Northrop (NOC) Q2 2026: Record $104.7B Backlog, Margin 10.1%
Northrop Grumman's order book crossed $100 billion for the first time — backlog reached $104.7 billion at June 30, 2026, up 16.7% from $89.7 billion a year earlier and up about 9% from year-end 2025 — yet second-quarter operating income fell 23% to $1,096 million and the operating margin compressed to 10.1% from 13.8%. The composition of that record matters as much as the size: of roughly $20.0 billion in second-quarter net awards, $7.6 billion came from a single line — the 10-Q discloses that further definition and authorisation of the Sentinel program execution plan "result[ed] in a $7.6 billion increase in program backlog." That is a cost-type EMD restructure being formally scoped, not a newly competed win, and it carries the margin profile of cost-plus work. Strip it out and the quarter's book-to-bill on genuinely new business is far less spectacular than the headline implies.
Most of the headline earnings decline is an artifact of the prior-year $231 million gain on the training services divestiture, but the underlying picture is not flattering either: segment operating income slipped 5.0% to $1,158 million on sales that rose 5.1% to $10,876 million, and the earnings that did survive were carried by an effective tax rate of 6.3% rather than by program performance. For a prime contractor entering a defense budget cycle in which the FY2027 request — roughly $1.5 trillion, some 44% above the FY2026 level, though about $350 billion of that arrives through mandatory reconciliation funding rather than regular appropriations and none of it is enacted yet — points to years of expanding demand, the question is no longer whether demand exists. It is whether Northrop can convert record demand into margin.
1. Condensed Consolidated Statement of Financial Position
1-1. Principal asset movements
| Item | Dec 31, 2025 ($M) | Jun 30, 2026 ($M) | Change % |
|---|---|---|---|
| Cash and cash equivalents | 4,403 | 2,307 | −47.6 |
| Accounts receivable, net | 1,375 | 2,311 | +68.1 |
| Unbilled receivables (contract assets) | 6,544 | 7,953 | +21.5 |
| Inventoried costs, net | 1,309 | 1,415 | +8.1 |
| Property, plant and equipment, net | 10,972 | 10,297 | −6.2 |
| Goodwill | 17,437 | 17,439 | +0.0 |
| Total assets | 51,377 | 50,763 | −1.2 |
Two lines deserve attention. First, receivables. Accounts receivable and unbilled receivables together rose to $10,264 million from $7,919 million at year-end — but half-year comparisons flatter the trend, because Northrop's billing cycle always builds working capital in the first half. The honest comparison is year-over-year: at June 30, 2025 the same two lines totalled $9,329 million, so the balance grew 10.0% against sales growth of 5.1%. Receivables are still outrunning revenue by roughly two to one, and unbilled receivables — revenue recognized under cost-to-cost before the customer has been billed — account for the bulk of it.
Second, property, plant and equipment fell 6.2% even though the company spent $469 million on capital expenditures in the half. The filing explains why. Under the first-quarter 2026 agreement with the U.S. Air Force to expand B-21 production capacity, Northrop agreed to sell to the Air Force an aircraft it had previously planned to utilise as a company-owned test asset. The 10-Q states the asset was still under construction at the time of sale, that construction costs had been recognised as capital expenditures inside PP&E, and that the agreement "resulted in a reduction of PP&E during the first quarter of 2026," with no material cash inflows related to the sale in that quarter. The reported PP&E decline therefore understates the physical investment now underway — Northrop still expects to invest approximately $2.5 billion over a multi-year period to expand B-21 capacity.
Inventoried costs rose to $1,415 million, driven almost entirely by work in process ($1,037 million versus $945 million); raw materials were essentially flat at $309 million. Goodwill of $17,439 million — 34.4% of total assets — was unchanged, with no impairment recorded. Operating lease right-of-use assets edged up to $1,901 million from $1,859 million, a routine ASC 842 movement with no signalling value.
