Northrop Grumman(US:NOC)2024-01-24 16:00Cash and Liquidity - Cash and cash equivalents as of December 31, 2023, totaled $3.1 billion, with $277 million held outside the U.S. by foreign subsidiaries[248] - The company has $20.7 billion in purchase obligations, approximately half of which is short-term, primarily related to U.S. government contracts[249] - Capital expenditure commitments as of December 31, 2023, amounted to $1.4 billion, expected to be satisfied with cash on hand[249] - Net cash provided by operating activities in 2023 increased by 34% to $3.875 billion, driven by improved trade working capital[254] - Adjusted free cash flow in 2023 increased by 30% to $2.1 billion, primarily due to higher operating cash flow[256] - The company issued $2.0 billion in unsecured senior notes in February 2023 for general corporate purposes, including debt repayment and share repurchases[248] - Cash returned to shareholders through share repurchases and dividends totaled $2.6 billion in 2023[258] - The impact of IRC Section 174 on cash from operations was estimated at $700 million for 2022 and $500 million for 2023[252] - The company's liquidity is supported by a $2.5 billion senior unsecured credit facility and a $500 million uncommitted credit facility[248] Pension and Benefits - The weighted-average composite pension discount rate was 5.15% at December 31, 2023, compared to 5.54% at December 31, 2022[268] - A 25 basis point decrease in the discount rate would increase the 2023 pension and OPB obligation by $866 million, while a 25 basis point increase would decrease it by $827 million[269] - The cash balance crediting rate assumption has been set to 4.02% for all years, with a minimum rate of 2.25% allowed under the plan[271] - The company's average annual rate of return from 1976 to 2023 was approximately 10.7%, with a 2023 return on plan assets of 11.1%[273] - A 100 basis point decrease in actual versus expected return on plan assets would increase the 2024 MTM expense by $305 million, while a 100 basis point increase would decrease it by $305 million[276] - Net periodic benefit cost for pension benefits was $148 million in 2023, compared to a benefit of $2.4 billion in 2022[448] - The fair value of pension plan assets increased to $30.251 billion in 2023 from $28.92 billion in 2022, driven by an 11.1% net plan asset return[450] - The projected benefit obligation for pension plans increased to $30.443 billion in 2023 from $29.067 billion in 2022, primarily due to a $1.6 billion interest cost[450] - The accumulated benefit obligation for all defined benefit pension plans was $30.1 billion in 2023, up from $28.8 billion in 2022[451] - Discount rate for pension benefits in 2023 is 5.15%, down from 5.54% in 2022[453] - Expected long-term return on plan assets for pension benefits remains at 7.50% for 2023[453] - Initial health care cost trend rate for 2023 is 6.20%, down from 6.50% in 2022[453] - Fair value of plan assets at the end of 2023 is $31.525 billion, up from $30.146 billion in 2022[457] - Estimated future benefit payments for 2024 total $2.146 billion, with $2.012 billion for pension plans and $134 million for medical and life plans[466] - Company expects to contribute $99 million to pension plans and $35 million to medical and life benefit plans in 2024[466] Contracts and Revenue - Net contract assets decreased by 37% to $1.5 billion at December 31, 2023, primarily due to decreases in net contract assets at Space Systems, Missions Systems, and Aeronautics Systems[342] - Revenue recognized from contract liabilities at the beginning of 2023 was $3.1 billion, compared to $2.4 billion in 2022 and $2.0 billion in 2021[343] - Approximately half of the company's sales in 2023 were derived from fixed-price contracts, which carry higher financial risk due to inflationary pressures and labor challenges[74] - Fixed-price development contracts are inherently more uncertain, with significant variability in cost estimates, while production contracts typically have reduced risks[75] - Cost-type contracts, often used for development programs, carry financial risks related to profit recognition and potential program cancellation due to cost, schedule, or technical performance issues[76] - The company manages performance based on contract and program execution, with sales recognized as control is transferred to customers[200] - 2023 sales increased by $2.7 billion, or 7%, reaching $39.29 billion, driven by higher sales across all four sectors[205][206] Operating Performance - 2023 operating income decreased by $1.1 billion, or 30%, primarily due to a $1.56 billion charge on the B-21 program at Aeronautics Systems[207] - 2023 operating margin rate declined to 6.5% from 9.8% in 2022, reflecting the impact of the B-21 program charge and other factors[207] - 2023 MTM (mark-to-market) pension and OPB expense was $422 million, driven by a 39 basis point decrease in the discount rate and actual net plan asset returns of 11.1%[209][210] - 2023 effective tax rate decreased to 12.4% from 16.1% in 2022, primarily due to lower earnings before income taxes resulting from the B-21 charge and MTM expense[211] - 2023 net earnings decreased by $2.8 billion, or 58%, to $2.056 billion, primarily due to a $1.7 billion decrease in MTM (expense) benefit and a $1.1 billion decrease in operating income[212] - 2023 MTM-adjusted net earnings were $2.372 billion, a 40% decrease from 2022, reflecting adjustments for MTM pension and OPB impacts[212] - 2023 G&A costs as a percentage of sales decreased to 10.2% from 10.6%, primarily due to higher sales[208] Investments and Assets - The company sold its minority investment in an Australian business for AUD $235 million ($157 million), resulting in a pre-tax gain of $97 million[364][365] - The company acquired $46 million of internal use software through long-term financing in 2022, recorded as a non-cash investing activity[361] - Lease incentives for landlord-funded leasehold improvements were $55 million in 2023 and $96 million in 2022, recorded in PP&E[361] - The company exchanged company-owned land for leased land valued at $155 million, resulting in a $96 million gain[362] - Capital expenditures incurred but not yet paid were $75 million in 2023, $113 million in 