Northrop Grumman 2012 Annual Report Download - page 38

NORTHROP GRUMMAN CORPORATION
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The table below shows the variances in segment operating income from the respective prior years:
Variance from Prior Year
$ in millions 2012 2011
Aerospace Systems $ 1 0% $ 4 0%
Electronic Systems 117 11% 47 5%
Information Systems (5)(1%) 10 1%
Technical Services 8 3% 11 4%
Intersegment earnings elimination — 0% (27) (12%)
2012 - Segment operating income in 2012 increased $121 million, or 4 percent, as compared to 2011, driven by a
number of factors including improved performance, particularly at Electronic Systems. Improved performance
reflects mitigation of contract risks and cost reduction initiatives, as well as portfolio shaping efforts. The increase in
segment operating margin rate reflects this improved segment performance on lower revenue.
2011 - Segment operating income in 2011 increased $45 million, or 1 percent, as compared to 2010, driven by
improved program performance, which more than offset the impact of lower sales.
Net Pension Adjustment
The net FAS/CAS pension adjustment in 2012 decreased $268 million, as compared to 2011, primarily due to
increased GAAP pension expense resulting from amortization of prior year actuarial losses and decreased CAS
pension expense allocated to the operating segments due to the design change in the company's defined benefit
pension plans adopted in December 2011. The net FAS/CAS pension adjustment in 2011 increased $390 million, as
compared to 2010, primarily due to decreased GAAP pension expense, primarily resulting from higher than
estimated returns on a larger amount of pension plan assets as of the beginning of the year.
Unallocated Corporate Expenses
Unallocated corporate expenses for 2012 were comparable with the prior year. Unallocated corporate expenses for
2011 decreased $16 million, or 9 percent, as compared with 2010, primarily due to a decrease in stock-based
compensation.
Interest Expense
Interest expense declined in both 2012 and 2011 by $9 million and $48 million, respectively, as compared to the
respective prior years. The decrease from 2010 to 2011 is primarily due to a lower weighted average interest rate
resulting from our debt refinancing in November 2010.
Federal and Foreign Income Taxes
2012 – Our effective tax rate on earnings from continuing operations for 2012 was 33.3 percent, as compared with
32.3 percent in 2011. The higher effective tax rate reflects the change in net tax benefits related to the absence of
research tax credits, which expired at the end of 2011. Although the American Taxpayer Relief Act of 2012 extended
the research tax credit through 2013, it was not enacted until January 2013. Therefore, the 2012 research credit will
be recorded in the first quarter of 2013.
2011 – Our effective tax rate on earnings from continuing operations for 2011 was 32.3 percent, as compared with
19.5 percent in 2010. In 2010, we recognized net tax benefits of $298 million to reflect the final approval from the
IRS and the U.S. Congressional Joint Committee on Taxation of the IRS’ examination of our tax returns for the
years 2004 through 2006.
Diluted Earnings Per Share
2012 – Our diluted earnings per share increased by $0.29, or 4 percent. The higher diluted earnings per share reflects
the full impact of 2011 share repurchases, which were largely purchased in the second half of 2011, the effect of our
2012 share repurchases and the higher segment operating income, partially offset by lower earnings reflecting the
lower net FAS/CAS pension adjustment.
2011 – Our diluted earnings per share increased by $0.70, or 10 percent. The higher diluted earnings per share
reflects higher earnings and the effects of our share repurchases.
Cash Provided by Continuing Operations
2012 – Cash provided by continuing operations for 2012 was $2.6 billion, as compared with $2.3 billion in 2011.
Cash provided by continuing operations reflects lower pension contributions, partially offset by higher income taxes