Northrop Grumman 2011 Annual Report Download - page 40

NORTHROP GRUMMAN CORPORATION
Discontinued Operations – Earnings for the businesses classified within discontinued operations for the dispositions
discussed above were as follows:
Year Ended December 31
$ in millions 2011 2010 2009
Sales and service revenues $1,646 $6,711 $7,740
Earnings from discontinued operations 59 229 345
Income tax expense (28) (95) (111)
Earnings, net of tax 31 134 234
Gain on divestitures 210 446
Income tax (expense) benefit (1) 5 (428)
Gain on divestitures, net of tax 115 18
Earnings from discontinued operations, net of tax $ 32 $ 149 $ 252
CONTRACTS
We generate the majority of our business from long-term government contracts for development, production, and
support activities. Government contracts typically include the following major cost elements: material, labor,
overhead, subcontract costs, and general and administrative costs. Unless otherwise specified in a contract, costs
billed to contracts with the U.S. Government are determined under the requirements of the Federal Acquisition
Regulation (FAR) and CAS regulations as allowable and allocable costs. Examples of costs incurred by us and not
billed to the U.S. Government in accordance with the requirements of the FAR and CAS regulations include, but
are not limited to, certain legal costs, lobbying costs, charitable donations, interest expense and advertising costs.
Our long-term contracts typically fall into one of two broad categories:
Flexibly Priced Contracts – Flexibly priced contracts include both cost-type and fixed-price incentive contracts.
Cost-type contracts provide for reimbursement of the contractor’s allowable costs incurred plus a fee that
represents profit. Cost-type contracts generally require that the contractor use its best efforts to accomplish the
scope of the work within some specified time and some stated dollar limitation. Fixed-price incentive contracts
also provide for reimbursement of the contractor’s allowable costs up to a ceiling amount, but are subject to a cost-
share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts
once the cost-share limit is reached.
Firm Fixed-Price Contracts – A firm fixed-price contract is a contract in which the specified scope of work is agreed
to for a price that is a pre-determined, negotiated amount and not generally subject to adjustment regardless of
costs incurred by the contractor. Time-and-materials contracts are considered firm fixed-price contracts as they
specify a fixed hourly rate for each labor hour charged.
The following table summarizes 2011 revenue recognized by contract type and customer:
($ in millions)
U.S.
Government
Other
Customers Total
Percent
of Total
Flexibly priced contracts $15,413 $ 237 $15,650 59%
Firm fixed-price contracts 8,492 2,270 10,762 41%
Total sales and service revenues $23,905 $2,507 $26,412 100%
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