On debt maturities, the 10-Q does not present a full ladder. What is disclosed: Northrop repaid $270 million of 7.875% notes and $257 million of 7.75% notes at maturity in March 2026 and, per the filing, issued no unsecured senior notes during the six months — retiring its two highest-coupon tranches without refinancing. Interest expense of $323 million for the half against roughly $14.4 billion of non-current long-term debt implies a blended cost near 4.5% on an annualised basis (2.2% for the six months). Separately, and not to be confused with that carrying balance, the estimated fair value of long-term debt was $14.4 billion versus $15.1 billion at year-end. The current portion of long-term debt sits inside Other current liabilities rather than on its own line.
1-2. Financial versus operating liabilities
Total liabilities fell 5.3% to $32,879 million. Financial debt did most of the work: non-current long-term debt declined 4.8% to $14,428 million, there were no commercial paper borrowings outstanding against a $3.0 billion program, and nothing was drawn on the $3.0 billion revolving credit facility maturing September 2030. Using non-current debt against book equity, debt-to-capitalisation sits near 44.7% — comfortably inside the 65% credit-agreement covenant, though the agreement's own definition may differ from that simple calculation. The company confirmed compliance with all covenants at June 30, 2026.
Operating liabilities moved the other way and reveal the working capital story from the liability side. Trade accounts payable fell 10.6% to $2,895 million and advance payments and billings in excess of costs incurred — customer cash held ahead of performance — fell 6.4% to $3,823 million. Northrop is simultaneously collecting less cash up front, paying suppliers down, and billing customers later. Off-balance-sheet, $611 million of standby letters of credit and $271 million of surety bonds were outstanding.
1-3. Capital structure
Shareholders' equity rose 7.3% to $17,884 million, and its composition is unusually clean. Retained earnings of $17,839 million represent 99.7% of total equity; common stock is $142 million, paid-in capital just $37 million, and accumulated other comprehensive loss $(134) million, of which $(133) million is cumulative translation adjustment. The near-zero paid-in capital is a direct consequence of policy: Northrop retires common stock on repurchase and charges the excess to retained earnings.
The more revealing number is how little of that policy was exercised. Buybacks totalled $63 million in the first half of 2026 against $872 million in the prior-year half — a 93% cut — and the 10-Q states plainly that there were no repurchases of common stock during the three months ended June 30, 2026, against a $3.0 billion authorisation approved in December 2024. A prime contractor with a record backlog that stops buying its own stock outright is telling you where the cash is going: the $2.5 billion B-21 capacity build and a first-half working capital drain, not shareholder returns.
2. Condensed Consolidated Statement of Earnings
2-1. Six-month results, three-year view
| Item | H1 2024 ($M) | H1 2025 ($M) | H1 2026 ($M) | 3Y CAGR (from H1 2023) |
|---|---|---|---|---|
| Sales | 20,351 | 19,819 | 20,757 | +3.2% |
| Operating income | 2,161 | 1,998 | 2,085 | +2.9% |
| Operating margin (%) | 10.62 | 10.08 | 10.04 | — |
| Net earnings | 1,884 | 1,655 | 1,969 | +6.0% |
| Net margin (%) | 9.26 | 8.35 | 9.49 | — |
| Diluted EPS ($) | — | 11.45 | 13.83 | — |
Over three years, sales have compounded at 3.2% and operating income at 2.9% — a business growing roughly with the defense budget, not ahead of it. Operating margin has drifted down from 10.62% to 10.04%. Net earnings, however, compounded at 6.0%, nearly double the operating income rate. The gap between operating and net growth is the story of this filing.
Two forces created it. Below-the-line pension income rose: the non-operating FAS pension benefit reached $332 million in the half against $267 million a year earlier, equal to 15.1% of pre-tax earnings of $2,198 million. And tax fell hard. The half-year effective rate dropped to 10.4% from 17.5%. The 10-Q attributes this to the remeasurement of uncertain tax positions as the IRS moves toward resolving prior-year returns and refund claims, plus a separate second driver — higher research credits, including a $19 million benefit tied to recently issued IRS CAMT guidance. Year to date, the ETR includes $244 million of research-credit benefits (inclusive of the UTP remeasurement) against $103 million a year earlier. The frequently quoted $115 million research-credit UTP remeasurement is a second-quarter figure, not a half-year one; the quarter alone carried $176 million of research credits.
