Northrop Grumman 2010 Annual Report Download - page 50

Operating Income (Loss)
We consider operating income to be an important measure for evaluating our operating performance and, as is
typical in the industry, we define operating income as revenues less the related cost of producing the revenues
and general and administrative expenses. We also further evaluate operating income for each of the business
segments in which we operate.
We internally manage our operations by reference to “segment operating income.” Segment operating income is
defined as operating income before unallocated expenses and net pension adjustment, neither of which affect the
operating results of segments, and the reversal of royalty income, which is classified as “other, net” for financial
reporting purposes. Segment operating income is one of the key metrics we use to evaluate operating
performance. Segment operating income is not, however, a measure of financial performance under GAAP, and
may not be defined and calculated by other companies in the same manner.
The table below reconciles segment operating income to total operating income:
$ in millions 2010 2009 2008
Year Ended December 31
Segment operating income (loss) $3,326 $2,929 $(299)
Unallocated corporate expenses (220) (111) (157)
Net pension adjustment (25) (311) 263
Royalty income adjustment (11) (24) (70)
Total operating income (loss) $3,070 $2,483 $(263)
Segment Operating Income (Loss)
Segment operating income in 2010 increased $397 million, or 14 percent, as compared with 2009. Total segment
operating income was 9.6 percent and 8.7 percent of total sales and service revenues in 2010 and 2009,
respectively. The increase in 2010 segment operating income is primarily due to the 3 percent increase in sales
volume and performance improvements across all operating segments. Segment operating income in 2009 was
$2.9 billion as compared with segment operating loss of $299 million in 2008. The loss in 2008 was primarily
due to goodwill impairment charges totaling $3.1 billion at Aerospace Systems and Shipbuilding. See discussion
of Segment Operating Results below for further information.
Unallocated Corporate Expenses
Unallocated corporate expenses generally include the portion of corporate expenses not considered allowable or
allocable under applicable CAS and FAR rules, and therefore not allocated to the segments, such as management
and administration, legal, environmental, certain compensation and retiree benefits, and other expenses.
Unallocated corporate expenses for 2010 increased $109 million, or 98 percent, as compared with 2009,
primarily due to inclusion of a $64 million net gain from a legal settlement in 2009, as well as an increase in
environmental, health and welfare, and stock compensation expenses in 2010. Unallocated corporate expenses for
2009 decreased $46 million, or 29 percent, as compared with 2008, primarily due to a $64 million gain from a
legal settlement in 2009, net of legal provisions and related expenses, partially offset by higher costs related to
environmental remediation and post-retirement employee benefits.
Net Pension Adjustment
Net pension adjustment reflects the difference between pension expenses determined in accordance with GAAP
and pension expense allocated to the operating segments determined in accordance with CAS. The pension
adjustment in 2010 decreased by $286 million as compared with 2009 primarily due to lower GAAP pension
expense as a result of favorable returns on pension plan assets in 2009. The net pension adjustment in 2009 was
an expense of $311 million, as compared with income of $263 million in 2008. The net pension expense in
2009 was primarily the result of negative returns on plan assets in 2008.
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NORTHROP GRUMMAN CORPORATION