Northrop Grumman 2011 Annual Report Download - page 50

NORTHROP GRUMMAN CORPORATION
Product sales at Information Systems decreased in volume by approximately 22% primarily due to $210 million in
sales volume that transitioned from product to service activity in 2010. Electronic Systems product sales volume
decreased $133 million during the period, and product cost of sales decreased by $163 million reflecting
performance improvement in land and self protection programs, higher volume in Targeting Systems, and lower
operating loss provisions in postal automation programs.
Cost of Segment Service Revenues
2011 – Cost of service revenues in 2011 decreased by $789 million and 130 basis points as a percentage of service
revenues as compared to 2010, due to the overall decline in sales for the period and margin rate improvements at
Information Systems, Technical Services and Electronic Systems, offset somewhat by an unfavorable margin rate
change at Aerospace Systems. Contributing to the overall decline in revenues was the company’s participation in
the NSTec joint venture, which resulted in the deconsolidation of this business in 2011. NSTec contributed
revenues of $579 million and segment cost of sales of $559 million in 2010 when it was included in Technical
Service’s sales, thus driving a 80 basis point improvement in margin rate for this segment. More modest margin
rate improvements at Electronic Systems and Information Systems effectively offset the decline in margin rate at
the Aerospace Systems business.
2010 – Cost of segment service revenues of $12.3 billion in 2010 was up over 2009 by $321 million due to
increased volume, which resulted in an increase in sales from $12.8 billion in 2009 to $13.4 billion in 2010. The
sales volume increase was due principally to Technical Services’ contract volume, driven by the KC-10 and C-20
contracts, which together increased by $307 million. Segment service margin rates across all segments improved in
2010, with Information Systems being the primary contributor as it experienced higher margin rates at its Civil
Systems division, and due to the absence of non-recurring costs of $37 million from the sale of ASD in 2009.
Overall, Information Systems experienced a 186 basis point margin rate improvement.
Unallocated Corporate Expenses
Unallocated corporate expenses generally include the portion of corporate expenses not considered allowable or
allocable under applicable CAS and FAR rules, and therefore not allocated to the segments, such as management
and administration, legal, environmental, certain compensation and retiree benefits, and other expenses.
Unallocated corporate expenses for 2011 decreased $16 million, or 9 percent, as compared with 2010, primarily
due to a decrease in stock-based compensation. Unallocated corporate expenses for 2010 increased $82 million, or
82 percent, as compared with 2009, primarily due to inclusion of a $64 million net gain from a legal settlement in
2009, as well as an increase in environmental, health and welfare, and stock-based compensation expenses in 2010.
Net Pension Adjustment
Net pension adjustment reflects the difference between pension expenses determined in accordance with GAAP
and pension expense allocated to the operating segments determined in accordance with CAS. For 2011 and 2010,
the net pension adjustment resulted in income of $400 million and $10 million, respectively. The increase in net
pension adjustment for both years is due to decreased GAAP pension expense, primarily resulting from higher
estimated returns on higher pension plan assets as of the beginning of the year.
Royalty Income Adjustment
Royalty income is included in segment operating income and reclassified to other income for financial reporting
purposes.
General and Administrative Expenses
In accordance with industry practice and the regulations that govern the cost accounting requirements for
government contracts, most general corporate expenses incurred at both the segment and corporate locations are
considered allowable and allocable costs on government contracts. For most components of the company, these
costs are allocated to contracts in progress on a systematic basis and contract performance factors therefore include
this cost component as an element of cost. General and administrative expenses primarily relate to segment
operations.
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