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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 29549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to_____________________
Commission File Number 1-3229
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE No. 95-1055798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Century Park East, Los Angeles, California 90067
(address of principal executive offices)
(310) 553-6262
(Registrant's telephone number, including area code)
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 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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock outstanding as of October 25, 1996 57,728,291 shares
Northrop Grumman Corporation and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three months ended Nine months ended
September 30 September 30
$ in millions, except per share 1996 1995 1996 1995
Net Sales $2,043 $1,630 $5,789 $5,006
Cost of sales
Operating costs 1,606 1,269 4,563 3,928
Administrative and
general expenses 272 230 714 663
Operating margin 165 131 512 415
Other, net 17 5 40 7
Interest expense (69) (36) (197) (106)
Income before income taxes 113 100 355 316
Federal and foreign income taxes 43 39 138 122
Net income $ 70 $ 61 $ 217 $ 194
Weighted average shares outstanding,
in millions 57.7 49.4 52.8 49.3
Earnings per share $ 1.21 $ 1.25 $ 4.10 $ 3.93
Dividends per share $ .40 $ .40 $ 1.20 $ 1.20
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF FINANCIAL POSITION
September 30 December 31
$ in millions 1996 1995
Assets
Cash and cash equivalents $ 93 $ 18
Accounts receivable, net of progress payments
of $2,750 in 1996 and $2,426 in 1995 1,344 1,197
Inventoried costs, net of progress payments
of $591 in 1996 and $428 in 1995 1,114 771
Deferred income taxes 37 25
Prepaid expenses 94 61
Total current assets 2,682 2,072
Property, plant and equipment 3,324 2,900
Accumulated depreciation (1,785) (1,724)
1,539 1,176
Goodwill, net of accumulated
amortization of $121 in 1996 and $63 in 1995 3,409 1,403
Other purchased intangibles, net of
accumulated amortization of
$92 in 1996 and $36 in 1995 1,011 356
Deferred income taxes 438 99
Prepaid pension cost, intangible pension
and benefit trust fund 196 255
Investments in and advances to
affiliates and sundry assets 238 94
5,292 2,207
$ 9,513 $ 5,455
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Northrop Grumman Corporation and Subsidiaries
September 30 December 31
$ in millions 1996 1995
Liabilities and Shareholders' Equity
Notes payable to banks $ 245 $ 65
Current portion of long-term debt 188 144
Trade accounts payable 463 360
Accrued employees' compensation 366 203
Advances on contracts 185 98
Income taxes payable, including deferred
income taxes of $554 in 1996 and $471 in 1995 609 528
Other current liabilities 482 317
Total current liabilities 2,538 1,715
Long-term debt 3,101 1,163
Accrued retiree benefits 1,676 1,048
Other long-term obligations 66 39
Deferred income taxes 21 31
Paid-in capital
Preferred stock, 10,000,000 shares
authorized and none issued
Common stock, 200,000,000 shares
authorized; issued and outstanding:
1996 --57,728,291; 1995 -- 49,462,615, 770 272
Retained earnings 1,353 1,199
Unfunded pension losses, net of taxes (12) (12)
2,111 1,459
$9,513 $5,455
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
Nine months ended September 30
$ in millions 1996 1995
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 1,652 $1,708
Other collections 4,109 3,195
Income tax refunds received 12 7
Interest received 8
Other cash receipts 5 10
Cash provided by operating activities 5,786 4,920
Uses of Cash
Cash paid to suppliers and employees 5,021 4,460
Interest paid 156 102
Income taxes paid 62 48
Other cash payments 3
Cash used in operating activities 5,239 4,613
Net cash provided by operating activities 547 307
Investing Activities
Payment for purchase of Westinghouse ESG,
net of cash acquired (2,886)
Additions to property, plant and equipment (122) (97)
Proceeds from sale of property, plant and equipment 24 31
Proceeds from sale of affiliates 18 29
Funding of retiree benefit trust (25)
Other investing activities 19 (20)
Net cash used in investing activities (2,972) (57)
Financing Activities
Borrowings under lines of credit 2,613 150
Repayment of borrowings under lines of credit (616) (259)
Proceeds from issuance of long-term debt 1,000
Principal payments of long-term debt (832) (70)
Proceeds from issuance of stock 498 3
Dividends paid (63) (59)
Other financing activities (100)
Net cash provided by(used in) financing activities 2,500 (235)
Increase in cash and cash equivalents 75 15
Cash and cash equivalents balance at
beginning of period 18 17
Cash and cash equivalents balance at end of period $ 93 $ 32
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Northrop Grumman Corporation and Subsidiaries
Nine months ended September 30
$ in millions 1996 1995
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 217 $ 194
Adjustments to reconcile net income
to net cash provided
Depreciation 157 165
Amortization of intangible assets 116 43
Write-off of intangible asset 14
Loss(gain) on disposals of property,
plant and equipment 5 (6)
Noncash retiree benefits (107) (43)
Decrease(increase) in
Accounts receivable 1 244
Inventoried costs (41) 200
Prepaid expenses (90) 135
Refundable income taxes 43
Increase(decrease) in
Progress payments (30) (323)
Accounts payable and accruals 224 (273)
Provisions for contract losses (33) (132)
Income taxes 115 63
Other transactions (1) (3)
Net cash provided by operating activities $ 547 $ 307
Noncash Investing and Financing Activities
Purchase of Westinghouse ESG
Fair value of assets acquired $3,948
Cash paid 2,890
Liabilities assumed $1,058
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30
$ in millions 1996 1995
Paid-in Capital
At beginning of year $ 272 $ 265
Stock issuance 493
Employee stock awards and options exercised,
net of forfeitures 5 4
$ 770 $ 269
Retained Earnings
At beginning of year $1,199 $1,026
Net income 217 194
Cash dividends (63) (59)
$1,353 $1,161
