<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-3998
LITTON INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-1775499
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21240 BURBANK BOULEVARD, 91367-6675
WOODLAND HILLS, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
Registrant's telephone number, including area code: (818) 598-5000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On February 29, 2000 there were 45,531,648 shares of Common Stock
outstanding.
Page 1 of 17
Exhibit Index appears on Page 16.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX
REPORT ON FORM 10-Q
FOR QUARTER ENDED JANUARY 31, 2000
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Six months ended January 31, 2000 and 1999................ 3
Consolidated Statements of Operations
Three months ended January 31, 2000 and 1999.............. 4
Consolidated Balance Sheets
January 31, 2000 and July 31, 1999........................ 5
Consolidated Statements of Cash Flows
Six months ended January 31, 2000 and 1999................ 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signature.............................................................. 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Sales and Service Revenues.................................. $2,719,793 $2,338,460
---------- ----------
Costs and Expenses
Cost of sales............................................. 2,176,214 1,829,583
Selling, general and administrative....................... 242,462 244,426
Depreciation and amortization............................. 95,678 79,934
Gain on sale of business.................................. (7,571) --
Special charge............................................ 6,254 --
Interest -- net........................................... 54,875 32,509
---------- ----------
Total............................................. 2,567,912 2,186,452
---------- ----------
Earnings before Taxes on Income and Cumulative Effect of a
Change in Accounting Principle............................ 151,881 152,008
Taxes on Income............................................. (62,271) (60,803)
---------- ----------
Earnings before Cumulative Effect of a Change in Accounting
Principle................................................. 89,610 91,205
Cumulative Effect of a Change in Accounting Principle....... (2,777) --
---------- ----------
Net Earnings................................................ $ 86,833 $ 91,205
========== ==========
Earnings per Share:
Basic: Earnings before Cumulative Effect of a Change in
Accounting Principle........................... $ 1.96 $2.00
Cumulative Effect of a Change in Accounting
Principle...................................... $(0.06) --
Net Earnings..................................... $ 1.90 $2.00
Diluted: Earnings before Cumulative Effect of a Change in
Accounting Principle........................... $ 1.93 $1.95
Cumulative Effect of a Change in Accounting
Principle...................................... $(0.06) --
Net Earnings..................................... $ 1.87 $1.95
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Sales and Service Revenues.................................. $1,349,003 $1,130,922
---------- ----------
Costs and Expenses
Cost of sales............................................. 1,093,977 884,374
Selling, general and administrative....................... 115,863 116,900
Depreciation and amortization............................. 48,682 40,096
Gain on sale of business.................................. (7,571) --
Special charge............................................ 6,254 --
Interest -- net........................................... 29,344 16,259
---------- ----------
Total............................................. 1,286,549 1,057,629
---------- ----------
Earnings before Taxes on Income............................. 62,454 73,293
Taxes on Income............................................. (25,606) (29,317)
---------- ----------
Net Earnings................................................ $ 36,848 $ 43,976
========== ==========
Earnings per Share:
Basic..................................................... $0.80 $0.96
Diluted................................................... $0.80 $0.94
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
2000 1999
----------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and marketable securities............................ $ 58,476 $ 30,693
Accounts receivable, net.................................. 897,621 859,074
Inventories less progress payments........................ 768,654 637,635
Deferred tax assets....................................... 442,309 436,512
Prepaid expenses.......................................... 37,406 28,900
---------- ----------
Total Current Assets.............................. 2,204,466 1,992,814
---------- ----------
Property, Plant and Equipment -- at cost.................... 1,758,744 1,564,848
Less accumulated depreciation............................. (960,705) (939,566)
---------- ----------
Property, Plant and Equipment, Net.......................... 798,039 625,282
---------- ----------
Goodwill and Other Intangibles, Net......................... 1,395,795 1,062,499
---------- ----------
Other Assets and Long-term Investments...................... 569,167 519,277
---------- ----------
Total Assets...................................... $4,967,467 $4,199,872
========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities
Accounts payable.......................................... $ 297,207 $ 317,651
Accrued expenses.......................................... 543,449 555,626
Payrolls and related expenses............................. 235,479 207,622
Taxes on income........................................... 40,309 64,207
