SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 29549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported)
August 1, 1997
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)
(Former name or former address, if changed since last report)
-1-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Item. 5 Other Events
MERGER WITH LOGICON, INC.
Effective August 1, 1997, the company consummated the merger of its wholly
owned acquisition subsidiary with and into Logicon, Inc., a leading defense
information technology and services company. Each share of Logicon's common
stock was converted to .6161 of a share of the company's common stock.
Approximately 8.6 million shares of the company's common stock were issued
for Logicon's common stock.
The merger is accounted for as a pooling of interests and,
accordingly, the accompanying supplemental financial statements have been
retroactively restated for all periods presented to include the results of
Logicon.
-2-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Item 7.Financial Statements and Exhibits
(a) Financial Statements
1. Restated Consolidated Financial Statements of Northrop
Grumman Corporation and Subsidiaries
a. Restated Consolidated Financial Statements of Northrop
Grumman Corporation and Subsidiaries.
(i) Restated Consolidated Statements of Financial
Position as of December, 31, 1996 and 1995.
(ii) Restated Consolidated Statements of Income for
the Years Ended December 31, 1996, 1995 and 1994.
(iii) Restated Consolidated Statements of Changes in
Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994.
(iv) Restated Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996, 1995 and 1994.
(v) Notes to Restated Consolidated Financial Statements
for each of the three years in the period ended
December 31, 1996.
(vi) Management's Discussion and Analysis of the Company's
Restated Financial Condition and Results of
Operations for each of the three years in the period
ended December 31, 1996.
c. Independent Auditors' Report
-3-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Restated CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, $ in millions 1996 1995
Assets:
Current assets
Cash and cash equivalents $ 123 $ 56
Marketable securities 8
Accounts receivable 1,453 1,285
Inventoried costs 1,053 771
Deferred income taxes 78 26
Prepaid expenses 68 64
Total current assets 2,775 2,210
Property, plant and equipment at cost
Land and land improvements 207 192
Buildings 806 785
Machinery and other equipment 2,114 1,899
Leasehold improvements 68 64
3,195 2,940
Accumulated depreciation (1,783) (1,753)
1,412 1,187
Other assets
Goodwill, net of accumulated amortization
of $150 in 1996 and $67 in 1995 3,470 1,439
Other purchased intangibles, net of accumulated
amortization of $116 in 1996 and $36 in 1995 988 356
Prepaid pension cost, intangible
pension asset and benefit trust fund 229 99
Deferred income taxes 520 255
Investments in and advances to
affiliates and sundry assets 251 96
5,458 2,245
$ 9,645 $ 5,642
-4-
<PAGE>
NORTHROP GRUMMAN CORPORATION
December 31, $ in millions 1996 1995
Liabilities and Shareholders' Equity:
Current liabilities
Notes payable to banks $ 228 $ 65
Current portion of long-term debt 200 144
Trade accounts payable 477 378
Accrued employees' compensation 357 242
Advances on contracts 230 98
Income taxes payable 25 58
Deferred income taxes 621 464
Other current liabilities 531 326
Total current liabilities 2,669 1,775
Long-term debt 2,950 1,163
Accrued retiree benefits 1,624 1,048
Other long-term liabilities 59 39
Deferred income taxes 61 31
Shareholders' equity
Paid-in capital
Preferred stock, 10,000,000 shares authorized;
none issued
Common stock, 200,000,000 shares authorized;
issued and outstanding
1996 - 66,527,262; 1995 - 58,019,842 784 273
Retained earnings 1,502 1,325
Unfunded pension losses, net of taxes (4) (12)
2,282 1,586
$ 9,645 $ 5,642
The accompanying notes are an integral part of these consolidated
financial statements.
-5-
<PAGE>
NORTHROP GRUMMAN CORPORATION
RESTATED CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
$ in millions, except per share 1996 1995 1994
Net sales $ 8,607 $ 7,272 $ 7,025
Cost of sales
Operating costs 6,658 5,697 5,736
Administrative and general expenses 1,246 1,003 783
Special termination benefits 282
Operating margin 703 572 224
Other income(deductions)
Interest income 12 4 9
Other, net (13) 9 (31)
Interest expense (270) (137) (109)
Income before income taxes 432 448 93
Federal and foreign income taxes 168 171 40
Net income $ 264 $ 277 $ 53
Weighted average common shares
outstanding, in millions 62.6 57.8 57.6
Earnings per share $ 4.22 $ 4.79 $ .92
The accompanying notes are an integral part of these consolidated
financial statements.
-6-
<PAGE>
NORTHROP GRUMMAN CORPORATION
RESTATED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
Year ended December 31,
$ in millions, except per share 1996 1995 1994
Paid-in Capital
At beginning of year $ 273 $ 261 $ 264
Stock issuance 493
Employee stock awards and options
exercised, net of forfeitures 23 12 12
Treasury stock transactions (5) (15)
At end of year 784 273 261
Retained Earnings
At beginning of year 1,325 1,130 1,158
Net income 264 277 53
Cash dividends (87) (82) (81)
At end of year 1,502 1,325 1,130
Unfunded Pension Losses, Net of Taxes
At beginning of year (12) (2)
Change in excess of additional minimum
liability over unrecognized prior service costs 8 (12) 2
At end of year (4) (12)
Total shareholders' equity $ 2,282 $ 1,586 $ 1,391
Book value per share $ 34.30 $ 27.34 $ 24.18
Cash dividends per share $ 1.60 $ 1.60 $ 1.60
The accompanying notes are an integral part of these consolidated
financial statements.