Unvested Employee Restricted Award Shares $ $ (1)
Unfunded Pension Losses, Net of Taxes $ (12) $
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Northrop Grumman Corporation and Subsidiaries
SELECTED INDUSTRY SEGMENT INFORMATION
Three months ended Nine months ended
September 30 September 30
$ in millions, except per share 1996 1995 1996 1995
Net Sales
Military and Commercial Aircraft $1,058 $1,187 $ 3,119 $ 3,595
Electronics 1,060 520 2,888 1,627
Intersegment sales (75) (77) (218) (216)
$2,043 $1,630 $ 5,789 $ 5,006
Operating Profit
Military and Commercial Aircraft $ 161 $ 132 $ 374 $ 359
Electronics 25 42 183 119
Total operating profit 186 174 557 478
Adjustments to reconcile
operating profit to operating margin:
Other income included above (8) (1) (9) (1)
State and local income taxes (5) (13) (24) (27)
General corporate expenses (31) (21) (90) (78)
Mark to market restricted stock rights (11) (11)
Retiree benefit cost included
in contract costs 40 11 112 100
Retiree benefit cost (6) (19) (23) (57)
Operating margin $ 165 $ 131 $ 512 $ 415
Contract Acquisitions
Military and Commercial Aircraft $ 734 $ 893 $2,612 $ 1,528
Electronics 605 697 5,206 2,315
Intersegment acquisitions (70) (61) (232) (198)
$1,269 $1,529 $ 7,586 $ 3,645
Funded Order Backlog
Military and Commercial Aircraft $ 6,894 $ 7,596
Electronics 5,678 3,254
Intersegment backlog (54) (38)
$12,518 $10,812
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Northrop Grumman Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared by management in accordance with the instructions
to Form 10-Q of the Securities and Exchange Commission. They do not
include all information and notes necessary for a complete
presentation of financial position, results of operations, changes in
shareholders' equity, and cash flows in conformity with generally
accepted accounting principles. They do, however, in the opinion of
management, include all adjustments (all of which were normal
recurring accruals) necessary for a fair statement of the results for
the periods presented. The financial statements should be read in
conjunction with the Notes and Independent Auditors' Report contained
in the company's 1995 Annual Report.
Acquisition
On March 1, 1996 the company purchased substantially all of the
defense and electronics systems business of Westinghouse Electric
Corporation at a cost of $2.9 billion and financed the transaction
with new borrowings. The purchase method of accounting was used to
record the transaction with fair values being assigned to the assets
acquired and liabilities assumed. The excess of the purchase price
over the tangible net assets acquired was first assigned to
identifiable intangible assets and the balance to goodwill with
amortization on a straight-line basis over weighted average periods of
11 years and 40 years, respectively.
The business acquired is being operated as a division of the
company and has been designated the Electronic Sensors and Systems
Division (ESSD). Financial data of ESSD have been consolidated with
Northrop Grumman effective March 1, 1996. The following unaudited pro
forma financial information combines Northrop Grumman's and ESSD's
results of operations as if the acquisition had taken place on January
1, 1995, and is not necessarily indicative of future operating results
for Northrop Grumman.
Three months ended Nine months ended
September 30 September 30
$ in millions, except per share 1996 1995 1996 1995
Sales $2,043 $2,178 $6,036 $6,591
Net Income 70 3 197 80
Earnings per share 1.21 .06 3.72 1.62
Inventoried Costs
The company's inventoried costs consist primarily of work in process
related to long-term contracts with customers.
Goodwill and Other Purchased Intangibles
Goodwill and other purchased intangible assets are amortized over
periods of 40 years and a weighted average of 15 years,
respectively. Goodwill and other purchased intangibles balances are
included in the identifiable assets of the industry segment to which
they have been assigned and amortization is charged against the
respective industry segment operating profit. The recoverability of
goodwill and other purchased intangibles is evaluated at least
annually considering the projected future profitability and cash flow
at the operations to which they relate. When it is determined that an
impairment has occurred, an appropriate charge to operations is
recorded.
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Northrop Grumman Corporation and Subsidiaries
Long-Term Debt
During the first quarter of 1996 the company sold to institutional
investors $400 million of 7 percent notes due 2006, $300 million of 7
3/4 percent debentures due 2016 and $300 million of 7 7/8 percent
debentures due 2026. The proceeds from this issuance were used to
finance a portion of the purchase price of ESSD. The debt indenture
contains restrictions relating to limitations on liens, sale and
leaseback arrangements and funded debt of subsidiaries.
To finance the balance of the purchase price of ESSD the company
amended its Credit Agreement with a group of domestic and foreign banks
to provide for three credit facilities: $1.8 billion available on a
revolving credit basis through March 2002; a variable interest rate
$500 million two-year term loan due March 1, 1998, which was repaid in
July, 1996; and a variable interest rate $1.5 billion six-year term
loan due in 24 quarterly installments of $62.5 million plus interest
beginning June 1996. At September 30, 1996, a total of $1.7 billion
was outstanding under these facilities. Effective November 1, 1996,
the Credit Agreement was further amended to reduce the $1.5 billion
term loan to $1.05 billion payable in 21 quarterly installments of $50
million plus interest beginning March 1, 1997.
The company will pay a facility fee and, at least quarterly,
interest on the outstanding debt under the Credit Agreement at rates
which vary based in part on the company's credit rating and leverage
ratio. In the event of a change in control, as defined, the banks are
relieved of their commitments. Compensating balances are not required.