Short-term debt........................................... 394,665 162,751
Contract liabilities and customer deposits................ 372,464 392,320
---------- ----------
Total Current Liabilities......................... 1,883,573 1,700,177
---------- ----------
Long-term Obligations....................................... 1,295,798 859,315
---------- ----------
Postretirement Benefit Obligations Other than Pensions...... 222,893 205,856
---------- ----------
Deferred Tax and Other Long-term Liabilities................ 179,974 134,278
---------- ----------
Shareholders' Investment
Capital stock
Voting preferred stock -- Series B..................... 2,053 2,053
Common stock........................................... 45,552 45,560
Additional paid-in capital................................ 345,981 345,005
Retained earnings......................................... 1,040,074 955,538
Accumulated other comprehensive loss-
Cumulative currency translation adjustment............. (48,431) (47,910)
---------- ----------
Total Shareholders' Investment.................... 1,385,229 1,300,246
---------- ----------
Total Liabilities and Shareholders' Investment.... $4,967,467 $4,199,872
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Cash and cash equivalents at beginning of period............ $ 30,693 $ 16,175
--------- --------
Operating Activities
Net earnings.............................................. 86,833 91,205
Adjustments to reconcile net earnings to net cash provided
by (used for) operating activities
Cumulative effect of a change in accounting
principle............................................. 2,777 --
Depreciation and amortization.......................... 95,678 79,934
Gain on sale of business............................... (7,571) --
Special charge......................................... 6,254 --
Net periodic pension income............................ (42,896) (31,010)
Changes in assets and liabilities, net of effects of
acquisitions/divestitures
Accounts receivable.................................. (26,491) (49,359)
Inventories.......................................... (23,323) (9,789)
Prepaid expenses..................................... (3,119) 25
Accounts payable..................................... (71,656) (67,386)
Accrued expenses..................................... (35,743) (22,490)
Payrolls and related expenses........................ 4,975 (15,280)
Deferred and current taxes on income................. 24,744 10,070
Contract liabilities and customer deposits........... (23,229) 10,667
Other operating activities............................. (3,468) 6,556
--------- --------
Cash (used for) provided by operating activities............ (16,235) 3,143
--------- --------
Investing Activities
Purchase of businesses, net of cash acquired.............. (542,128) (8,888)
Purchase of capital assets................................ (59,034) (55,262)
Proceeds from sale of businesses.......................... 19,276 45,990
Other investing activities................................ 6,690 (1,560)
--------- --------
Cash used for investing activities.......................... (575,196) (19,720)
--------- --------
Financing Activities
Proceeds from issuance of senior notes due 2009........... 396,892 --
Change in short-term debt, net............................ 228,784 104,977
Purchase of Common stock.................................. (2,295) (29,485)
Other financing activities................................ (4,167) 2,381
--------- --------
Cash provided by financing activities....................... 619,214 77,873
--------- --------
Resulting in increase in cash and cash equivalents.......... 27,783 61,296
--------- --------
Cash and cash equivalents at end of period.................. $ 58,476 $ 77,471
========= ========
Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents................................. $ 58,476 $ 77,471
Marketable securities..................................... -- 19,340
--------- --------
Total cash and marketable securities.............. $ 58,476 $ 96,811
========= ========
Supplemental disclosure of cash flow information
Interest paid............................................. $ 45,098 $ 35,016
Income taxes paid, net.................................... $ 32,202 $ 48,954
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JANUARY 31, 2000
1. The amounts included in this report are unaudited; however, in the opinion
of management, all adjustments necessary for a fair statement of results for
the stated periods have been included. These adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Certain
reclassifications of prior period information were made for comparative
purposes. These interim consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report to Shareholders for the fiscal year ended July 31,
1999. The results of operations for the six months ended January 31, 2000
are not necessarily indicative of operating results for the entire year.
2. The components of inventory balances are summarized below:
<TABLE>
<CAPTION>
JANUARY 31, 2000 JULY 31, 1999
---------------- -------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Raw materials and work in progress.......................... $1,399,318 $1,037,155
Finished goods.............................................. 61,546 32,438
---------- ----------
1,460,864 1,069,593
Less progress payments...................................... (692,210) (431,958)
---------- ----------
Net inventories............................................. $ 768,654 $ 637,635
========== ==========
</TABLE>
The increases at January 31, 2000 reflect the acquisition of Avondale
Industries, Inc. ("Avondale") discussed in Note 7.