-7-
<PAGE>
NORTHROP GRUMMAN CORPORATION
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, $ in millions 1996 1995 1994
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 2,226 $ 2,289 $ 2,616
Other collections 6,372 4,818 5,110
Interest received 13 3 10
Income tax refunds received 12 48 11
Other cash receipts 8 7 13
Cash provided by operating activities 8,631 7,165 7,760
Uses of Cash
Cash paid to suppliers and employees 7,528 6,168 7,088
Interest paid 219 144 94
Income taxes paid 141 73 108
Other cash payments 3 2
Cash used in operating activities 7,888 6,388 7,292
Net cash provided by operating activities 743 777 468
Investing Activities of Acquistions
Payment for businesses purchased,
net of cash acquired (2,886) (23) (1,898)
Additions to property, plant and equipment (198) (140) (137)
Proceeds from sale of property,
plant and equipment 58 34 18
Proceeds from sale of affiliates/operations 45 5
Proceeds from sale of marketable securities,
net of purchases 9 1 46
Funding of retiree benefit trust (25) (31)
Dividends from affiliates, net of investments 5
Other investing activities 4 (21) 6
Net cash used in investing activities (2,993) (144) (1,991)
Financing Activities
Borrowings under lines of credit 2,734 153 2,371
Repayment of borrowings under
lines of credit (635) (259) (1,200)
Proceeds from issuance of long-term debt 1,000 600
Principal payments of long-term
debt/capital leases (1,090) (446) (251)
Proceeds from issuance of stock 502 8 9
Dividends paid (87) (82) (78)
Other financing activities (107) (22)
Net cash provided by(used in)
financing activities 2,317 (626) 1,429
Increase(decrease) in cash and
cash equivalents 67 7 (94)
Cash and cash equivalents balance at
beginning of year 56 49 143
Cash and cash equivalents
balance at end of year $ 123 $ 56 $ 49
-8-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Year ended December 31, $ in millions 1996 1995 1994
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 264 $ 277 $ 53
Adjustments to reconcile net income
to net cash provided
Depreciation 210 231 231
Amortization of intangible assets 165 59 43
Common stock issued to employees 10 1
Loss on disposals of property, plant
and equipment 32 34 33
Retiree benefits cost 52 64 33
Special termination benefits 282
Decrease(increase) in
Accounts receivable (111) 186 210
Inventoried costs 7 426 (368)
Prepaid expenses 13 (14) 11
Refundable income taxes 84 (84)
Increase(decrease) in
Progress payments 84 (282) 407
Accounts payable and accruals 36 (102) (314)
Provisions for contract losses 2 (143) (84)
Provisions for disposal of real
estate and other assets 50 (8) 42
Deferred income taxes 126 86 76
Income taxes payable (33) 1 (27)
Retiree benefits (170) (114) (80)
Other noncash transactions 6 (8) 3
Net cash provided by operating activities $ 743 $ 777 $ 468
Noncash Investing and Financing Activities:
Purchase of businesses
Fair value of assets acquired $ 4,003 $ 35 $ 4,273
Cash paid (2,888) (31) (2,304)
Liabilities assumed $ 1,115 $ 4 $ 1,969
The accompanying notes are an integral part of these consolidated
financial statements.
-9-
<PAGE>
NORTHROP GRUMMAN CORPORATION
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
corporation and its subsidiaries. All material intercompany accounts,
transactions and profits are eliminated in consolidation.
The company's financial statements are in conformity with
generally accepted accounting principles. The preparation thereof
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingencies at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared on the basis of the most current and best
available information and actual results could differ from those
estimates.
Statement Presentation
The accompanying financial statements have been restated for the merger
of the company's wholly owned acquisition subsidiary with and into Logicon,
Inc. (Logicon), which is accounted for as a pooling of interests as discussed
in the footnote "Merger with Logicon, Inc."
Northrop Grumman Corporation and its Subsidiaries fiscal 1997
financial statements will reflect an after tax charge of approximately
$20 million for expenses associated with the merger, principally
investment banking fees.
Nature of Operations
Northrop Grumman is a major producer of military and commercial
aircraft subassemblies and defense electronics and is the prime
contractor on the U.S. Air Force B-2 Stealth Bomber. The company
operates in the aircraft, electronics and information technology and
services industry segments within the broadly defined aerospace
industry. The majority of the company's products and services are
ultimately sold to the U.S. Government and the company is therefore
affected by, among other things, the federal budget process.
Sales to the U.S. Government (including foreign military sales)
are reported within each industry segment and in total in the Selected
Financial Data. The company does not conduct a significant volume of
activity through foreign operations or in foreign currencies.
Descriptions of the company's principal products and services
along with industry segment data, which is considered to be an integral
part of these financial statements, can be found in the Management's
Discussion and Analysis section of this report. Intersegment sales are
transacted at cost incurred with no profit added. Operating profit is
defined to include the Other Income earned by each industry segment,
but to exclude costs allocated to segments for General Corporate
Expenses and State and Local Income Taxes. General corporate assets
include cash and cash equivalents, corporate office furnishings and
equipment, other unallocable property, investments in affiliates,
prepaid pension cost, intangible pension asset, benefit trust fund
assets, deferred tax assets and certain assets held for sale.
-10-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Sales
Sales under cost-reimbursement, service, research and development, and
construction-type contracts are recorded as costs are incurred and
include estimated earned fees or profits calculated on the basis of the
relationship between costs incurred and total estimated costs
(cost-to-cost type of percentage-of-completion method of accounting).
Construction-type contracts embrace those fixed-price type contracts
that provide for the delivery at a low volume per year or a small
number of units after a lengthy period of time over which a significant
amount of costs have been incurred. Sales under other types of
contracts are recorded as deliveries are made and are computed on the
basis of the estimated final average unit cost plus profit (units-of-delivery
type of percentage-of-completion method of accounting).
Certain contracts contain provisions for price redetermination or
for cost and/or performance incentives. Such redetermined amounts or
incentives are included in sales when the amounts can reasonably be
determined. In the case of the B-2 bomber production contract, future
changes in operating margin will be recognized on a units-of-delivery
basis and recorded as each equivalent production unit is delivered.
Amounts representing contract change orders, claims or limitations in
funding are included in sales only when they can be reliably estimated
and realization is probable. In the period in which it is determined
that a loss will result from the performance of a contract, the entire
amount of the estimated ultimate loss is charged against income. Loss
provisions are first offset against costs that are included in assets,
with any remaining amount reflected in Other Current Liabilities. Other
changes in estimates of sales, costs, and profits are recognized using
the cumulative catch-up method of accounting. This method recognizes in
the current period the cumulative effect of the changes on current and
prior periods. Hence, the effect of the changes on future periods of
contract performance is recognized as if the revised estimates had been
the original estimates.
Contract Research and Development
Customer-sponsored research and development costs (direct and indirect
costs incurred pursuant to contractual arrangements) are accounted for
like other contracts.
Noncontract Research and Development
This category includes independent research and development costs and
company-sponsored research and development costs (direct and indirect
costs not recoverable under contractual arrangements). Independent
research and development (IR&D) costs are included in administrative
and general expenses (indirect costs allocable to U.S. Government
contracts) whereas company-sponsored research and development costs are
charged against income as incurred.
Environmental Costs
Environmental liabilities are accrued when the company determines it is
responsible for remediation costs and such amounts are reasonably
estimable. When only a range of amounts is established and no amount
within the range is better than another, the minimum amount in the
range is recorded. The company does not anticipate and record
insurance recoveries before collection is probable.