The credit agreement contains restrictions relating to the payment
of dividends, acquisition of the company's stock, aggregate
indebtedness for borrowed money and interest coverage.
Common Stock
In June 1996 the company, in a public offering, issued approximately 8
million shares of common stock at $63.25 per share. The net proceeds
of $493 million were used to pay down outstanding debt under the
company's Credit Agreement.
Contingencies
In accordance with company policy on environmental remediation, the
estimated cost to complete remediation has been accrued where it is
probable that the company will incur such costs in the future,
including those for which it has been named a Potentially Responsible
Party by the Environmental Protection Agency or similarly designated by
other environmental agencies. To assess the potential impact on the
company's financial statements, management estimates the total
reasonably possible remediation costs that could be incurred by the
company, taking into account currently available facts on each site as
well as the current state of technology and prior experience in
remediation of contaminated sites. These estimates are reviewed
periodically and adjusted to reflect changes in facts and technical and
legal circumstances. Management estimates that at September 30, 1996,
the reasonable range of future costs for environmental remediation,
including those acquired in the purchase of the defense and electronics
systems business of Westinghouse Electric Corporation, is $45 million
to $65 million, of which $53 million has been accrued. While
management cannot predict whether new information gained as projects
progress will materially affect the estimated liability accrued,
management does not anticipate that future remediation expenditures
will have a material adverse effect on the company's results of
operations or financial position.
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Northrop Grumman Corporation and Subsidiaries
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S
FINANCIAL CONDITION AND THE RESULTS OF ITS OPERATIONS.
During the first quarter of 1996, Northrop Grumman acquired the defense
and electronics systems business of Westinghouse Electric Corporation.
The business acquired is being operated as a division of the company
and has been designated the Electronic Sensors and Systems Division
(ESSD). Northrop Grumman results for 1996 include ESSD operations from
March 1, 1996, the date of acquisition. Results for 1995 do not
include ESSD data.
The reporting of industry segment data has been realigned based
upon the company's current mix of products. Operating results for
those programs formerly reported in the missiles and unmanned vehicles
segment and aircraft services programs previously included in the data
systems and other services segment (DSOS) are now included in the
military and commercial aircraft segment (MCA). The balance of the
programs previously included in DSOS and all of the operations of ESSD
are included in the electronics industry segment. Data for comparable
prior periods has been restated.
Sales for the third quarter of 1996 were 25 percent higher than
last year's third quarter. Sales rose 16 percent in the first nine
months versus the comparable period of 1995.
MCA industry segment sales decreased in the third quarter and
first nine months of 1996 versus comparable periods of 1995 primarily
as a result of decreased volume on the B-2 bomber and F/A-18 strike
fighter programs. Lower volume on the company's other military
programs also contributed to the decrease in sales for the first nine
months of 1996 versus the comparable period of 1995.
Electronics industry segment sales for the third quarter and first
nine months of 1996 increased over the same periods a year ago as a
result of including the post acquisition sales added by ESSD, which
more than offset the revenue declines in the other programs in this
segment.
Sales by major program/business area and units delivered were as
shown in the following table. The Airborne Radar, Marine, Space and
Airspace Management program areas were acquired as part of ESSD. The
balance of sales for ESSD are included in the "All Other" category.
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Northrop Grumman Corporation and Subsidiaries
Three months Nine months
September 30 September 30
$ in millions 1996 1995 1996 1995
B-2 $ 383 $ 478 $1,271 $1,452
Surveillance Aircraft
(E-8 Joint STARS, E-2) 250 265 811 793
F/A-18 185 228 521 622
Boeing Jetliners 160 124 421 421
Airborne Radar 172 388
ECM 87 87 286 240
Marine 140 311
C-17 73 56 194 195
Space 97 214
Airspace Management 58 171
Data Systems 49 35 138 139
All Other 389 357 1,063 1,144
$2,043 $1,630 $5,789 $5,006
Three months Nine months
Units 1996 1995 1996 1995
F/A-18 C/D 17 16 49 39
747 9 5 21 18
F/A-18 E/F 2 3 5
C-17 2 3 5 5
B-2 1 1 4 3
The amount of operating profit increased in the third quarter and
first nine months of 1996 as compared to the same periods of 1995.
Third quarter operating profit included the disposition of three claims
stemming from work performed in the 1980's. The MCA segment benefited
$31 million from the settlement of two claims involving productivity
improvements on the F/A-18 and contractual issues related to support
services on the TA-4J aircraft. The Electronics industry segment
operating profit was reduced by $29 million as a result of the
writedown of a claim related to avionics work performed by the former
Grumman Corporation prior to its acquisition by Northrop.
The third quarter 1996 MCA segment operating profit also benefited
from cumulative margin rate adjustments made on several Boeing jetliner
programs, which resulted in a net $7 million operating margin increase.
These adjustments reflected continued improvement in operating
performance of these programs. The MCA segment operating profit for
the first nine months of 1996 increased versus 1995 as a result of the
$31 million from claim settlements and higher operating margin on the C-
17 military transport aircraft and commercial aerostructures programs.
These increases more than offset lower overall operating margin on the
B-2 Bomber, due to lower sales volume, and a $25 million charge
recorded in the first quarter of 1996 related to the company's work for
Fokker Aircraft N.V., which declared bankruptcy last March. This
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Northrop Grumman Corporation and Subsidiaries
year's first nine months also benefited from the delivery of four
B-2 bombers versus three in the first three quarters of 1995. The MCA
segment third quarter and first nine months of 1996 were also impacted
by $7 million and $21 million respectively in expenditures for ongoing
company-sponsored research and development on commercial aerostructures,
as compared to $15 million and $23 million for the comparable periods of
1995. Electronics industry segment operating profit for the third quarter
was reduced by $9 million as a result of a cumulative downward margin rate
adjustment related to the inspection and replacement of incorrect rivets
installed on E-8 Joint STARS aircraft. The reductions in operating profit
for the third quarter and first nine months of 1996 as compared to the same
periods in 1995 were partially offset by the inclusion of ESSD operations.