3. Interest (expense) income is shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Interest expense............................ $(30,575) $(18,364) $(57,402) $(36,405)
Interest income............................. 1,231 2,105 2,527 3,896
-------- -------- -------- --------
Net interest expense........................ $(29,344) $(16,259) $(54,875) $(32,509)
======== ======== ======== ========
</TABLE>
4. Basic earnings per share ("EPS") is calculated based on the weighted average
number of shares outstanding and diluted EPS includes the effects of
dilutive potential common shares.
7
<PAGE> 8
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JANUARY 31, 2000
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Earnings before Cumulative Effect of
a Change in Accounting Principle... $ 36,848 $ 43,976 $ 89,610 $ 91,205
Preferred stock dividends............ (205) (205) (410) (410)
----------- ----------- ----------- -----------
Net earnings before Cumulative Effect
of a Change in Accounting Principle
available to common shareholders... $ 36,643 $ 43,771 $ 89,200 $ 90,795
Cumulative Effect of a Change in
Accounting Principle............... -- -- (2,777) --
----------- ----------- ----------- -----------
Net earnings available to common
shareholders....................... $ 36,643 $ 43,771 $ 86,423 $ 90,795
=========== =========== =========== ===========
Weighted average common shares
outstanding used for basic earnings
per share.......................... 45,556,749 45,465,074 45,566,348 45,506,917
Dilutive effect of stock options..... 456,312 1,056,304 610,532 995,586
----------- ----------- ----------- -----------
Number of shares used for diluted
earnings per share................. 46,013,061 46,521,378 46,176,880 46,502,503
=========== =========== =========== ===========
Basic:
Earnings before Cumulative Effect
of a Change in Accounting
Principle....................... $0.80 $0.96 $ 1.96 $2.00
Cumulative Effect of a Change in
Accounting Principle............ -- -- $(0.06) --
Net earnings per share............. $0.80 $0.96 $ 1.90 $2.00
Diluted:
Earnings before Cumulative Effect
of a Change in Accounting
Principle....................... $0.80 $0.94 $ 1.93 $1.95
Cumulative Effect of a Change in
Accounting Principle............ -- -- $(0.06) --
Net earnings per share............. $0.80 $0.94 $ 1.87 $1.95
</TABLE>
5. The Company reports comprehensive income and its components in accordance
with Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Comprehensive income includes "all changes in equity
during a period except those resulting from investments by owners and
distributions to owners."
Comprehensive income and its components are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net earnings.................................... $36,848 $43,976 $86,833 $91,205
Currency translation adjustments................ (2,421) (2,291) (521) 4,134
------- ------- ------- -------
Total comprehensive income...................... $34,427 $41,685 $86,312 $95,339
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JANUARY 31, 2000
6. The Company's operations are reported in four segments: Advanced
Electronics, Information Systems, Ship Systems, and Electronic Components
and Materials.
The Advanced Electronics segment designs, develops and manufactures inertial
navigation, guidance and control, IFF (identification friend or foe) and
marine electronic systems. This segment also provides command, control and
communications and electronic warfare systems and integrates avionics systems
and shipboard information and communication systems.
The Information Systems segment designs, develops, integrates and supports
computer-based information systems and provides information technology and
services.
The Ship Systems segment is engaged in the building of large multimission
surface combatant ships and is a provider of overhaul, repair, modernization,
ship design and engineering services. The results for the six months ended
January 31, 2000 include the Avondale acquisition (discussed in Note 7) which
also is the primary reason for the increase in assets for this segment to
$1.07 billion at January 31, 2000 from $361 million at July 31, 1999.
The U.S. Government is a significant customer of the Advanced Electronics,
Information Systems and Ship Systems segments.
The Electronic Components and Materials segment is an international supplier
of complex backpanels, connectors, laser crystals, solder materials,
specialty products and other electronic components used primarily in the
telecommunications, industrial and computer markets.
Corporate amounts include primarily general corporate expenses.