-11-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Interest Rate Swap Agreements
The company may enter into interest rate swap agreements to offset the
variable-rate characteristic of certain variable-rate term loans
outstanding under the company's Credit Agreement. Interest on these
interest rate swap agreements is recognized as an adjustment to
interest expense in the period incurred.
Income Taxes
Provisions for federal, state and local income taxes are calculated on
reported financial statement pretax income based on current tax law and
also include, in the current period, the cumulative effect of any
changes in tax rates from those used previously in determining deferred
tax assets and liabilities. Such provisions differ from the amounts
currently payable because certain items of income and expense are
recognized in different time periods for financial reporting purposes
than for income tax purposes.
The company accounts for certain contracts in process using
different methods of accounting for financial statements and tax
reporting and thus provides deferred taxes on the difference between
the financial and taxable income reported during the performance of
such contracts.
In accordance with industry practice, state and local income and
franchise tax provisions are included in administrative and general
expenses.
Earnings per Share
Earnings per share are based on the weighted average number of shares
of common stock outstanding during each period, after giving
recognition to stock splits and stock dividends. The dilutive effect of
common stock equivalents, shares under stock options, was insignificant.
Cash and Cash Equivalents
Cash and cash equivalents include interest-earning debt instruments
that mature in three months or less from the date purchased.
Accounts Receivable
Accounts receivable include amounts billed and currently due from
customers, amounts currently due but unbilled (primarily related to
contracts accounted for under the cost-to-cost type of
percentage-of-completion method of accounting), certain estimated
contract changes, claims in negotiation and amounts retained by the
customer pending contract completion.
-12-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Inventoried Costs
Inventoried costs primarily relate to work in process under fixed-price
type contracts (excluding those included in unbilled accounts receivable
as previously described). They represent accumulated contract costs less
the portion of such costs allocated to delivered items. Accumulated contract
costs include direct production costs, factory and engineering overhead,
production tooling costs, and allowable administrative and general expenses
(except for general corporate expenses and IR&D allocable to commercial
contracts, which are charged against income as incurred).
In accordance with industry practice, inventoried costs are
classified as a current asset and include amounts related to contracts
having production cycles longer than one year.
Depreciable Properties
Property, plant and equipment owned by the company are depreciated over
the estimated useful lives of individual assets. Capital leases
providing for the transfer of ownership upon their expiration or
containing bargain purchase options are amortized over the estimated
useful lives of individual assets. Most of these assets are depreciated
using declining-balance methods, with the remainder using the
straight-line method, with the following lives:
Years
Land improvements 5-20
Buildings 5-45
Machinery and other equipment 1-18
Leasehold improvements Length of lease
Goodwill and Other Purchased Intangible Assets
Goodwill and other purchased intangible assets are amortized on a
straight-line basis over periods of 40 years and a weighted average 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.
-13-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Acquisitions
On March 28, 1996, Logicon acquired Geodynamics Corporation
(Geodynamics) for a cash purchase price of $32 million. Geodynamics
specializes in remote sensing, geographic information systems, modeling
and simulation, software development, and systems engineering and
integration for the Department of Defense and other government agencies.
The operations of Geodynamics since the acquisition date are included in
the information technology and services segment.
On March 1, 1996 the company purchased substantially all of the
defense and electronics systems business (ESG) of Westinghouse Electric
Corporation at a cost of $2.9 billion and financed the transaction with
new borrowings. The operations of ESG have been consolidated with
Northrop Grumman effective March 1, 1996 and are included in the
electronics industry segment.
On February 16, 1995, Logicon acquired Syscon Corporation
(Syscon), which operated as an indirectly wholly owned subsidiary of
Harnischfeger Industries, Inc., for a cash purchase price of
$45 million. Syscon is engaged principally in the business of providing
systems development, systems integration and systems services to the
U.S. government and commercial enterprises. The operations of Syscon
since the acquisition date are included in the information technology
and services segment.
In April 1994 the company purchased the outstanding stock of
Grumman Corporation (Grumman) at a cost of $2.1 billion and financed
the transaction mainly with new borrowings. The operations of Grumman
since acquisition are included in the industry segments to which
products are associated.
In August 1994 the company purchased the remaining 51 percent interest
in Vought Aircraft Company (Vought) for $130 million cash. The company had
previously purchased a 49 percent interest in Vought for $45 million in
September 1992. The operations of Vought since August 1994 are included in
the aircraft industry segment.
The purchase method of accounting was used to record all five
acquisitions with estimated fair values being assigned to assets and
liabilities. The excess of the purchase price over the net tangible assets
acquired was assigned to identifiable intangible assets and the remaining
balance to goodwill.
The following unaudited pro forma financial information combines
Northrop Grumman's, ESG's, Geodynamics' and Syscon's results of operations,
as if the acquisitions had taken place on January 1, 1995, and is not
necessarily indicative of future operating results of Northrop Grumman.
$ in millions, except per share 1996 1995
Sales $ 8,907 $ 9,777
Net income 244 160
Earnings per share 3.90 2.77
-14-
<PAGE>
NORTHROP GRUMMAN CORPORATION
MERGER WITH LOGICON, INC.
Effective August 1, 1997, the company consummated the merger of its
wholly owned acquisition subsidiary with and into Logicon, Inc., a
leading defense information technology and services company. Each
share of Logicon's common stock was converted to .6161 of a share of
the company's common stock. Approximately 8.6 million shares of the
company's common stock was issued for Logicon's common stock then
outstanding.
The merger is accounted for as a pooling of interests, and
accordingly the accompanying financial statements give retroactive
effect for all periods presented to include the results of Logicon.
Operating results of the separate companies for each year are as
follows:
$ in millions, except per share 1996 1995 1994
Revenues
Previously reported $ 8,071 $ 6,818 $ 6,711
Logicon 536 454 314
$ 8,607 $ 7,272 $ 7,025
Net income
Previously reported $ 234 $ 252 $ 35
Logicon 30 25 18
$ 264 $ 277 $ 53
Earnings per share
Previously reported $ 4.33 $ 5.11 $ .72
Restated to give effect to pooling $ 4.22 $ 4.79 $ .92
MARKETABLE SECURITIES
Marketable securities are as follows:
$ in millions 1996 1995
Available for sale securities (mature within one year)
U.S. government and government agencies
Amortized cost basis (plus interest) $ - $ 8
Fair value (plus interest) - 8
Gross unrealized loss $ - $ -
The specific identification method has been used to determine cost
for each security. There have been no realized gains or losses from the
sale of available for sale securities during 1996 or 1995. The net
unrealized holding loss on available for sale securities which was included
in stockholders' equity at December 31, 1995, was immaterial.
