Northrop Grumman 2013 Annual Report Download - page 37

NORTHROP GRUMMAN CORPORATION
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Government regulations. Contract operating income and period-to-period contract operating margin rates are
adjusted over the contract's period of performance to reflect the latest estimated revenue and cost for the contract,
including changes in the risks and opportunities affecting the contract. Such adjustments are accounted for under the
cumulative catch-up method of accounting and may have a favorable or unfavorable effect on operating income
depending upon the specific conditions affecting each contract.
In evaluating our operating performance, we look primarily at changes in sales and operating income, including the
effects of meaningful changes in operating income as a result of changes in contract estimates. Where applicable,
significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a
specific cost element across multiple contracts, are described in our analysis. Based on this approach and the nature
of our operations, the discussion of results of operations first focuses on our four segments before distinguishing
between products and services. Changes in sales are generally described in terms of volume, deliveries or other
indicators of sales activity, and contract mix. For purposes of this discussion, volume generally refers to increases or
decreases in cost or sales from production/service activity levels or delivery rates. Performance refers to changes in
contract margin rates for the period, primarily related to the changes in estimates referred to above.
CONSOLIDATED OPERATING RESULTS
Selected financial highlights, excluding the results of discontinued operations, are presented in the table below:
Year Ended December 31
$ in millions, except per share amounts 2013 2012 2011
Sales $24,661 $25,218 $26,412
Operating costs and expenses 21,538 22,088 23,136
Operating income 3,123 3,130 3,276
Operating margin rate 12.7% 12.4% 12.4%
Federal and foreign income tax expense $ 911 $ 987 $ 997
Effective income tax rate 31.8% 33.3% 32.3%
Diluted earnings per share $ 8.35 $ 7.81 $ 7.52
Cash provided by continuing operations $ 2,483 $ 2,640 $ 2,347
Sales
Sales for 2013 decreased $557 million, or 2 percent, as compared with 2012. Sales for 2012 decreased $1.2 billion,
or 5 percent, as compared with 2011.
The table below shows the variances in segment sales from the respective prior years:
Variance from Prior Year
$ in millions 2013 2012
Aerospace Systems $ 37 0% $ 13 0%
Electronic Systems 199 3% (422) (6%)
Information Systems (760)(10%) (565) (7%)
Technical Services (176)(6%) (174) (5%)
Intersegment sales elimination 143 (7%) (46) 2%
Total sales variance ($557)(2%) ($1,194) (5%)
For further information by segment refer to Segment Operating Results below, and for product and service detail,
refer to the Product and Service Analysis section that follows Segment Operating Results.
Operating Costs and Expenses
Operating costs and expenses are primarily comprised of labor, material, subcontractor and overhead costs, and are
generally allocated to contracts as incurred. In accordance with industry practice and the regulations that govern cost
accounting requirements for government contracts, most general management and corporate expenses incurred at the
segment and corporate locations are considered allowable and allocable costs. Allowable and allocable general and
administrative costs are allocated on a systematic basis to contracts in progress.