Northrop Grumman Corp. (NYSE:NOC)

The period between 2018 and 2022 demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) and invested capital both exhibited variability over the five-year span, influencing the overall economic profit generated.

NOPAT Trend

NOPAT began at US$3,933 million in 2018, decreased significantly to US$2,243 million in 2019, then recovered to US$3,992 million in 2020. A substantial increase was observed in 2021, reaching US$8,020 million, before declining to US$4,975 million in 2022. This indicates considerable volatility in operational profitability.

Cost of Capital Trend

The cost of capital experienced a slight increase from 9.73% in 2018 to 10.18% in 2019, followed by a decrease to 9.48% in 2020. It then rose again to 10.07% in 2021 and further to 10.53% in 2022. This suggests increasing financing costs towards the end of the analyzed period.

Invested Capital Trend

Invested capital showed a minor decrease from US$24,076 million in 2018 to US$23,507 million in 2019. Subsequently, it increased steadily to US$26,642 million in 2020, US$27,632 million in 2021, and reached US$30,111 million in 2022. This represents a consistent expansion of the capital base over the latter portion of the period.

Economic Profit Trend

Economic profit was US$1,590 million in 2018, then decreased to a loss of US$150 million in 2019. It recovered to US$1,466 million in 2020, and experienced a significant surge to US$5,239 million in 2021. Economic profit then decreased to US$1,805 million in 2022. The fluctuations in economic profit closely mirror the changes in NOPAT, indicating that operational profitability is a primary driver of value creation.

The most substantial economic profit occurred in 2021, coinciding with the peak in NOPAT. The negative economic profit in 2019 suggests that the return on invested capital was less than the cost of capital during that year. While economic profit remained positive in 2018, 2020, 2021, and 2022, the decline from the 2021 peak to 2022 warrants further investigation.

The financial data reveals variations in net earnings and net operating profit after taxes (NOPAT) for the analyzed periods from 2018 to 2022.

Net earnings

Net earnings exhibited a fluctuation pattern over the five years. There was a marked decline from 3,229 million US dollars in 2018 to 2,248 million in 2019. This was followed by a recovery to 3,189 million in 2020. A significant increase occurred in 2021, reaching 7,005 million US dollars, before decreasing again to 4,896 million in 2022. Overall, there is a noticeable peak in 2021 that suggests an exceptional event or operational performance during that year.

Net operating profit after taxes (NOPAT)

NOPAT mirrored a similar trend as net earnings. It decreased from 3,933 million US dollars in 2018 to 2,243 million in 2019. Subsequently, NOPAT increased to 3,992 million in 2020 and experienced a sharp rise in 2021 to 8,020 million. In 2022, NOPAT declined to 4,975 million. The increase in 2021 is even more pronounced in NOPAT compared to net earnings, indicating that operating efficiency or profitability improved significantly during that year before reverting closer to previous levels in 2022.

Trend analysis

The decrease observed in both metrics from 2018 to 2019 suggests challenges faced during that period. Recovery in 2020 indicates improved financial performance. The exceptional increases in 2021 could be attributed to unique operational factors or market conditions supporting enhanced profitability. The reductions in 2022 imply a normalization following the peak year, though values remain higher than the lows experienced in 2019.

The data reveals notable fluctuations in the federal and foreign income tax expense and cash operating taxes over the five-year period ending December 31, 2022.

Federal and Foreign Income Tax Expense

The tax expense exhibits a variable trend. Initially, it decreases from 513 million in 2018 to 300 million in 2019. Subsequently, it rises to 539 million in 2020, followed by a significant surge to 1,933 million in 2021. The figure then declines to 940 million in 2022, indicating substantial volatility in the reported tax expense.

Cash Operating Taxes

Cash operating taxes demonstrate a generally increasing pattern with some fluctuation. Starting at 431 million in 2018, the amount nearly doubles to 891 million in 2019 but then decreases to 385 million in 2020. This is followed by a sharp rise to 1,533 million in 2021, after which the value slightly decreases to 1,413 million in 2022. Over the period, cash operating taxes have exhibited an upward momentum, particularly notable in the last two years.

In summary, both tax-related financial metrics display significant changes, with peak values reached in 2021. The federal and foreign income tax expense shows higher volatility compared to cash operating taxes. The patterns suggest a period of increasing tax liabilities culminating in 2021, followed by a partial reversion in 2022, which may reflect changes in taxable income, tax regulations, or company-specific tax strategies during these years.

The financial data demonstrates distinct trends over the five-year period from December 31, 2018, through December 31, 2022, across total reported debt and leases, shareholders’ equity, and invested capital.