-15-
<PAGE>
NORTHROP GRUMMAN CORPORATION
ACCOUNTS RECEIVABLE
Unbilled amounts represent sales for which billings have not been presented
to customers at year end, including differences between actual and estimated
overhead and margin rates. These amounts are usually billed and collected
within one year. Progress payments are, however, received on a number of
fixed-price contracts accounted for using the cost-to-cost type
percentage-of-completion method.
Amounts due upon contract completion are retained by customers until
work is completed and customer acceptance is obtained.
In 1996 the company terminated an agreement that was entered into in
1995 with a financial institution to sell designated pools of its commercial
accounts receivables, with limited recourse, in amounts up to $75 million. At
December 31, 1995, $34 million of accounts receivable had been sold.
Accounts receivable at December 31, 1996, are expected to be collected in
1997 except for approximately $255 million due in 1998 and $188 million due in
1999 and later. These amounts principally relate to long-term contracts with
the U.S. Government.
Allowances for doubtful amounts represent mainly estimates of overhead
type costs which may not be successfully negotiated and collected.
Accounts receivable were comprised of the following:
$ in millions 1996 1995
Due from U.S. Government, long-term contracts
Current accounts
Billed $ 458 $ 327
Unbilled 3,493 3,253
Progress payments received (2,721) (2,426)
Net current accounts 1,230 1,154
Due upon contract completion 2 9
1,232 1,163
Due from other customers, long-term contracts
Current accounts
Billed 78 14
Unbilled 47 50
125 64
Total due, long-term contracts 1,357 1,227
Trade and other accounts receivable
Due from U.S. Government 75 61
Due from other customers 76 65
Total due, trade and other 151 126
1,508 1,353
Allowances for doubtful amounts (55) (68)
$ 1,453 $ 1,285
-16-
<PAGE>
NORTHROP GRUMMAN CORPORATION
INVENTORIED COSTS
Inventoried costs were comprised of the following:
$ in millions 1996 1995
Production costs of contracts in process $ 1,169 $ 924
Excess of production cost of delivered items
over the estimated average unit cost 105 85
Administrative and general expenses 199 166
1,473 1,175
Progress payments received (533) (428)
940 747
Product inventories - at the lower of
average cost or market 113 24
$ 1,053 $ 771
Inventoried costs relate to long-term contracts in process and include
expenditures for raw materials and work in process beyond what is required
for recorded orders. These expenditures are incurred to help maintain stable
and efficient production schedules. The excess of production costs of
delivered and in process items over the estimated average costs is carried
in inventory under the learning curve concept. Under this concept, production
costs per unit are expected to decrease over time due to efficiencies arising
from continuous improvement in the performance of repetitive tasks. However,
no material amount representing claims, unamortized tooling or other deferred
costs is included in inventoried costs.
The ratio of inventoried administrative and general expenses to total
inventoried costs is estimated to be the same as the ratio of total
administrative and general expenses incurred to total contract costs incurred.
According to the provisions of U.S. Government contracts, the customer
has title to, or a security interest in, substantially all inventories related
to such contracts.
-17-
<PAGE>
NORTHROP GRUMMAN CORPORATION
INCOME TAXES
Income tax expense, both federal and foreign (which arises primarily from
work performed abroad by domestic operations), was comprised of the following:
$ in millions 1996 1995 1994
Currently payable
Federal income taxes $ 60 $ 89 $ 74
Foreign income taxes 2 1 1
62 90 75
Change in deferred federal income taxes 106 81 (35)
$ 168 $ 171 $ 40
Income tax expense differs from the amount computed by
multiplying the statutory federal income tax rate times the
income before income taxes due to the following:
$ in millions 1996 1995 1994
Income tax expense at statutory rate $ 151 $ 157 $ 33
Goodwill amortization 16 13 9
Provision for nondeductible expenses 4 4 4
Benefit from ESOP dividends (3) (3) (4)
Dividend exclusion (2)
$ 168 $ 171 $ 40
Deferred income taxes arise because of differences in the treatment
of income and expense items for financial reporting and income tax purposes.
The principal type of temporary difference stems from the recognition of
income on contracts being reported under different methods for tax purposes
than for financial reporting.
-18-
<PAGE>
NORTHROP GRUMMAN CORPORATION
The tax effects of significant temporary differences and carryforwards
that gave rise to year-end deferred federal and state tax balances, as
categorized in the Consolidated Statements of Financial Position, were as
follows:
$ in millions 1996 1995
Deferred tax assets
Deductible temporary differences
Retiree benefit plan expense $ 602 $ 421
Provision for estimated expenses 79 25
Income on contracts 49 14
Other 41 36
771 496
Taxable temporary differences
Purchased intangibles (110) (124)
Excess tax over book depreciation (64) (71)
Retiree benefit plan income(expenses) (18)
Administrative and general expenses period
costed for tax purposes (2)
(174) (215)
$ 597 $ 281
Deferred tax liabilities
Taxable temporary differences
Income on contracts $ 873 $ 799
Administrative and general expenses
period costed for tax purposes 1 1
Retiree benefit plan income(expense) 1 (7)
Excess tax over book depreciation 9 1
Other 14 16
898 810
Deductible temporary differences
Provision for estimated expenses (86) (121)
Retiree benefit plan expense (1) (2)
(87) (123)
Tax carryforwards
Tax credits (39) (102)
Alternative minimum tax credit (90) (90)
(129) (192)
$ 682 $ 495
Net deferred tax liability
Total deferred tax liabilities (taxable
temporary differences above) $ 1,072 $ 1,025
Less total deferred tax assets (deductible
temporary differences and tax carryforwards above) 987 811
$ 85 $ 214
-19-
<PAGE>
NORTHROP GRUMMAN CORPORATION
The tax carryforward benefits are expected to be used in the periods in
which net deferred tax liabilities mature. The expiration dates for these tax
credit carryforwards are in various amounts over the years 1997 through 2007.
The alternative minimum tax credit can be carried forward indefinitely.
NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
The company has available short-term credit lines in the form of money market
facilities with several banks. The amount and conditions for borrowing under
these credit lines depend on the availability and terms prevailing in the
marketplace. No fees or compensating balances are required for these credit
facilities. At December 31, 1996, $226 million was outstanding at a weighted
average interest rate of 6.44 percent. At December 31, 1995, $65 million was
outstanding at a weighted average interest rate of 6.15 percent. At
December 31, 1994, $171 million was outstanding at a weighted average interest
rate of 7 percent.
