Dave Keffer
Corporate Vice President and Chief Financial Officer at Northrop Grumman
Okay, thanks, Kathy, and good morning everyone. 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 adjustments 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/ATOR, 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 continue 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 adjustments on F-35. In our other three sectors, segment operating margin rates met or exceeded the high ends 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.
In the 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%.
Turning to EPS, our transaction-adjusted EPS 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 EPS guidance range we provided in October. Transaction-adjusted EPS 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 EPS 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. In Aeronautics, we expect sales in the mid-to-high $10 billion range. As we noted last quarter, we are 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 adjustments 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 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 0.9 times 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 in 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 EPS 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 non-operational 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 a 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 in our business and financial strategy in 2022.
With that, I'll turn the call back over to you, Kathy.
