Northrop Grumman (NOC)
Northrop Grumman is the closest thing to a pure defence business in this group, and its FCF conversion of 79% is the lowest of the six primes.
Educational analysis for professional use. This profile is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
Snapshot
Business Overview
Northrop Grumman is the closest thing to a pure-play US defence contractor in this group, working on classified platforms, space and missile defence. FY2025 sales were $41,954M (organic $41,842M), and backlog stood at $95,681M. Book-to-bill, which NOC defines in filings as net awards divided by sales, was 1.10x on net awards of $46.3B. The company is close to 100% defence-oriented: US government revenue was 84% of sales, with the balance mostly international government sales and FMS, foreign military sales made through the US government. Market capitalisation was roughly $78B as of 10 June 2026 (~142.0M shares × $548.67).
Where NOC diverges from the rest of the group is segment margin dispersion. Mission Systems led at 14.6%; Defense and Space Systems were 10.9% and 11.0%; Aeronautics Systems sat at 6.3%, the portfolio floor. Company-wide segment operating margin was 10.4%. B-21 sits in Aeronautics alongside restricted programmes, but its revenue share is not disclosed in the 10-K. F-35 net awards were $3.3B in FY2025, about 8% of the company's $42.0B sales, which is an orders figure, not a revenue share.
Approximately half of FY2025 sales came from firm fixed-price contracts. NOC's 10-K language distinguishes cost-type (lower margin, lower cost-growth risk) from firm fixed-price (higher margin opportunity, higher unanticipated-cost risk). The contract-type guide uses NOC's margin/risk framing alongside GD's filed 51% fixed / 44% cost-reimbursement split on US government revenue.
How the Numbers Read
FY2025 free cash flow was $3,307M against net earnings of $4,182M, a 79% FCF conversion ratio. That falls in the 70-90% range this site treats as normal, below the 90% level treated as strong. The FCF conversion guide ranks NOC lowest among the six primes (LMT 138%, RTX 118%, LHX 170%, GD 94%, BAE 92%, NOC 79%). Conversion below 90% warrants a look at working-capital and capex timing rather than an earnings-quality concern, but it explains why net income and free cash flow tell different stories about NOC's FY2025 economics.
NOC's own FCF yield, $3,307M FCF divided by its ~$78B market cap on 10 June 2026, was approximately 4.2%. Book-to-bill of 1.10x is above the 1.0 level this site treats as healthy, though below RTX (1.56x), GD (1.5x company-wide) and LHX (1.3x), as mapped in the backlog guide.
Valuation Framework
The gap between earnings and cash, 79% conversion, is the reconciling item: net income overstates the free cash flow NOC generates relative to LMT or LHX. Forward margin mix tilts on segment weights. Mission Systems at 14.6% lifts the consolidated average, while Aeronautics at 6.3%, weighted to B-21 and restricted work, is the offset.
Fixed-price exposure, about half of sales, means margins can improve on well-executed development transitions, but cost growth is a risk if learning-curve assumptions fail. That is the opposite risk profile from a cost-plus-heavy submarine yard, and it shows up directly in the Aeronautics vs Mission Systems spread.
What to Watch in the Financials
Aeronautics Systems margin. 6.3% in FY2025. B-21 and restricted programmes dominate this segment, so any disclosed EAC adjustment, a revised estimate of a contract's total cost and revenue at completion, or a schedule slip on classified development work moves the lowest-margin pool.
FCF conversion trend. 79% in FY2025. Track operating cash flow against net earnings quarter by quarter. Pension timing, known industry-wide as FAS-CAS, and award payment timing are the usual swing factors at a prime.
Book-to-bill momentum. 1.10x sits in the range this site treats as steady-state growth (above 1.05 is growth, 0.95 to 1.05 is steady). Net awards of $46.3B need to stay ahead of revenue recognition to build backlog from the $95.7B base.
Fixed-price contract mix. ~50% of sales. Renegotiations, scope changes and cost growth on fixed-price development phases flow straight to Aeronautics and Defense Systems margins.
Key Risks
Classified programme opacity. B-21 revenue share is not filed. Unlike LMT, where F-35 is a quantified 27% of consolidated sales, the case here rests on backlog and segment margins alone.
Lowest FCF conversion among the six primes. 79% means earnings-based and cash-based screens diverge. A sustained drop below 70% would fall into the range this site treats as worth investigating.
Aeronautics margin floor. 6.3% segment operating margin leaves thin operating leverage while B-21 transitions from development into production.
Fixed-price cost growth. ~Half of sales on firm fixed-price terms. Unanticipated costs on development or low-rate initial production compress margins without contractual relief.
Funded backlog and FCF conversion are the inputs. This primer takes them to a ten-year cash-flow value and an FCF yield you can screen.
The Excel model is the primer's two archetype builds live across 11 sheets: a ten-year, backlog-driven free-cash-flow DCF with a Gordon terminal. Change the book-to-bill, the FCF conversion ratio or the WACC and the value per share moves; the backlog, conversion-bridge and concentration sheets update alongside it.