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Text: But before we start, I'd just like to go through a couple of comments here.
These risks and uncertainties may cause actual company results to differ materially.
We delivered another year of solid operating performance in 2021 and positioned our business for continued growth in 2022.
We are executing our strategy, which is to grow the business today and into the future, maintain excellent performance and reduce costs to deliver strong margin rate and deploy our capital to create value.
We made significant progress in executing this strategy again in 2021.
Our organic sales growth for the year was 3%.
Our segment operating margin was an exceptionally strong 11.8%, which increased 40 basis points compared to 2020 with performance more than offsetting mix and COVID-related headwinds.
We grew our transaction adjusted earnings per share by 8% and generated a $3.1 billion of transaction adjusted free cash flow.
Regarding capital deployment, we returned a record $4.7 billion to shareholders through dividends and share repurchases, including a $500 million accelerated share repurchase that we announced in November of 2021.
We strengthened our balance sheet, retiring over $2.2 billion of debt during the year and achieving an increased credit rating in the process.
And we continue to invest in our business with over $1.4 billion in capital expenditures to create new technologies and support franchise programs.
We also continue to add to our portfolio of franchise programs, with competitive wins on programs like the Integrated Battle Command System, or IBCS, as well as Hypersonic and Ballistic Tracking Space Sensor and Next Generation Interceptor.
As we look forward to '22 and beyond, we expect our organic growth will continue as we win new business and convert the robust backlog we've built over the past several years into sales growth.
And while we'll know more about the President's budget request in the coming weeks, we continue to believe that our portfolio is strongly aligned with the threat environment and the key investment priorities of our customers.
Further, we expect strong margin performance, as well as double-digit free cash flow growth from 2022 through 2024.
2022 guidance reflects our confidence in our strategy, our broad portfolio and our ability to deliver continued growth and strong performance.
As reported, the COVID pandemic continued to present challenges to labor availability, parts supply and shipping delays across the economy, particularly in the second half of last year.
We have felt these effects and the challenges at both our supply chain and our own labor availability.
We will continue to take proactive steps to address such COVID risks, both to our employees and our business.
And looking forward, our current guidance reflect the factors we know today and our best estimate for the remainder of the year.
Dave is going to provide more details on the quarter, the full year and our guidance in just a few minutes.
But turning now to the budget environment.
The federal government continues to operate under a continuing resolution that currently run through February 18.
Negotiations on the fiscal year 2022 appropriations bills are continuing.
And we remain optimistic that Congress will reach an agreement by the end of the first quarter.
The National Defense Authorization Act contained a $25 billion increase to the defense budget that represents 5% growth compared to fiscal year 2021, which we expect to also be supported in the appropriations bill.
In the NDAA, there is continued support for our major programs, and several of our programs received incremental funding above the President's budget request, including Triton, E-2D F-35, F-18 and G/ATR, among others.
And finally, we expect the FY '23 President's budget to be delivered to Congress in March of this year, reflecting this administration's priorities in areas such as mission systems, space, missile defense, advanced weapons and deterrents.
Focusing now on highlights in the quarter, one of our proudest moments was the launch of the Webb Space Telescope on December 25.
Northrop Grumman is the prime contractor for NASA on Webb, and we're honored to have partnered with NASA to provide the world with this revolutionary technology.
Webb will peer more than 13.5 billion years into the past when the first stars and galaxies were formed, ushering in an exciting new era of space observation and expanding our understanding of the universe.
In addition to Webb, we're also supporting NASA's Artemis mission by producing the largest solid rocket motors ever built for the space launch vehicle system, which is being developed to send the first woman and next man to the moon.
In the fourth quarter, the space sector received a $3.2 billion award to support Artemis missions IV through VIII.
Another important milestone in the quarter was the competitively awarded IBCS in our Defense Systems sector.
This program is a centerpiece of the U.S. Army's modernization strategy for air and missile defense and all-domain command and control.
It's a prime example of our capabilities to integrate assets in the battle space regardless of source, service or domain.
This is one of many examples of how we are helping our customers share data between systems and improve command and control in support of their JADC2 vision.
In the area of missile defense, we had several milestones in the quarter, which position us to help our customers track and defend against hypersonic and ballistic missile threats.