Had H1 2026 been taxed at the prior-year 17.5% rate, net earnings would have been roughly $1,813 million — meaning about $156 million, or $1.10 of the $2.38 year-to-date EPS increase, came from the tax line alone. Nearly half of the reported EPS growth is a tax event, not an operating one. Note also that current unrecognized tax benefits climbed to $831 million from $436 million at year-end; the IRS resolution that produced this quarter's benefit is not finished.
The second quarter makes the point more sharply. Operating income fell $329 million on the prior-year $231 million divestiture gain, $61 million of lower segment operating income, and a $56 million reduction in the FAS/CAS operating adjustment. Strip both years to comparable operating substance — removing the divestiture gain and net favourable estimate-at-completion adjustments of $94 million this year and $126 million last year — and core operating income was roughly $1,002 million, or 9.2% of sales, against $1,068 million, or 10.3%. That is a 110 basis point compression in genuine program margin. On the tax side, at the prior-year 17.7% rate, Q2 diluted EPS would have been approximately $6.75 rather than the reported $7.68 (against $8.15 a year earlier); the 6% headline EPS decline would have been closer to 17%.
Operating leverage ran backwards in the quarter. Sales grew 5.1% while segment operating income fell 5.0% — each point of growth destroyed roughly a point of segment profit. Segment margin was 10.65% versus 11.78%.
Q2 2026 segment results
| Segment | Sales ($M) | YoY % | Operating margin | Prior year |
|---|---|---|---|---|
| Aeronautics Systems | 3,519 | +13.0 | 10.29% | 10.31% |
| Defense Systems | 2,093 | +5.1 | 7.45% | 12.71% |
| Mission Systems | 3,250 | +2.9 | 15.42% | 13.97% |
| Space Systems | 2,753 | +4.0 | 8.57% | 10.58% |
Aeronautics grew fastest on the B-21 ramp and held margin flat. Mission Systems was the only sector to expand margin. The damage sat in Defense Systems, where a $68 million unfavourable adjustment on the Stand-in Attack Weapon program for the U.S. Air Force met a tough comparison against a $76 million favourable Sentinel adjustment in the prior-year quarter, and in Space Systems, where a $91 million unfavourable adjustment on the Graphite Epoxy Motor 63XL program — driven by higher projected material cost and quantity — followed a $71 million charge on the same program in the first quarter tied to a solid rocket motor anomaly during a Q1 2026 launch. GEM 63XL alone has now absorbed $162 million in the first half.
Those two charges total $159 million, yet net EAC adjustments for the quarter were $94 million favourable — so roughly a quarter of a billion dollars of offsetting favourable adjustments sit underneath. The filing names two: on B-21, as first-quarter agreement details were finalised, costs shifted between lots producing favourable EAC adjustments on the first four LRIP lots (offset by an increase in the loss contingency accrual on the remainder of the program), and on Sentinel, a favourable earnings adjustment on recently achieved contract incentives. Investors should be clear that the quarter's reported profit leaned on reallocations and incentive recognition, not on clean execution.
Two things must be said about the half-year comparison, because the direction reverses. As reported, year-to-date operating income rose $87 million, or 4%, on $443 million of higher segment operating income — largely because the prior-year half carried a $477 million B-21 loss provision at Aeronautics — partially offset by the prior-year divestiture gain and a $112 million decrease in the FAS/CAS adjustment. Aeronautics half-year operating margin accordingly "recovered" to 9.81% from 2.33%, but that is a mechanical comparison against a provision, not a performance recovery. Adjusting H1 2025 for both the $477 million provision and the $231 million divestiture gain gives roughly $2,244 million of comparable operating income against $2,085 million this year — an underlying decline of about 7%. Both numbers are true; the reported +4% is the GAAP fact, the −7% is what the operating business actually did.
Note on non-GAAP: Northrop presents "organic sales" for Defense Systems, defined as total sales excluding the divested training services business. Segment operating income is itself a non-GAAP measure. All figures in the tables above are GAAP.