9
<PAGE> 10
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JANUARY 31, 2000
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------ ----------------
2000 1999 2000 1999
------- ------- ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Sales and Service Revenues from Unaffiliated
Customers
Advanced Electronics.............................. $ 335 $ 358 $ 672 $ 757
Information Systems............................... 369 389 771 780
Ship Systems...................................... 485 242 957 510
Electronic Components and Materials............... 160 142 320 292
------ ------ ------ ------
Total Sales and Service Revenues.................... $1,349 $1,131 $2,720 $2,339
====== ====== ====== ======
Intersegment Sales and Service Revenues
Advanced Electronics.............................. $ 7 $ 3 $ 12 $ 8
Information Systems............................... 4 7 7 13
Electronic Components and Materials............... 1 2 3 4
------ ------ ------ ------
Total Intersegment Sales and Service Revenues....... $ 12 $ 12 $ 22 $ 25
====== ====== ====== ======
Operating Profit (Loss)
Advanced Electronics.............................. $ (14) $ 27 $ 14 $ 56
Information Systems............................... 29 20 50 40
Ship Systems...................................... 64 34 122 69
Electronic Components and Materials............... 26 25 51 51
Gain on Sale of Business (see Note 8)............. 7 -- 7 --
Special Charge (see Note 8)....................... (6) -- (6) --
Intersegment Eliminations......................... -- (1) -- (1)
------ ------ ------ ------
Operating Profit.................................. 106 105 238 215
Interest and Corporate Amounts.................... (44) (32) (86) (63)
------ ------ ------ ------
Earnings before Taxes on Income and Cumulative
Effect of a Change in Accounting Principle........ $ 62 $ 73 $ 152 $ 152
====== ====== ====== ======
</TABLE>
7. On August 2, 1999, the Company completed the acquisition of Avondale for
$39.50 per share in cash. The total purchase price was approximately $590
million and the acquisition has been accounted for under the purchase method
of accounting. Avondale, with revenues of approximately $750 million in its
fiscal year ended December 31, 1998, is engaged in the design, construction,
repair and overhaul of various types of ocean-going vessels, primarily for
the U.S. Navy. The results herein reflect a preliminary allocation of the
purchase price and the estimates of fair values will be refined during
fiscal year 2000 and changes, if any, will be reflected in the consolidated
financial statements. The preliminary goodwill amount of approximately $360
million is being amortized over twenty-five years.
10
<PAGE> 11
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JANUARY 31, 2000
8. In July 1999, the Company recorded special charges totaling $74.6 million
pre-tax and $44.8 million after-tax in connection with a plan to exit the
mainframe and professional services business at the Litton Enterprise
Solutions, Inc. ("LES") subsidiary reported in the Information Systems Group
and to consolidate certain manufacturing facilities at its Data Systems and
Applied Technology (now a part of the Advanced Systems division) divisions
to reduce excess capacity. The portion representing non-cash asset
write-downs totaled $19.8 million for goodwill impairment and abandonment of
software and facilities improvements. The components and balances of the
remainder of the special charges accrual at July 31, 1999 and January 31,
2000 are as follows:
<TABLE>
<CAPTION>
JULY 31, 1999 PAYMENTS ADJUSTMENTS JANUARY 31, 2000
------------- -------- ----------- ----------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Software and hardware lease termination
costs................................. $41.3 $ (.5) $ 6.9 $47.7
Severance and termination costs......... 10.2 (3.6) (1.8) 4.8
Other closure and exit costs............ 3.3 -- 1.2 4.5
----- ----- ----- -----
$54.8 $(4.1) $ 6.3 $57.0
===== ===== ===== =====
</TABLE>
The $3.6 million in severance and termination payments made in the first
six months of fiscal year 2000 resulted from the termination of 419
employees out of a total of approximately 550 to be terminated in
connection with the above actions.
In December 1999, the Company completed the sale of LES which resulted in a
pre-tax gain of $7.6 million and a special charge of $6.3 million primarily
representing additional accrual for hardware and software lease obligations
under non-cancelable leases, partly offset by the reversal of termination
benefits relating to employees who have continued employment with the
buyer.
9. Effective August 1, 1999, the Company adopted Statement of Position 97-3
("SOP 97-3"), "Accounting by Insurance and Other Enterprises for Insurance
Related Assessments", which required a change in the accounting for
assessments by the workers' compensation second-injury fund administered by
the Department of Labor. The resulting cumulative effect of a change in
accounting principle was a charge of $2.8 million, net of tax or $.06 per
share.
