Northrop Grumman 2011 Annual Report Download - page 46

NORTHROP GRUMMAN CORPORATION
CONSOLIDATED OPERATING RESULTS
Selected financial highlights are presented in the table below:
Year Ended December 31
$ in millions 2011 2010 2009
Sales and service revenues $ 26,412 $ 28,143 $ 27,650
Cost of sales and service revenues (20,786) (22,849) (22,805)
General and administrative expenses (2,350) (2,467) (2,571)
Operating income 3,276 2,827 2,274
Interest expense (221) (269) (269)
Charge on debt redemption (229)
Federal and foreign income tax expense (997) (462) (636)
Cash provided by continuing operations 2,347 2,056 1,995
Operating Performance Assessment and Reporting
We manage and assess the performance of our businesses based on our performance on individual contracts and
programs (two or more closely-related contracts) generally obtained from government organizations using the
financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates and
Judgments described above in Part II, Item 7. As indicated in our discussion on “Contracts” above in Part II,
Item 7, our portfolio of long-term contracts is largely flexibly-priced, which means that sales tend to fluctuate in
concert with costs across our large portfolio of active contracts, with operating income being a critical measure of
operational performance. Due to FAR rules that govern our business, most types of costs are allowable, and we do
not focus on individual cost groupings (such as manufacturing, engineering, and design labor costs, subcontractor
costs, material costs, overhead costs, and general and administrative costs), as much as we do on total contract costs,
which is the key driver of both revenue and operating income.
In any given reporting period, each of our segments manages numerous contracts that provide for the delivery of
products or services to our customers. Our contract management process involves the use of contract
estimates-at-completion (EACs) that are generally prepared and evaluated on a bottoms-up basis at least annually
and reviewed on a quarterly basis over the performance period of the contract. These EACs include an estimated
contract operating income margin rate based initially on the contract award amount, adjusted to reflect estimated
risks related to contract performance. These risks typically include technical risk, schedule risk and performance
risk based upon our evaluation of the contract effort. Similarly, the EACs include identified opportunities for
operating income margin rate improvement. Over the performance period of the contract, our program
management organizations perform recurring evaluations of contract performance and adjust the contract revenue
and cost estimates over the life of the contract to reflect the latest reliable information available. Our business and
program management organizations are comprised of a large cadre of skilled professional managers who utilize our
contract administration and management control systems with the objective of successfully overseeing our contract
performance to satisfy the customer’s expectations, deliver high quality products and services, and manage contract
risks and opportunities to achieve an appropriate operating income margin rate on the contract. Our
comprehensive business and contract management process involves personnel from the planning, production
control, contracts, cost management, supply chain and program and business management functions. As part of this
overall contract management function, these personnel monitor compliance with our critical accounting policies
related to contract accounting and compliance with U. S. Government regulations. As a result, contract operating
income and period-to-period contract operating income margin rates are adjusted over the contract performance
period to reflect changes in the risks and opportunities affecting the contract, and adjustments may have a favorable
or unfavorable effect on operating income margin depending upon the specific conditions affecting each contract.
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