Northrop Grumman Financial Model
Aerospace and Defence Company Financials Example (Free Excel Download)
Northrop Grumman is a top-tier global aerospace and defence technology company that provides advanced systems, products, and solutions to the US Department of Defense (DoD) and allied nations.
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About this model
This model provides a comprehensive equity valuation and forecasting tool for an analyst covering Northrop Grumman, focusing on contract backlog conversion, segment-level margin expansion, and the impact of FAS/CAS pension adjustments on operating cash flow.
Northrop Grumman is a top-tier global aerospace and defence technology company that provides advanced systems, products, and solutions to the US Department of Defense (DoD) and allied nations. The company operates across the entire battlespace, from undersea to outer space and cyberspace.
- Business Segments: Aeronautics Systems (~28% of revenue), Space Systems (~27%), Mission Systems (~26%), and Defense Systems (~19%), excluding intersegment eliminations.
- Key Geographies: Primarily the United States (typically >85% of revenue), with growing international sales to allied nations.
- Business Model Type: Long-term contract-based manufacturing and engineering (mix of cost-type and fixed-price contracts).
- Competitive Position: One of the "Prime 5" US defence contractors, holding near-monopoly or duopoly positions in strategic deterrence (B-21 Raider, Sentinel ICBM) and advanced space systems.
- Recent Major Events: A $1.56 billion pre-tax charge on the B-21 Low-Rate Initial Production (LRIP) contract in late 2023, the divestiture of its Training Services business in 2025, and a record backlog reaching $95.7 billion in early 2026.
The downloadable Northrop Grumman financial model includes SEC-sourced historical financials, forecast assumptions, core operating schedules, and valuation outputs in an Excel workbook built for review and scenario analysis.
A turnkey financial model
Live formulas, no hardcoded values
Outputs are driven by live formulas, so the workbook updates from its assumptions instead of relying on hardcoded results.
All assumptions in one tab
Inputs are clearly marked in the Assumptions tab and separated from calculations, making it clear what to change and what to leave intact.
Statements always balancing
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Distinct schedules for clarity
Debt, working capital, taxes, and cash flow can get messy quickly. We group calculations in clear schedules, not across disconnected tabs.
No hidden macros or external links
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Changes flow through the model
Update a key driver and see the impact carry through the forecast, financing, and return outputs. We never use hardcoded numbers in formulas.
Historicals & AssumptionsNorthrop Grumman financial modelCompany, Historicals & Assumptions used
Source: SEC EDGAR · values in USD
| Line item | FY2021 | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|---|
| Revenue | $35.67B | $36.60B | $39.29B | $41.03B | $41.95B |
| General and administrative expenses | $3.60B | $3.87B | $4.01B | $3.99B | $4.03B |
| Operating income | $5.65B | $3.60B | $2.54B | $4.37B | $4.51B |
| Net income | $7.00B | $4.90B | $2.06B | $4.17B | $4.18B |
Forecast assumptions
Defaults used in the downloadable model. Forecast horizon: FY2026–FY2030.
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How to build a detailed financial model for Northrop Grumman
A complete walkthrough of every driver, margin, working-capital input, and capital-allocation assumption used in the downloadable model.
Revenue Deep Dive
Aeronautics Systems
- Segment Name: Aeronautics Systems
- Revenue Driver Formula: Beginning Backlog + Bookings (Awards) - Revenue Recognized (Cost-to-Cost method)
- Historical Growth Rate: 2-5% CAGR (spiked to 12% in 2024 due to B-21 ramp)
- Key Growth Levers and Headwinds: B-21 Raider production ramp and F-35 fuselage volume; headwinds from fixed-price development cost overruns.
- Pricing Dynamics: Transitioning from cost-plus development to fixed-price incentive production.
- Revenue Recognition: Over time using the cost-to-cost method (Estimate at Completion - EAC).
- Seasonality: Q4 is typically the strongest quarter for revenue and bookings due to the US government fiscal year-end (September 30) contract award cycle.
