Northrop Grumman 2011 Annual Report Download - page 53

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NORTHROP GRUMMAN CORPORATION
the portion of corporate expenses such as management and administration, legal, environmental, certain
compensation costs and other retiree benefits, and other expenses not considered allowable or allocable under
applicable CAS regulations and the FAR, and therefore not allocated to the segments. Changes in segment
operating income are typically expressed in terms of volume, as discussed above, or performance.
Performance refers to changes in contract margin rates for the period. These changes typically relate to profit
recognition associated with revisions to total estimated costs at completion of the contract (EAC) that reflect
improved (or deteriorated) operating performance on a particular contract. Operating income changes are
accounted for on a cumulative catch-up basis at the time an EAC change is recorded. We identify favorable and
unfavorable adjustments to determine our qualitative discussion of performance results and, where meaningful, we
disclose the effects of such adjustments on a contract or program basis.
Operating income may also be affected by, among other things, the effects of workforce stoppages, natural disasters
(such as earthquakes), resolution of disputed items with the customer, recovery of insurance proceeds, and other
discrete events. At the completion of a long-term contract, any originally estimated costs not incurred or reserves
not fully utilized (such as warranty reserves) could also impact contract earnings. Where such items have occurred
and the effects are meaningful, a separate description is provided.
Changes in estimates related to our contracts accounted for using the percentage-of-completion method are
recorded using the cumulative catch-up method of accounting. The aggregate effects of these favorable and
unfavorable changes across our portfolio of numerous contracts can have a significant effect upon our reported
sales and operating income in each of our reporting periods. In 2011, 2010 and 2009, we recognized favorable
operating income adjustments of $1.1 billion, $945 million and $758 million, and unfavorable operating income
adjustments of $385 million, $270 million and $337 million, respectively, consisting of cumulative catch-up
adjustments from the use of the percentage-of-completion method of accounting.
For a more complete understanding of each segment’s product and services, see the business descriptions in Part I,
Item 1.
Program Descriptions
For convenience, a brief description of certain programs discussed in this Form 10-K are included in the “Glossary
of Programs” at the end of Part II, Item 7.
AEROSPACE SYSTEMS
Year Ended December 31
$ in millions 2011 2010 2009
Sales and service revenues $10,458 $10,910 $10,419
Segment operating income 1,261 1,256 1,071
As a percentage of segment sales 12.1% 11.5% 10.3%
Sales and Service Revenues
2011 – Aerospace Systems revenue decreased $452 million, or 4 percent, as compared with 2010. The decrease is
primarily due to $388 million lower sales in Space Systems (SS) and $255 million lower sales in Strike & Surveillance
Systems (S&SS), partially offset by $90 million higher sales in Battle Management & Engagement Systems (BM&ES)
and $87 million higher sales in Advanced Programs & Technology (AP&T). The lower sales at SS are primarily due
to reduced funding for weather satellite programs and the James Webb Space Telescope (JWST), as well as lower
volume for several other space programs. The lower sales at S&SS are primarily due to lower volume on the F-35
Lightning II (F-35) manned aircraft program, which transitioned to a units-of-delivery revenue recognition method
beginning with low rate initial production lot 5, and the completion of the aerial targets program. The higher sales at
BM&ES are primarily due to higher volume on Long Endurance Multi-Intelligence Vehicle (LEMV) and Joint
Surveillance Target Attack Radar System (JSTARS), partially offset by lower volume on EA-18G. The higher sales at
AP&T are primarily due to increased volume on restricted programs.
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