Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to Northrop Grumman's fourth quarter 2025 conference call. Today's call is being recorded. My name is Josh, and I will be your operator today. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed.

Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's fourth quarter 2025 conference call. Before we start, matters discussed on today's call, including guidance and outlooks for 2026 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. In addition, we will refer to a presentation that is posted to our investor relations website. On the call today are Kathy Worden, our chair, CEO, and president, John Green, our CFO, and Ken Cruz, our CFO prior to January 7th. At this time, I'd like to turn the call over to Kathy. Kathy?

Thanks, Todd. Good morning, and thank you for joining our fourth quarter and full year 2025 earnings call. The Northrop Grumman team delivered another quarter of strong operating results, generating the highest quarterly sales growth of 2025 and exceeding expectations across our key performance metrics. Throughout the year, we kept a disciplined approach in executing our strategy, remaining true to our technology leadership and ensuring our company moves at the speed of relevance, particularly as our customers transform the way they acquire defense capabilities. This business strategy includes our capital deployment plan, which prioritizes investments in value-creating growth opportunities, of which there are many in this current environment. Northrop Grumman's portfolio is aligned to what U.S. and international customers need right now, and we see a clear path to continued solid growth in the future. We ended the year with over $95 billion in backlog, a new company record. driven by over 46 billion in net awards in 2025. Our backlog has grown by nearly 20 billion since 2021, and our five-year average book-to-bill ratio has been 1.1 times. Our 2025 sales and EPS both exceeded the high end of our guidance range, and free cash flow was 3.3 billion for the year. This represents a 26% increase in free cash flow compared to 2024. the third consecutive year of at least 25% growth. This strong performance provides momentum for our company in an increased demand environment and gives us continued confidence in our outlook. This confidence is rooted in our conviction that we have a talented engineering and operations team and a portfolio uniquely designed to deliver the capabilities needed by our U.S. and international customers. In the U.S., we are aligned with the administration's and Congress's focus on expanding American manufacturing capabilities and capacity on critical programs and ensuring technological superiority. We have purposely built and shaped our portfolio with a focus on our customers' demand signals. We are a leader in developing and delivering advanced and often considered exquisite capabilities, which are at the core of U.S. warfighting today. However, we have also demonstrated that we can design and develop more affordable solutions that can be produced in mass and fielded quickly. One example of this is high volume space assets that we are building for the Space Development Agency, including our fourth quarter award for 18 tranche three tracking layer satellites, which brings our total SVA satellite backlog to 150. Our missile tracking solution leverages our broad set of missile defense capabilities to provide global detection, warning, and tracking of hypersonic weapons and advanced missiles from the earliest stages of launch through interception. Protecting the homeland is a top priority for the Trump administration, as outlined in the recently released National Defense Strategy. In alignment with the Department of War's focus on acquisition transformation, we are transforming Northrop Grumman. We are moving with urgency and proactively bringing innovative solutions to our customers. An example of this includes the latest advancements in our uncrewed portfolio. The first of which is Project Talon, an evolution of our collaborative combat aircraft increment one design that strikes a balance between capability and affordability. Project Talon was designed and built in under 24 months. To accelerate the development, we leveraged our autonomous testbed ecosystem, BEACON, which is now known as Talon IQ. Project Talon builds on Northrop Grumman's seven decades of experience with advanced battle-tested uncrewed systems. In December, the same month that we unveiled it, the U.S. Air Force awarded our aircraft with a designator, the YFQ-48A. This is only the third CCA platform to have this type of designation. Beyond the interest the Air Force has shown in this system, we also believe Talon will have broad global appeal. I want to highlight a second example in our uncrewed market, which speaks to our partnership approach. We teamed with Kratos to develop a collaborative combat aircraft for the Marines and received a $231 million award late last year. The expeditionary uncrewed aircraft combines our vast experience in multifunction mission systems with Kratos' proven platform, the Valkyrie. We've completed more than 20 successful demonstrations in operationally relevant environments, and we are working to rapidly field this capability to work alongside crewed fighters. Our focus extends well beyond developing the next generation of space and airborne uncrewed platform. We are equally dedicated to scaling our operations across our portfolio to meet rapidly increasing demands, including critical areas like munitions. To address the growth in munitions, we have made significant investments to expand capacity for existing programs and in support of second source initiatives. Since 2021, we have successfully doubled our production capacity for tactical solid rocket motors at our ABL facility in West Virginia, and are now advancing efforts to further