In the fourth quarter, we announced that HBTSS had passed its critical design review.
These satellites are planned to be part of a multilayered network of spacecraft that will detect and track hypersonic missiles.
Also in the quarter, we were selected by the Missile Defense Agency to design a glide phase interceptor for regional hypersonic missile defense.
In our Mission Systems sector, we continue to see our customers prioritizing development of capabilities that will increase the effectiveness and survivability of legacy systems, as well as new technologies for next-generation systems.
In the fourth quarter, MS received an accelerated award for F-16 SABR for approximately $200 million, and full year awards of approximately $700 million.
We have now received total contract awards for near 1,000 radars for this program in support of the U.S. Air Force and National Guard, as well as several international customers.
In addition, our network information systems business area within Mission Systems received approximately $1 billion in awards for advanced processing solutions.
This portfolio delivers strategic microelectronics focused on high-performance computing and security, which helps our customers with connectivity and processing solutions.
We anticipate additional awards in this segment of the portfolio for the next few years, and we expect it will be a significant growth driver for MS in 2022.
The military aircraft market is undergoing a transition as our customers focus their investments in next-generation programs while divesting some legacy platforms.
As we've discussed, certain programs in our portfolio at Aeronautics Systems are maturing and experiencing headwinds.
But there are also a number of exciting new opportunities that are emerging.
This includes next-generation manned aircraft, as well as new unmanned opportunities, which U.S. Air Force Secretary Kendall recently announced.
In addition to pursuing these longer-term opportunities, we remain focused on executing our programs and delivering for our customers.
Another important aspect of our company's future is our strategy for sustainability.
We strongly believe that our environmental, social and governance programs play an important role in sustainable, profitable growth and in long-term value creation for our shareholders, customers and employees.
Northrop Grumman is a leader in conservation activity with a 44% reduction in greenhouse gas emissions since 2010.
In the fourth quarter, S&P released its Global Corporate Sustainability Assessment scores, and we ranked in the 96 percentile.
We were included on the Dow Jones Sustainability Index North America for the sixth consecutive year, and we were included in the Dow Jones Sustainability World Index for the first time.
Our ESG strategy also includes portfolio management actions.
As we've discussed on earnings calls last year, we committed to transition out of the small aging and surveillance contracts that we have for cluster munitions, and that contract is complete.
And while we continue to be an ammunitions supplier as both a prime and a merchant supplier, we have made the decision to transition our prime role in depleted-uranium ammunition to another provider, following one final single production year contract.
We are currently working to establish our next set of sustainability goals and priorities, specifically as they relate to greenhouse gas emissions, water conservation and solid waste diversion with a stronger emphasis on renewable energy.
Overall, we're making substantial progress in our ESG journey, and we look forward to sharing more in our upcoming sustainability and TCFD reports.
And then I have a few additional comments before we move on to Q&A.
2021 was another strong year of performance for the company.
Before going through the details of our results and guidance, I'd like to note a few items to keep in mind when comparing Q4 to the same period last year.
As we previewed in prior quarters, the divested IT services business, the equipment sale at AS and four more working days in Q4 2020 represented over $1.6 billion of sales when compared to Q4 2021.
With that said, sales per working day in 2021 were at their highest level in Q4.
Moving to sector results.
We continued to see certain COVID-related effects on our labor and supply chain in Q4, and these effects were most significant in our aeronautics sector.
The Q4 decline in AS sales was partially driven by fewer working days and the 2020 equipment sale, and it also included a $93 million unfavorable EAC adjustment on F-35.
Turning to Defense Systems.
Sales declined in Q4 in 2021, primarily due to the IT services divestiture.
Organic sales were down 9% in Q4 and 4% for the full year, driven by the completion of our contract at the Lake City ammunition plant, which generated almost $400 million of sales in 2020.
Mission Systems organic sales were down 3% in the fourth quarter, primarily due to the reduction in working days and up 6% for the full year.
Higher 2021 sales were driven by increased volume on G/ATR, GBSD, SABR, JCREW and restricted programs, among others.
And lastly, Space Systems Q4 and full year organic sales rose by 6% and 24%, respectively.