Space Systems
- Segment Name: Space Systems
- Revenue Driver Formula: Funded Backlog x Conversion Rate + New Awards
- Historical Growth Rate: 5-10% CAGR (normalising after rapid growth in 2020-2023)
- Key Growth Levers and Headwinds: Space Development Agency (SDA) satellites, Next Generation Interceptor (NGI), and Sentinel (GBSD) program; headwinds from the wind-down of certain restricted programs.
- Pricing Dynamics: Heavily cost-plus due to the developmental nature of national security space programs.
- Revenue Recognition: Over time (EAC).
- Seasonality: Similar to Aeronautics, Q4 weighted.
Mission Systems
- Segment Name: Mission Systems
- Revenue Driver Formula: Contract Volume x Blended Margin / Cost-to-Cost %
- Historical Growth Rate: 4-6% CAGR
- Key Growth Levers and Headwinds: Advanced microelectronics, radar systems (SABR), and airborne sensors.
- Pricing Dynamics: Higher mix of fixed-price production and commercial-like off-the-shelf components, yielding the highest margins in the portfolio.
- Revenue Recognition: Over time (EAC) and some point-in-time for discrete component deliveries.
- Seasonality: Q4 weighted.
Defense Systems
- Segment Name: Defense Systems
- Revenue Driver Formula: Ammunition/Weapons Volume x Unit Price + Sustainment Contract Value
- Historical Growth Rate: 2-4% CAGR
- Key Growth Levers and Headwinds: Solid rocket motors (GMLRS, PAC-3), IBCS system for Poland, and ammunition demand driven by global conflicts; headwinds from the 2025 divestiture of the Training Services business.
- Pricing Dynamics: Mix of fixed-price production (weapons) and cost-plus (sustainment).
- Revenue Recognition: Over time (EAC).
- Seasonality: Q4 weighted.
Cost Structure
Variable Costs / COGS
- Line-by-line breakdown: Product costs (direct materials, direct labour, manufacturing overhead) and Service costs (engineering labour, subcontracts).
- Gross margin range: 15-18% (highly dependent on net EAC adjustments).
- Key input costs: Aerospace-grade titanium, aluminium, electronic components, and highly cleared engineering labour.
- How COGS scales: Linear with revenue, but subject to step-function changes if a fixed-price contract enters a forward loss position (e.g., B-21 LRIP).
Operating Expenses
- R&D: Company-sponsored R&D is typically 2.5-3.0% of revenue. Customer-funded R&D is included in COGS/Revenue.
- SG&A: General and administrative expenses run at 4-5% of revenue. Marketing is minimal given the single-buyer (DoD) dynamic.
- Depreciation & Amortisation: ~2.5-3.0% of revenue, split heavily towards tangible PP&E due to manufacturing facility build-outs.
- Stock-Based Compensation: ~0.5% of revenue.
- Unallocated Corporate Expenses: Includes state taxes, intangible amortisation, and the crucial FAS/CAS pension adjustment.
Margin Profile
- Segment Operating Margin: 10.5% - 11.5% (Aeronautics ~9-10%, Space ~9-10%, Defense ~11-12%, Mission ~14-15%).
- Consolidated Operating Margin: 9.5% - 10.8% (impacted by unallocated corporate and pension adjustments).
- Margin trend: Expanding slightly as legacy fixed-price development programs transition to production, though capped by statutory DoD profit limits.
Balance Sheet Structure
- Total assets: ~$45 billion.
- Key asset categories: Unbilled Receivables (Contract Assets) are massive, representing revenue recognised but not yet billed based on contract milestones.
- Goodwill & intangibles: ~$17 billion (~38% of total assets), primarily from the Orbital ATK acquisition.
- Working capital profile:
- DSO: 40-50 days (billed), but effectively much longer when including unbilled contract assets.
- DIO: 15-25 days (inventory is low because most costs are immediately applied to contracts).
- DPO: 35-45 days.
- Net working capital: Positive and a significant use of cash during program ramp-ups.
- PP&E: ~$9 billion, driven by specialised manufacturing facilities and secure compartmentalised information facilities (SCIFs).
- Right-of-use assets: ~$1.5 billion, standard operating leases for office and light manufacturing space.
