NORTHROP GRUMMAN CORP DE
For the period ended Dec 31, 2023. Filed Jan 25, 2024.
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FY2023 · Filed Jan 25, 2024
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Consolidated Operating Results
For purposes of the operating results discussion below, we assess our performance using certain financial measures that are not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”).
Mark-to-market adjusted net earnings (MTM-adjusted net earnings) and MTM-adjusted earnings per share (MTM-adjusted EPS) exclude MTM pension and OPB (expense)/benefit and related tax impacts, which are generally only recognized during the fourth quarter. Transaction-adjusted net earnings and transaction-adjusted earnings per share (transaction-adjusted EPS) exclude the MTM impacts noted above, as well as impacts related to the IT services divestiture, including the gain on sale of the business, associated federal and state income tax expenses, transaction costs, and the make-whole premium for early debt redemption. These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the company’s underlying financial performance by presenting the company’s operating results before the non-operational impact of pension and OPB actuarial gains and losses, and with regard to transaction-adjusted net earnings and EPS, the impact of certain divestiture activity. These measures are also consistent with how management views the underlying performance of the business as the impact of MTM accounting and the IT services divestiture are not considered in management’s assessment of the company’s operating performance or in its determination of incentive compensation awards.
We reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures below. These non-GAAP measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as an alternative to operating results presented in accordance with GAAP.
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Selected financial highlights are presented in the table below:
| Year Ended December 31 · % Change in | ||||||
|---|---|---|---|---|---|---|
| $ in millions, except per share amounts · 2023 · 2022 · 2021 · 2023 · 2022 | ||||||
| Sales | $39,290 | $36,602 | $35,667 | 7% | 3% | |
| Operating costs and expenses | 36,753 | 33,001 | 31,996 | 11% | 3% | |
| Operating costs and expenses as a % of sales | 93.5% | 90.2% | 89.7% | |||
| Gain on sale of business | — | — | 1,980 | —% | NM | |
| Operating income | 2,537 | 3,601 | 5,651 | (30)% | (36)% | |
| Operating margin rate | 6.5% | 9.8% | 15.8% | |||
| Mark-to-market pension and OPB (expense) benefit | (422) | 1,232 | 2,355 | NM | (48)% | |
| Federal and foreign income tax expense | 290 | 940 | 1,933 | (69)% | (51)% | |
| Effective income tax rate | 12.4% | 16.1% | 21.6% | |||
| Net earnings | 2,056 | 4,896 | 7,005 | (58)% | (30)% | |
| Diluted earnings per share | $13.53 | $31.47 | $43.54 | (57)% | (28)% | |
Sales
2023 sales increased $2.7 billion, or 7 percent, due to higher sales at all four sectors. 2023 sales reflect continued strong demand for our products and services.
See “Segment Operating Results” below for further information by segment and “Product and Service Analysis” for product and service detail. See Note 16 to the consolidated financial statements for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments.
Operating Income and Margin Rate
2023 operating income decreased $1.1 billion, or 30 percent, primarily due to a $1.56 billion charge on the B-21 program at Aeronautics Systems, partially offset by higher operating income at Space Systems and Defense Systems. The B-21 charge relates to the low-rate initial production (LRIP) phase of the program and is due principally to a change in our assumptions regarding funding to mitigate the impact of macroeconomic disruptions on the program and higher projected manufacturing costs that reflect recent supplier negotiations and our experience in completing the first aircraft. The decrease was also offset by $311 million of lower unallocated corporate expense, largely due to higher deferred state tax benefits associated with the MTM adjustment and B-21 charge and lower intangible asset amortization and PP&E step-up depreciation, as well as a $118 million reduction in the FAS/CAS operating adjustment. 2023 operating margin rate declined to 6.5 percent from 9.8 percent reflecting the items above.
2023 G&A costs as a percentage of sales decreased to 10.2 percent from 10.6 percent, primarily due to higher sales, which more than offset our continued investments for future business opportunities.
For further information regarding product and service operating costs and expenses, see “Product and Service Analysis” below.
Mark-to-Market Pension and OPB Benefit/Expense
The primary components of pre-tax MTM (expense) benefit are presented in the table below:
| Year Ended December 31 | |||
|---|---|---|---|
| $ in millions | 2023 | 2022 | 2021 |
| Actuarial (losses) gains on projected benefit obligation | $(1,489) | $9,662 | $1,163 |
| Actuarial gains (losses) on plan assets | 1,067 | (8,430) | 1,192 |
| MTM (expense) benefit | $(422) | $1,232 | $2,355 |
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The 2023 MTM expense of $422 million was primarily driven by a 39 basis point decrease in the discount rate from year end 2022, partially offset by actual net plan asset returns of 11.1 percent compared to our 7.5 percent asset return assumption.
