Northrop Grumman 2014 Annual Report Download - page 34

NORTHROP GRUMMAN CORPORATION
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The table below shows the variances in segment sales from the respective prior years:
Variance from Prior Year
$ in millions 2014 2013
Aerospace Systems $(17) 0% $ 37 0%
Electronic Systems (198)(3%) 199 3%
Information Systems (374)(6%) (760) (10%)
Technical Services (44)(2%) (176) (6%)
Intersegment sales elimination (49) 3% 143 (7%)
Total sales variance $(682)(3%) $(557) (2%)
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 primarily comprise 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.
Operating costs and expenses comprise the following:
Year Ended December 31
$ in millions 2014 2013 2012
Product Costs $ 10,431 $ 10,623 $ 10,415
Service Costs 7,947 8,659 9,223
General and administrative expenses 2,405 2,256 2,450
Operating costs and expenses $ 20,783 $ 21,538 $ 22,088
2014 – Product costs as a percentage of product sales for 2014 were 74.4 percent, as compared to 75.7 percent
during 2013. The decrease is mainly due to the settlements described in the Segment Operating Results section
below, and the continuing benefit of higher margin rates resulting from previous net favorable adjustments. Service
costs as a percentage of service sales for 2014 were 79.8 percent, as compared to 81.5 percent during 2013. The
decrease was mainly due to improved performance across a number of service programs at Information Systems and
the continuing benefit of higher margin rates resulting from previous net favorable adjustments at Aerospace
Systems.
2013 – Product costs as a percentage of product sales for 2013 were 75.7 percent, as compared to 75.3 percent
during 2012; the increase is primarily due to lower product operating margins in newly awarded programs at
Information Systems. Service costs as a percentage of service sales for 2013 were 81.5 percent, as compared to 81.0
percent during 2012; the increase is primarily due to lower service operating margins at Aerospace Systems and
Information Systems.
For further information regarding product and service sales and costs, see the Product and Service Analysis section
that follows Segment Operating Results.
2014 – General and administrative expenses as a percentage of total sales increased to 10.0 percent in 2014, from
9.1 percent in 2013. The increase largely reflects increased investment for future business.
2013 – 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.