Northrop Grumman Corporation (NYSE: NOC) reported fourth quarter 2022 sales increased 16 percent to $10.0 billion, as compared with $8.6 billion in the fourth quarter of 2021. Sales increased 3 percent to $36.6 billion in 2022, as compared with $35.7 billion in 2021. Fourth quarter 2022 sales reflect strong demand, the timing of material receipts and continued improvement in labor availability trends. Fourth quarter 2022 net earnings were $2.1 billion, including a $922 million after-tax mark-to-market pension and OPB (“MTM”) benefit. Fourth quarter 2022 transaction-adjusted net earnings1 were $1.2 billion, or $7.50 per diluted share. 2022 net earnings were $4.9 billion, or $31.47 per diluted share, and include the noted MTM benefit. 2022 transaction-adjusted net earnings1 were $4.0 billion, or $25.54 per diluted share, and reflect an $85 million, or $0.55 per diluted share, reduction for negative returns on marketable securities related to our non-qualified benefit plans and other non-operating assets.”
The Northrop Grumman team continues to deliver strong financial and operating performance, further positioning our company for near and long-term growth. We’re providing differentiated solutions for our customers’ highest priority missions, driving a strong global demand signal for our products and maintaining a healthy backlog,” said Kathy Warden, chair, chief executive officer and president. “Given our proven ability to competitively win, hire and perform, we’re raising our sales outlook for 2023 and expect to deliver strong multi-year cash flow growth. We are focused on executing our strategy, investing in the capabilities and capacity our customers need, and returning a significant portion of our growing cash flows to our shareholders.”
Transaction-adjusted Net Earnings and EPS2022 net earnings reflect a MTM benefit of $922 million, net of tax. 2021 net earnings reflect a MTM benefit of $1.8 billion, net of tax, and a gain on the sale of the company’s IT services business. Excluding 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, as well as the impact of the MTM benefit and related tax impacts, 2022 transaction-adjusted net earnings1 decreased 4 percent and transaction-adjusted EPS1 was comparable with the prior year. Net earnings during 2022 and the fourth quarter of 2021 were not impacted by the sale of the company’s IT services business and do not include any transaction-related adjustments. Transaction-adjusted net earnings1 and transaction-adjusted EPS1 are measures the company uses to compare performance to prior periods and for EPS guidance. Lower total pension benefits, including MTM and non-MTM impacts, reduced fourth quarter 2022 diluted EPS by $5.48 and 2022 diluted EPS by $6.19 as compared with the prior year periods. See Schedule 6 at the end of this release for further information. The table below reconciles net earnings and diluted EPS to transaction-adjusted net earnings1 and transaction-adjusted EPS1:
Fourth quarter 2022 sales increased $1.4 billion, or 16 percent, due to higher sales volume at all four sectors. Fourth quarter 2022 sales reflect strong demand, the timing of material receipts and continued improvement in labor availability trends.2022 sales increased $935 million and 2022 organic sales increased $1.1 billion, or 3 percent, due to higher sales at Space Systems and Mission Systems, partially offset by lower sales at Aeronautics Systems and Defense Systems. 2022 sales reflect strong demand, the timing of material receipts and improving trends in labor availability during the second half of the year.
Operating Income and Margin Rate Fourth quarter 2022 operating income increased $164 million, or 22 percent, primarily due higher sales and a higher operating margin rate. Fourth quarter 2022 operating margin rate increased to 9.0 percent primarily due to lower unallocated corporate expense, driven by a lower MTM-related deferred state tax expense, and a higher segment operating margin rate, partially offset by an $80 million reduction in the FAS/CAS operating adjustment.2022 operating income decreased $2.1 billion, or 36 percent, primarily due to a $2.0 billion pre-tax gain on sale and $192 million of unallocated corporate expenses recognized in the prior year associated with the IT services divestiture. Operating income also decreased due to a $330 million reduction in the FAS/CAS operating adjustment, which more than offset higher segment operating income and lower non-divestiture-related unallocated corporate expense. 2022 operating margin rate declined to 9.8 percent from 15.8 percent reflecting the items above.
Segment Operating Income and Margin Rate Fourth quarter 2022 segment operating income increased $166 million, or 17 percent primarily due to higher sales. Fourth quarter 2022 segment operating margin rate increased to 11.3 percent from 11.2 percent due to a higher operating margin rate at Aeronautics Systems, which more than offset lower operating margin rates at the other sectors.
