Northrop Grumman Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Northrop Grumman is a global aerospace and defense company serving primarily the U.S. Department of Defense, intelligence community and international customers. The filing covers the unaudited quarter ended March 31, 2022. Reportable segments are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems. Results are affected by the January 2021 divestiture of the IT and mission support services business, which generated $162 million of prior-year first-quarter sales and a $2.0 billion pretax gain.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total sales | $8.797 billion | $9.157 billion | Down 4% |
| Operating income | $897 million | $2.822 billion | Down 68% |
| Operating margin | 10.2% | 30.8% | Down 20.6 points |
| Net earnings | $955 million | $2.195 billion | Down 56% |
| Diluted EPS | $6.10 | $13.43 | Down 55% |
| Effective tax rate | 16.5% | 27.2% | Down 10.7 points |
| Cash used in operating activities | $488 million | $66 million | Higher use of $422 million |
| Adjusted free cash flow | $(732) million | $(271) million | Lower by $461 million |
Product sales were $6.841 billion and service sales were $1.956 billion. Segment operating income was $1.037 billion, producing an 11.8% segment margin versus 12.0% in the prior-year period. Aggregate favorable net estimate-at-completion adjustments contributed $173 million of operating income, including a $67 million favorable adjustment on the B-21 program.
Segment sales and operating income were: Aeronautics Systems, $2.703 billion and $307 million; Defense Systems, $1.283 billion and $155 million; Mission Systems, $2.497 billion and $385 million; and Space Systems, $2.855 billion and $261 million. Space Systems sales rose 13%, while Aeronautics, Defense and Mission Systems sales declined.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $2.174 billion at March 31, 2022, down from $3.530 billion at December 31, 2021.
- Long-term debt was $12.825 billion; estimated fair value was $13.8 billion.
- No commercial paper or credit-facility borrowings were outstanding. The company had a $2.0 billion senior unsecured credit facility, maturing in August 2024, and renewed a $500 million uncommitted facility in April 2022.
- Capital expenditures were $244 million. Cash dividends paid were $251 million, and common-stock repurchases were $318 million.
- Total remaining share-repurchase authorization was approximately $3.8 billion at March 31, 2022. The quarterly dividend was $1.57 per share.
- Backlog was $75.8 billion, including $31.1 billion funded and $44.7 billion unfunded. Management expected approximately 40% of backlog to be recognized as revenue within 12 months and 60% within 24 months.
Material changes versus the prior comparable period
- Reported earnings and margins declined primarily because Q1 2021 included the $2.0 billion pretax IT-services divestiture gain and $192 million of related unallocated corporate expenses.
- Excluding divestiture effects, organic sales declined 2% and transaction-adjusted net earnings declined 11%; transaction-adjusted diluted EPS declined 7% to $6.10 from $6.57.
- Sales were pressured by COVID-19-related employee leave, labor shortages and supply-chain disruption, as well as program timing and lower volume in several aircraft, weapons and mission-system programs.
- Space Systems growth was driven by development-program ramp-up, including Next Generation Interceptor and GBSD, and higher volume on Commercial Resupply Services programs.
- Operating cash flow was negative primarily because of increased trade working-capital requirements, including higher unbilled receivables and accounts payable and other liability movements.
Guidance, outlook, risks and unusual items
The filing does not provide a formal full-year revenue or earnings guidance figure. Management stated that it was not currently assuming significant additional COVID-19 impacts on 2022 results, while acknowledging continued labor, supply-chain and inflation risks. Management expects available cash, operating cash flow and access to debt markets and credit facilities to satisfy near- and long-term liquidity needs.
- Beginning in 2022, IRC Section 174 requires research and development costs to be amortized rather than deducted currently. Unless legislation is enacted retroactively, the company estimates a potential approximately $1 billion reduction in 2022 operating cash flow.
- The company is exposed to inflation, supplier and component availability, labor shortages, COVID-19 developments, cybersecurity threats and the effects of the Russia-Ukraine conflict. It procures certain products and services in the region, including engines and cores for the Antares rocket.
- Environmental remediation liabilities were $582 million accrued at March 31, 2022, with $361 million of reasonably possible future costs in excess of accrued amounts. Bethpage, New York remediation requirements and related claims could increase costs materially.
- The company had approximately $1.7 billion of unrecognized tax benefits, including $428 million related to IRC Section 451(b). Unfavorable resolution could materially affect future cash flows.
- A U.S. government review of the company’s CAS pension interest-rate assumptions could have a material adverse effect, although no loss range was estimable.
- The company is involved in significant litigation and regulatory matters, including a USPS contract dispute, Bethpage environmental matters and FTC compliance discussions. Management does not currently believe the FTC matter or other ordinary-course matters are likely to be materially adverse, but outcomes remain uncertain.
Important facts for investors to verify
- Whether organic sales and segment margins recover from labor, supply-chain and program-timing pressures.
- Conversion of the $75.8 billion backlog into funded orders, revenue and operating cash flow.
- Timing and magnitude of cash-flow effects from IRC Section 174 and any related legislative changes.
- Resolution and potential cash exposure from tax audits, CAS pension-cost claims and Bethpage environmental obligations.
- Sustainability of share repurchases and dividends given negative first-quarter operating cash flow and approximately $12.8 billion of long-term debt.
- Execution and profitability of major development programs, including B-21, GBSD and Next Generation Interceptor, where contract estimates and EAC adjustments can materially affect reported results.