Northrop Grumman 2012 Annual Report Download - page 41

NORTHROP GRUMMAN CORPORATION
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Protection Security System, Saudi Arabian American Oil Company, Netcents DKO, F-22 and several other
programs, partially offset by higher volume on Encore II and Trailer Mounted Support System programs. The lower
civil sales volume is primarily due to the sale of the County of San Diego contract, which reduced sales by $70
million as compared to the same period in 2010, lower volume on the ENM program and completion of the Treasury
Communications System program in 2010.
Operating income for 2011 increased $10 million, or 1 percent, and operating margin rate increased to 9.7 percent
from 9.0 percent. The increase is primarily driven by improved performance on several civil programs, including the
Virginia Information Technologies Agency Outsource contract and the effect of the sale of the County of San Diego
contract, partially offset by the lower sales volume in defense programs described above.
TECHNICAL SERVICES
Year Ended December 31
$ in millions 2012 2011 2010
Sales $3,019 $3,193 $3,705
Operating income 268 260 249
Operating margin rate 8.9% 8.1% 6.7%
2012 - Technical Services sales for 2012 decreased $174 million, or 5 percent, as compared with 2011. The decrease
was primarily due to reduced volume from portfolio shaping of approximately $70 million as we focus our
operations into core areas, lower KC-10 logistics activity of approximately $60 million and lower ICBM logistics
and modernization activity of approximately $50 million.
Operating income for 2012 increased $8 million, or 3 percent, and operating margin rate increased to 8.9 percent
from 8.1 percent. The higher operating income and operating margin rate were primarily due to improved
performance on the KC-10 program, partially offset by lower sales volume as described above.
2011 - Technical Services sales for 2011 decreased $512 million, or 14 percent, as compared with 2010. The
decrease is primarily due to $606 million lower sales in defense and government systems, primarily due to the
reduced participation in the NSTec joint venture. Effective January 1, 2011, the company reduced its participation in
this joint venture and deconsolidated it, resulting in no sales recorded for the joint venture for 2011, compared with
sales of $579 million in 2010. The decrease was partially offset by increased activity on the KC-10 program, which
began in February 2010.
Operating income for 2011 increased $11 million, or 4 percent, and operating margin rate increased to 8.1 percent
from 6.7 percent. The increase in operating margin rate is primarily due to effects of the change in participation in
the NSTec joint venture and performance improvements on several logistics and modernization and defense
programs, partially offset by unfavorable program performance on KC-10.
PRODUCT AND SERVICE ANALYSIS
Year Ended December 31
$ in millions 2012 2011 2010
Product sales $13,838 $15,073 $16,091
Product costs(1) 10,415 11,491 12,558
% of product sales 75.3% 76.2% 78.0%
Service sales 11,380 11,339 12,052
Service costs(1) 9,223 9,295 10,291
% of service sales 81.0% 82.0% 85.4%
(1) Product and service costs do not include an allocation of general and administrative expenses.
2012 - Product costs as a percentage of product sales decreased 90 basis points for the year ended December 31,
2012, compared to 2011. This improvement reflects higher margins on combat avionics at Electronic Systems.
Service costs as a percentage of service sales decreased 100 basis points for the year ended December 31, 2012,
compared to 2011. This improvement reflects higher service margins in all four business segments. The