Additionally, the company has a 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, that 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. 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 pays, at least quarterly, interest on the
outstanding debt under the Credit Agreement at rates that vary based in
part on the company's credit rating and leverage ratio. At
December 31, 1996, $1.05 billion under the term loan was outstanding at a
weighted average interest rate of 5.97 percent. Principal payments
permanently reduce the amount available under this agreement as well as
the debt outstanding.
At December 31, 1996, $500 million at a weighted average interest
rate of 5.79 percent was outstanding under the company's revolving
credit facility. In 1995 there were no borrowings under the company's
revolving credit facility. Under these agreements, in the event of a
"change in control," the banks are relieved of their commitments.
Compensating balances are not required under these agreements.
The company's credit agreements contain restrictions relating to
the payment of dividends, acquisition of the company's stock, aggregate
indebtedness for borrowed money and interest coverage. At December 31, 1996,
$326 million of retained earnings were unrestricted as to the payment of
dividends. Total indebtedness for all types of borrowed money is limited
under the company's credit agreement covenants. At December 31, 1996,
indebtedness was limited to $7.4 billion.
-20-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Long-term debt consisted of the following:
$ in millions 1996 1995
Notes due 1999, 8.4% $ $ 143
Notes due 2004, 8.625% 350 350
Notes due 2006, 7% 400
Debentures due 2016, 7.75% 300
Debentures due 2024, 9.375% 250 250
Debentures due 2026, 7.875% 300
Mortgages 1
Revolving credit facility 500
Term loans payable to banks due in quarterly
installments through 2002 at floating rates 1,050 563
3,150 1,307
Less current portion 200 144
$ 2,950 $ 1,163
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 ESG. The debt indenture contains restrictions relating to
limitations on liens, sale and leaseback arrangements and funded debt of
subsidiaries.
In November 1995 the notes due in 1999 were called for redemption
at face value, on January 2, 1996. The December 31, 1995 balance of
$143 million was classified as current. The debentures due in 2024 are
callable after October 15, 2004 at a premium of 4 percent declining to
par after 2013.
The principal amount of long-term debt outstanding at December 31, 1996,
due in each of the years 1997 through 2001 is $200 million with $2,150
million due after five years.
-21-
<PAGE>
NORTHROP GRUMMAN CORPORATION
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the Consolidated Statements of
Financial Position for Cash and Cash Equivalents, Accounts
Receivable and amounts borrowed under the company's short-term
credit lines approximate their fair value.
The fair value of the long-term debt was calculated based on
interest rates available for debt with terms and due dates similar
to the company's existing debt arrangements.
The company has limited involvement with derivative financial
instruments and does not use them for trading purposes. To mitigate
the variable rate characteristic of the term loans, the company entered
into interest rate swap agreements maturing at various dates through
May 1999 with several banks resulting in a fixed interest rate of 6.23
percent on a notional amount of $425 million at December 31, 1996.
Unrealized gain(loss) on interest rate swap agreements are calculated
based upon the amounts at which they could be settled at current
interest rates. The market gain(loss) on interest rate swaps was
$(1) million, $(7) million and $7 million at December 31, 1996, 1995 and
1994 respectively. The institutions have options to extend $200 million
of the swaps through May 1998. The company expects the banks to fully
satisfy their obligations under the arrangements.
Carrying amounts and the related estimated fair values of the
company's financial instruments at December 31 of each year are as
follows:
$ in millions 1996 1995
Long-term debt
Carrying amount $ 3,150 $ 1,307
Fair value 3,221 1,405
Interest rate swap agreements
Notional amount 425 300
Gains(losses) (1) (7)
-22-
<PAGE>
NORTHROP GRUMMAN CORPORATION
RETIREMENT BENEFITS
The company sponsors several defined-benefit pension plans covering
substantially all employees. Pension benefits for most employees are
based on the employee's years of service and compensation during the
last ten years before retirement. It is the policy of the company to
fund at least the minimum amount required for all qualified plans,
using actuarial cost methods and assumptions acceptable under U.S.
Government regulations, by making payments into a trust separate from
the company. Five of the company's fifteen qualified plans which cover
over 80 percent of all employees, were in a legally defined
full-funding limitation status at December 31, 1996. To protect the
assets in the master trust from a "change in control" the trust
agreement and the Northrop Grumman Pension Plan were appropriately
amended during 1991.
The company and subsidiaries also sponsor defined-contribution
plans in which most employees are eligible to participate. Company
contributions, up to 4 percent of compensation, are based on a matching
of employee contributions.
In addition, the company and its subsidiaries provide certain
health care and life insurance benefits for retired employees.
Employees achieve eligibility to participate in these contributory
plans upon retirement from active service and if they meet specified
age and years of service requirements. Election to participate must be
made at the date of retirement. Qualifying dependents are also eligible
for medical coverage. Approximately 85 percent of the company's current
retirees participate in the medical plans. The cost and funded status
for the medical and life benefits are combined in the tables that
follow because (1) life benefits constitute an insignificant amount of
the combined cost, and (2) for those plans with assets, the assets in
trust for each plan can be used to pay benefits under either plan. Plan
documents reserve the company's right to amend or terminate the plans
at any time. Premiums charged retirees for medical coverage are based
on years of service and are adjusted annually for changes in the cost
of the plans as determined by an independent actuary. In addition to
this medical inflation cost-sharing feature, the plans also have
provisions for deductibles, copayments, coinsurance percentages,
out-of-pocket limits, schedule of reasonable fees, managed care
providers, maintenance of benefits with other plans, Medicare carve-out
and a maximum lifetime benefit of from $250,000 to $1,000,000 per
covered individual. It is the policy of the company to fund the maximum
amount deductible for income taxes into the VEBA trust established for
the Northrop Retiree Health Care Plan for Retired Employees for payment
of benefits
-23-
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
The cost to the company of these plans in each of the last three
years is shown in the following table.