Total Reported Debt & Leases

This metric experienced minor fluctuations during the period, beginning at $16,124 million in 2018 and decreasing to $15,448 million in 2019. It then rose to a peak of $16,609 million in 2020 before declining to $14,657 million in 2021. In 2022, it increased slightly to $15,000 million. Overall, the total reported debt and leases have remained relatively stable, with variations within a limited range, indicating controlled management of financial obligations.

Shareholders’ Equity

Shareholders’ equity showed a consistent upward trend throughout the period. Starting at $8,187 million in 2018, it increased steadily each year to reach $15,312 million by the end of 2022. This represents an overall growth of approximately 87% over the five-year span, suggesting a strengthening equity base and possibly enhanced retained earnings or capital infusions, contributing to financial stability and increased net asset value.

Invested Capital

Invested capital exhibited a general upward trajectory. From $24,076 million in 2018, it declined slightly in 2019 to $23,507 million but then rose significantly to $26,642 million in 2020. Subsequent years continued this increase, reaching $27,632 million in 2021 and $30,111 million in 2022. This upward movement indicates ongoing investment in the company's operations, assets, or growth initiatives, reflecting expansion or reinvestment strategies.

In summary, the company maintained stable levels of debt across the reviewed years while consistently increasing shareholders’ equity and invested capital. The growth in equity and invested capital, coupled with controlled debt levels, suggests strengthening financial health and a possible focus on sustainable growth and value creation for shareholders.

The economic spread ratio exhibited considerable fluctuation between 2018 and 2022. Initial values were positive, declined significantly, then rose substantially before moderating again. This pattern mirrors the changes observed in economic profit over the same period.

Economic Spread Ratio - Overall Trend

The economic spread ratio began at 6.60% in 2018, indicating a positive spread between return on invested capital and the cost of capital. It experienced a substantial decrease in 2019, becoming negative at -0.64%, suggesting the company’s returns were insufficient to cover its cost of capital. A recovery occurred in 2020, with the ratio increasing to 5.50%. The most significant increase was observed in 2021, reaching 18.96%, before decreasing to 6.00% in 2022.

The negative economic spread ratio in 2019 is a notable outlier, representing a period where invested capital did not generate sufficient returns to meet the company’s cost of capital. The dramatic increase in 2021 suggests a period of exceptionally strong performance relative to the capital employed. The subsequent decline in 2022, while still positive, indicates a return to more moderate levels of excess return.

Relationship to Economic Profit

The economic spread ratio closely correlates with economic profit. The negative economic profit in 2019 aligns with the negative economic spread ratio observed in the same year. Similarly, the peak in economic profit in 2021 corresponds with the highest economic spread ratio during the analyzed period. The moderate economic profit in 2018 and 2022 is reflected in the corresponding economic spread ratios of 6.60% and 6.00%, respectively.

Invested capital generally increased throughout the period, from US$24,076 million in 2018 to US$30,111 million in 2022. This increase in capital employed occurred alongside the fluctuations in the economic spread ratio, indicating that changes in profitability, rather than capital base, were the primary driver of the observed variations in economic spread.

The economic profit margin exhibited considerable fluctuation between 2018 and 2022. Initial profitability declined significantly before recovering and then stabilizing. A review of the period reveals distinct phases in performance.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at 5.28%. This represents a positive return on sales, indicating the company generated economic profit. However, 2019 saw a substantial decrease, resulting in a negative margin of -0.44%. This signifies the company’s return on sales fell below its cost of capital. A recovery was observed in 2020, with the margin increasing to 3.98%, returning to positive territory, albeit at a level below that of 2018.

A significant surge in the economic profit margin occurred in 2021, reaching 14.69%. This indicates a substantial improvement in profitability relative to sales and cost of capital. The margin experienced a decrease in 2022, settling at 4.93%, though remaining positive. This suggests a moderation of the exceptional performance seen in the prior year, but still representing a profitable outcome.

The economic profit margin’s volatility suggests sensitivity to underlying economic factors or company-specific operational changes. The substantial increase in 2021 warrants further investigation to understand the drivers behind this performance, while the subsequent decline in 2022 should also be examined to determine its causes and potential implications for future performance.

Relationship to Sales

Sales demonstrated an overall upward trend, increasing from US$30,095 million in 2018 to US$36,602 million in 2022. However, the economic profit margin did not consistently follow this trend. The increase in sales did not directly translate into a proportional increase in economic profit margin throughout the entire period, highlighting the importance of cost management and capital efficiency in driving overall profitability.

The period under review demonstrates that while revenue growth is important, it is not the sole determinant of economic profitability. The fluctuations in economic profit margin suggest that factors beyond sales volume, such as cost of capital, operational efficiency, and pricing strategies, play a crucial role in generating economic value.