increase that capacity by another 50%, effectively trickling our tactical SRM production capabilities at that facility by early 2027. And we are making similar investments to expand capacity at our Elkton, Maryland site to triple capacity there by 2030. This proactive approach places us in a strong position as the weapons market continues to expand. On one end of the spectrum, we are developing cost-effective solutions that can be quickly designed, produced, and deployed at scale. On the other end of the spectrum, we are also developing and producing unmatched strategic deterrence assets for our nation. This includes executing on numerous programs in the restricted arena, which comprises over 30% of our business. It also encompasses emerging areas in space, which has evolved into a warfighting domain. Space security, or capabilities to protect space assets, represent a tremendous growth opportunity for our company, given our proven technology and experience in this domain. And these capabilities are fundamental to maintaining the most advanced military in the world. And, of course, our contribution to strategic deterrence also includes our work on modernization of the triad. Regarding status of our work on the triad, The B-21 program is meeting key milestones, including first flight of the second aircraft in 2025. In the fourth quarter, as expected, we were awarded the LRAC Lot 3 contract, as well as advanced procurement funding for Lot 5. We continue to work closely with the Air Force on plans to increase the production rate of the program. Our priority is to establish a mutually beneficial agreement that accelerates the delivery of this game-changing capability to our nation. Funding for this acceleration has been approved as part of the reconciliation bill, and I am optimistic that we will come to an agreement with the Air Force this quarter. We also continue to make progress on Sentinel, advancing key aspects while partnering with the Air Force to restructure the program. In addition to continued progress on the missile, We are maturing launch silo design and moving forward with prototyping activities in the command and launch segments of the program. In the United States, our customers are turning to industry to move beyond traditional business models, break down bureaucracy, and increase deliveries of capabilities at a faster pace. Importantly, they have backed this request with funding, and this creates an immense opportunity for Northrop Grumman. We are encouraged by the recent $1.5 trillion FY27 budget recommendation, which indicates the potential for historic growth in defense spending. And in support of this approach, we are bringing proposals forward to accelerate our program, embrace new ways of working, and partner more effectively with our customers. Our company is well aligned with the administration and Congress's focus on speed, capacity, and performance. all in support of national defense. We are hopeful that FY26 defense appropriations will be completed soon, and we see strong support for the capabilities we deliver to the warfighter in the bill moving through Congress now. We also expect reconciliation investments to move forward this year. Internationally, we are experiencing strong momentum. as allied nations increasingly invest in enhancing their national security capability. Our international growth strategy focuses on both exporting products manufactured in the United States and forming industrial partnerships to develop indigenous capabilities in these nations. We are successfully executing this strategy, with international sales growing by 20% in 2025. Demand signals remain strong, and we anticipate continued growth in 2026 and beyond. The global appetite for our technology is fueling this demand, particularly in air and missile defense systems, advanced munitions, radars, and a diverse array of airborne capabilities. We've now received formal requests to acquire IDCS from over 20 countries, and we are seeing notable progress on multiple other opportunities, including ground-based radars where we are expecting contracts from customers in the Americas, Middle East, and Asia Pacific. The Rural Bus Global Demand Environment supports our 2026 guidance, which is consistent with the outlook we provided you in October. We're positioned to deliver another strong year of sales and margin growth, enabling our ability to generate cash and invest in our business. As a result, we expect to increase capital expenditures this year. Our focus will be on a variety of high impact value generating initiatives in areas such as solid rocket motors, missile defense, advanced technologies, and restricted capabilities. These investments are intended to create long-term value for both our customers and shareholders by delivering advanced solutions quickly, enabling our military, to maintain its competitive edge. 2025 was a strong year for our company, and we are well positioned to continue this success into 2026 and beyond. I'd like to thank the entire Northrop Grumman team for their contributions to our results and your dedication to our customers. We are proud of the impact our products have on global peace and stability, and we share the sense of responsibility and urgency our customers have to provide our nation and allies the best products in the world. Before turning the call over to Ken, I want to welcome John Green, who joined our team as CFO earlier this month. John is an experienced CFO and has a proven track record of driving growth and operational excellence, and I look forward to working with him. I also want to extend my deepest gratitude to Ken. for his leadership and significant contributions during his more than 20-year career with Northrop Grumman. He was instrumental to our strong finish to 2025, and he has ensured a smooth transition to John. Thank you, Ken, and I'll turn the call over to you.