Capital Expenditure & Investment
- Capex as % of revenue: 4.0% - 4.5% (elevated recently due to B-21 and Sentinel facility investments).
- Maintenance vs. growth: ~30% maintenance, ~70% growth (program-specific tooling and facilities).
- Major capex programmes: Palmdale facility expansion (B-21), Promontory solid rocket motor facility expansion.
- Capitalised software: Minimal relative to physical infrastructure.
- M&A pattern: Transformational (Orbital ATK in 2018) followed by long periods of organic growth and portfolio pruning (e.g., IT services sale to Peraton, Training Services divestiture).
Debt & Capital Structure
- Total debt: ~$13.5 billion.
- Debt/EBITDA ratio: ~2.0x - 2.5x.
- Credit rating: BBB+ (S&P) / Baa1 (Moody's).
- Key debt instruments: Senior unsecured notes with staggered maturities.
- Maturity profile: Well-laddered, typically $1.0B - $1.5B maturing annually.
- Interest rate profile: Predominantly fixed-rate bonds; weighted average cost of debt ~4.0%.
- Share repurchase programme: Highly active; typically returns >100% of Free Cash Flow to shareholders via buybacks and dividends (e.g., $3.7B returned in 2024).
- Dividend policy: ~1.5% yield, growing at 8-10% annually; payout ratio ~30% of net income.
Cash Flow Characteristics
- OCF conversion: ~1.0x - 1.1x of Net Income.
- Free cash flow margin: 6.0% - 7.5% of revenue ($2.6B to $3.0B absolute).
- Major non-cash items: Depreciation & amortisation, FAS/CAS pension adjustment (FAS is non-cash expense, CAS is cash recovery from government), and deferred taxes.
- Working capital cash flow impact: Contract assets are a major swing factor. Milestone payments on large programs (like B-21) can shift hundreds of millions of dollars between quarters.
- Capex intensity: Moderately high for a prime contractor due to vertical integration in space and aeronautics.
- Cash tax rate: Section 174 R&D capitalisation rules have temporarily increased cash taxes above the GAAP effective tax rate, though this is normalising.
Sheet Structure
- Assumptions: Hardcoded drivers, macro DoD budget growth, segment book-to-bill ratios, and margin targets.
- Backlog & Bookings: Roll-forward of funded and unfunded backlog by segment (Beginning Backlog + Awards - Revenue = Ending Backlog).
- Income Statement: Revenue by segment, intersegment eliminations, segment operating income, unallocated corporate, FAS/CAS adjustment, interest, and taxes.
- Pension Schedule (FAS/CAS): Calculation of GAAP pension expense (FAS) vs. Government recoverable pension cost (CAS).
- Balance Sheet: Contract assets, contract liabilities, standard working capital, debt, and equity.
- Cash Flow Statement: Net income to OCF (bridged by FAS/CAS and working capital), investing cash flows (capex), and financing (buybacks/dividends).
- Debt Schedule: Tranche-by-tranche bond maturities, interest expense calculation, and debt paydown/refinancing.
- Working Capital: DSO, DPO, and contract asset/liability days.
- DCF Valuation: Unlevered free cash flow, WACC calculation, terminal value (Gordon Growth and Exit Multiple).
Key Financial Relationships
- `Segment Revenue = Prior Year Segment Revenue x (1 + Segment Growth Rate)` OR `Segment Revenue = Beginning Backlog x Backlog Conversion Rate`
- `Total Sales = Aeronautics Sales + Defense Sales + Mission Sales + Space Sales + Intersegment Eliminations`
- `Segment Operating Income = Segment Revenue x Segment Operating Margin %`
- `Total Segment Operating Income = Sum of Segment Operating Incomes`
- `Consolidated Operating Income = Total Segment Operating Income + Net FAS/CAS Pension Adjustment - Unallocated Corporate Expenses`
- `Net FAS/CAS Pension Adjustment = CAS Pension Cost (Recoverable) - FAS Pension Expense (GAAP)`
- `Ending Backlog = Beginning Backlog + (Total Sales x Book-to-Bill Ratio) - Total Sales`
- `Contract Assets = Total Sales x (Contract Asset Days / 365)`
- `Free Cash Flow = Cash from Operations - Capital Expenditures`
- `Share Repurchases = Free Cash Flow - Dividends Paid - Debt Principal Repayments + Net New Borrowing`
- `Interest Expense = Average Debt Balance x Weighted Average Interest Rate`
- `Effective Tax Rate = Income Tax Expense / Earnings Before Taxes`
Cross-Sheet Dependencies
- The Backlog & Bookings sheet is the primary engine; it feeds revenue into the Income Statement.
