Sales and service revenues

Cost of sales and service revenues

Operating income

Other expense

Earnings from continuing operations before income taxes

Federal and foreign income taxes

Earnings from continuing operations

Basic earnings per share from continuing operations

Basic weighted average common shares outstanding

Diluted earnings per share from continuing operations

Diluted weighted average common shares outstanding

Sales and service revenues

Cost of sales and service revenues

Operating income

Other expense

Earnings from continuing operations before income taxes

Federal and foreign income taxes

Earnings from continuing operations

Basic earnings per share from continuing operations

Basic weighted average common shares outstanding

Diluted earnings per share from continuing operations

Diluted weighted average common shares outstanding

Sales and service revenues

Cost of sales and service revenues

Goodwill impairment

Operating (loss) income

Other expense

Earnings (loss) from continuing operations before income taxes

Federal and foreign income taxes

Earnings (loss) from continuing operations

Basic earnings (loss) per share from continuing operations

Basic weighted average common shares outstanding

Diluted earnings (loss) per share from continuing operations

Diluted weighted average common shares outstanding

Cash and cash equivalents

Accounts receivable, net

Other current assets

Current assets

Property, plant, and equipment, net

Goodwill

Other assets

 

Current portion of long-term debt and notes payable

Trade accounts payable

Other current liabilities

Current liabilities

Long-term debt, net of current portion

Pension and post-retirement plan liabilities

Other long-term liabilities

 

Other shareholders’ equity

Accumulated other comprehensive loss

Total equity

The adjustment reflects the March 31, 2011 distribution of the assets, liabilities, and results of operations historically reported in the company’s Shipbuilding segment, which will be operated by HII after the spin-off. As part of the spin-off, the company completed a pro rata distribution of HII’s common stock to its shareholders.

The adjustment eliminates intercompany sales and service revenues of $8 million, $9 million and $9 million for the years ended December 31, 2010, 2009 and 2008, respectively, which were historically recorded within the Shipbuilding segment results. The intercompany sales and service revenues and associated costs described in Note C below were eliminated in consolidation and therefore not included in the Northrop Grumman Consolidated amounts.

The adjustment to cost of sales and service revenues reflects the following: i) the net pension and post-retirement benefits adjustment associated with Shipbuilding employees and retirees who participate in current Northrop Grumman retirement benefit plans, which were historically managed and recorded at the corporate office; ii) the assignment to Shipbuilding of non-recurring spin-off transaction costs incurred by the company; iii) the elimination of the intercompany cost of sales and service revenues associated with the intercompany sales and service revenues discussed in Note B; iv) the cash and share-based incentive compensation associated with Shipbuilding employees, which was historically managed and recorded at the corporate office; and v) the deferred state income taxes associated with Shipbuilding operations which were historically managed and recorded at the corporate office. The net pension and post-retirement benefits adjustment was $49 million, $88 million and $24 million for the years ended December 31, 2010, 2009 and 2008, respectively. The adjustment to assign non-recurring transaction costs to Shipbuilding was $28 million, $7 million and zero for the years ended December 31, 2010, 2009, and 2008, respectively. The elimination of intercompany cost of sales and service revenues adjustment was $7 million, $9 million and $8 million for the years ended December 31, 2010, 2009, and 2008, respectively. The cash and share-based incentive compensation adjustment was $3 million, $2 million and $3 million for the years ended December 31, 2010, 2009 and 2008, respectively. The deferred state income taxes adjustment was a credit of $7 million, $12 million and $4 million for the years ended December 31, 2010, 2009, and 2008, respectively.

In support of Shipbuilding’s contracts, Northrop Grumman and its subsidiaries provided products and services to Shipbuilding totaling $97 million, $100 million, and $73 million, for the years ended December 31 2010, 2009, and 2008, respectively. These products and services were recorded at cost without margin by Shipbuilding. Northrop Grumman’s profit margin rate for the type of work provided to Shipbuilding for the years ended December 31, 2010, 2009 and 2008, was approximately 13.4%, 12.6% and 13.4%, respectively. Now that the spin-off is complete, the company will begin negotiations with HII on the terms of future subcontract work to be performed by the company. Because the terms of such work have not been negotiated and the ultimate margin rates to be paid by HII are unknown, the company has not included any pro forma adjustments for incremental subcontract revenue.

The adjustment reflects financing costs of $2 million incurred in redeeming Shipbuilding’s external debt in 2010, and the elimination of intercompany interest of $27 million in each of the years ended December 31, 2010, 2009 and 2008, both of which were historically recorded within the Shipbuilding segment results. The intercompany interest expense included in the Shipbuilding results was eliminated in consolidation and therefore not included in the Northrop Grumman Consolidated amounts.

Federal income taxes have not been historically allocated to Shipbuilding as they were centrally managed and recorded at the corporate office. The pro forma adjustment reflects the effective tax rates of 40.1%, 30.4%, and 27.9% applied to the earnings (loss) before income taxes for Shipbuilding plus the Other Adjustments for the years ended December 31, 2010, 2009 and 2008, respectively. For 2008, the $2,490 million non-deductible non-cash goodwill impairment charge was excluded from Shipbuilding segment results in determining the effective tax rate.

For 2008 when the company reported a loss, basic weighted average shares outstanding of 334.5 million shares were used because use of the diluted average shares outstanding of 341.6 million shares would have had an anti-dilutive effect.

The adjustments reflect the allocation of amounts that were historically managed and recorded at the corporate office that pertain to Shipbuilding including: i) deferred income taxes consisting of a $301 million net current deferred tax asset, a $121 million net long-term deferred tax liability and $338 million included in accumulated other comprehensive loss related to unamortized retirement benefit plan costs (see Note B above) associated with the Shipbuilding tax provision; ii) employee benefit plan-related assets and liabilities consisting of other assets of $154 million, other current liabilities of $173 million, pension and post-retirement liabilities of $947 million, other long-term liabilities of $25 million and unamortized retirement benefit plan costs of $858 million included in accumulated other comprehensive loss associated with Shipbuilding employees; and, iii) certain other current liabilities consisting of group insurance liabilities of $48 million and litigation settlement reserves of $15 million.