2022, and $91 million in 2021[363] - Property, plant and equipment (PP&E) increased to $17.617 billion in 2023 from $16.058 billion in 2022, with net PP&E at $9.653 billion in 2023 compared to $8.8 billion in 2022[360] - The carrying value of life insurance policies was $399 million at December 31, 2023, compared to $367 million at December 31, 2022[359] - The company's portfolio of marketable securities had a fair value of $339 million at December 31, 2023, exposed to market volatilities, price changes, and interest rates[294] Debt and Financing - The company issued $2.0 billion of unsecured senior notes in February 2023, including $1.0 billion of 4.70% senior notes due 2033 and $1.0 billion of 4.95% senior notes due 2053[425] - Total long-term debt increased from $12,877 million in 2022 to $13,856 million in 2023, with the estimated fair value of long-term debt at $13.4 billion in 2023[430] - Maturities of long-term debt as of December 31, 2023, include $70 million due in 2024, $1,582 million due in 2025, and $8,963 million due thereafter[433] - The company has $13.9 billion of long-term debt, primarily fixed-rate, with a fair value of approximately $13.4 billion at December 31, 2023[295] Taxes - Total federal and foreign income tax expense for 2023 was $290 million, a significant decrease from $940 million in 2022 and $1.933 billion in 2021[476] - The 2023 effective tax rate (ETR) decreased to 12.4% from 16.1% in 2022, primarily due to lower earnings before income taxes[402] - Income tax payments, net of refunds, were $1.2 billion in 2023, compared to $1.5 billion in 2022 and $1.3 billion in 2021[404] - Unrecognized tax benefits increased to $1.994 billion at the end of 2023, up from $1.663 billion in 2022, primarily due to accounting methods and the 2017 Tax Cuts and Jobs Act[408] - The company has $615 million in available tax credits and $358 million in unused net operating losses that may be applied against future taxable income[414] - Deferred tax assets increased to $5.548 billion in 2023 from $3.488 billion in 2022, primarily due to capitalized research and experimental expenditures[413] - The company has accumulated undistributed earnings from foreign subsidiaries, which are intended to be indefinitely reinvested to fund international operations[415] - The company has approximately $2.0 billion in unrecognized tax benefits as of December 31, 2023[283] Goodwill and Intangible Assets - Goodwill balance as of December 31, 2023, totaled $17,517 million, with Aeronautics Systems and Space Systems having accumulated goodwill impairment losses of $417 million and $153 million, respectively[416] - Net customer-related and other intangible assets decreased from $384 million in 2022 to $305 million in 2023, with amortization expense for 2023 at $80 million[417] - No impairment charges were recorded for the years ended December 31, 2023, 2022, and 2021[291] Derivatives and Commitments - Derivative assets fair value is $172 million in 2023, up from $71 million in 2022[460] - Unfunded commitments for opportunistic investments are $1.6 billion in 2023, up from $1.5 billion in 2022[463] - Unfunded commitments for private equity funds are $1.9 billion in 2023, down from $2.0 billion in 2022[464] - The company's foreign currency forward contracts had a notional value of $286 million in 2023, with $162 million designated as a cash flow hedge[420] Environmental and Legal - The company expects approximately 90% of its environmental remediation costs to be recoverable as of December 31, 2023[281] Stock-Based Compensation - 4.4 million shares remain available for issuance under the 2011 Plan as of December 31, 2023[468] - Stock-based compensation expense for 2023 was $87 million, a decrease from $99 million in 2022 and $94 million in 2021[472] - Unrecognized compensation expense related to unvested stock awards at December 31, 2023 was $96 million, expected to be charged over 1.3 years[473] - The grant date fair value of shares issued in settlement of fully vested stock awards was $99 million in 2023, compared to $93 million in 2022 and $103 million in 2021[476] Market and Competitive Risks - The global security environment, including conflicts in Ukraine and Israel, may increase demand for the company's defense products and services[184][185][186] - The company faces increased competition for talent globally, with rising wage rates and challenges in attracting and retaining qualified personnel, particularly in science, technology, engineering, and math fields[111] - The company relies heavily on subcontractors and suppliers for raw materials, components, and services, with supply chain disruptions potentially impacting financial performance[114] - The company's ability to meet obligations is at risk if suppliers fail to deliver products or services on time, comply with regulations, or maintain financial viability[115] - The company requires assured access to microelectronics, with potential significant impacts on production and delivery if the supply chain is disrupted[116] - The company's international business is exposed to geopolitical, economic, and regulatory risks, which could affect profitability and operations[119] - The company's international contracts may include local content requirements, offset obligations, and financial penalties, increasing operational risks[123] - The company's Sentinel program is under a Nunn-McCurdy breach review due to increased cost projections, primarily in construction and procurement[197] - The company faces inflation risks, particularly impacting fixed-price contracts, such as the LRIP phase of the B-21 program at Aeronautics Systems[297] Divestitures and Acquisitions - The company completed the divestiture of its IT and mission support services business for $3.4 billion, recording a pre-tax gain of $2.0 billion[198] - The company recorded $162 million in sales and $20 million in pre-tax profit for the IT and mission support services business in 2021[199] Valuation and Fair Value - The company uses the income approach to determine the fair value of reporting units, projecting sales, operating expenses, working capital, capital spending, and cash flows over a multi-year period, with a weighted-average cost of capital (WACC) as the discount rate[289]