We continued to ramp significantly on franchise programs, including a $1.1 billion increase on GBSD in 2021.
Growth was also driven by restricted space programs, as well as NGI and Artemis.
Moving to segment operating income and margin rate.
AS operating margin rate decreased to 8.4% in the quarter and 9.7% for the full year due to the unfavorable EAC adjustment on F-35.
In our other three sectors, segment operating margin rates met or exceeded the high end of our prior 2021 guidance ranges.
Defense Systems operating margin rate increased 90 basis points to 12.1% in the quarter and 80 basis points to 12% for the full year.
Higher operating margin rate was largely due to improved performance, as well as recent contract completions.
At Mission Systems, operating income and rate grew in both periods.
As a result of higher EAC adjustments and business mix changes, operating margin rate grew to 15.9% in the fourth quarter and 15.6% for the full year.
And at Space Systems, operating margin rate was 9.6% in the quarter and 10.6% for the full year.
Favorable EAC adjustments from strong performance on commercial space programs helped offset mix pressures for the year.
And keep in mind that space, along with AS and MS, benefited from the pension-related overhead benefits that we recognized in the first quarter of 2021.
At the total company level, segment operating margin rate in the fourth quarter was the same as Q4 2020, even with the F-35 charge in 2021.
And it increased 40 basis points for the full year to 11.8%.
Our transaction adjusted earnings per share declined 9% from Q4 2020 to Q4 2021, primarily due to lower sales volume from the factors I described earlier.
For the full year EPS, we exceeded the high end of the earnings per share guidance range we provided in October.
Transaction-adjusted earnings per share grew 8% in 2021 due to strong segment performance and lower corporate unallocated costs.
Lower corporate unallocated was driven by two items we've discussed in prior quarters: the $60 million benefit from an insurance settlement related to the former Orbital ATK business, and lower state taxes.
Regarding our pension plans, asset performance was strong again in 2021 at nearly 11%, the third year in a row of double-digit asset returns.
Our FAS discount rate increased 30 basis points to 2.98%.
These factors resulted in a mark-to-market benefit of roughly $2.4 billion in 2021.
In addition, our net pension funding status has improved by over $3 billion and on a PBO basis, is now over 93% funded.
We continue to project minimal cash pension contributions over the next several years.
Also summarized are our pension cost estimates for the years 2022 through 2024.
CAS recoveries are projected to continue declining over the planning period.
And while this causes an earnings per share headwind, particularly in 2022, it makes our rates more competitive and our products more affordable.
Our CAS prepayment credit is approximately $1.7 billion as of January 1 of this year.
Now turning to cash.
We generated nearly $3.6 billion of operating cash flow and $3.1 billion of transaction-adjusted free cash flow in 2021, in line with our expectations.
In the fourth quarter, we made our final federal and state tax payments associated with the IT services divestiture of almost $200 million.
We also made our first payment of roughly $200 million of deferred payroll taxes from the CARES Act legislation.
The remaining payment of the same amount will occur this December.
Looking ahead to 2022, our sector guidance is shown on Slide 9.
This outlook assumes that appropriations bills are passed by the end of Q1, and it assumes a relatively consistent level of impact from the effects of COVID that we experienced in 2021.
At aeronautics, we expect sales in the mid- to high $10 billion range.
As we noted last quarter, we're projecting headwinds in our HALE portfolio, as well as lower sales on JSTARS, F-18 and our restricted business.
Sales on F-35 are expected to be slightly higher in 2021 due to the EAC adjustment we booked in Q4.
We expect an AS margin rate of approximately 10%, which is up 30 basis points year over year.
For Defense Systems, we expect sales to be in the high $5 billion range as this business returns to modest organic growth following the IT services divestiture and the completion of our Lake City contract.
Operating margin rate is expected to remain very strong in the high 11% range.
Mission Systems sales are projected to be in the mid-$10 billion range, up from $10.1 billion of organic sales in 2021, reflecting continued strength in demand for our products.
Operating margin rate is expected in the low 15% range.
Space Systems is expected to remain our fastest-growing business and to become our largest segment in 2022.
Sales are projected in the mid-$11 billion range, up from -- up about $1 billion from 2021 with a margin rate in the low 10% range.