Operating margin for the third quarter and first nine months of
1996 included an increase in retiree benefit income, which was
partially offset by a charge in the third quarter of 1996 for a mark to
market adjustment related to restricted employee stock rights.
Other income for the third quarter and first nine months included
gains of $6 million and $18 million, respectively, from the sales of a
portion of an equity investment in a manufacturer of high technology
equipment.
Interest expense for the third quarter of 1996 was $33 million
higher than the corresponding quarter of 1995. Interest expense for
the first nine months of 1996 was $91 million higher than the first
three quarters of 1995. These increases resulted from the higher
average level of borrowings due to new borrowings required for the ESSD
acquisition.
In June 1996 the company issued approximately 8 million shares of
common stock in a public offering. The $493 million in net proceeds
from the issuance were used to pay down long-term debt. During the
first nine months $547 million of cash was generated from operations
versus $307 million in the first nine months of 1995 and was more than
sufficient to finance capital expenditures and dividends. The
company's liquidity and financial flexibility is expected to continue
to be provided by the cash flow generated from operating activities,
which for the balance of this year is not expected to continue at the
level achieved in the first nine months, supplemented by unused
borrowing capacity under the company's credit agreement and other short
term credit facilities.
Forward-Looking Information
Certain statements or assumptions in Management's Discussion and
Analysis contain or are based on "forward-looking" information (as
defined in the Private Securities Litigation and Reform Act of 1995)
that involve risk and uncertainties, including the availability of
future cash flow. The company's operations are necessarily subject to
various risks and uncertainties, actual outcomes are dependent upon the
company's successful performance of internal plans, government
customers' budgetary restraints, customer changes in short range and
long range plans, domestic and international competition in both the
defense and commercial areas, product performance, continued
development and acceptance of new products, performance issues with key
suppliers and subcontractors, government import and export policies,
termination of government contracts, political processes, legal,
financial and governmental risks related to international transactions
and global needs for military and commercial aircraft and electronic
systems and support, as well as other economic, political and
technological risks and uncertainties.
I-12
Northrop Grumman Corporation and Subsidiaries
Part II OTHER INFORMATION
Item 1. Legal Proceedings
In the second quarter of 1996, a Federal jury returned a verdict
for the company with respect to the remaining issues in the litigation
entitled U.S. ex rel David Peterson and Jeff Kroll v. Northrop
Corporation which is described in the company's Annual Report on Form
10-K for 1995, as supplemented in the company's Form 10-Q for the
quarterly periods ended March 31, 1996 and June 30, 1996. The
government's motion for a new trial filed on May 30, 1996, was denied
on August 16, 1996. A notice of appeal was filed by the government on
October 10, 1996.
II-1
Northrop Grumman Corporation and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Amendment No. 1 dated as of November 1, 1996, to
Second Amended and Restated Credit Agreement dated as of
April 15, 1994, Amended and Restated as of March 1, 1996.
Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 1996.
II-2
Northrop Grumman Corporation and Subsidiaries
SIGNATURES
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.
Northrop Grumman Corporation (Registrant)
Date: November 1, 1996 by/s/N. F. Gibbs
Nelson F. Gibbs
Corporate Vice President and Controller
Date: November 1, 1996 by/s/James C. Johnson
James C. Johnson
Corporate Vice President and Secretary
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Northrop Grumman Corporation and Subsidiaries
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share)
Three months ended Nine months ended
September 30 September 30
Primary: 1996 1995 1996 1995
Average shares outstanding 57,715 49,399 52,755 49,339
Common stock equivalents 1,472 1,265 1,370 1,052
Totals 59,187 50,664 54,125 50,391
Net income $69,751 $61,606 $216,540 $194,136
Earnings per share(1) $ 1.18 $ 1.22 $ 4.00 $ 3.85
Fully diluted:
Average shares outstanding 57,715 49,399 52,755 49,339
Common stock equivalents 1,640 1,322 1,640 1,322
Totals 59,355 50,721 54,395 50,661
Net income $69,751 $61,606 $216,540 $194,136
Earnings per share(1) $ 1.18 $ 1.21 $ 3.98 $ 3.83
(1) This calculation was made in compliance with Item 601 of
Regulation S-K. Earnings per share presented elsewhere in this
report exclude from their calculation shares issuable under
employee stock options and rights, since their dilutive effect
is less than 3%.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 93
<SECURITIES> 0
<RECEIVABLES> 1,438
<ALLOWANCES> 94
<INVENTORY> 1,114
<CURRENT-ASSETS> 2,682
<PP&E> 3,324
<DEPRECIATION> 1,785
<TOTAL-ASSETS> 9,513
<CURRENT-LIABILITIES> 2,538
<BONDS> 3,101
0
0
<COMMON> 770
<OTHER-SE> 1,341
<TOTAL-LIABILITY-AND-EQUITY> 9,513
<SALES> 5,789
<TOTAL-REVENUES> 5,789
<CGS> 5,277
<TOTAL-COSTS> 5,277
<OTHER-EXPENSES> (40)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> 355
<INCOME-TAX> 138
<INCOME-CONTINUING> 217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 4.10
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</TABLE>
Amendment No. 1
EXECUTION COPY
NORTHROP GRUMMAN CORPORATION
_________________
AMENDMENT NO. 1
Dated as of November 1, 1996
to
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of April 15, 1994
Amended and Restated as of March 1, 1996
_________________
CHASE SECURITIES INC.,
as Arranger
THE CHASE MANHATTAN BANK,
as Administrative Agent
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
as Syndication Agent
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Documentation Agent
AMENDMENT NO. 1
AMENDMENT NO. 1 dated as of November 1, 1996, between
NORTHROP GRUMMAN CORPORATION, a corporation duly organized and
validly existing under the laws of the State of Delaware (the
"Company"); each of the lenders that is a signatory hereto
(individually, a "Bank" and, collectively, the "Banks"); THE
CHASE MANHATTAN BANK, as Swingline Bank; and THE CHASE MANHATTAN
BANK, as agent for the Banks (in such capacity, together with its
successors in such capacity, the "Administrative Agent").
