Northrop Grumman Corporation 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. The filing is an annual Form 10-K rather than a quarterly filing; selected fourth-quarter items are noted where disclosed. Northrop Grumman is a global aerospace and defense contractor organized into Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems. The U.S. government accounted for 85% of 2021 sales.
Financial Highlights
| Metric | 2021 | 2020 | Change |
|---|
| Sales | $35.667 billion | $36.799 billion | Down 3% |
| Operating income | $5.651 billion | $4.065 billion | Up 39% |
| Operating margin | 15.8% | 11.0% | Up 4.8 points |
| Net earnings | $7.005 billion | $3.189 billion | Up 120% |
| Diluted EPS | $43.54 | $19.03 | Up 129% |
| Transaction-adjusted net earnings | $4.123 billion | $3.963 billion | Up 4% |
| Transaction-adjusted EPS | $25.63 | $23.65 | Up 8% |
| Cash flow from operations | $3.567 billion | $4.305 billion | Down 17% |
| Adjusted free cash flow | $2.236 billion | $3.683 billion | Down 39% |
| Cash and cash equivalents | $3.530 billion | $4.907 billion | Down $1.377 billion |
| Long-term debt, including current portion | $12.783 billion | $15.003 billion | Down $2.220 billion |
| Backlog | $76.046 billion | $80.969 billion | Down 6% |
Segment Results
| Segment | 2021 Sales | Sales Change | 2021 Operating Margin |
|---|
| Aeronautics Systems | $11.259 billion | Down 7% | 9.7% |
| Defense Systems | $5.776 billion | Down 23% | 12.0% |
| Mission Systems | $10.134 billion | Up 1% | 15.6% |
| Space Systems | $10.608 billion | Up 21% | 10.6% |
Material Changes Versus the Prior Comparable Period
- Northrop Grumman completed the sale of its IT and mission support services business on January 30, 2021, receiving $3.4 billion in cash and recording a $1.980 billion pretax gain. The divestiture reduced 2021 sales by approximately $2.2 billion and backlog by $1.4 billion, making reported year-over-year comparisons less comparable.
- Organic sales increased 3% to $35.505 billion. Space Systems organic sales rose 24% and Mission Systems organic sales rose 6%, while Aeronautics Systems declined 7% and Defense Systems declined 4% on an organic basis.
- Reported earnings benefited from a $2.355 billion mark-to-market pension and other postretirement benefit gain, compared with a $1.034 billion expense in 2020. The gain primarily reflected a higher discount rate and plan asset returns of approximately 10.9%.
- Operating cash flow declined primarily because the company paid $785 million of federal and state taxes related to the divestiture. Adjusted free cash flow also reflected the loss of favorable 2020 effects from CARES Act tax deferrals and increased Department of Defense progress payments.
- Share repurchases increased to $3.705 billion in 2021 from $490 million in 2020. The company had $2.2 billion remaining under the 2021 authorization at year-end and subsequently authorized an additional $2.0 billion program in January 2022.
- Long-term debt decreased after repayment of $700 million of notes at maturity and redemption of $1.5 billion of notes due in 2022. The company recorded a $54 million pretax make-whole premium related to the redemption.
Liquidity, Capital Allocation, and Commitments
- Year-end cash was $3.530 billion, including $295 million held outside the United States. The company had no borrowings under its $2.0 billion senior unsecured revolving credit facility or its $500 million uncommitted facility.
- Management stated that cash, operating cash flow, credit facilities, commercial paper, and potential capital-market access are expected to provide sufficient short- and long-term liquidity.
- Capital expenditures were $1.415 billion in 2021, and capital expenditure commitments were $1.5 billion at year-end.
- Purchase obligations were $17.7 billion, approximately half of which were short-term. Management does not consider these obligations a material liquidity risk because they largely relate to U.S. government contracts with termination liability protections.
- The company paid $983 million of dividends in 2021 and increased its quarterly dividend 8% to $1.57 per share in May 2021.
Guidance, Outlook, and Management Commentary
- The filing does not provide a clear quantitative 2022 revenue, earnings, margin, or cash-flow guidance figure.
- Management expects long-term opportunity from heightened global security concerns and capabilities in space, missile defense, hypersonics, counter-hypersonics, survivable aircraft, and mission systems.
- FY 2022 appropriations had not been enacted as of the filing date; the government was operating under a continuing resolution extended through February 18, 2022. Management highlighted uncertainty around program funding, new starts, and defense priorities.
- COVID-19 continued to affect fourth-quarter 2021 revenue and operating income through labor shortages, employee leave, evolving government requirements, inflation, and supply-chain constraints. Management expected these challenges to continue and potentially worsen.
- The F-35 program recorded a $93 million unfavorable estimate-at-completion adjustment in the fourth quarter, in addition to a $42 million unfavorable adjustment in the third quarter, primarily due to COVID-19-related labor impacts. The company modified its production plan and expected production rates to increase gradually as pandemic impacts subsided.
- Aggregate net favorable estimate-at-completion adjustments contributed $527 million to 2021 operating income, compared with $466 million in 2020.
Risks, Contingencies, and Unusual Items
- Customer concentration is significant: U.S. government sales were 85% of 2021 revenue. Changes in appropriations, acquisition priorities, continuing resolutions, government shutdowns, or contract termination could materially affect results.
- Approximately 49% of 2021 sales were from fixed-price contracts, exposing the company to cost growth, labor inflation, supplier problems, technical issues, and schedule risk.
- COVID-19, microelectronics shortages, supply-chain disruption, inflation, labor availability, and employee vaccination requirements could increase costs and delay performance, with uncertain recovery under contracts.
- The company is subject to substantial environmental obligations, particularly legacy contamination at Bethpage, New York. Environmental remediation accrued costs were $572 million, with $363 million of reasonably possible future costs in excess of accrued amounts; Bethpage costs could increase materially and may not be fully recoverable.
- A U.S. government challenge to the interest-rate assumption used in determining CAS pension expense could have a material adverse effect, although the company could not estimate a potential loss range.
- Unrecognized tax benefits were approximately $1.630 billion, including $399 million associated with IRC Section 451(b). Unfavorable resolution could materially affect future cash flows.
- The company faced ongoing litigation involving a Postal Service contract, environmental claims, government cost matters, and discussions with the Federal Trade Commission concerning compliance with the Orbital ATK acquisition order. The filing states that outcomes generally cannot be predicted, although most other pending matters were not expected to be material.
- Goodwill was $17.515 billion, approximately 41% of total assets. No goodwill impairment was recorded, but adverse changes in business conditions, appropriations, or market assumptions could result in future impairment charges.
Investor Verification Checklist
- Verify the sustainability of earnings excluding the $1.980 billion divestiture gain and $2.355 billion pension mark-to-market benefit.
- Assess organic growth and margin trends after the IT services divestiture, particularly in Aeronautics Systems and Defense Systems.
- Monitor F-35 labor and production recovery, future estimate-at-completion adjustments, and fixed-price contract performance.
- Track backlog conversion, funded versus unfunded backlog, new awards, and the effect of continuing resolutions or defense appropriations.
- Review cash conversion after divestiture-related taxes, capital expenditures, pension contributions, debt repayments, dividends, and share repurchases.
- Evaluate exposure to the Bethpage environmental matters, CAS pension-cost dispute, uncertain tax positions, and other government contract claims.
- Confirm subsequent developments after January 26, 2022, including the new $2.0 billion repurchase authorization and final settlement of the $500 million accelerated share repurchase agreement.
