Northrop Grumman 2012 Annual Report Download - page 46

NORTHROP GRUMMAN CORPORATION
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Contractual Obligations
The following table presents our contractual obligations as of December 31, 2012, and the estimated timing of future
cash payments:
$ in millions Total 2013 2014 -
2015 2016 - 2017 2018 and beyond
Long-term debt $ 3,924 $ 5 $ 855 $113 $2,951
Interest payments on long-term debt 2,485 207 401 356 1,521
Operating leases 1,071 274 435 233 129
Purchase obligations(1) 6,907 4,187 2,364 177 179
Other long-term liabilities(2) 878 88 242 100 448
Total contractual obligations $15,265 $4,761 $4,297 $979 $5,228
(1) A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally
binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum, or variable price provisions; and the approximate timing of the transaction. These amounts are
primarily comprised of open purchase order commitments to vendors and subcontractors pertaining to funded
contracts.
(2) Other long-term liabilities primarily consist of total accrued environmental reserves, deferred compensation,
and other miscellaneous liabilities, of which $88 million is related to environmental reserves recorded in other
current liabilities. It excludes obligations for uncertain tax positions of $175 million, as the timing of such
payments, if any, cannot be reasonably estimated.
Further details regarding long-term debt and operating leases can be found in Notes 10 and 12, respectively, to the
consolidated financial statements in Part II, Item 8.
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
Revenue Recognition
Overview – We derive the majority of our business from long-term contracts for development, production and
support activities for the U.S. Government. These contracts are accounted for in conformity with GAAP for
construction-type and production-type contracts and federal government contractors, generally using the percentage-
of-completion method accounting. We classify contract revenues as product or service depending on the
predominant attributes of the contract. We consider the nature of these contracts and the types of products and
services provided when determining the proper accounting method for a particular contract.
Percentage-of-Completion Accounting – The use of the percentage-of-completion method requires us to make
reasonably dependable estimates for the design, manufacture, and delivery of our products and services. We
generally recognize revenues from our long-term contracts under the cost-to-cost or the units-of-delivery measures
of the percentage-of-completion method of accounting. The percentage-of-completion method recognizes revenue as
work on a contract progresses. Most of our contracts use the cost-to-cost method, where revenue is calculated based
on the percentage of total costs incurred in relation to total estimated costs at completion of the contract. The units-
of-delivery measure recognizes revenues as deliveries are made to the customer, generally using unit sales values.
Under both of these methods of percentage-of-completion accounting, we estimate profit as the difference between
total estimated revenue and total estimated cost of a contract at completion, and recognize that profit as costs are
incurred or as units are delivered.
Certain contracts contain provisions for price redetermination or for cost and/or performance incentives. These
amounts are included in sales when they are reasonably estimable. Amounts representing un-priced change orders,
claims, requests for equitable adjustment, or recovery of costs in excess of limitations in funding are included in
estimated contract revenue only when they are reliably estimable and realization is probable. Changes in estimates
of contract revenues, costs, or profits are recognized using the cumulative catch-up method of accounting. This
method recognizes, in the current period, the cumulative effect of the changes on current and prior periods. Revenue
and profit on future periods of contract performance are recognized as if the revised estimate had been used since
contract inception. If it is determined that a loss will result from the performance of a contract, the entire amount of
the estimable future loss is charged against income in the period the loss is identified. Loss provisions are first offset
against costs that are included in unbilled accounts receivable or inventoried costs, and any remaining amount is
reflected in liabilities.