Northrop Grumman 2013 Annual Report Download - page 38

NORTHROP GRUMMAN CORPORATION
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Operating costs and expenses comprise the following:
Year Ended December 31
$ in millions 2013 2012 2011
Product and service costs $19,282 $19,638 $20,786
General and administrative expenses 2,256 2,450 2,350
Operating costs and expenses $21,538 $22,088 $23,136
2013 – Product and service costs for 2013 decreased $356 million, or 2 percent, as compared with 2012, consistent
with the change in sales. General and administrative expenses as a percentage of total sales decreased to 9.1 percent
in 2013, from 9.7 percent in 2012; the decrease reflects lower indirect costs principally related to cost reduction
initiatives at Information Systems, as well as lower bid and proposal expenses.
2012 – Product and service costs for 2012 decreased $1.1 billion, or 6 percent, as compared with 2011. The primary
driver of the reduction in product and service costs was reduced volume at Electronic Systems, Information Systems
and Technical Services. General and administrative expenses as a percentage of total sales increased to 9.7 percent
in 2012, from 8.9 percent in 2011; the increase includes the impact of lower sales, higher indirect costs related to
compensation accruals and cost classification changes to standardize cost accounting practices at one of our
segments, as well as higher bid and proposal expenses.
For the product and service costs detail, see the Product and Service Analysis section that follows Segment
Operating Results.
Operating Income
We define operating income as sales less operating costs and expenses, which includes general and administrative
expenses. Changes in estimated contract operating income at completion, resulting from changes in estimated sales,
operating costs and expenses, are recorded using the cumulative catch-up method of accounting. The aggregate
effects of these changes in our estimated costs at completion, across our portfolio of contracts, can have a significant
effect on our reported sales and operating income in each of our reporting periods. Cumulative catch-up adjustments
are presented in the table below:
Year Ended December 31
$ in millions 2013 2012 2011
Favorable adjustments $1,044 $1,270 $1,123
Unfavorable adjustments (291)(285)(385)
Net favorable adjustments $ 753 $ 985 $ 738
Federal and Foreign Income Taxes
2013 – The effective tax rate on earnings from continuing operations for 2013 was 31.8 percent, as compared with
33.3 percent in 2012. The company's lower effective tax rate for 2013 includes a $37 million benefit for the
American Taxpayer Relief Act, enacted in January 2013, which reinstated research tax credits for 2012 and 2013,
and a $21 million benefit for higher section 199 manufacturing deductions than in the prior year.
2012 – The 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.
Diluted Earnings Per Share
2013 – Diluted earnings per share for 2013 increased by $0.54, or 7 percent, as compared with 2012. The higher
diluted earnings per share is primarily due to the benefit of 2012 and 2013 share repurchases.
2012 – Diluted earnings per share for 2012 increased by $0.29, or 4 percent, as compared with 2011. The higher
diluted earnings per share reflects the benefit of 2011 and 2012 share repurchases and higher segment operating
income, partially offset by lower earnings reflecting the lower net Financial Accounting Standards/Cost Accounting
Standards (FAS/CAS) pension adjustment.