Turning to Slide 10.
Our total revenue guidance is $36.2 billion to $36.6 billion, representing a range of 2% to 3% organic growth, consistent with the rate we estimated in October 2021.
This growth is enabled by our strong backlog, which stands at over $76 billion, and covers more than two years of annual sales.
The 2021 book-to-bill of 0.9x was lower than our prior expectation due to the AS F-35 award shift to 2022.
More importantly, our three-year trailing average book-to-bill is approximately 1.22, and remains the foundation of our current and future growth.
As COVID-related headwinds that we experienced late in 2021 continue into early 2022, we anticipate that first quarter 2022 sales will be less than 25% of the full year.
We have increased the segment operating margin rate outlook that we provided in October as we now expect a rate roughly consistent with 2021 in the range of 11.7% to 11.9%.
This projection reflects our continued disciplined approach to cost management and our efforts to offset mix headwinds with strong program performance.
Altogether, we expect transaction adjusted earnings per share to be between $24.50 and $25.10, based on approximately 155 million weighted shares outstanding.
As shown on Slide 11, this includes roughly $2 of year-to-year earnings per share headwinds from lower net pension benefits driven by the reduction in CAS recoveries and higher corporate unallocated expense due to the one-time benefits in 2021.
Earnings volume from sales growth strong operating margin performance and the lower share count will help to offset those nonoperational items.
We project 2022 transaction-adjusted free cash flow of $2.5 billion to $2.8 billion, assuming the R&D tax amortization law is deferred or repealed.
We continue to project about $1 billion of higher cash taxes should current tax law remain in effect.
As I mentioned, our cash tax outlook includes the final payroll tax payment from the CARES Act of approximately $200 million.
Capex is expected to remain roughly consistent with 2021 on an absolute dollar basis and slightly lower as a percentage of sales.
Slide 12 provides our longer-term outlook on cash.
The midpoint of our 2022 transaction-adjusted free cash flow guidance is $2.65 billion, and includes roughly $375 million of lower CAS recoveries than 2021.
From there, we expect a double-digit free cash flow CAGR through 2024, driven by operational performance, lower capex and the absence of the payroll tax headwind.
Our base case again assumes deferral of the R&D tax for all periods.
Speaking of taxes, we're projecting an effective tax rate of approximately 17% going forward, roughly consistent with 2021, excluding the divestiture or mark-to-market pension effects.
Also, we anticipate the resolution of an appeals process for certain open years of legacy OATK tax filings in 2022.
Audit and appeals processes are underway, but in earlier stages for certain Northrop tax years.
We refer you to our 10-K for additional details on the key items, both timing related and permanent in nature to be resolved in those processes.
In closing, we're proud of our 2021 performance, and we're focused on continuing to execute well on our business and financial strategy in 2022.
In summary, we have strong franchise programs that are well aligned to budget priorities.
We are focused on capturing and investing in new growth opportunities while also executing to drive earnings and cash flow growth.
We delivered a solid set of results in 2021, and we are well-positioned to continue growing and performing in 2022 and beyond.
Our top priority for cash deployment remains shareholder return, including a competitive dividend and share repurchases.
With that in mind, our board of directors recently approved an increase in our share repurchase authorization of $2 billion.
And based on our outlook today, we plan on returning at least $1.5 billion to shareholders via share repurchase in 2022.
We have extraordinary talent, and this includes our leadership team.
As we announced in November, Blake Larson is retiring after a 40-year career with Northrop Grumman and its heritage companies.
Blake has helped to position our space business for incredible growth and as important, a focus on performance and quality.
We are grateful for his contributions to our company and our country.
Tom brings strong experience in the space market.
He was part of the space team, and I'm confident in his ability to lead this business.
Natalia, back to you.

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q4 transaction-adjusted net earnings include after-tax charge of $73 million, or $0.46 per share, on f-35 program at aeronautics systems largely driven by covid-19-related impacts.
quarterly organic sales decreased 10%.
guidance reflects continued growth in 2022 with organic sales up 2% - 3%.
sees fy 2022 transaction-adjusted earnings per share $24.50 — $25.10.

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