Northrop Grumman raises 2025 EPS and cash flow guidance as international sales climb 18% amid robust defense demand

Earnings Call Insights: Northrop Grumman (NOC) Q2 2025

Management View

Kathy J. Warden, CEO, stated that “we delivered a strong second quarter. The breadth and depth of our company’s portfolio and our ability to respond with speed to our customers’ needs continues to drive robust growth as evidenced by our strong backlog.” She emphasized a 9% increase in revenue compared to Q1, with sequential sales growth in all four segments and an 11.8% segment operating margin.
Warden announced increased guidance for segment operating income, earnings per share, and free cash flow, citing strong Q2 results and confidence in the second half outlook.
International sales grew 18% year-over-year in Q2 and are up 14% year-to-date, with “a strong international book-to-bill for aircraft, weapons, missile defense and airborne systems.” Significant opportunities were cited in Europe and the Middle East for programs like IBCS, weapon systems, and ground-based radars.
Warden highlighted “Golden Dome for America” as a major new opportunity, with Northrop Grumman positioned as a key capability provider for global missile defense. She also detailed progress on the Sentinel program, including agreement on a program restructure and a positive earnings adjustment from performance incentives. The B-21 program received an additional $4.5B to expand production capacity, with ongoing discussions regarding an accelerated production ramp.
Strategic investments in solid rocket motor capacity were reported, with annual production rates expected to rise from 13,000 units today to 25,000 by 2029. The company repurchased nearly $900M in stock in H1 2025 and increased its quarterly dividend by 12%.
CFO Kenneth B. Crews reported, “second quarter sales were $10.4 billion, up 1% year-over-year. Sequentially, Q2 sales were up 9% compared to Q1, with all segments contributing to this meaningful growth.” He noted Q2 diluted EPS of $8.15, a 28% increase year-over-year, driven by higher sales, improved segment performance, and a $1.04 gain on the divestiture of the training services business.

Outlook

The company raised its 2025 guidance for segment operating income, EPS, and free cash flow. EPS guidance increased by $0.05 to a range of $25 to $25.40. Free cash flow guidance now stands at $3.05B to $3.35B for 2025, up from previous targets. The company expects organic sales growth of approximately 3% for the year, with H2 revenue projected to be higher than H1 by $2.5B. Segment operating margin rate for H2 is forecasted at nearly 11.4%.
Management expects B-21, Sentinel, and Columbia programs to collectively deliver roughly $750M in higher H2 sales, with new programs like TACAMO, IBCS, and international ground-based radars contributing nearly $700M. Q3 sales are projected to be up 3% to 4% compared to Q2, with further acceleration in Q4.

Financial Results

Q2 segment operating income was up 11% compared to Q2 2024, with the segment operating margin rate rising 100 basis points to 11.8%.
Aeronautics sales increased 2% year-over-year due to higher volume on B-21 and TACAMO, partially offset by lower restricted sales. Defense Systems sales grew 7% on a GAAP basis, driven by Sentinel and higher ammunition sales. Mission Systems sales rose 14% year-over-year, driven by inventory liquidation and higher marine program volume.
Space segment Q2 sales were lower, reflecting $283M in year-over-year headwinds due to winding down work on two programs.
Free cash flow for the quarter was $637M, with management reiterating that Q4 is expected to be the largest quarter for cash generation.

Q&A

Douglas Stuart Harned, Bernstein: Asked about the modest guidance increase despite strong Q2 margins. Kenneth B. Crews explained, “One nonoperational item that offset that was the change regarding tax reform… due to general limitations on certain credits as well as deductions related to certain R&D expenditures, the offset on the operational performance was driven by that.”
Gavin Eric Parsons, UBS: Inquired about B-21 accelerated production and returns. Warden responded, “We are looking to get a fair and equitable business arrangement where we would be incentivized to invest in that production capacity. And with that would come the opportunity to earn improved returns on both the remaining lots of LRIP and the NTE units.”
Ronald Jay Epstein, Bank of America: Sought details on international sales growth and backlog. Warden noted “very strong book-to-bill, 1.4x in international” and ongoing broad-based demand across weapons, missile defense, and sensors.
Robert Alan Stallard, Vertical Research: Asked about Sentinel’s silos as a pacing item. Warden replied, “We actually made progress such that the work was turned back on for the launch facilities… we are back into designing those and really nailing down with the Air Force the appropriate requirements.”
Sheila Karin Kahyaoglu, Jefferies: Probed Defense Systems growth with solid rocket motor expansion. Warden explained, “Defense Systems is likely to have our highest sustained growth rate over these next several years, largely fueled by weapon systems as well as our integrated air and missile defense.”

Sentiment Analysis

Analysts expressed a positive but probing tone, frequently pressing for details about margin sustainability, program funding impacts, and international sales momentum.
Management maintained a confident and constructive tone throughout, especially in describing portfolio strength, program progress, and the outlook, frequently using affirmative language such as “we are confident” and “we expect.”
Compared to the previous quarter, analysts appear less concerned about B-21 risks and more focused on growth opportunities and international expansion, while management’s tone has shifted from defensive and cautious to more assured and forward-looking, supported by improved operational results and stronger guidance.

Quarter-over-Quarter Comparison

Guidance was increased for EPS and free cash flow in Q2, whereas in Q1, guidance was reaffirmed or adjusted downward due to B-21 charges.
Management’s strategic focus in Q2 expanded to highlight international sales, program accelerations, and new opportunities such as Golden Dome, compared to Q1’s emphasis on risk management and backlog.
Analysts in Q2 focused more on the sustainability of higher margins, international growth, and the implications of increased defense funding, while in Q1, attention centered on B-21 charges, supply chain concerns, and contract delays.
Management’s sentiment in Q2 reflected greater confidence, with less discussion of program risks or cost challenges than in the previous quarter.

Risks and Concerns

Management cited potential uncertainties around the outcome of discussions with the Air Force regarding B-21 accelerated production, noting “the ultimate outcome of these discussions remain uncertain.”
The impact of changes to R&D tax credits, which led to a higher effective tax rate for the year, was highlighted as a factor partially offsetting operational performance.
Analysts raised questions regarding the sustainability of recent margin improvements and the potential for further program adjustments, especially on Sentinel and B-21.

Final Takeaway

Management underscored a strong Q2 marked by broad-based sales growth, margin improvement, and robust international demand, supporting an increased outlook for EPS and free cash flow. The company remains focused on executing major programs like B-21 and Sentinel, expanding capacity for solid rocket motors, and leveraging new opportunities in missile defense while maintaining a disciplined approach to capital deployment and shareholder returns.

Read the full Earnings Call Transcript