$ in millions 1996 1995 1994
<S> <C> <C> <C> <C>
Defined benefit pension plans
Actual return on assets $(1,379) $(1,856) $ 25
Deferral of actual return on assets 618 1,233 (541)
Expected return on assets (761) (623) (516)
Service cost 174 125 176
Interest cost 570 520 372
Amortization of unrecognized items
Transition asset, net (42) (42) (42)
Prior service costs 41 31 14
Net gain from previous years (21) (34) (40)
Net periodic pension income $ (39) $ (23) $ (36)
Defined-contribution plans $ 84 $ 63 $ 66
Retiree health care and life insurance benefit plans
Actual return on assets $ (60) $ (95) $ 22
Deferral of actual return on assets 38 76 (42)
Expected return on assets (22) (19) (20)
Service cost 27 20 28
Interest cost 91 89 61
Amortization of unrecognized
gain from previous years (5) (3) (2)
Excess dependent cost 2
Net periodic postretirement benefit cost $ 91 $ 87 $ 69
</TABLE>
In addition to the net periodic pension income and postretirement benefit
cost, in 1994 the company recognized the effect of an early retirement
incentive program of $250 million for pension and $32 million for
postretirement benefits. The total $282 million effect on the company's
1994 operating margin is shown in the Consolidated Statements of Income under
the caption Special Termination Benefits.
Major assumptions as of each year-end used in the accounting for the
defined-benefit plans are shown in the following table. Pension cost is
determined using all three factors as of the end of the preceding year,
whereas the funded status of the plans, shown later, uses only the first two
factors, as of the end of each year.
1996 1995 1994
Discount rate for obligations 7.50% 7.00% 8.25%
Rate of increase for compensation 4.50 5.00 5.25
Expected long-term rate of return
on plan assets 9.00 9.00 8.75
-24-
<PAGE>
NORTHROP GRUMMAN CORPORATION
These assumptions were also used in retiree health care and life
insurance benefit calculations with one modification. Since, unlike the
pension trust, the earnings of the VEBA trust are taxable, the above
9 percent expected rate of return on plan assets was reduced
accordingly to 5.25 percent after taxes. A significant factor used in
estimating future per capita cost, for the company and its retirees, of
covered health care benefits is the health care cost trend rate assumption.
The rate used was 7 percent for 1996 and is assumed to decrease gradually to
6 percent for 2006 and remain at that level thereafter. An additional
one-percentage-point of increase each year in that rate would result in a
$12 million annual increase in the aggregate of the service and interest cost
components of net periodic postretirement benefit cost, and a $111 million
increase in the accumulated postretirement benefit obligation at
December 31, 1996.
The following tables set forth the funded status and amounts
recognized in the Consolidated Statements of Financial Position at each
year-end for the company's defined-benefit pension and retiree health
care and life insurance benefit plans. The summary showing pension
plans whose accumulated benefits are in excess of assets at December
31, 1996, is comprised of seven qualified plans along with twelve
unfunded nonqualified plans for benefits provided to directors,
officers and employees either beyond those provided by, or payable
under, the company's main plans.
The company revised its estimate of the discount rate for
obligations and rate of increase for compensation assumptions in
calculating the funded status of the plans at December 31, 1996. The
changes resulted in a $483 million decrease in the projected benefit
obligation for pension plans and a $59 million decrease in the
accumulated postretirement benefit obligation.
$ in millions 1996 1995
Pension plans whose assets exceed accumulated benefits
Actuarial present value of benefit obligations
Vested benefits $ 6,255 $ 6,572
Nonvested benefits 328 320
Accumulated benefit obligations 6,583 6,892
Effect of assumed salary rate increases 391 469
Projected benefit obligations 6,974 7,361
Less market value of plan assets 9,184 8,319
Excess of assets over projected benefit obligations (2,210) (958)
Unrecognized items
Net transition asset 247 289
Prior service costs (248) (286)
Net gain 2,067 921
Accrued retiree benefits pension asset included in
Consolidated Statements of Financial Position $ (144) $ (34)
Pension plans whose accumulated benefits exceed assets
Actuarial present value of benefit obligations
Vested benefits $ 839 $ 311
Nonvested benefits 51 8
Accumulated benefit obligations 890 319
Effect of assumed salary rate increases 145 15
Projected benefit obligations 1,035 334
Less market value of plan assets 436 177
Excess of projected benefit obligations over assets 599 157
Unrecognized items
Net transition obligation (3) (3)
Prior service costs (16) (5)
Net gain(loss) (10) (31)
Additional minimum liability 22 29
Accrued retiree benefits liability included in
Consolidated Statements of Financial Position $ 592 $ 147
-25-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Pension plan assets at December 31, 1996, were comprised of 49 percent
domestic equity type investments in listed companies (including 4 percent in
Northrop Grumman common stock), 17 percent equity investments listed on
international exchanges, 27 percent in fixed income type investments,
principally U.S. Government securities, 3 percent in venture capital and real
estate investments, and 4 percent in cash. The investment in Northrop
Grumman represents 4,798,523 shares, or seven percent of the company's total
shares outstanding.
Effective January 1, 1995, the company adopted amendments to two of the
company's retirement plans to cap the maximum years of service credit that an
employee can earn and adjusted the amount of service credit earned each year.
The effect of these changes was to increase the projected benefit obligation
at December 31, 1994 by $210 million.
$ in millions 1996 1995
Retiree health care and life insurance benefit plans
Accumulated postretirement benefit obligation (APBO)
Retirees $ 841 $ 960
Fully eligible active employees 81 88
Active employees not yet eligible 383 288
1,305 1,336
Less market value of plan assets 468 433
Excess of APBO over assets 837 903
Unrecognized items
Prior service cost (2) (1)
Net gain(loss) 191 (15)
Accrued retiree benefits liability included in
Consolidated Statements of Financial Position $ 1,026 $ 887
Retiree health care and life insurance plan assets at December 31, 1996, were
almost entirely comprised of equity type investments in listed companies.
-26-
<PAGE>
NORTHROP GRUMMAN CORPORATION
CONTINGENCIES
The corporation and its subsidiaries have been named as defendants in
various legal actions. Based upon available information, it is the
company's expectation that those actions are either without merit or
will have no material adverse effect on the company's results of operations
or financial position.
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 remediating contaminated sites. These
estimates are reviewed periodically and adjusted to reflect changes in facts
and technical and legal circumstances. Management estimates that at
December 31, 1996, the reasonable range of future costs for environmental
remediation, including those sites acquired in the purchase of ESG, is
$63 million to $107 million, of which $64 million has been accrued. Although
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.
Minimum rental commitments under long-term noncancellable operating
leases total $340 million which is payable as follows: 1997 - $82 million,
1998 - $59 million, 1999 - $49 million, 2000 - $38 million, and 2001 -
$29 million, and 2002 and thereafter - $83 million.
