NOC Q1 Earnings Call: Profit Miss Driven by B-21 Charges and Contract Delays

Security and aerospace company Northrop Grumman (NYSE:NOC) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 6.6% year on year to $9.47 billion. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $42.25 billion at the midpoint. Its non-GAAP profit of $3.32 per share was 47% below analysts’ consensus estimates. The stock traded down 11.8% to $468.25 after reporting and hosting the earnings call.

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StockStory's Take

Northrop Grumman’s first quarter results were shaped by delays in government contract awards and a significant profit adjustment on the B-21 bomber program. Management cited the ongoing impact of a dynamic U.S. defense budget environment, including a continuing resolution that slowed new awards, as a key reason for lower sales and margins. CEO Kathy Warden acknowledged the $477 million pretax loss on B-21 as a consequence of higher manufacturing and material costs, some of which stemmed from process changes to support accelerated production rates and macroeconomic pressures.

Looking ahead, management reaffirmed its full-year revenue outlook but reduced its non-GAAP earnings guidance due to the B-21 charge. Warden pointed to a record backlog and strong international demand as drivers of confidence in achieving the company’s targets. She also highlighted ongoing investments in innovation and operational efficiency as essential to supporting future growth, even as the defense industry navigates uncertainties in budget cycles and supply chain risks.

Key Insights from Management’s Remarks

Northrop Grumman’s management addressed the main factors behind the quarter’s performance, focusing on program-specific challenges and evolving market dynamics. The company attributed the earnings miss primarily to the B-21 adjustment and delayed U.S. government contracts, while also emphasizing progress in other key programs and international markets.

• B-21 Bomber Cost Adjustment: The $477 million pretax charge on the B-21 program was driven by higher manufacturing costs following a process change to enable faster production, as well as increased material costs due to macroeconomic factors. Management stated these changes were necessary to support future production rates and reduce long-term program risk.
• Contracting and Award Delays: Leadership cited slower-than-expected government contract awards, a result of the ongoing U.S. defense budget continuing resolution, as a major factor behind the lower sales ramp in the quarter. However, management expects improvement in award timing as the year progresses.
• Sentinel and IBCS Program Progress: The Sentinel missile program achieved a critical milestone with a successful static fire test, while the Integrated Battle Command System (IBCS) secured a nearly $500 million contract to expand software and AI capabilities. These developments underline steady progress in strategic programs aligned with U.S. national security priorities.
• International Sales Momentum: International sales rose 11% year over year, with management highlighting robust demand from Europe, Asia Pacific, and the Middle East. The company’s first-quarter international book-to-bill ratio of 1.45 indicates sustained growth potential in overseas markets.
• Cost Efficiency Initiatives: Management noted ongoing efforts to drive $200 million in annual cost savings through supplier engagement, facility optimization, and digital process improvements. These initiatives are viewed as essential to maintaining competitiveness amid inflationary pressures and evolving trade policies.

Drivers of Future Performance

Management’s near-term outlook is shaped by expectations for improved contract flow, execution on major programs, and growing international demand, but is tempered by inflationary headwinds and ongoing budgetary uncertainties.

• Backlog Conversion and Award Timing: The ability to convert a record $92.8 billion backlog into revenue depends on timely government contract awards, especially in the second half of the year. Management believes that recent award momentum will support a sequential sales ramp.
• Program Execution and Cost Control: Delivering on key programs such as Sentinel, IBCS, and B-21—while managing manufacturing costs and supply chain risks—remains central to stabilizing margins and achieving profit targets. Ongoing cost efficiency measures are expected to offset some macroeconomic pressures.
• International Demand Expansion: Management sees continued growth in international markets as a major long-term driver, supported by new product approvals and expanded partnerships. However, trade policy changes and global supply chain issues remain potential risks.

Top Analyst Questions

• Kristine Liwag (Morgan Stanley): Asked for milestones to watch for de-risking the B-21 program and about potential future charges. Management explained that recent process changes and learning on early production lots should reduce risk going forward, but acknowledged some uncertainties remain.
• Robert Stallard (Vertical Research): Inquired about the stability of U.S. government contracting and what provides confidence in improvement. Management expressed optimism due to observed progress on award decisions, but cautioned that uncertainties in budget cycles persist.
• Ronald Epstein (Bank of America): Pressed for clarity on whether B-21 charges could recur and the factors behind the latest adjustment. Management said the bulk of costs stemmed from a one-time process change and material inflation, and do not expect similar charges to repeat, but noted ongoing risk management.
• Sheila Kahyaoglu (Jefferies): Asked how tariffs and trade policy could affect Northrop Grumman’s supply chain and costs. Management stated that most supply contracts shield the company from trade-related cost increases, but they continue to monitor and mitigate component availability risks.
• Myles Walton (Wolfe Research): Questioned the confidence behind the expected sales ramp in the second half, given current contract delays. Management pointed to large awards already in backlog, planned ramps on key programs, and anticipated new competitive wins as reasons for their outlook.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be watching (1) the pace at which delayed government contracts are awarded and converted into revenue, (2) progress on critical milestones in major programs like B-21 and Sentinel, and (3) the trajectory of international sales growth as new awards are booked. Execution on cost control measures and the ability to manage supply chain risks will also be important markers of success.

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