11
<PAGE> 12
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company reported revenues of $1.35 billion and $2.72 billion for the
second quarter and six months ended January 31, 2000, compared with $1.13
billion and $2.34 billion, respectively, for the prior year's periods. Segment
operating profit was $106.8 million and $238.5 million for the second quarter
and six months ended January 31, 2000, and corresponding amounts for the fiscal
year 1999 periods were $104.9 million and $215.0 million, respectively. Net
earnings for the second quarter were $36.8 million, compared with $44.0 million
for the comparable period of the prior year. Net earnings for the first six
months of the current year were $89.6 million before the cumulative effect of a
change in accounting principle resulting from the adoption of Statement of
Position 97-3 in the first quarter. Net earnings were $91.2 million for the
first six months of last fiscal year.
The Advanced Electronics segment reported revenues of $341.0 million and
$682.6 million for the second quarter and six months of fiscal year 2000,
compared with $361.3 million and $764.5 million for the corresponding periods of
the prior fiscal year. The decrease in revenues reflects a decline in sales of
legacy navigation systems combined with lower unit prices for the next
generation systems, as well as temporary delays in new production start-ups.
Revenues were also impacted by the sale of a division in October 1998, partially
offset by contributions from Denro Inc. which was acquired in the third quarter
of fiscal year 1999. This segment incurred an operating loss of $14.5 million
for the second quarter and reported an operating profit of $14.0 million for six
months of the current fiscal year. Operating profit for the second quarter and
six months of fiscal 1999 was $26.9 million and $56.3 million, respectively. The
operating loss for the second quarter of the current year included cost growth
provisions totaling $34.0 million recorded for two development programs at the
Company's Guidance and Control Systems division. During the second quarter, it
was determined that additional expenditures will be required to complete the CG
47 Ships Automated Electronics and SH-2G(A) Helicopter Integrated Avionics
programs. The higher costs resulted from the design of complex developmental
software, increased customer requirements and testing and later than expected
customer furnished data and equipment. The CG 47 program involves the
development and integration of software and computers for machinery and control
systems automation and integrated bridge systems on board the U.S. Navy's CG 47
class of Aegis cruisers. The SH-2G(A) program involves the upgrade of avionics
for eleven SH-2G(A) Super SeaSprite surveillance helicopters used by the Royal
Australian Navy. Backlog for the Advanced Electronics segment amounted to $1.32
billion at January 31, 2000, compared with $1.31 billion at July 31, 1999. In
connection with the aforementioned facilities consolidation at the Applied
Technology division, the Company recorded a special charge totaling $4.1 million
in the fourth quarter of fiscal year 1999. This charge included $2.3 million for
severance and related benefits in connection with the termination of
approximately 170 employees and $1.8 million to vacate a facility and for the
write-off of software with no future use. As of the end of the second quarter of
fiscal year 2000, 87 employees have been terminated, resulting in cash
termination benefits of approximately $.4 million.
The Information Systems segment reported revenues and operating profit,
excluding the effects of the gain on sale of LES and special charge, of $373.6
million and $29.6 million for the current quarter, compared with $396.0 million
and $19.8 million for the prior year's second quarter. Revenues and operating
profit for the first six months of fiscal year 2000 were $778.5 million and
$50.1 million compared with $792.8 million and $40.4 million for the
corresponding periods of fiscal year 1999. Revenues were impacted by reduced
revenues from the Data Systems division ("DSD") and the sale of LES in December
1999. Operating profit for the second quarter of fiscal 2000, however, benefited
from the reversal of $12.5 million in contract losses no longer required as a
result of the sale of LES, partially offset by expenditures at DSD to ready
ruggedized computers and display product lines for key digitized battlefield
competitions. The Company reached a decision to exit the LES business in the
fourth quarter of fiscal year 1999 and recorded special charges totaling $65.2
million which included $41.3 million in software and hardware lease termination
costs, $4.0 million for employee severance and termination benefits, $16.9
million for the write-off of software, building improvements and goodwill and
$3.0 million of other exit costs. Cash expenditures for exit activities through
January 31, 2000 amounted to approximately $1.8 million. The sale of LES
resulted in a $7.6 million gain and a special charge of $6.3 million primarily
representing $6.9 million in additional noncancelable software and hardware
lease
12
<PAGE> 13
PART I. FINANCIAL INFORMATION (CONTINUED)
obligations, partly offset by the $1.8 million reversal in termination benefits
no longer required as certain employees have continued employment with the buyer
of LES. In the fourth quarter of fiscal 1999, the Company also recorded a
special charge totaling $5.3 million to consolidate manufacturing facilities
used in the command and control businesses at DSD. This charge included $3.9
million for severance and termination benefits for approximately 270 employees
and $1.4 million for vacating facilities and other costs. Through the end of the
second quarter of fiscal 2000, the Company has expended approximately $1.9
million in cash, primarily in connection with the termination of 229 employees.