- The Income Statement generates Net Income, which starts the Cash Flow Statement.
- The Pension Schedule feeds the FAS/CAS adjustment line on the Income Statement and the non-cash pension add-back on the Cash Flow Statement.
- The Cash Flow Statement determines the cash available for share repurchases, which feeds the Equity section of the Balance Sheet and reduces the share count on the Income Statement (boosting EPS).
- The Working Capital sheet uses revenue from the Income Statement to calculate contract assets/liabilities, which feed the Balance Sheet and the operating section of the Cash Flow Statement. Circularity risk exists in the Interest Expense / Debt / Cash Flow loop; use a toggle to break circularity.
Sign Convention
- Income Statement: Revenue is positive. Expenses (COGS, SG&A, Interest, Taxes) are positive numbers subtracted in subtotals.
- Cash Flow Statement: Net Income is positive. Cash inflows (e.g., increase in payables, depreciation) are positive. Cash outflows (e.g., increase in receivables, capex, dividends) are negative.
- Balance Sheet: All assets, liabilities, and equity balances are positive.
- Intersegment Eliminations: Entered as negative numbers to reduce total gross revenue to consolidated net revenue.
Things Most Likely to Go Wrong
- FAS/CAS Pension Accounting: This is unique to US defence contractors. The model must separate GAAP pension expense (FAS) from the cash the government reimburses for pensions (CAS). The net difference sits in operating income.
- Intersegment Eliminations: NOC has ~$2.5 billion in intersegment sales (e.g., Mission Systems selling radars to Aeronautics Systems). If you sum segment revenues without the elimination line, you will overstate total revenue by ~6%.
- Contract Assets vs. Traditional Receivables: Standard DSO calculations fail here. You must model "Unbilled Receivables" (Contract Assets) separately from standard Accounts Receivable.
- EAC Adjustments: Forward loss provisions (like the $1.56B B-21 charge in 2023) distort historical margin averages. Do not use 2023 Aeronautics margins as a go-forward run rate.
- Divestiture Stub Periods: The 2025 Training Services divestiture removes revenue from Defense Systems mid-year and adds a one-time pre-tax gain of ~$205M-$231M to unallocated corporate. This must be normalised out of go-forward operating margins.
- Book-to-Bill Lag: A book-to-bill > 1.0x does not instantly create revenue; it increases backlog, which converts to revenue over 2-5 years depending on the segment.
- Share Count Reduction: NOC aggressively buys back stock. Failing to model the declining share count will severely understate EPS.
- R&D Capitalisation Cash Tax Impact: Section 174 rules create a divergence between the GAAP tax rate (~17%) and the actual cash taxes paid.
Validation Checks
- "Consolidated Operating Margin should be in the 10.0% - 11.5% range; flag if outside this band."
- "Book-to-Bill ratio should be between 1.0x and 1.3x based on recent historical averages (1.23x in 2024)."
- "Intersegment eliminations should run at approximately -5.5% to -6.5% of gross segment sales."
- "Capex as % of revenue should run between 4.0% and 4.5%."
- "Free Cash Flow conversion (FCF / Net Income) should be between 60% and 80%."
- "Balance sheet must balance: Total Assets = Total Liabilities + Equity in every period."
- "Effective tax rate should be 17.0% - 18.0%."
- "Debt/EBITDA should remain below 3.0x per rating agency guidance."