The Company, the Banks, and certain other banks listed
on Schedule II hereto (hereinafter the "Non-Continuing Banks")
and the Administrative Agent are parties to a Second Amended and
Restated Credit Agreement dated as of April 15, 1994 amended and
restated as of March 1, 1996 (as heretofore modified and
supplemented and in effect on the date hereof, the "Credit
Agreement"), providing, subject to the terms and conditions
thereof, for loans to be made by said Banks to the Company in an
aggregate principal amount not exceeding $3,800,000,000. The
Company, the Banks and the Administrative Agent wish to amend the
Credit Agreement in certain respects, and accordingly, the
parties hereto hereby agree as follows:
Section 1. Definitions. Except as otherwise defined
in this Amendment No. 1, terms defined in the Credit Agreement
are used herein as defined therein.
Section 2. Amendments. Subject to the satisfaction of
the conditions precedent specified in Section 4 below, but
effective as of the date hereof, the Credit Agreement shall be
amended as follows:
2.01. References in the Credit Agreement to "this
Agreement" (and indirect references such as "hereunder",
"hereby", "herein" and "hereof") shall be deemed to be references
to the Credit Agreement as amended hereby.
2.02. Section 1.01 of the Credit Agreement is amended
by amending and (to the extent not already included in said
Section 1.01) adding the following definitions and inserting the
same in the appropriate alphabetical locations:
"'Amendment No. 1' shall mean the Amendment No. 1 dated
as of November 1, 1996 to this Agreement among the Company, the
Banks party thereto and the Administrative Agent.
"'Amendment No. 1 Effective Date' shall mean the date
on which Amendment No. 1 became effective.
"'Applicable Facility Fee Rate' and 'Applicable Margin'
shall mean, during any period when the Rating is in one of
the Rating Groups specified below, the percentage set forth
below opposite the reference to such fee or to the relevant
Class and Type of Syndicated Loan:
REVOLVING CREDIT LOANS
Rating Rating Rating Rating
Group Group Group Group
Fee or Loan I II III IV
Applicable
Facility Fee .10% .125% .15% .25%
Rate
Applicable
Margin for .20% .25% .30% .50%
Eurodollar
Loans
Applicable
Margin for 0% 0% 0% 0%
Base Rate
Loans
TERM LOANS
Rating Rating Rating Rating
Group Group Group Group
Fee or Loan I II III IV
Applicable
Margin for .30% .375% .45% .75%
Eurodollar
Loans
Applicable
Margin for 0% 0% 0% 0%
Base Rate
Loans
Any change in the Applicable Facility Fee Rate or in the
Applicable Margin by reason of a change in the Moody's
Rating or the S&P Rating shall become effective on the date
of announcement or publication by the respective Rating
Agency of a change in such Rating or, in the absence of such
announcement or publication, on the effective date of such
changed Rating."
"'Facility' shall mean the Revolving Credit Facility."
"'Majority Banks' shall mean Banks holding more than
50% of the aggregate amount of (a) the Revolving Credit
Commitments or, if the Revolving Credit Commitments shall
have terminated, the sum of (i) the aggregate unpaid
principal amount of the Revolving Loans plus (ii) the
aggregate unpaid principal amount of the Competitive Bid
Loans plus (b) the aggregate principal amount of the
Series II Term Loans."
"Mandatory Prepayment Period" shall mean any period
during which one or more of the following conditions is
satisfied: (a) the Leverage Ratio is greater than 50%; or
(b) an Investment Grade Rating Period does not exist.
"'Rating' shall mean a Moody's Rating or an S&P
Rating."
"'Rating Agency' shall mean Moody's or S&P."
"'Rating Group' shall mean any of Rating Group I,
Rating Group II, Rating Group III and Rating Group IV."
"'Rating Group I' shall mean (a) no Event of Default
has occurred and is continuing and (b) the Moody's Rating is
at or above Baa1 (or a Substitute Rating is at the
corresponding rating level or higher) or the S&P Rating is
at or above BBB+ (or a Substitute Rating is at the
corresponding rating level or higher); "Rating Group II"
shall mean (a) no Event of Default has occurred and is
continuing, (b) the Moody's Rating is at or above Baa2 (or a
Substitute Rating is at the corresponding rating level or
higher) or the S&P Rating is at or above BBB (or a Substi
tute Rating is at the corresponding rating level or higher)
and (c) Rating Group I is not in effect; "Rating Group III"
shall mean (a) no Event of Default has occurred and is
continuing, (b) the Moody's Rating is at or above Baa3 (or a
Substitute Rating is at the corresponding rating level or
higher) or the S&P Rating is at or above BBB- (or a
Substitute Rating is at the corresponding rating level or
higher) and (c) neither Rating Group I nor Rating Group II
is in effect; and "Rating Group IV" shall mean none of
Rating Group I, Rating Group II or Rating Group III is in
effect; provided that, (A) if the Moody's Rating and the S&P
Rating (or, in either case, a Substitute Rating) shall be at
different Rating levels and one of such Ratings is no more
than one Rating level lower than the other of such Ratings,
then the applicable Rating Group shall be based upon the
higher of such Ratings and (B) if the Moody's Rating and the
S&P Rating (or, in either case, a Substitute Rating) shall
be at different Rating levels and one of such Ratings is two
or more Rating levels lower than the other of such Ratings,
then the applicable Rating Group shall be based upon a
Rating that is one level lower than the higher of such
Ratings."
