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Northrop Grumman (NOC) is sharply lower after reporting its Q2 results this morning. The aerospace and defense contractor delivered a large EPS beat, while revenue increased 5% yr/yr and 10% sequentially to $10.88 bln, roughly matching expectations. NOC also raised its FY26 sales outlook amid strong demand across strategic deterrence, tactical weapons, missile defense, and restricted programs. Revenue guidance increased to $43.75-44.25 bln from $43.50-44.00 bln, roughly in line with expectations, while adjusted EPS guidance rose to $28.60-29.10 from $27.40-27.90, nicely above expectations.

• Segment growth: Aeronautics Systems led the quarter, with sales increasing 13% yr/yr to $3.52 bln on higher B-21 and other restricted program volume, the TACAMO ramp, and increased activity on the B-2, F-35, and E-2 programs. Defense Systems sales increased 5% to $2.09 bln, while Mission Systems rose 3% to $3.25 bln and Space Systems increased 4% to $2.75 bln.
• Margin pressure: Segment operating income declined 5%, with margin down 120 bps to 10.6%. Defense Systems margin fell 520 bps to 7.5% on the loss of last year's Sentinel benefit, higher AARGM-ER costs, and a $68 mln SiAW charge. Space Systems margin declined 200 bps to 8.6% on a $91 mln GEM 63XL adjustment. Aeronautics held at 10.3%, while Mission Systems expanded 140 bps to 15.4%.
• Demand and backlog: Net awards of $20.0 bln lifted backlog 17% yr/yr to a record $104.7 bln, led by Sentinel, restricted programs, F-35, and Glide Phase Interceptor awards. NOC is also pursuing ten multiyear tactical-weapons agreements, with capacity already in place, while accelerated B-21 production supports longer-term Aeronautics growth.
• Cash flow and outlook: Adjusted free cash flow jumped 54% to $978 mln, primarily reflecting lower net cash tax payments, partially offset by capital expenditures increasing 31% to $302 mln. NOC maintained FY26 segment operating-income guidance of $4.85-5.00 bln and adjusted free-cash-flow guidance of $3.10-3.50 bln.

Briefing.com Analyst Insight

NOC's Q2 included several encouraging indicators, including 10% sequential sales growth, strong cash generation, and record backlog of nearly $105 bln. Aeronautics was the standout as B-21 and TACAMO drove double-digit growth, while Mission Systems delivered strong margin expansion. However, overall segment profitability weakened as Defense Systems absorbed tactical-missile investments and Space Systems continued to work through GEM 63XL issues. The EPS beat and higher FY26 EPS outlook also benefited from a lower expected tax rate, while segment operating-income guidance remained unchanged. The higher Aeronautics outlook supports the longer-term growth profile, but improved execution in Defense and Space will likely be needed to drive broader margin recovery. Separately, converting record backlog into sustained sales and cash flow will remain central to the outlook.