Northrop Grumman Q2 2026 sales rose 5% to $10.9B and backlog hit a record $104.7B on $20B of awards (incl. $7.6B Sentinel), but $159M of charges on GEM 63XL and SiAW cut margins and EPS fell 6% to $7.68.
Revenue
$10.9B
+5.1% YoY
Net income
$1.1B
-6.8% YoY
Diluted EPS
$7.68
-5.8% YoY
Operating margin
10.1%
Record backlog and a guidance raise, but program charges pulled margins down
Northrop Grumman's second quarter of 2026 (three months to June 30) had a strong top line and weak profitability. Sales rose 5% to $10.88 billion, with growth in all four business segments. The company also booked $20.0 billion of new orders, which lifted backlog (signed work not yet delivered) to a record $104.7 billion. Profit went the other way. Operating income fell 23% to $1.10 billion and diluted EPS fell 6% to $7.68.
The headline comparison is distorted in both directions:
The prior-year quarter included a one-time gain. Q2 2025 carried a $231 million gain from selling the training services business. After tax, it added $150 million, or $1.04 per share, to net earnings.
This quarter includes a one-time tax benefit. The effective tax rate dropped to 6.3% from 17.7%. The main cause was a $115 million remeasurement of uncertain tax positions after "recent developments with the IRS towards resolving our previously filed federal income tax returns and refund claims." That is about $0.81 per share (our calculation: $115M ÷ 142.4M diluted shares).
Removing both items gives roughly $6.87 of EPS this quarter against $7.11 a year ago, a decline of about 3%. These are our own rough adjustments, not company figures. The underlying trend is still slightly lower profit on higher sales. The cause is cost overruns on two fixed-price weapons programs.
Key figures
Metric
Q2 2026
Q2 2025
YoY Change
Sales
$10,876M
$10,351M
+5.1%
Operating income
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Book-to-bill is our own calculation from the $20.0B of awards and $10.88B of sales. A ratio above 1.0 means the company booked more new work than it delivered. The filing states the other figures directly.
Two definitions help here. Operating margin is the share of sales left after the costs of running the business, before interest and tax. Segment operating margin is the margin of the four business segments alone, before corporate items and pension accounting adjustments. It is the better gauge of how the programs themselves performed. That measure fell 1.2 percentage points.
What the charges were: EAC adjustments
Defense contractors book profit on long contracts according to an estimate at completion (EAC), which is their forecast of the contract's total cost. When that forecast rises on a fixed-price contract, the company absorbs the extra cost and books a catch-up charge for the whole contract in the current quarter. Net favorable EAC adjustments added $94 million to operating income this quarter, down from $126 million a year ago. That total hides two large charges:
GEM 63XL (Space Systems), −$91 million. GEM 63XL is a strap-on solid rocket booster for commercial launch vehicles. The charge was "largely related to increases in the projected cost and quantity of material needed to complete the program." It follows a $71 million charge in Q1 for corrective actions after a solid rocket motor anomaly on a Q1 2026 launch. The first-half total on this one program is $162 million.
SiAW, the Stand-in Attack Weapon (Defense Systems), −$68 million. The charge reflects higher projected costs "to support the design and qualification of system software and hardware architecture for the U.S. Air Force." Management also said it expects higher costs to mature production of AARGM-ER, an extended-range anti-radar missile. It calls both programs investments in its "missile prime business," meaning programs where Northrop is the lead contractor for the whole missile.
A favorable adjustment on Sentinel, the new intercontinental ballistic missile, partly offset these charges. It came from the recent achievement of contract incentives. It was smaller than the one-off $76 million Sentinel gain in Q2 2025, so it did not fully close the gap.
Segment performance
Segment
Q2 2026 sales
YoY
Q2 2026 op. income
YoY
Margin (vs. Q2 2025)
Aeronautics Systems
$3,519M
+13%
$362M
+13%
10.3% (10.3%)
Defense Systems
$2,093M
+5%
$156M
−38%
7.5% (12.7%)
Mission Systems
$3,250M
+3%
$501M
+14%
15.4% (14.0%)
Space Systems
$2,753M
+4%
$236M
−16%
8.6% (10.6%)
Aeronautics Systems grew fastest. The drivers were higher volume on the B-21 bomber and other classified ("restricted") programs, a $106 million increase on the E-130J TACAMO airborne command-post aircraft as it ramps up, and more work on B-2, F-35 and E-2. The end of F/A-18 production deliveries partly offset this. Margin held at 10.3%.
Defense Systems had the weakest quarter. Sales rose 5% (7% organically, excluding the divested training business) on the Sentinel ramp-up and the IBCS air-defense command system. Margin fell more than 5 points because of the SiAW charge and the missing prior-year Sentinel gain.
