NORTHROP GRUMMAN 2019 ANNUAL REPORT B-21 Artist Rendering
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NORTHROP GRUMMAN 2019 ANNUAL REPORT 2019 ANNUAL GRUMMAN NORTHROP B-21 Artist Rendering 2019Annual Report NORTHROP GRUMMAN 2019 ANNUAL REPORT Selected Financial Highlights $3,969 $3,780 $33,841 $3,218 $30,095 $26,004 $21.21 $21.33 $14.04 17 18 19 17 18 19 17 18 19 Sales Operating Income Mark-To-Market (MTM) - ( $ in millions ) ( $ in millions ) Adjusted Diluted EPS* $5.16 $4.70 $4,297 $3.90 $3,827 $3,033 $2,613 $2,578 $1,685 17 18 19 17 18 19 17 18 19 Cash Dividends Cash Provided by Free Cash Flow* Declared Operating Activities ($ in millions) (Per Common Share) ($ In Millions) *Non-GAAP financial metric. For more information, including a definition, reconciliation to the most directly comparable GAAP measure and why we believe this measure may be useful to investors, please refer to “Use of Non-GAAP Financial Measures” at the back of this Annual Report. Dear Fellow Shareholders In 2019, we delivered strong financial results while remaining steadfast in our dedication to performance and positioning Northrop Grumman for the future. In addition, we successfully integrated Orbital ATK in its first full year of operations within our company. We executed a profitable growth strategy for our company, to include launching domain-focused campaigns that leverage the power of our diverse portfolio and align our offerings with our customers’ current and emerging needs. We focused on areas such as space, cyber, strategic missiles and all- domain command and control—areas that are the highest priorities of our global customers. These campaigns laid the groundwork for the organization changes to our operating sectors, which we announced in September. Our new sector structure brings together pieces of our businesses that have shared markets, customers and technologies. It improves our ability to rapidly bring new solutions to our customers and strengthens our program performance. Our new structure became effective at the beginning of 2020 and, simultaneously, we introduced our new “Defining Possible” brand to reinforce the value we’re providing, through performance, agility and innovation. 2019 Financial Performance Sales rose 12 percent and operating income increased 5 percent, reflecting a full year of Orbital ATK contribution and continued growth at our Aerospace Systems and Mission Systems sectors. The integration of the Orbital ATK acquisition has been very successful. We exceeded our cost synergy targets and these savings contributed to improved performance. All four of our businesses were more profitable in 2019 and together generated a 13 percent increase in segment operating income* and an 11.6 percent segment operating margin rate.* Our segment operating income* grew more than sales, demonstrating that cost reductions and program performance offset a business mix including a higher amount of development efforts as we began work on new programs. In addition to performing well on our current portfolio of programs, we captured more than $45 billion in new business. Our total backlog increased 21 percent, to nearly $65 billion. All four of our sectors generated double-digit increases in their total backlogs. Our business capture reflects strong alignment between our capabilities and our customers’ priority investment areas, as well as the rapid capture of Orbital ATK revenue synergies. These new awards are the foundation for continued profitable growth. Our backlog has increased more than 50 percent since the end of 2017, reflecting robust new awards and the addition of Orbital ATK. NORTHROP GRUMMAN 2019 ANNUAL REPORT In 2019 we also had strong cash generation. Our businesses delivered $4.3 billion in operating cash and our free cash flow* increased 18 percent to more than $3.0 billion. Our strong cash generation has continued to enable value-creating capital deployment. We invested $1.3 billion in capital expenditures to drive innovation and affordability for our customers. We reduced debt by $500 million, made voluntary contributions to our pension plans and distributed $1.6 billion to our shareholders through dividends and share repurchases. We also increased our quarterly dividend 10 percent and reduced our weighted average share count by 3 percent. Positioning for the Future Our new organizational structure more closely aligns our capabilities with our customers’ priority investment areas, as defined by the National Defense Strategy. This realignment is the next step in maximizing the powerful revenue synergy opportunity we envisioned from our combination with Orbital ATK. Our new structure is designed to accelerate our ability to rapidly identify and deliver the technologies, products and services that our customers need. Effective January 1, 2020, our