STOCK RIGHTS
The company has a Common Stock Purchase Rights plan with one right
issued in tandem with each share of common stock. The rights will
become exercisable on the tenth business day after a person or group
has acquired 15 percent or more of the general voting power of the
company, or announces an intention to make a tender offer for 30
percent or more of such voting power, without the prior consent of the
Board of Directors. If the rights become exercisable, a holder will be
entitled to purchase one share of common stock from the company at an
initial exercise price of $105.
If a person acquires more than 15 percent of the then outstanding
voting power of the company or if the company is combined with an
acquiror, each right will entitle its holder to receive, upon exercise,
shares of the company's or the acquiror's (depending upon which is the
surviving company) common stock having a value equal to two times the
exercise price of the right.
The company will be entitled to redeem the rights at $.02 per
right at any time prior to the earlier of the date that a person has
acquired or obtained the right to acquire 15 percent of the general
voting power of the company or the expiration of the rights in October
1998. The rights are not exercisable until after the date on which the
company's prerogative to redeem the rights has expired. The rights do
not have voting or dividend privilege and cannot be traded
independently from the company's common stock until such time as they
become exercisable. The rights do not and will not become exercisable
because of the Lockheed Martin transaction.
-27-
<PAGE>
NORTHROP GRUMMAN CORPORATION
STOCK COMPENSATION PLANS
At December 31, 1996, Northrop Grumman had two stock-based compensation
plans -- the 1993 Long-Term Incentive Stock Plan (LTISP) applicable to
employees and the 1995 Stock Option Plan for Non-Employee Directors
(SOPND) and Logicon had two stock-based compensation plans -- the 1992
Employee Incentive Stock Option Plan (LEISOP) and the 1991 Stock Option
Plan for Non-Employee Directors (LSOPND). Each unexercised option
granted under the Logicon stock-based compensation plans was converted
to .6161 options for the company's common stock and the option price
was adjusted accordingly. Under terms of the merger agreement between
the company and Logicon, substantially all of the approximately 300,000
unexercised options (in Northrop Grumman shares) granted under the
Logicon plans, became vested and exercisable upon consummation of the
merger.
The LTISP permits grants to key employees of three general types
of stock incentive awards: stock options, stock appreciation rights
(SARs) and stock awards. With shareholder approval of this plan and
subsequent amendment, a total of 4.1 million additional shares were
made available for future grants. Up to 1.8 million of these shares may
be in the form of stock awards. At December 31, 1996, 227,062 shares
remained available for future grants under the LTISP. Under the LTISP
each grant of a stock option is made at the closing market price on the
date of grant. Options generally vest in 25 percent increments, two,
three, four and five years from the grant date and expire ten years
after the grant date. No SARs have been granted under the LTISP.
Stock awards, in the form of restricted performance stock rights, are
granted to key employees without payment to the company. Recipients of
the rights earn shares of stock based on a total-shareholder-return
measure of performance over a five-year period with interim
distributions three and four years after grant. If at the end of the
five-year period the performance objectives have not been met, up to 70
percent of the original grant will be forfeited. Termination of
employment can result in forfeiture of some or all of the benefits
extended under the plan.
The shareholder approval of the SOPND in 1995 made available
300,000 shares for grants of stock options to nonemployee directors.
Each grant of a stock option is made at the closing market price on the
date of the grant, is immediately exercisable and expires ten years
after the grant date. At December 31, 1996, 289,500 shares were
available for future grants under the SOPND.
The LEISOP provided for grants of options to key employees to
purchase shares of the company's common stock at prices not less than
market value at date of grant. The exercise period is 10 years or
less from the date of the grant of the option.
The LSOPND provided the ability to grant non-employee directors
options to purchase common stock of the company. Options were granted
according to a formula contained in the LSOPND at prices not less than
the fair market value at date of grant and expire five years from the
date of grant.
-28-
<PAGE>
NORTHROP GRUMMAN CORPORATION
The company applies Accounting Principles Board Opinion 25 -
Accounting for Stock Issued to Employees and related Interpretations in
accounting for awards made under the plans. When stock options are
exercised, the amount of the cash proceeds to the company is recorded
as an increase to paid-in capital. No compensation expense is
recognized in connection with stock options. Compensation expense for
restricted performance stock rights is estimated and accrued over the
vesting period. The fixed 30 percent minimum distribution portion is
recorded at grant value and the variable portion is recorded at market
value. Compensation expense recognized for stock awards was $25
million in 1996, $4 million in 1995 and $4 million in 1994.
Stock option activity for the last three years is summarized below:
Weighted-
Average
Shares Exercise Shares
Under Option Prices Exercisable
Outstanding at January 1, 1994 2,776,278 $ 22 1,019,731
Granted 820,830 40
Cancelled (198,581) 14
Exercised (269,989) 25
Outstanding at December 31, 1994 3,128,538 27 1,114,703
Granted 899,757 53
Cancelled (418,365) 15
Exercised (180,249) 22
Outstanding at December 31, 1995 3,429,681 35 1,212,290
Granted 1,048,640 76
Cancelled (190,041) 31
Exercised (261,008) 28
Outstanding at December 31, 1996 4,027,272 47 1,384,026
Had compensation expense been determined based on the fair value at the
grant dates for stock option awards granted in 1996 and 1995, consistent with
the method of Financial Accounting Standards Board Statement 123 - Accounting
for Stock Based Compensation, net income and earnings per share in 1996 would
have been lower by $2 million and three cents, respectively. For 1995 net
income would have been unchanged and earnings per share would have been lower
by one cent. These amounts were determined using weighted-average per share
fair values of options granted in 1996 and 1995 of $24 and $17, respectively.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model based on an expected life of six years
and for 1996 and 1995, respectively, the following additional assumptions:
dividend yield - 2.1% and 2.8%; expected volatility - 28% and 31%; and
risk-free interest rate - 6.2% and 5.8%.
-29-
<PAGE>
NORTHROP GRUMMAN CORPORATION
At December 31, 1996, the following stock options were outstanding:
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/96 Contractual Life Prices at 12/31/96 Prices
$12 to 25 834,119 2.7 years $ 18 741,558 $ 18
26 to 40 785,794 6.0 years 33 442,142 30
41 to 55 749,002 7.4 years 44 192,819 44
56 to 70 796,557 8.8 years 58 7,507 57
71 to 81 861,800 10.0 years 81
4,027,272 1,384,026
Restricted performance stock rights were granted with weighted-average
grant-date fair values per share as follows: 1996 - 802,800 at $81; 1995 -
22,660 at $53; and 1994 - 141,540 at $43.