Firm backlog for the Information Systems segment at January 31, 2000 increased
to $1.01 billion from $976.1 million at July 31, 1999. In addition, this segment
had unfunded backlog with potential contract values of $2.2 billion at January
31, 2000 and July 31, 1999.
The Ship Systems segment reported revenues and operating profit of $484.7
million and $63.7 million for the second quarter of fiscal year 2000, compared
with $241.6 million and $34.1 million for the second quarter of the prior fiscal
year. The respective amounts for the six months of fiscal year 2000 were $957.1
million and $122.3 million, compared with $509.8 million and $69.2 million for
the first six months of fiscal year 1999. The increases were primarily due to
the acquisition of Avondale in August 1999 and contracts moving into more
advanced stages of production at Ingalls Shipbuilding, Inc. ("Ingalls"). Current
construction activities at Ingalls include seven Aegis destroyers and one LHD
class amphibious assault ship for the U.S. Navy. Current activities at Avondale
include two amphibious transport ships under the U.S. Navy's LPD program, five
Sealift support ships also for the U.S. Navy and three double-hulled crude oil
carriers for a commercial customer. With the addition of Avondale and an award
from the U.S. Navy in December 1999 to build two additional Aegis destroyers,
backlog increased to $5.65 billion at January 31, 2000 from $4.09 billion at
July 31, 1999. Subsequent to the end of the quarter, the U.S. Navy exercised an
option for construction of a third LPD 17 Class amphibious assault ship under a
cost-reimbursable contract valued at $491.9 million. Avondale, which serves as
prime contractor for the LPD 17 program, is constructing the first two ships and
the third ship will be built by a team member.
Revenues and operating profit for the Electronic Components and Materials
segment were $162.2 million and $26.5 million for the second quarter of the
current fiscal year, compared with $144.0 million and $24.6 million,
respectively, for the same period of the prior year. Revenues and operating
profit for the first six months of fiscal year 2000 were $323.6 million and
$50.9 million, compared with $296.2 million and $50.4 million for the first six
months of fiscal year 1999. The increase in revenues reflects continued demand
from the wireless telecommunications market and recently completed acquisitions,
while operating margins continued to be impacted by start up costs at a newly
expanded manufacturing facility, although capacity utilization increased during
the second quarter of fiscal year 2000.
Operating results for the second quarter and six months ended January 31,
2000 included $21.3 million and $42.9 million in net periodic non-cash pension
income under the Company's defined benefit plans. The comparable amounts for the
fiscal 1999 periods were $15.5 million and $31.0 million, respectively. These
amounts when combined with the impacts of the Company's other benefit plans
resulted in approximately $3.2 million and $9.2 million income in the second
quarter and first six months of 2000 compared with $1.5 million and $3.4 million
for the prior year's periods, respectively.
Net interest expense for the second quarter and six months ended January
31, 2000 amounted to $29.3 million and $54.9 million, compared with $16.3
million and $32.5 million for the prior year's periods, respectively. Interest
expense was higher in the current year primarily as a result of the $400 million
principal amount of 8.00% Senior Notes due 2009 ("Senior Notes") and commercial
paper issued in connection with the August 1999 acquisition of Avondale.
Cash and marketable securities increased to $58.5 million at January 31,
2000 from $30.7 million at July 31, 1999. Increased working capital requirements
of $85 million in the second quarter and $154 million in the six months resulted
in a net use of cash for operating activities in the second quarter and six
months. Cash flow from operations is expected to improve over the remainder of
fiscal year 2000 as a result of higher
13
<PAGE> 14
PART I. FINANCIAL INFORMATION (CONTINUED)
collections. Subsequent to the end of the second quarter, the Company completed
the sale of the Weather Services International Corporation ("WSI") for
approximately $120 million in cash. With annual revenues of approximately $40
million, WSI provides weather presentation systems and weather data. Management
believes that cash flow from these sources will be sufficient to meet
anticipated operating needs and fund capital expenditures over the remainder of
the current fiscal year. Additionally, at January 31, 2000, the Company had
unused credit commitments of $400 million under an existing revolving credit
agreement with various banks available for its general use and replacement of
existing debt. The Company also has two additional short-term credit agreements,
totaling $800 million, which serve as back-up facilities for its commercial
paper program.