new sectors are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems. Defining Possible We introduced our new “Defining Possible” brand to reinforce the value we are providing through performance, agility and innovation. Defining what is possible is our purpose, and discovery and innovation are at the heart of everything we do. Whether it’s an autonomous submarine that detects mines without putting lives at risk, digital walls that protect physical structures, the world’s first stealth bomber or the universe’s most powerful space telescope, we are driven to solve the toughest challenges. We show our customers what is possible through a performance framework and a culture that balances agility and affordability with quality and safety. The new brand will also help us attract and retain the talent we need to continue to fuel our business. We are showing the solutions we’re developing and the real employees who are doing it, to help promote our purpose and our unique culture by showing how we bring together people from many backgrounds, personal passions and disciplines to push the boundaries in science, technology and engineering. A Strong Culture and Sustainable Business We continue to build on our strong culture with leading environmental, social and governance practices. Maintaining the highest levels of ethics and integrity and a modern governance structure is central to ensuring we act in the best interests of our customers and our shareholders. Our integrity is the core of our reputation. We are committed to a diverse and inclusive culture where employees feel respected and are encouraged to follow their passion. We are proud that female representation on our Board of Directors has increased to more than 30 percent, and female representation on our executive leadership team has increased from 8 percent in 2010 to 58 percent in 2020. We continue to promote diversity and inclusion at all levels of the company. PAGE 2 NORTHROP GRUMMAN 2019 ANNUAL REPORT Our New Sectors Aeronautics Systems is an innovative manned and autonomous air systems provider, with a proven track-record of systems engineering, manufacturing excellence and reliability. In addition to long-duration franchise manned programs like B-21, B-2, F-35, E-2D and unmanned programs like Global Hawk and Triton, Aeronautics Systems also includes Orbital ATK aerostructures for military and commercial customers. Defense Systems brings together Technology Services, Orbital ATK’s defense businesses and select Mission Systems capabilities. A broad- spectrum provider of critical technology services, sustainment and modernization, integrated battle command systems, directed energy, tactical weapons and information systems, Defense Systems is focused on addressing evolving threats and quick-turn requirements for a wide variety of national security, military and civilian customers. Mission Systems is a C4ISR technology leader in open, cyber-secure, software-defined systems for defense and intelligence applications across multiple domains. As a leader in Agile software development for defense applications, Mission Systems combines superior hardware and software capabilities to deliver differentiated solutions for our national security customers. Mission Systems’ advanced capabilities and domain expertise are also key competitive differentiators that we leverage across the entire company. Space Systems is a leader in delivering end-to-end mission solutions through the design, development, integration, production and operation of space, launch and missile systems. Our new Space Systems sector unifies our significant space and launch capabilities in a single organization and provides a platform for accelerated development of innovative and affordable offerings for our national security, civil and commercial customers. NORTHROP GRUMMAN 2019 ANNUAL REPORTPAGE 3 Notable recognition for the strength of our culture includes: • Dow Jones Sustainability North America Index for the fourth consecutive year; • an AA rating from MSCI for environmental, social and governance management and performance; • named as one of Corporate Responsibility Magazine’s 100 Best Corporate Citizens; • one of DiversityInc’s Top 50 Companies for Diversity for the tenth year in a row and number one for both veterans and people with disabilities; • received the highest ranking for the fifth year in a row on the Disability Equality Index and named a “Best Place to Work For Disability Inclusion;” • achieved a perfect score on the Corporate Equality Index and designated a “Best Place to Work for LGBTQ Equality;” • a leadership score of A- in CDP’s 2019 climate change program for the eighth consecutive year; and • a ranking by Indeed as one of the 50 Top-Rated Workplaces. Our culture is reflective of who we are—from our care for the environment