Northrop Grumman’s (NOC) first quarter of 2025 saw a challenging start to the year, with results reflecting pressure from a significant charge and program transitions. Sales declined 7% year-over-year to $9.47 billion, weighed down by a $477 million loss provision tied to the B-21 program in Aeronautics Systems, as well as lower volumes across Aeronautics and Space Systems. Operating income dropped 46% to $573 million, pushing the operating margin rate down to 6.1% from 10.6% a year earlier. Segment profitability also declined sharply, with segment operating income falling 49% to $568 million, and the segment operating margin contracting to 6.0%.

Bottom-line results mirrored this pressure, as net earnings dropped 49% to $481 million, and diluted EPS fell to $3.32, down from $6.32 in Q1 2024. Cash flow was notably weak, with free cash flow deeply negative at $(1.82) billion, due to typical seasonality, elevated vendor payments, and overall lower profitability.

By segment, Aeronautics Systems was the main drag, posting an operating loss of $183 million and a negative 6.5% margin, reflecting the B-21 provision and lower volumes on restricted programs and F-35 sustainment. In contrast, Defense Systems delivered a 15% increase in operating income to $179 million on the strength of Sentinel and ammunition programs. Mission Systems grew sales by 6% to $2.81 billion, though margins dipped due to investments in restricted business. Space Systems experienced the steepest sales decline—down 18%—as several programs neared completion, with operating income falling 14% despite slight margin improvement from favorable adjustments.

Looking ahead, management trimmed 2025 guidance to reflect recent challenges. Full-year sales are expected to land between $42.0–$42.5 billion, while segment operating income was revised downward to $4.2–$4.35 billion. MTM-adjusted EPS is now projected at $24.95–$25.35, down from previous guidance, and free cash flow is forecasted between $2.85–$3.25 billion.

The outlook across segments shows mixed expectations. Aeronautics Systems guidance was reduced substantially, now anticipating a low 6% margin, down from mid-to-high 9%. Defense Systems is expected to maintain strong high-single-digit margins, while Mission Systems is targeting a healthy mid-14%, and Space Systems aims for a high-10% margin.

Despite current pressures, Northrop Grumman’s fundamentals remain supported by a record backlog of $92.8 billion, bolstered by $10.8 billion in Q1 awards, including significant wins in restricted programs and major platforms like the F-35 and Triton. Strategic moves—such as realigning business units, initiating over $200 million in cost reductions, and advancing digital transformation—are intended to streamline operations and restore margin strength. Management is also leaning into international growth, with non-U.S. bookings outpacing domestic in 2024, and expects that trend to accelerate in 2025.

With $3.5 billion invested in capital expenditures over the last two years and 100% of free cash flow returned to shareholders, Northrop Grumman remains committed to disciplined capital deployment. The recent sale of its training services business for $327 million, expected to close mid-year, is part of ongoing portfolio optimization.

While reduced guidance reflects real near-term challenges—particularly in Aeronautics and Space—the company is aiming for a second-half rebound, backed by cost actions, contract execution, and continued demand in key defense and space domains. Management reaffirmed confidence in achieving its $4 billion free cash flow target by 2028, even as it remains watchful of macroeconomic, budgetary, and supply chain risks.