"'Revolving Credit Banks' shall mean (a) on the
Amendment No. 1 Effective Date, the Banks having Revolving
Credit Commitments as set forth in Schedule I hereto and
(b) thereafter, the Banks from time to time holding
Revolving Loans and/or Revolving Credit Commitments after
giving effect to any assignments thereof permitted by
Section 11.06 hereof."
"'Series II Principal Payment Date' shall mean each
Quarterly Date in each year, commencing with the second such
Quarterly Date following the Amendment No. 1 Effective Date
through and including the Series II Term Loan Final Maturity
Date."
"'Series II Term Loan Banks' shall mean (a) on the
Amendment No. 1 Effective Date, the Banks having Series II
Term Loans as set forth in Schedule I hereto and
(b) thereafter, the Banks from time to time holding
Series II Term Loans after giving effect to any assignments
thereof permitted by Section 11.06 hereof."
"'Term Loan Banks' shall mean the Series II Term Loan
Banks."
"'Term Loans' shall mean the Series II Term Loans."
2.03. Clause (i) of the fourth sentence of the
definition of "Interest Period" is amended to read in its
entirety as follows:
"(i) no Interest Period for any Revolving Loan may end after
the Revolving Commitment Termination Date;".
2.04. The definitions of "Equity Issuance", "Excess
Cash Flow", "Principal Office", "Rating Level 1", "Rating
Level 2", "Series I Term Loans", "Series I Term Loan Banks",
"Series I Term Loan Commitment", "Series I Term Loan Facility",
"Series I Term Loan Final Maturity Date", "Series II Term Loan
Commitment", "Series II Term Loan Facility" and "Term Loan
Commitments" in Section 1.01 of the Credit Agreement are deleted
in their entirety.
2.05. The second sentence of Section 1.03 is amended
to delete the following: "a Series I Term Loan,".
2.06. Section 2.01 is amended to read in its entirety
as follows:
"2.01 Syndicated Loans. Subject to and upon the terms
and conditions herein set forth, each Bank severally agrees
(i) to make Revolving Loans (together with the Series II
Term Loans, the "Syndicated Loans" and each a "Syndicated
Loan") to the Company in Dollars up to such Bank's
Commitment under the Revolving Credit Facility and (ii) to
effect a prepayment and reallocation of, and thereafter to
maintain, its Series II Term Loans, all as set forth below:
(a) [Intentionally omitted].
(b) Series II Term Loans. Subject to the terms
and conditions of this Agreement and Amendment No. 1, Series
II Term Loans shall be prepaid and reallocated pursuant to
Section 4.03(a) of Amendment No. 1 and thereafter may, at
the option of the Company, be maintained as, and/or
Converted into, Base Rate Loans or Eurodollar Loans.
(c) Revolving Loans. Syndicated Loans under the
Revolving Credit Facility shall be available at any time and
from time to time from and after the Amendment Effective
Date to and including the Revolving Commitment Termination
Date. Subject to the terms and conditions of this
Agreement, during such period, Revolving Loans may be
borrowed, repaid and reborrowed and may, at the option of
the Company, be borrowed and maintained as, and/or Converted
into, Base Rate Loans or Eurodollar Loans. Notwithstanding
the foregoing, no Revolving Loan shall be made if the sum of
(i) such Revolving Loan (together with all other Revolving
Loans and Competitive Bid Loans to be made on the same day
as such Revolving Loan) plus (ii) the aggregate principal
amount of all outstanding Competitive Bid Loans plus
(iii) the aggregate principal amount of all outstanding
Revolving Loans plus (iv) the aggregate principal amount of
all outstanding Swingline Loans exceeds the aggregate amount
of the Revolving Credit Commitments at such time."
2.07. The second sentence of Section 2.02(a) of the
Credit Agreement is amended to read in its entirety as follows:
"Not later than 1:00 p.m. New York time on the date
specified for each Syndicated Loan borrowing hereunder, each
Bank shall make available the amount of the Syndicated Loan
to be made by it on such date to the Administrative Agent,
at an account in New York designated by the Administrative
Agent, in immediately available funds, for account of the
Company."
2.08. Subsection (f) of Section 2.03 of the Credit
Agreement is amended to read in its entirety as follows:
"(f) Any Bank whose offer to make any Competitive Bid
Loan has been accepted shall, not later than 1:00 p.m. New
York time on the date specified for the making of such Loan,
make the amount of such Loan available to the Administrative
Agent at an account in New York designated by the
Administrative Agent in immediately available funds. The
amount so received by the Administrative Agent shall,
subject to the terms and conditions of this Agreement, be
made available to the Company on such date by depositing the
same, in immediately available funds, in an account
designated by the Company."
2.09. Subsection (b) of Section 2.04 is amended to
read in its entirety as follows:
"(b) Termination of Commitments. The Revolving
Credit Commitments and the Swingline Commitment shall
terminate on the Revolving Commitment Termination Date."
