Northrop Grumman 2010 Annual Report Download - page 85

Discontinued Operations – Earnings for the businesses classified within discontinued operations (primarily the result
of the sale of ASD discussed above) were as follows:
$ in millions 2010 2009 2008
Year Ended December 31
Sales and service revenues $1,536 $1,625
Earnings from discontinued operations 149 146
Income tax expense (54) (55)
Earnings, net of tax $ 95 $ 91
Gain on divestitures 10 446 66
Income tax benefit (expense) 5(428) (40)
Gain from discontinued operations, net of tax $15 $18 $26
Earnings from discontinued operations, net of tax $15 $ 113 $ 117
Tax rates on discontinued operations vary from the company’s effective tax rate generally due to the non-
deductibility of goodwill for tax purposes and the effects, if any, of capital loss carryforwards.
7. SHIPBUILDING STRATEGIC ACTIONS
In July 2010, the company announced plans to consolidate its Gulf Coast shipbuilding operations by winding
down its shipbuilding operations at the Avondale, Louisiana facility in 2013 after completing the LPD-class ships
currently under construction there. Future LPD-class ships will be built in a single production line at the
company’s Pascagoula, Mississippi facility. The consolidation is intended to reduce costs, increase efficiency, and
address shipbuilding overcapacity. Due to the consolidation, the company expects higher costs to complete ships
currently under construction in Avondale due to anticipated reductions in productivity and increased the
estimates to complete LPDs 23 and 25 by approximately $210 million. The company recognized a $113 million
pre-tax charge to Shipbuilding’s operating income for these contracts during the second quarter of 2010. The
company is currently exploring alternative uses of the Avondale facility by potential new owners, including
alternative opportunities for the workforce there.
In addition, the company anticipates that it will incur substantial restructuring and facilities shutdown-related
costs, including, but not limited to, severance, relocation expense, and asset write-downs related to the Avondale
facility decision. These costs are expected to be allowable expenses under government accounting standards and
are expected to be recoverable in future years’ overhead costs. These future costs could approximate $310 million
and such costs should be allocable to existing flexibly priced contracts or future negotiated contracts at the Gulf
Coast operations in accordance with FAR provisions relating to the treatment of restructuring and shutdown
related costs.
In its initial audit report on the company’s cost proposal for the restructuring and shutdown related costs, the
Defense Contract Audit Agency (DCAA) stated that, in general, the proposal was not adequately supported in
order for them to reach a conclusion. They also questioned approximately ten percent of the costs submitted and
did not accept the cost proposal as submitted. The company intends to resubmit its proposal to address the
concerns expressed by the DCAA. Ultimately, the company anticipates that this process will result in an
agreement with the U.S. Navy that is substantially in accord with management’s cost allowability expectations.
Accordingly, the company has treated these costs as allowable costs in determining the cost and earnings
performance on Shipbuilding’s contracts in process. If there is a formal challenge to the company’s treatment of
its restructuring costs, there are prescribed dispute resolution alternatives to resolve such a challenge and the
company would likely pursue a dispute resolution process.
The company also announced in July 2010 that it would evaluate whether a separation of the Shipbuilding
segment would be in the best interests of shareholders, customers, and employees by allowing both the company
and the Shipbuilding segment to more effectively pursue their respective opportunities to maximize long-term
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NORTHROP GRUMMAN CORPORATION