Key Assumptions (Default Values)
| Assumption | Default Value | Unit | Rationale |
|---|---|---|---|
| Aeronautics Systems Growth | 3.0 | % | Normalised growth post B-21 LRIP ramp |
| Defense Systems Growth | 3.0 | % | Steady munitions demand, offset by Training divestiture |
| Mission Systems Growth | 5.0 | % | Strong demand for advanced microelectronics and sensors |
| Space Systems Growth | 4.0 | % | SDA satellite growth offsetting restricted program wind-downs |
| Intersegment Eliminations | -6.0 | % | Historical average of gross segment sales |
| Aeronautics Operating Margin | 9.5 | % | Rebounding from 2023 forward loss charges |
| Defense Operating Margin | 11.5 | % | Historical average |
| Mission Operating Margin | 14.5 | % | Highest margin segment, historical average |
| Space Operating Margin | 9.5 | % | Historical average |
| Book-to-Bill Ratio | 1.15 | x | 3-year historical average |
| Capex as % of Revenue | 4.2 | % | Elevated facility investment cycle |
| Effective Tax Rate | 17.5 | % | Management guidance for 2025/2026 |
| Dividend Payout Ratio | 30.0 | % | Historical average |
| Share Repurchases (% of FCF) | 70.0 | % | Management commitment to return 100% of FCF via dividends + buybacks |
| Cost of Debt | 4.2 | % | Weighted average interest rate on existing notes |
| WACC | 8.5 | % | Standard defence prime discount rate |
| Terminal Growth Rate | 2.5 | % | Aligned with long-term US GDP and DoD budget growth |
Data Sources & Benchmarks
- SEC EDGAR: Northrop Grumman 10-K and 8-K filings (specifically the Q4 2024 and Q4 2025 earnings releases for segment re-alignments and divestiture impacts).
- Investor Relations: NOC quarterly earnings presentations and multi-year financial outlook slides.
- Key Peers for Benchmarking: Lockheed Martin (LMT), General Dynamics (GD), RTX Corporation (RTX), L3Harris (LHX).
- Industry Data Sources: US Department of Defense (DoD) Comptroller budget requests (Future Years Defense Program - FYDP), Stockholm International Peace Research Institute (SIPRI) for global defence spending.
- Consensus Estimates: Visible Alpha or Bloomberg for segment-level revenue and margin consensus.
Sources
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Frequently asked
What does Northrop Grumman do and what are its main business segments?+
Northrop Grumman is a top-tier global aerospace and defense technology company providing advanced systems, products, and solutions primarily to the US Department of Defense and allied nations. Its main business segments include Aeronautics Systems, Space Systems, Mission Systems, and Defense Systems.
How does Northrop Grumman generate revenue, and what is its primary business model?+
Northrop Grumman generates revenue through long-term contract-based manufacturing and engineering, serving government clients with advanced defense technologies. Its revenue is driven by converting a substantial contract backlog, which reached $95.7 billion in early 2026, into sales across its various systems.
What is the assumed capital expenditure as a percentage of revenue in the Northrop Grumman financial model?+
The financial model for Northrop Grumman assumes capital expenditure as a percentage of revenue to be approximately 4.0%. This figure is reflective of recent elevated investments, particularly for major programs like the B-21 Raider and Sentinel ICBM facilities.
What is the projected revenue growth rate used in the Northrop Grumman financial model?+
The Northrop Grumman financial model projects a revenue growth rate of approximately 3.8%. This assumption helps forecast future top-line performance, considering the company's contract-based business model and substantial backlog.
What is the purpose of the downloadable Excel model for Northrop Grumman?+
The downloadable Excel model for Northrop Grumman serves as a comprehensive equity valuation and forecasting tool for analysts. It focuses on key aspects such as contract backlog conversion, segment-level margin expansion, and the impact of FAS/CAS pension adjustments on operating cash flow. The model provides forecasts for the FY2026–FY2030 horizon.
What are some key operating expense assumptions used in the Northrop Grumman financial model?+
Key operating expense assumptions in the financial model include Cost of Goods Sold (COGS) at approximately 55% of revenue and Selling, General & Administrative (SGA) expenses at about 9.98% of revenue. Additionally, Research & Development (R&D) is assumed to be around 3.04% of revenue.
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