2.10. Subsection (a) of Section 2.08 is amended to
read in its entirety as follows:
(a) The Syndicated Loans made by each Bank shall
be evidenced (i) if Series II Term Loans, by a single
promissory note of the Company in substantially the form of
Exhibit A-2 hereto, dated the Restatement Date, payable to
such Bank in a principal amount equal to its Series II Term
Loan and otherwise duly completed (each a "Series II Term
Note", collectively the "Series II Term Notes" or the "Term
Notes") and (ii) if Revolving Loans, by a single promissory
note of the Company substantially in the form of Exhibit A-3
hereto, dated the Restatement Date, payable to such Bank in
a principal amount equal to its Revolving Credit Commitment
and otherwise duly completed (each a "Revolving Note" and
collectively the "Revolving Notes"). The date, amount, Type
and interest rate of each Series II Term Loan and each
Revolving Loan made by each Bank, and all payments made on
account of the principal thereof, shall be recorded by such
Bank on its books and, prior to any transfer of the Note
evidencing the same, endorsed by such Bank on the schedule
attached to such Note or any continuation thereof; provided
that the failure by such Bank to make such recordation or
endorsement shall not relieve the Company of any of its
obligations hereunder or under such Note.
2.11. Section 2.09 is amended to delete the word
"first" and the following phrase: "and second to the aggregate
outstanding principal amount of the Series I Term Loans".
2.12. Subsections (a), (b) and (e) of Section 2.10 of
the Credit Agreement are each amended to read in their entirety
as follows: "[Intentionally omitted]."
2.13. Subsection (c) of Section 2.10 of the Credit
Agreement is amended to read in its entirety as follows:
"(c) Sale of Assets. Without limiting the
obligation of the Company to obtain the consent of the
Majority Banks pursuant to Section 8.09 hereof to any
Disposition not otherwise permitted under Section 8.09
hereof, in the event that the Net Available Proceeds of any
individual Disposition made after the Amendment Effective
Date while a Mandatory Prepayment Period is in effect (or
if, after giving effect to any such Disposition, a Mandatory
Prepayment Period would exist) (herein, the "Current
Disposition") exceeds $5,000,000 and, together with the Net
Available Proceeds that individually exceed $5,000,000 of
each prior Disposition as to which a prepayment has not yet
been made under this Section 2.10(c), shall in the aggregate
exceed $50,000,000 then, (i) at the time the Company gives
notice to the Administrative Agent pursuant to Section 4.07
of the prepayment to be made pursuant to this Section
2.10(c), the Company will deliver to the Administrative
Agent a statement, certified by a senior financial officer
of the Company, in form and detail satisfactory to the
Administrative Agent, of the aggregate amount of the Net
Available Proceeds of such Current Disposition and prior
Dispositions and (ii) the Company shall prepay the Term
Loans in an aggregate amount equal to 100% of the Net
Available Proceeds received for such Current Disposition and
such prior Dispositions (except that Net Available Proceeds
consisting of Permitted Buyer Indebtedness need not be
applied to such prepayment until the earlier of any payment
or Disposition of such Permitted Buyer Indebtedness and then
only to the extent of such payment or the Net Available
Proceeds of such Disposition), such prepayment to be
effected as provided in paragraph (f) of this Section 2.10.
2.14. Subsections (i) and (ii) of Section 2.10(f)
shall be amended to read in their entirety as follows:
"(i) Prepayments of Term Loans described in
paragraph (d) of this Section 2.10 shall be applied to
the then remaining installments of the Series II Term
Loans ratably.
(ii) Prepayments of Term Loans described in
paragraph (c) of this Section 2.10 shall be applied (A)
to the extent that any such prepayment, together with
all such prepayments theretofore made in any fiscal
year after the Amendment No. 1 Amendment Effective
Date, does not exceed $100,000,000, to the then
remaining installments of the Series II Term Loans in
direct order of their maturities and (B) thereafter to
the then remaining installments of the Series II Term
Loans ratably."
2.15. The second sentence of Section 2.11(b) of the
Credit Agreement is amended to read in its entirety as follows:
"Not later than 3:00 p.m. New York time, on the date
specified in each Swingline Borrowing Notice hereunder, the
Swingline Bank shall, subject to the terms of this
Agreement, make the amount of the Swingline Loan to be made
by it on such date available to the Administrative Agent at
an account in New York designated by the Administrative
Agent in immediately available funds, for account of the
Company."
2.16. Subsection (c) of Section 3.01 of the Credit
Agreement is amended to read in its entirety as follows:
"[Intentionally omitted]".
2.17. Subsection (d) of Section 3.01 of the Credit
Agreement is amended to read in its entirety as follows:
"(d) The Company hereby promises to pay to the
Administrative Agent for account of the Banks the aggregate
principal amount of the Series II Term Loans outstanding on
the Amendment No. 1 Effective Date in 21 equal consecutive
quarterly installments payable on the Series II Principal
Payment Dates."
2.18. The first sentence of Section 4.01 of the Credit
Agreement is amended to read in its entirety as follows:
"Except to the extent otherwise provided herein, all
payments of principal, interest and other amounts to be made
by the Company under this Agreement and the Notes shall be
made in Dollars, in immediately available funds, to the
Administrative Agent at an account in New York designated by
the Administrative Agent, not later than 1:00 p.m. New York
time on the date on which such payment shall become due
(each such payment made after such time on such due date to
be deemed to have been made on the next succeeding Business
Day)."
