Northrop Grumman (NYSE: NOC) lifted its full-year sales guidance by $250 million and its MTM-adjusted EPS guidance by $1.20 after a second quarter that beat top- and bottom-line estimates. The numbers were strong enough to justify a raise. Management lifted guidance by more than the beat alone would suggest, signaling confidence in a demand cycle still accelerating.
Sales rose 5% year-over-year to $10.88 billion, edging past the $10.80 billion consensus. GAAP diluted EPS of $7.68 beat the $6.82 estimate by a wide margin, though the comparison is complicated by a prior-year $1.04 per share gain from the training services divestiture. Excluding that item, EPS was essentially flat year-over-year. The forward look is where the quarter earns its weight.
Net awards of $20 billion pushed total backlog to a company-record $104.7 billion, up 9% from year-end 2025. The composition matters. Sentinel alone contributed $7.6 billion in new awards, and restricted programs added $4.3 billion, primarily at Aeronautics Systems and Space Systems. These are not small, speculative wins. Sentinel is a multi-decade ICBM replacement program. Restricted awards typically carry high barriers to entry and long production tails. The backlog now covers roughly 2.4x trailing twelve-month sales, giving Northrop unusual visibility into revenue for a defense contractor.
The guidance raise itself is the quarter's dominant signal. Full-year sales guidance moved to $43.75B-$44.25B from $43.5B-$44.0B, a $250 million increase at the midpoint. MTM-adjusted EPS guidance rose to $28.60-$29.10 from $27.40-$27.90, a $1.20 increase that is proportionally larger than the sales raise. That implies margin expansion in the second half, consistent with the segment-level operating income guidance reiterated at $4,850M-$5,000M. The company is effectively saying it can deliver higher profit on a relatively modest revenue increase, pointing to operating leverage as programs mature.
Segment performance was mixed. The mix tells a story about where the company is investing. Aeronautics Systems led with a 13% sales surge to $3.52 billion, driven by B-21 and TACAMO ramp. Operating margin held steady at 10.3%, a solid result for a segment in the early stages of production ramp on two major programs. Mission Systems posted a 14% operating income increase and expanded margin to 15.4% from 14.0%, the best margin performance in the portfolio, driven by improved EAC adjustments on marine systems and radar programs.
The drag came from Defense Systems and Space Systems. Defense Systems operating income fell 38% to $156 million, with margin compressing to 7.5% from 12.7%. The culprit was a $68 million unfavorable EAC adjustment on the SiAW program, reflecting higher costs to mature production on the Extended Range AARGM-ER and to develop SiAW itself. Space Systems operating income fell 16% to $236 million, with margin dropping to 8.6% from 10.6%, driven by a $91 million unfavorable EAC adjustment on the GEM 63XL solid rocket motor program. These are not structural margin problems. They are program-specific cost growth on development-stage efforts, and the company is choosing to invest now rather than defer problems. The reiterated segment operating income guidance implies these headwinds are expected to moderate in the second half.
Free cash flow was a bright spot. Adjusted free cash flow of $978 million in the quarter more than doubled from $637 million a year ago, driven by lower net tax payments. For the full year, the company reiterated its $3.1B-$3.5B adjusted free cash flow guidance, which at the midpoint implies a roughly 4.5% free cash flow yield on the current market cap. That is not cheap for a defense prime, but the backlog growth and guidance raise argue that the earnings trajectory is still rising.
The effective tax rate dropped to 6.3% from 17.7%, contributing $179 million to the bottom line versus a year ago. That was driven by a remeasurement of uncertain tax positions related to IRS developments on previously filed returns. This is a one-time benefit. Investors should normalize for it when modeling forward EPS.
What to watch next. The second half will test whether the SiAW and GEM 63XL EAC adjustments are truly one-quarter events or the beginning of a pattern. Sentinel's ramp will be the single most important driver of revenue and margin across Defense Systems and Space Systems. With a $104.7 billion backlog, the question is not whether Northrop has demand, but whether it can execute on production without further cost overruns. The guidance raise says management believes it can. The next two quarters will show whether that confidence is warranted.