Northrop Grumman Corporation (NOC) Cash Flow Statement

The wide quarterly swings in OCF/NI, from -1.89 in 2026Q1 to 2.73 in 2025Q4, suggest that cash conversion is heavily influenced by milestone-based revenue recognition and contract timing rather than underlying earnings quality. The 2026Q1 negative OCF of -$1.7B, despite net income of $875M, appears driven by a $3.1B working capital outflow, likely reflecting advance payments or delayed collections on major programs. Investors should monitor whether these swings normalize over a full year, as the cumulative OCF/NI across the ten quarters is approximately 1.0, implying that earnings and cash flow are broadly aligned over time.

The FCF trajectory shows a clear seasonal pattern, with Q1 quarters consistently negative (2024Q1: -$976M, 2025Q1: -$1.8B, 2026Q1: -$1.8B) followed by strong Q4 recoveries (2024Q4: $1.8B, 2025Q4: $3.2B). This pattern likely reflects the timing of government contract payments and milestone completions, which cluster in the second half of the fiscal year. The 2026Q2 FCF margin of 9.0% is below the 2025Q4 peak of 27.6%, but above the 2025Q2 level of 6.2%, indicating a gradual improvement that may continue as B-21 production ramps.

Northrop's CapEx/Revenue ratio of 2.8% in 2026Q2 is well below the 5.7% seen in 2025Q4 and the 7.6% in 2024Q4, indicating that the company is not in a heavy investment phase. This low capital intensity suggests that the majority of CapEx is likely maintenance-oriented, given the company's reliance on specialized facilities and classified programs that may not require significant new physical capacity. The modest CapEx levels, combined with strong D&A of $367M in 2026Q2, imply that the company's asset base is relatively mature, and future growth may be more dependent on R&D and human capital than on physical expansion.

The extreme swings in working capital, particularly the -$3.1B outflow in 2026Q1 and -$2.7B in 2025Q1, suggest that Northrop's cash flow is heavily influenced by the timing of large contract payments and advances. These outflows are likely tied to the company's major programs, such as B-21 and Sentinel, where milestone-based billing can cause significant quarterly distortions. The positive working capital contributions in Q4 quarters (2024Q4: +$1.6B, 2025Q4: +$674M) indicate that collections accelerate at year-end, which may reflect government fiscal year-end spending patterns. Investors should focus on annual rather than quarterly working capital trends to assess the underlying efficiency of the company's cash conversion cycle.

Northrop's capital deployment strategy appears heavily weighted toward returning cash to shareholders, with dividends consuming a significant portion of FCF. In 2026Q2, dividends of $351M exceeded the quarter's FCF of $978M, but on a cumulative basis, dividends and buybacks of $5.4B exceeded cumulative FCF of $4.5B, suggesting the company is supplementing shareholder returns with debt or existing cash reserves. The lack of buybacks in 2026Q2, after $68M in 2026Q1, may indicate a pause in repurchase activity, possibly to preserve liquidity given the working capital swings. This deployment pattern, combined with the company's debt levels, warrants monitoring for sustainability if FCF remains volatile.

The near-equivalence of cumulative net income and operating cash flow over the ten-quarter period indicates that the company's accruals are not systematically inflating earnings. This alignment is particularly notable given the significant working capital swings, which appear to be timing-related rather than indicative of deteriorating cash conversion. The cumulative OCF/NI ratio of approximately 1.0 suggests that the FAS/CAS pension adjustments and other non-cash items are offsetting, providing confidence in the sustainability of reported earnings. However, the 2026Q1 negative OCF of -$1.7B, despite positive net income, highlights the importance of analyzing cash flow on a trailing twelve-month basis to smooth out quarterly distortions.