2.19. Subsection (b) of Section 4.02 is amended to
read in its entirety as follows:
"(b) the making, Conversion and Continuation of Revolving
Loans, and the Conversion and Continuation of Series II Term
Loans, of a particular Type (other than Conversions provided
for by Section 5.04 hereof) shall be made pro rata among the
relevant Banks according to the amounts of their respective
Revolving Credit Commitments (in the case of making of
Loans) or their respective Revolving Credit and Series II
Term Loans (in the case of Conversions and Continuations of
Loans);
2.20. Subsection (c) of Section 8.01 of the Credit
Agreement is amended to read in its entirety as follows:
"(c) with each of the financial statements required to
be delivered under Section 8.01(a) or 8.01(b) hereof, a
certificate of an authorized financial or accounting officer
of the Company, in form and substance satisfactory to the
Administrative Agent setting forth (i) the Net Available
Proceeds of each Disposition in excess of $5,000,000 that
has occurred in the fiscal period to which such financial
statements relate and (ii) the aggregate amount of Net
Available Proceeds for each other Disposition in excess of
$5,000,000 that has occurred in prior fiscal periods and for
which no prepayment has been made pursuant to
Section 2.10(c) hereof;".
2.21. Clause (i) of Section 8.09(d) of the Credit
Agreement is amended to read in its entirety as follows:
"[Intentionally omitted];".
2.22. Section 8.19 of the Credit Agreement is amended
to read in its entirety as follows: "[Intentionally omitted]."
2.23. The first sentence of Section 10.09 of the
Credit Agreement is amended to read in its entirety as follows:
"The Documentation Agent, the Syndication Agent and the
Arranger identified on the cover page of this Agreement, or
on the cover page of any amendment hereto, shall have no
duties or responsibilities hereunder other than, in the case
of the Documentation Agent and the Syndication Agent, as
Banks hereunder."
2.24. Schedule I of the Credit Agreement is amended to
read in its entirety as Schedule I hereto.
2.25. Exhibit A-1 is amended to read in its entirety
as follows: "[Intentionally omitted]."
Section 3. Representations and Warranties. The
Company represents and warrants to the Banks that (i) the
representations and warranties set forth in Section 7 of the
Credit Agreement are true and complete on the date hereof as if
made on and as of the date hereof (or, if any such representation
or warranty is expressly stated to have been made as of a
specific date, as of such specific date) and as if each reference
in said Section 7 to "this Agreement" included reference to this
Amendment No. 1, (ii) after giving effect to the amendments in
Section 2 of this Amendment No. 1, no Default shall have occurred
and be continuing, (iii) the making and performance by the
Company of this Amendment No. 1, and the Revolving Notes and
Series II Term Notes delivered pursuant to Section 4.04 hereof,
have been duly authorized by all necessary corporate action and
(iv) this Amendment No. 1, and the Credit Agreement as amended by
Amendment No. 1, constitute, and each of such Notes (when
executed and delivered for value) will constitute, legal, valid
and binding obligations of the Company, enforceable in accordance
with its terms, except as such enforceability may be limited by
(a) bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general applicability affecting the enforcement
of creditors' rights and (b) the application of general
principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
Section 4. Conditions Precedent. As provided in
Section 2 above, the amendments to the Credit Agreement set forth
in said Section 2 shall become effective, as of the date hereof,
upon the satisfaction of the following conditions precedent:
4.01. Execution by All Parties. This Amendment No. 1
shall have been executed and delivered by each of the parties
hereto.
4.02. Payment of Interest and Fees. Each Bank and Non-
Continuing Bank shall have been paid in full all interest and
fees accrued under the Credit Agreement to the Amendment No. 1
Effective Date (as defined in the Credit Agreement as hereby
amended).
4.03. Reallocation. The Series II Term Loans shall
have been prepaid under Section 2.09 of the Credit Agreement on
November 1, 1996, but prior to the effectiveness of the
amendments to the Credit Agreement set forth in Section 2 above,
in an aggregate principal amount of $257,500,000; and immediately
thereafter the Banks and the Non-Continuing Banks shall be deemed
to have made and taken such assignments, as the case may be, of
the remaining Series II Term Loans such that, after giving effect
thereto, each Bank shall hold a Series II Term Loan in an
aggregate principal amount set forth in opposite the name of such
Bank in Schedule I hereto. In order to fund such assignments and
thereby effect the reallocations of the Series II Term Loans,
each Bank listed in Part A of Schedule III will pay on the
Amendment No. 1 Effective Date to the Administrative Agent the
amount set forth opposite such Bank's name in Part A of Schedule
III, out of which aggregate amounts the Administrative Agent will
pay on the Amendment No. 1 Effective Date to each Bank and Non-
Continuing Bank listed in Part B of Schedule III the amount set
forth opposite its name in Part B of Schedule III.
4.04. Notes. The Administrative Agent shall have
received Revolving Notes and Series II Term Notes, duly completed
and executed by the Company in exchange for the Revolving Notes
and Series II Term Notes of the Company previously delivered
pursuant to the Credit Agreement.
4.05. Documents. The Administrative Agent shall have
received such other documents as the Administrative Agent or any
Bank or special New York counsel to Chase may reasonably request.
Section 5. Miscellaneous. Except as herein provided,
the Credit Agreement shall remain unchanged and in full force and
effect. This Amendment No. 1 may be executed in any number of
counterparts, all of which taken together shall constitute one
and the same amendatory instrument and any of the parties hereto
may execute this Amendment No. 1 by signing any such counterpart.
This Amendment No. 1 shall be governed by, and construed in
accordance with, the law of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be duly executed and delivered as of the day
and year first above written.
NORTHROP GRUMMAN CORPORATION
By: Albert F. Myers
Title: Corporate Vice President & Treasurer
THE BANKS
THE CHASE MANHATTAN BANK
By: Richard C. Smith
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: Lori Kannegieter
Title: Managing Director
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: Diana H. Imhof
Title: Vice President