2-2. Fixed versus variable cost behaviour
Overhead leverage is working. G&A costs fell to 9.4% of sales from 9.8% in the quarter and to 9.6% from 10.2% for the half, which the filing attributes simply to higher sales. The problem is below G&A.
A basis caution before the numbers: the product and service cost figures that follow are the sum of the four segments' disclosed operating costs. They exclude intersegment cost lines and unallocated corporate expense, and they therefore do not reconcile to consolidated total operating costs and expenses. The two should not be added together or netted against each other.
On that segment basis, product costs rose 8.6% year over year in the quarter to $7,949 million while service costs fell 2.4% to $1,769 million — product cost inflation running well ahead of 5.1% sales growth. Growth is coming from hardware production, which is where material cost, supplier negotiation and fixed-price exposure all live, while the higher-margin services base contracts. Depreciation and amortization rose to $367 million from $350 million in the quarter, and stock-based compensation to $49 million from $40 million for the half — neither is the driver.
Separately, on a consolidated basis, total operating costs and expenses consumed 89.9% of sales versus 88.5% a year earlier (the prior-year figure computed after adding back the $231 million divestiture gain, which sits on its own line rather than as a cost offset).
3. Condensed Consolidated Statement of Cash Flows
| Item | H1 2025 ($M) | H1 2026 ($M) | Change |
|---|---|---|---|
| Net cash used in operating activities | (697) | (376) | +321 |
| Net cash used in investing activities | (191) | (364) | −173 |
| Net cash used in financing activities | (1,566) | (1,356) | +210 |
| Cash, end of period | 1,899 | 2,307 | +408 |
Both halves show negative operating cash flow, which is normal for Northrop: government billing cycles concentrate collections in the second half, and applying an "operating cash flow to net earnings above 1.0" test to a first-half stub would be misleading. The year-over-year comparison is the useful one, and it improved. Operating cash outflow narrowed by $321 million. Free cash flow — operating cash flow less capital expenditures — was negative $845 million against negative $1,184 million, a $339 million improvement.
The improvement came from a smaller working capital build and a large non-cash tax add-back, not from stronger collections. The single biggest favourable swing was deferred income taxes, which contributed a $453 million add-back this year against a $114 million use last year — a $567 million swing that is the cash-flow statement's echo of the same tax remeasurement that flattered EPS. The unbilled receivables build also shrank, to $860 million from $1,343 million, a $483 million improvement.
Against that, almost every other working capital line got worse. Accounts receivable absorbed $936 million, marginally more than the $929 million a year earlier — no collections improvement at all. Trade accounts payable drained $345 million against $2 million. Advance payments and billings in excess of costs incurred drained $263 million against $70 million, meaning customers are funding less of the work up front. Other liabilities consumed $836 million against $420 million. Netted out, the operating cash flow "improvement" is substantially a deferred-tax add-back and a slower unbilled build, sitting on top of genuinely deteriorating trade terms.
Investing outflow nearly doubled to $364 million, but that is a composition effect rather than a spending surge: capital expenditures actually fell slightly to $469 million from $487 million, and the prior-year comparison was cushioned by divestiture proceeds that did not repeat. This year's figure was partly offset by $107 million of proceeds from the sale of an investment, on which the company recognised a $35 million gain — the same item that lifted "Other, net" in the earnings statement. Financing outflow narrowed to $1,356 million, and the composition there is the capital-allocation tell: no new senior notes issued, $527 million of high-coupon maturities repaid, and buybacks cut to $63 million from $872 million with nothing repurchased in the second quarter at all.
The bottom line. Northrop has the demand — $104.7 billion of it, a genuine record. But a meaningful slice of this quarter's backlog growth is a cost-type program being scoped rather than a competitive win; the reported earnings were carried by a 6.3% tax rate and $253 million of offsetting favourable EAC adjustments; core program margin compressed 110 basis points; product cost inflation is running at 8.6% against 5.1% sales growth; and the company has stopped repurchasing stock while it funds a $2.5 billion capacity build. The conversion of record demand into record margin is a 2027 and 2028 question, and nothing in this filing yet proves it will happen.
