Northrop Grumman 2009 Annual Report Download - page 51

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$ in millions 2009 2008 2007
Year Ended December 31
Operating Income (Loss)
Aerospace Systems $1,071 $ 416 $ 919
Electronic Systems 969 947 809
Information Systems 631 629 725
Shipbuilding 299 (2,307) 538
Technical Services 161 144 139
Intersegment eliminations (202) (128) (105)
Total segment operating income (loss) 2,929 (299) 3,025
Non-segment factors affecting operating income (loss)
Unallocated expenses (111) (157) (209)
Net pension adjustment (311) 263 127
Royalty income adjustment (24) (70) (18)
Total operating income (loss) $2,483 $ (263) $2,925
KEY SEGMENT FINANCIAL MEASURES
Operating Performance Assessment and Reporting
We manage and assess the performance of our businesses based on our performance on individual contracts and
programs obtained generally from government organizations using the financial measures referred to below, with
consideration given to the Critical Accounting Policies, Estimates and Judgments described on page 31. Based on
this approach and the nature of our operations, the discussion of results of operations generally focuses around
our five segments versus distinguishing between products and services. Product sales are predominantly generated
in the Aerospace Systems, Electronic Systems and Shipbuilding segments, while the majority of our service
revenues are generated by the Information Systems and Technical Services segments.
Sales and Service Revenues
Period-to-period sales reflect performance under new and ongoing contracts. Changes in sales and service
revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to
increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service
levels on individual contracts. Volume changes will typically carry a corresponding income change based on the
margin rate for a particular contract.
Segment Operating Income
Segment operating income reflects the aggregate performance results of contracts within a business area or segment.
Excluded from this measure are certain costs not directly associated with contract performance, including the
portion of corporate expenses such as management and administration, legal, environmental, certain compensation
and other retiree benefits, and other expenses not considered allowable or allocable under applicable CAS
regulations and the FAR, and therefore not allocated to the segments. Changes in segment operating income are
typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in
contract margin rates. These changes typically relate to profit recognition associated with revisions to total estimated
costs at completion of the contract (EAC) that reflect improved (or deteriorated) operating performance on a
particular contract. Operating income changes are accounted for on a cumulative to date basis at the time an EAC
change is recorded. Operating income may also be affected by, among other things, the effects of workforce
stoppages, the effects of natural disasters (such as hurricanes and earthquakes), resolution of disputed items with the
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NORTHROP GRUMMAN CORPORATION
eBP - v54508-i003_a.pdf - Page 45 of 124 - March 11, 2010 - 20:02:39