Federal and Foreign Income Taxes
The 2023 effective tax rate (ETR) decreased to 12.4 percent from 16.1 percent in 2022 primarily due to lower earnings before income taxes as a result of the B-21 charge and MTM expense, which collectively reduced the 2023 ETR by 3.8 percentage points. The 2022 MTM benefit increased the 2022 ETR by 1.2 percentage points. See Note 7 to the consolidated financial statements for additional information.
Net Earnings
The table below reconciles net earnings to MTM-adjusted net earnings and transaction-adjusted net earnings:
| Year Ended December 31 · % Change in | |||||
|---|---|---|---|---|---|
| $ in millions | 2023 | 2022 | 2021 | 2023 | 2022 |
| Net earnings | $2,056 | $4,896 | $7,005 | (58)% | (30)% |
| MTM expense (benefit) | 422 | (1,232) | (2,355) | NM | (48)% |
| MTM-related deferred state tax (benefit) expense(1) | (22) | 65 | 124 | NM | (48)% |
| Federal tax (benefit) expense of items above(2) | (84) | 245 | 469 | NM | (48)% |
| MTM adjustment, net of tax | 316 | (922) | (1,762) | NM | (48)% |
| MTM-adjusted net earnings | 2,372 | 3,974 | 5,243 | (40)% | (24)% |
| Gain on sale of business | — | — | (1,980) | NM | NM |
| State tax impact(3) | — | — | 160 | NM | NM |
| Transaction costs | — | — | 32 | NM | NM |
| Make-whole premium | — | — | 54 | NM | NM |
| Federal tax impact of items above(4) | — | — | 614 | NM | NM |
| Transaction adjustment, net of tax | — | — | (1,120) | NM | NM |
| Transaction-adjusted net earnings | $2,372 | $3,974 | $4,123 | (40)% | (4)% |
(1)The deferred state tax impact in each period was calculated using the company’s blended state tax rate of 5.25 percent and is included in Unallocated corporate expense within operating income.
(2)The federal tax impact in each period was calculated by subtracting the deferred state tax impact from MTM benefit (expense) and applying the 21 percent federal statutory rate.
(3)The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.
(4)The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.
2023 net earnings decreased $2.8 billion, or 58 percent, principally due to a $1.7 billion decrease in our MTM (expense) benefit, a $975 million reduction in the non-operating FAS pension benefit and the $1.1 billion decrease in operating income described above, partially offset by a $650 million decrease in income tax expense, a $107 million increase in returns on marketable securities related to our non-qualified benefit plans, and a $97 million gain recognized upon the sale of our minority investment in an Australian business.
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Diluted Earnings Per Share
The table below reconciles diluted earnings per share to MTM-adjusted EPS and transaction-adjusted EPS:
| Year Ended December 31 · % Change in | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 | 2022 | |
| Diluted earnings per share | $13.53 | $31.47 | $43.54 | (57)% | (28)% |
| MTM expense (benefit) per share | 2.78 | (7.92) | (14.64) | NM | (46)% |
| MTM-related deferred state tax (benefit) expense per share(1) | (0.14) | 0.42 | 0.77 | NM | (45)% |
| Federal tax (benefit) expense of items above per share(2) | (0.56) | 1.57 | 2.92 | NM | (46)% |
| MTM adjustment per share, net of tax | 2.08 | (5.93) | (10.95) | NM | (46)% |
| MTM-adjusted EPS | 15.61 | 25.54 | 32.59 | (39)% | (22)% |
| Gain on sale of business per share | — | — | (12.31) | NM | NM |
| State tax impact(3) per share | — | — | 0.99 | NM | NM |
| Transaction costs per share | — | — | 0.20 | NM | NM |
| Make-whole premium per share | — | — | 0.34 | NM | NM |
| Federal tax impact of items above(4) per share | — | — | 3.82 | NM | NM |
| Transaction adjustment per share, net of tax | — | — | (6.96) | NM | NM |
| Transaction-adjusted EPS | $15.61 | $25.54 | $25.63 | (39)% | —% |
(1)The deferred state tax impact in each period was calculated using the company’s blended state tax rate of 5.25 percent and is included in Unallocated corporate expense within operating income.
(2)The federal tax impact in each period was calculated by subtracting the deferred state tax impact from MTM benefit (expense) and applying the 21 percent federal statutory rate.
(3)The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.
(4)The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.
2023 diluted earnings per share decreased $17.94, or 57 percent, reflecting the 58 percent decrease in net earnings described above and a 2 percent decrease in weighted-average diluted shares outstanding.
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.