2022 segment operating income increased $36 million, or 1 percent, due to higher operating income at Mission Systems, Space Systems and Aeronautics Systems, partially offset by lower operating income at Defense Systems due, in part, to the impact of the IT services divestiture. 2021 segment operating income included $20 million from the IT services business, as well as a benefit of approximately $100 million due to the impact of lower overhead rates on the company’s fixed price contracts. Segment operating margin rate decreased to 11.6 percent from 11.8 percent principally due to lower net EAC adjustments due, in part, to macroeconomic impacts, including inflationary pressures and supply chain challenges.Federal and Foreign Income Taxes
The fourth quarter 2022 effective tax rate (ETR) decreased to 15.2 percent from 19.0 percent principally due to an $86 million benefit resulting from the resolution of the IRS examination of certain legacy Orbital ATK tax returns. The 2022 ETR decreased to 16.1 percent from 21.6 percent primarily due to the $86 million benefit described above, as well as additional federal income taxes in the prior year resulting from the IT services divestiture. The company’s 2022 MTM benefit increased the 2022 ETR by 1.2 percentage points; however, the 2021 MTM benefit did not significantly impact the 2021 ETR. Cash Flows Fourth quarter 2022 net cash provided by operating activities increased $809 million and fourth quarter 2022 transaction-adjusted free cash flow1 increased $768 million principally due to improved trade working capital.2022 cash provided by operating activities decreased $666 million principally due to lower CAS pension recoveries and changes in trade working capital, including approximately $900 million of federal tax payments related to Section 174 tax legislation.
The prior year included $785 million of tax payments related to the IT services divestiture. 2022 transaction-adjusted free cash flow1 decreased $1.4 billion principally due to lower CAS pension recoveries and changes in trade working capital, including the approximately $900 million of federal tax payments related to Section 174.Awards and Backlog Fourth quarter and year to date 2022 net awards totaled $9.1 billion and $39.3 billion, respectively, and backlog totaled $78.7 billion.
Significant fourth quarter 2022 new awards include $3.2 billion for restricted programs (primarily at Aeronautics Systems, Space Systems and Mission Systems), $0.7 billion for F-35 and $0.4 billion for Integrated Air and Missile Defense Battle Command System (IBCS). Significant 2022 new awards include $10.6 billion for restricted programs (principally at Aeronautics Systems, Mission Systems and Space Systems), $5.3 billion for F-35, $2.1 billion for GEM63 solid rocket boosters, largely related to Amazon’s Project Kuiper, $1.5 billion for the Space Development Agency (SDA) Tranche 1 Transport and Tracking Layer programs, $1.3 billion for Commercial Resupply Services (CRS) missions and $1.3 billion for Ground-based Midcourse Defense (GMD).
Fourth quarter 2022 sales increased $126 million, or 5 percent, due to higher volume in Manned Aircraft, partially offset by lower volume in Autonomous Systems. Manned Aircraft sales reflect $101 million of higher F-35 sales and higher volume on restricted programs, including the impact of higher net EAC adjustments. These increases were partially offset by lower volume on the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion. Autonomous Systems sales principally reflect lower volume on the Global Hawk program.
2022 sales decreased $728 million, or 6 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including restricted programs, a $180 million decrease on the Global Hawk program, a $159 million decrease on the E-2 program and a $119 million decrease on the JSTARS program as it nears completion.
Fourth quarter 2022 operating income increased $69 million, or 31 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 10.5 percent from 8.4 percent primarily due to higher net EAC adjustments, including a $66 million positive adjustment on the engineering, manufacturing and development (EMD) phase of the B-21 program largely related to an increase in the amount of performance incentives we expect to earn. The prior year operating margin rate reflects a $93 million unfavorable EAC adjustment on F-35 and a $21 million benefit associated with favorable overhead rate performance.
2022 operating income increased $23 million, or 2 percent, due to a higher operating margin rate, partially offset by lower sales. 2022 operating margin rate increased to 10.6 percent from 9.7 percent primarily due to higher net favorable EAC adjustments and a $38 million gain on a property sale. Higher net favorable EAC adjustments reflect $133 million of positive adjustments on the EMD phase of the B-21 program, partially offset by lower net EAC adjustments associated with other restricted work, as well as $135 million of unfavorable EAC adjustments on F-35 in the prior year. The prior year operating margin rate also reflects a $21 million benefit associated with favorable overhead rate performance.
Sales Fourth quarter 2022 sales increased $279 million, or 20 percent, primarily due to the timing of material receipts on several programs. Sales increased $115 million on the IBCS program principally due to supplier ramp-up for low-rate initial production. Sales also increased due to higher volume on the Special Ammunition and Weapon Systems (SAWS) program.2022 sales decreased $197 million, or 3 percent, due, in part, to a $106 million reduction in sales related to the IT services divestiture. 2022 organic sales decreased $91 million, or 2 percent, principally due to a $154 million decrease from lower scope on an international training program, completion of a Joint Services support program and wind-down of the UKAWACS and JSTARS programs, partially offset by a $144 million increase from ramp-up on the IBCS program, as well as higher volume on the SAWS and NATO Alliance Ground Surveillance In-Service Support (NATO AGS ISS) programs. Operating Income Fourth quarter 2022 operating income increased $16 million, or 10 percent, primarily due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 11.0 percent from 12.1 percent primarily due to the write-down of an unconsolidated joint venture investment and lower net favorable EAC adjustments.2022 operating income decreased $32 million, or 5 percent, due, in part, to a $14 million reduction in operating income related to the IT services divestiture, as well as lower sales. Operating margin rate was comparable with the prior year.
This press release was prepared and distributed by Northrop Grumman