EURO CONVERSION
The "Euro" was adopted on January 1, 1999 by eleven member countries of the
European Union. The existing national currencies of the participating countries
will continue to be legal tender until January 1, 2002 after which the Euro will
be the sole legal tender for the participating countries. The Company is
modifying its financial and accounting systems to incorporate the Euro. The
Company believes the Euro conversion will not have a material effect on its
consolidated financial statements.
YEAR 2000 READINESS DISCLOSURES
The Company implemented and completed all phases of its program to address
the potential impact of the Year 2000 on its business systems, facilities, and
products which included embedded software before December 1999. In addition to
required modifications, the Company replaced manufacturing and business systems
with more efficient and technologically up to date systems that were also Year
2000 compliant.
The Company's transition to the Year 2000 was successful with no
significant issues related to its business systems, facilities and products. The
Company is not aware of any significant Year 2000 issues that were experienced
by its major customers or suppliers. Incremental costs to address and achieve
Year 2000 compliance were expensed as incurred and totaled approximately $26
million through January 31, 2000 of which $3 million was expended during the
first six months of fiscal year 2000.
SAFE HARBOR CAUTIONARY STATEMENT
This document contains forward-looking statements made in reliance upon the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements reflect management's current assumptions and
estimates of future performance and economic conditions, and are subject to
risks and uncertainties that could cause actual results to differ materially.
For a discussion identifying important factors that could cause actual results
to vary materially from those anticipated in the forward-looking statements, see
the Company's 1999 Annual Report on Form 10-K, and other documents, filed with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As previously discussed, the Company issued Senior Notes as well as sold
commercial paper to finance the acquisition of Avondale. The estimated fair
value of the fixed rate Senior Notes at January 31, 2000 was $389.4 million, and
if there was a 10% decrease in the interest rate, the estimated fair value would
have been $411.9 million. With respect to the short-term commercial paper
borrowings, a hypothetical 10% increase to the interest rate would not have had
a material impact on the Company's consolidated financial statements.
For further disclosures about the Company's exposure to market risks, see
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," of the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1999.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litton brought suit against Honeywell, Inc. for patent infringement
relating to the manufacture of ring laser gyro navigation systems used in
commercial aircraft. In August 1993, the jury rendered a verdict in favor of
Litton that the District Court rejected in January 1995. In July 1996, the
Federal Circuit Court of Appeals reversed the District Court's decision,
reinstated parts of the jury's verdict related to liability in favor of Litton
and ordered a new trial on the amount of damages. In March 1997, the United
States Supreme Court vacated the Court of Appeals' ruling and remanded the case
to the Court of Appeals for further consideration. On April 7, 1998, the Court
of Appeals reinstated its finding that the patent was valid, however, it
remanded the case back to the District Court for a determination on both
liability and damages. In July 1999, the District Court heard motions for
summary judgment filed on behalf of Litton and Honeywell. On September 23, 1999,
the U.S. District Court granted Honeywell's motions rejecting the patent and
state law claims. On January 28, 2000, the District Court entered judgment on
behalf of Honeywell. On February 25, 2000, the Company filed its appeal to the
Federal Circuit Court of Appeals.
Litton also brought suit against Honeywell for illegal monopolization of
the market for inertial reference systems for large commercial air transport,
commuter and business aircraft. In February 1996, a jury rendered a verdict in
favor of Litton. The District Court upheld the jury's verdict on liability, but
declined to enter the jury's damage award on the basis that Litton's damages
study did not disaggregate damages among legal and illegal conduct. A new trial
limited to the amount of damages resulted in a jury verdict on December 9, 1998,
of $250 million in favor of Litton. On January 27, 1999, U.S. District Court
Judge Mariana R. Pfaelzer entered a final judgment against Honeywell of $250
million which, by law, is trebled to $750 million, plus post judgment interest
from the date of entry of judgment, costs and attorney fees. On May 20, 1999,
the court heard Honeywell's post trial motions. On September 23, 1999, the court
denied Honeywell's motions as they related to Litton Systems, Inc. but granted a
motion regarding Litton Systems Canada, holding it did not have standing or
jurisdiction to bring its claims in the United States. As a result of that
ruling, the judgment against Honeywell was reduced to $660 million plus
interest, attorney fees and costs. In late December 1999, the District Court
issued a supplemental judgment awarding Litton $35.6 million for attorneys' fees
and costs. On January 7, 2000, Honeywell filed a Notice of Appeal.
