic sector and the building of the center fuselage. We are standing up a second source, Rheinmetall, to complement our production facility to replace PAI from Turkey who was providing that excess capacity.

And so we feel like we have what Lockheed needs to be able to produce at the rates they're projecting, and we don't see much change there. I will note about 40% to 45% of what we are building today, because we built a bit ahead of the units being delivered, is for international customers. And the international demand remains strong.

When you look at the rest of the portfolio, we have Mission Systems also working production. Modernization is driving sales right now. And sustainment is increasingly a key part of the revenue composition for us on F-35. So we expect all of those dynamics to continue into the foreseeable future and, net-net, be about even with where we are today.

Shifting gears to the emerging defense tech players. I mean that seems to be the term de jure here, emerging tech, and with a big, fat multiple. They're getting a lot of investor traction and investor mind share for sure. And some have actually won some significant Department of Defense -- or Department of War contracts. How are you thinking about this momentum both from a potential competitive standpoint and also partnership standpoint? How do you think they live in the ecosystem? And where do you see the value in your portfolio? Would you consider buying one of them, partnering one of them? And are there parts of the Northrop portfolio moat that you're not worried about that they could potentially take market share from?

A lot to unpack there. Let me start with we welcome the competition and we welcome partnering. That is how the ecosystem works, and we embrace new companies coming into that ecosystem. Today we are partnering with most of what you would define as new entrants, in one way or another.

We don't do partnerships for the sake of partnerships. We do them when there is a capability that that partner has, when added with ours is complementary and can lead us to have the right offering for the government. And so you will see us talk about those partnerships in more specific ways than overarching ways, but nonetheless, they are happening with those companies.

We are also, though, competing. And I'm pleased when we go into a competition and are able to, head to head, demonstrate, because that's when a company shines, like ours, is innovating and bringing new technology, and performance can be evaluated. So we're seeing that happen as well. And I feel good about how our team is faring in those head-to-head competitions, both with our traditional competitors and the new entrants.

And our company is very familiar with new acquisition approaches. We are one of the top companies in receiving other transactional authority contract awards, far more than any of the new entrants. So we know how to compete even outside of the traditional acquisition system, and we've demonstrated that over the last few years.

So really, I think it's healthy. I embrace competition, and I take new entrants as seriously as I take more traditional companies. We compete vigorously, but we also partner when it makes sense. And I think in this time of high demand, there's a place for all of us.

Yes. And Beacon. You unveiled Beacon. It's a flying mission test bed that can help companies hone autonomous software from multiple companies. Can you talk more about this capability? First, what is it? How meaningful is this capability set? And is this an emerging partnership model that you can lean into?

Yes. So Beacon, for those of you who hadn't heard about what we announced, it is a test bed for autonomous systems. Our company was one of the first to have a fully autonomous vehicle. And we have over 500,000 flying hours, which is more than any other company. And we wanted to bring that expertise to a test bed that could help other companies come in and demonstrate their innovations, learn by being able to apply those in a high-fidelity model based on all of that flight experience, us see who we might partner with as we look at future opportunities in autonomous systems, and have a resource that not only benefits our company but benefits the ecosystem as a whole.

If you say, "Well, what's in it for you?" Well, what's in it for us is being able to learn, partner and embrace the best of the best to bring forward solutions for the U.S. government. That's what we are in business to do. And when we do that, we find that our win rate goes up and we have the best product. So we want to create environments where that kind of partnering can happen, back to your previous question. And we think that it's going to let the best companies demonstrate what they're capable of doing in a realistic flight simulation environment.

This question I always tried asking because I can't sleep at night after I hear your answer. But what keeps you up at night? What are you worried about in this environment? Look, portfolio aside, it seems like you have the -- you're seeing the dollars come through for the programs that you've invested in. So that's materializing, the portfolio is in great shape. So what are you most worried about? What keeps you up at night?

Yes. The threat environment. That hasn't been my answer when you've asked me that in recent years. But I will say the escalation that I'm sensing both domestically, regionally and globally, it continues to escalate. It's what's driving the demand that I just spoke about. And in many ways, that supports our industry, but in other ways, it's a signal of the lack of global stability that we are operating within. And so that does keep me up at night.

It's why I came in to this industry, 24 years ago today, the anniversary of 9/11, some of you know, I came into this industry after 9/11. I thought I'd stay for a couple of years, do my part for national security. It's why I stayed in this industry this entire time. And I think as Americans, we really have to take a moment to really reflect on what's happening in the world and get back to peace through strength. Peace through strength.

Well, thank you very much, Kathy. Thank you for being here with us today and sharing your thoughts. This concludes our presentation with Northrop Grumman.

Thank you.