Dave Keffer
Corporate Vice President & Chief Financial Officer at Northrop Grumman
Thanks, Kathy, and good morning, everyone.
We finished the year with strong momentum, enabling us to reaffirm and build upon our favorable forward outlook. I'll start by elaborating on our 2023 results and then provide additional details on our guidance. On the demand side, we ended 2023 with over $84 billion in backlog, a new record for our company. All four of our segments generated a full-year book-to-bill ratio over one-time sales. We also continued to deliver strong top-line results with Q4 sales of $10.6 billion, up 6% compared to the fourth quarter of 2022. Full-year sales were even stronger, up over 7% at $39.3 billion, or roughly $300 million higher than our latest guidance. These top-line results were enabled not only by the strong demand environment we're seeing among our customers, but also by our ability to ramp on new programs, expand our workforce, and convert our backlog into sales.
Moving to segment results, we generated sales growth in each of our businesses in 2023. Aeronautics sales were up 2% for the year, returning to growth earlier than previously expected. AS growth was driven by higher volume on restricted programs that more than offset declines on mature production programs. DS posted sales growth of 5%, led by higher volume in the weapons and missile defense portfolio. Mission System sales were also up 5%, driven by higher restricted sales on advanced microelectronics programs and higher volume on marine systems programs. And our space business posted another quarter of double-digit top-line growth, with sales up approximately 14% for the year. Nearly 40% of the growth came from Sentinel and NGI, with the rest coming from our broad space portfolio.
As Kathy described, our segment margins included a charge for the B-21 program. The charge was primarily driven by the confluence of lower assumptions around macroeconomic disruption funding and higher production cost projections. While the full pre-tax charge had the effect of lowering our segment margins, only $143 million has been recorded as an EAC adjustment, including a $43 million reduction to Q4 sales. The remaining was booked as a contingent liability because the majority of the lots have yet to be awarded. The charge also led to an $82 million benefit in corporate unallocated expense, stemming from a reduction in deferred state taxes.
Continuing with our results, slide 5 shows a comparison of our 2023 earnings per share to the guidance we provided in October. Diluted EPS includes a $2.08 unfavorable mark-to-market adjustment from our pension plans and a $7.68 per share impact from the B-21 charge. Absent these items, we would have exceeded the high end of our prior EPS guidance range by over $0.40. Our 2023 mark-to-market adjusted EPS also included significantly less pension income compared to 2022. In total, net pension costs generated a $4.07 per share headwind in 2023.
Next, I'll take a few moments to discuss our cash flows. As is our historical pattern, we had an outstanding quarter of cash performance in Q4, generating $1.6 billion in free cash flow. For the full year, our operating cash flow was $3.9 billion, and our free cash flow was $2.1 billion. This result was near the high end of our guidance range and represented free cash flow growth of 30% compared to 2022.
Turning to pension results, we generated strong asset returns of roughly 11% in 2023, ahead of our long-term assumptions. The FAS discount rate declined by roughly 40 basis points to 5.15%. Netted together, along with updated census data, this generated a mark-to-market pension expense of $422 million in our GAAP results.
Slide 7 in our earnings deck summarizes our pension estimates for the next three years. We continue to expect CAS recoveries to increase from current levels, providing a benefit to our cash flows, but slightly less than prior projections. And we expect a higher level of non-operating FAS pension income in the coming years, driven by our strong asset returns in 2023. In total, our funded status remains superb at nearly 100%, and we continue to project minimal cash pension contributions over the next several years.
Turning to 2024, slide 9 in our earnings deck includes our segment-level guidance. Building off the strong top-line results in Q4, we now expect aeronautics sales in the low 11 billions, driven by growth on B-21 and on other programs such as F-35 and E-2D. This is higher than our prior sales estimates for AS, which reflected a flat 2023 and modest growth in 2024. Higher B-21 sales also result in a slightly lower margin rate expectation for AS, which we now project in the mid-9%, netting out to a similar volume of margin dollars compared to prior estimates. DS sales are expected to be roughly $6 billion, up low single digits from 2023. As we mentioned on the Q3 call, DS has really turned the corner on growth through strong demand for weapons and missile defense capabilities.
We are optimistic in our ability to convert these opportunities into sustained growth in this business over time, which we expect to be partially offset by modest declines in the sustainment and training portions of the business. Margins are projected to remain strong at DS in the low 12% range. Mission System sales are expected in the low to mid $11 billion range for another year of mid-single digit growth, with margins of roughly 15%. And that space, after expanding sales at a greater than 17% CAGR since 2019, growth is expected to moderate in 2024 with higher segment margins. Space sales are now expected in the mid-to-high $14 billion range, with margins of approximately 9%. The mid-single digit growth rate in space reflects declines in a restricted program due to shifts in government priority, which are more than offset by growth in other parts of the space portfolio.
Having built a tremendous backlog in recent years, space now has an opportunity to deliver strong ROI through more measured growth, along with margin expansion and cash generation. At the company level, our guidance reflects growth in sales and segment margin between 4% 5%, absent the B-21 charge, consistent with the outlook we provided on our October call, even after delivering top line upside in Q4. We expect another solid year of bookings, with a book-to-bill around one times. And similar to our cadence over the last few years, we expect sales to ramp throughout the year, with first quarter sales a little less than 24% of our full year estimate.
We plan to be in the market soon for new debt issuance to take advantage of the favorable rate environment. The proceeds from the debt issuance will also be used in part to support refinancings of $1.5 billion of notes that are coming due in January of 2025, as well as for general corporate purposes and share repurchases, including the $1 billion ASR we intend to initiate in the coming days. We've reflected this debt issuance in our interest expense guidance, and we'd also expect interest income to contribute to the EPS line, as it did in 2023. We project an effective tax rate of approximately 17% in 2024, consistent with the range we've experienced over the last few years, excluding the mark-to-market adjustment and other unique items.
We're coming closer to conclusions on a number of open audit and appeals processes with the IRS, which could have positive or negative effects on book and cash taxes as they're resolved over the next couple of years, and our forward guidance does not include any such adjustments. Similarly, we have not factored any potential changes to R&D tax legislation into our outlook. And as a reminder, our interpretation of current tax law results in a projected 5-year impact from R&D amortization of approximately $2 billion. We will continue to track these matters carefully and provide updates as they progress. In total, we expect our 2024 earnings per share to be between $24.45 and $24.85 on with approximately 148.5 million weighted shares outstanding.
Moving to cash, we expect 2024 free cash flow between $2.25 billion and $2.65 billion consistent with our prior outlook. And as we've said before, capital expenditures are expected to remain elevated in 2024 before moderating in 2025 and beyond.
Slide 11 in our earnings deck provides an update to our long-term free cash flow outlook to include 2026. We continue to expect our free cash flow to grow at a double-digit rate for several more years with additional growth in the second half of the decade. This expansion will be driven by sustained growth in our business, generating strong operating margin volume and converting those profits into cash. Meanwhile, lower cash taxes, higher CAS recoveries and lower levels of capital spending in the coming years provide additional structural levers to expand our cash flows at a rapid rate. Importantly, these ranges also include the latest estimated cash impacts associated with the B-21 charge.
We expect roughly 60% of the charge to affect cash flows through 2026 with the remainder in the following years. Longer-term, we are confident we'll be able to continue to absorb the cash headwinds from B-21 while delivering excellent free cash flows in 2027 and beyond. In closing, I want to thank the entire Northrop Grumman team for their contributions to another great year. The strength of our portfolio and visibility of franchise programs provides us the opportunity to deliver and deploy robust cash flows as we execute on our strategy.
And with that, let's open up the call to Q&A.