On November 12, 1999, a lawsuit was filed in the United States District
Court for the Eastern District of Louisiana entitled Harry L. Thompson, Jr. et
al. v. Avondale Industries, Inc., et al. challenging certain actions of Avondale
Industries, Inc. ("Avondale"), a wholly-owned subsidiary of the Company, certain
Avondale officers, and certain fiduciaries under the Avondale Employee Stock
Ownership Plan (the "ESOP"). The actions were taken in connection with the sale,
by the ESOP, of approximately 4,681,000 shares of Avondale common stock during
the period from 1996 to 1998, prior to the acquisition of Avondale by the
Company in August, 1999. The lawsuit alleges that one sale involving 1,100,000
shares violated the Securities Exchange Act of 1934 and that with respect to all
of such sales, the defendants also breached fiduciary duties owed to the ESOP
participants under the Employee Retirement Income Security Act of 1974
("ERISA"). On March 22, 2000, the District Court is scheduled to hear the
defendants' motion for dismissal.
15
<PAGE> 16
PART II. OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's 1999 Annual Meeting of Shareholders was held on December
3, 1999 in Marina del Rey, California.
Proxies for the meeting were solicited on behalf of the Board of Directors
of the Company. There was no solicitation in opposition to the Board of
Directors' nominees for election of directors as listed in the Company's
definitive Proxy Statement dated October 29, 1999. All of the nominees were
elected as follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- ---------- --------
<S> <C> <C>
Alton J. Brann................................ 41,274,064 336,090
Michael R. Brown.............................. 41,286,152 324,002
Joseph T. Casey............................... 41,269,286 340,868
Carol B. Hallett.............................. 41,272,171 337,983
Orion L. Hoch................................. 41,271,500 338,654
David E. Jeremiah............................. 41,266,606 343,548
John M. Leonis................................ 41,285,085 325,069
William P. Sommers............................ 41,268,390 341,764
C.B. Thornton, Jr............................. 41,288,037 322,117
</TABLE>
In addition to electing directors, the shareholders voted to ratify the
appointment of Deloitte & Touche LLP as independent auditors by the following
votes: 41,518,172 shares "for", 55,993 shares "against", and 35,989 shares
"abstained"; and approve the Shareholder Proposal Regarding Shareholder Rights
Plans by the following votes: 21,350,639 shares "for", 17,308,343 shares
"against", 193,106 shares "abstained" and 2,758,066 shares of "broker
non-votes."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
second quarter ended January 31, 2000.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTON INDUSTRIES, INC.
(Registrant)
By /s/ CAROL A. WIESNER
------------------------------------
Carol A. Wiesner
Vice President and Controller
(Chief Accounting Officer)
March 13, 2000
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JANUARY 31, 2000 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 58,476
<SECURITIES> 0
<RECEIVABLES> 897,621
<ALLOWANCES> 0
<INVENTORY> 768,654
<CURRENT-ASSETS> 2,204,466
<PP&E> 1,758,744
<DEPRECIATION> 960,705
<TOTAL-ASSETS> 4,967,467
<CURRENT-LIABILITIES> 1,883,573
<BONDS> 1,295,798
0
2,053
<COMMON> 45,552
<OTHER-SE> 1,337,624
<TOTAL-LIABILITY-AND-EQUITY> 4,967,467
<SALES> 2,719,793
<TOTAL-REVENUES> 2,719,793
<CGS> 2,176,214
<TOTAL-COSTS> 2,176,214
<OTHER-EXPENSES> 94,361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,875
<INCOME-PRETAX> 151,881
<INCOME-TAX> 62,271
<INCOME-CONTINUING> 89,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,777)
<NET-INCOME> 86,833
<EPS-BASIC> 1.90
<EPS-DILUTED> 1.87
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