Mission Systems (radars, sensors, electronics) was the strongest on profit. Margin rose to 15.4% on "higher net EAC adjustments driven by improved performance." Sales grew 3%, led by a $130 million increase in marine systems.
Space Systems sales rose 4%. A $139 million increase from Commercial Resupply Service missions (cargo flights to the International Space Station) plus the Glide Phase Interceptor and Ground-based Midcourse Defense programs drove the increase. The GEM 63XL charge also reduced booked sales, so margin fell to 8.6%.
B-21: no new loss this quarter
B-21 is the item investors watch most closely. It is a fixed-price stealth bomber program that cost Northrop a $477 million loss provision in Q1 2025. Cumulative losses on its low-rate initial production (LRIP) phase stand at about $2.0 billion, with a $1.0 billion loss accrual still on the balance sheet. The company says that in Q2 it "made no significant changes to the previously recognized loss." In Q1 2026 Northrop reached an agreement with the Air Force to expand capacity and raise the production rate. As it finalized the details this quarter, some costs moved between production lots. The result was favorable adjustments on the first four lots and a matching increase in the loss accrual on the rest of the program. Northrop still expects to invest about $2.5 billion over several years in B-21 production capacity, in exchange for "the opportunity to earn improved returns" on later lots. The filing also warns that changes in cost estimates or supplier negotiations "could materially affect" results, so the risk remains.
Orders: Sentinel drives a record backlog
The $20.0 billion of Q2 awards included $7.6 billion for Sentinel. That award reflects Air Force authorization of more of the restructured program's execution plan, following its 2024 Nunn-McCurdy cost-breach review. The awards also included $4.3 billion for classified programs, $1.0 billion for F-35, $0.8 billion for the Glide Phase Interceptor and $0.7 billion for the MESA radar. Defense Systems backlog is up 25% since December, to $34.7 billion. The company expects to convert about 35% of total backlog into revenue over the next 12 months and 55% over 24 months.
Cash flow
Operating cash flow rose 47% to $1.28 billion, "primarily due to lower net cash tax payments." Adjusted free cash flow was $978 million, up from $637 million. Free cash flow is operating cash minus capital spending. First-half adjusted free cash flow is still −$845 million, while full-year guidance is $3.1–3.5 billion. Hitting that range needs roughly $4 billion or more in the second half, which is normal for Northrop's seasonal pattern but is a large amount. Share buybacks dropped sharply, to $68 million in the first half from $891 million a year earlier. Cash fell to $2.3 billion from $4.4 billion at year-end.
Takeaway: Demand is not the problem. The problem is margin on development-stage and fixed-price programs. Orders were 1.8x sales and backlog reached a record $104.7 billion. Even so, segment margin fell 120 basis points on $159 million of charges on just two programs (GEM 63XL and SiAW). The B-21 loss held steady this quarter, but it is a pause, not a resolution.
Outlook
Management raised full-year 2026 guidance:
2026 guidance
New (Jul 21)
Prior
Sales
$43.75–44.25B
$43.5–44.0B
MTM-adjusted EPS
$28.60–29.10
$27.40–27.90
Segment operating income
$4.85–5.0B
unchanged
Adjusted free cash flow
$3.1–3.5B
unchanged
MTM-adjusted EPS excludes mark-to-market pension gains and losses. The $1.20 EPS increase is larger than the $0.81 one-time tax benefit booked this quarter, so it is not only the tax item. The segment operating income target did not change, though, even with higher sales guidance. Segment-level guidance shows a trade-off. Aeronautics sales guidance rose to about $14 billion (from mid-$13 billion) and its margin guidance rose to mid-to-high 9%. Mission Systems margin guidance rose to about 15% (from high 14%). Space Systems margin guidance fell to low 10% (from about 11%). Northrop now expects more revenue at about the same total operating profit. In other words, the company expects the second half of the year to be about as profitable as the first half at the segment level.
Our read: The main risk in the numbers has shifted. It is less the B-21 than a group of smaller fixed-price development programs: solid rocket motors and the new missiles Northrop is trying to lead. Each one has produced charges of $70–90 million per quarter. The backlog growth will keep revenue growing through 2027, and Mission Systems' 15% margin shows what the portfolio can earn when programs reach mature production. The questions for Q3 are whether GEM 63XL and SiAW stop producing charges, and whether second-half cash generation arrives on schedule. Buybacks have been cut back to almost nothing while the $2.5 billion B-21 capacity investment is under way, so cash delivery matters more than usual this year.
Source: Northrop Grumman Form 10-Q for the quarter ended June 30, 2026, and the accompanying Q2 2026 earnings release (Exhibit 99), both filed July 21, 2026.