-30-
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
UNAUDITED SELECTED QUARTERLY DATA
Quarterly financial results are set forth in the following tables together
with dividend and common stock price data.
1996 Quarters, $ in millions, except per share 4 3 2 1
<S> <C> <C> <C> <C>
Net sales $ 2,413 $ 2,172 $2,291 $ 1,731
Operating margin 159 176 219 149
Net income 24 78 94 68
Earnings per share .38 1.18 1.58 1.17
Dividend per share .40 .40 .40 .40
Stock price:
High 84 1/4 80 1/4 69 1/4 67 3/8
Low 76 3/8 63 3/4 57 3/4 58 3/8
</TABLE>
The fourth quarter of 1996 includes a $90 million pretax charge related
to the closure of four plants. The charge included $30 million for costs
related to the reduction of personnel and other closure activities and $60
million for the write-down of facilities. The sale of shares owned by the
company in ETEC Systems, Inc. generated pretax gains of $10 million,
$6 million and $12 million in the fourth, third and second quarters,
respectively. The first quarter includes a $25 million charge related to
nacelles work the company performed for Fokker Aircraft N.V., which declared
bankruptcy in March 1996.
The sum of quarterly earnings per share for 1996 does not equal
earnings per share for the year because the average number of common
shares outstanding for the second half of 1996 was disproportionately
higher than the full year average due to the issuance in June of
approximately 8 million shares of common stock in a public stock
offering.
<TABLE>
1995 Quarters, $ in millions, except per share 4 3 2 1
<S> <C> <C> <C> <C>
Net sales $ 1,932 $ 1,744 $ 1,871 $ 1,725
Operating margin 130 139 175 128
Net income 65 67 85 60
Earnings per share 1.12 1.16 1.47 1.04
Dividend per share .40 .40 .40 .40
Stock price:
High 64 1/4 62 5/8 54 49 3/4
Low 56 51 7/8 47 39 3/4
</TABLE>
The operating margin in the second quarter of 1995 benefited from
a net $34 million in cumulative operating margin adjustments. Positive
adjustments on the B-2 stealth bomber and C-17 military transport
programs were partially offset by a downward adjustment on the Boeing
747 jetliner program. The 747 adjustment reflected cost increases
related to the stretch-out of the current production contract. The B-2
adjustment was made as a result of negotiated contract adjustments and
a revised estimate of the overall operating margin expected to be
earned on the B-2 production contract. The positive adjustment on the
C-17 reflected improved operating performance on this program.
-31-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Management's Discussion and Analysis of the Company's
Restated Financial Condition and Results of Operations
BUSINESS CONDITIONS
Northrop Grumman's three industry segments - aircraft, electronics, and
information technology and services - are each a factor in
the broadly defined aerospace industry. While Northrop Grumman is
subject to the usual vagaries of the marketplace, it is also affected
by the unique characteristics of the aerospace industry and by certain
elements peculiar to its own business mix.
Northrop Grumman is one of the major companies that compete for
the relatively small number of large, long-term programs that
characterize both the defense and commercial segments of the aerospace
business. It is common in the aerospace industry for work on major
programs to be shared between a number of companies. A company
competing to be a prime contractor can turn out to be a
subcontractor. It is not uncommon to compete with customers, and
simultaneously to be both a supplier to and customer of a given
competitor. Over the past several years the aerospace industry has
been going through a consolidation process and along with it,
significant downsizing. These actions, in which Northrop Grumman has
participated, have made competition even more intense than in the
past. The nature of major aerospace programs, conducted under binding
contracts, allows companies that perform well to benefit from a level
of program continuity unknown in many industries. Lockheed Martin and
The Boeing Company are the largest companies in the aerospace industry
at this time. Northrop Grumman also competes against these and other
companies for a number of large and smaller programs in the electronics
and systems integration areas. Thus, long operating cycles are
characteristic of the industry's - and Northrop Grumman's - business.
Effective August 1, 1997, the company consummated its merger with
Logicon, Inc., (Logicon) a leading defense information technology company.
The merger is accounted for as a pooling of interests. Accordingly, the
accompanying restated financial statements have been retroactively
restated for the merger with Logicon. The results of Logicon are included
in the information technology and services industry segment along with
similar Northrop Grumman business which previously had been classified in the
aircraft and electronics industry segments.
In the first quarter of 1996 Northrop Grumman acquired the defense
and electronics systems business (ESG) of Westinghouse Electric
Corporation at a cost of $2.9 billion. The business acquired is being
operated as a component of the electronics industry segment. The
company purchased the outstanding common stock of Grumman Corporation
(Grumman) for $2.1 billion in the second quarter of 1994. Northrop
Corporation was renamed Northrop Grumman Corporation effective May 18,
1994. In August 1994 the company purchased the remaining 51 percent
interest in Vought Aircraft Company (Vought) for $130 million. The
company had purchased a 49 percent interest in Vought in 1992. The
company also acquired two defense Information Technology and Services
and services companies: Geodynamics Corporation (Geodynamics) in March
1996 for $32 million and Syscon Corporation (Syscon) in February 1995
for $45 million.
-32-
<PAGE>
NORTHROP GRUMMAN CORPORATION
The B-2 bomber, for which the company is the prime contractor, is
Northrop Grumman's largest program. The aircraft segment is
responsible for final assembly of the B-2's airframe and systems
integration at its Palmdale, California facility. The company also
manufactures the fuselage and elements of the B-2's navigation and
electronic warfare/situation awareness system. Major subcontractors
include Boeing, which produces the aft center section, outboard wing
sections, landing gear and fuel system, and Hughes Electronics
Corporation, which produces the radar systems. The U. S. Air Force
currently plans to operate two B-2 bomber squadrons of eight aircraft
each with an additional five aircraft available to fill in for those in
depot for periodic maintenance.
The company also is the principal subcontractor to The Boeing
Company (formerly McDonnell Douglas) on the F/A-18 program. The F/A-18
is a fighter/ground-attack aircraft with configurations equipped for
either one or two crew members. Principally deployed by the U.S. Navy
on aircraft carriers, it has also been purchased by several other
nations as a land-based combat aircraft. The company builds
approximately 40 percent of the aircraft including the center and aft
fuselage, vertical tails, and associated subsystems. Of the versions
of the F/A-18 currently in production, the C is a single-seat combat
aircraft that was first delivered to the U.S. Navy in 1987 and the D is
a two-seat version principally used for training. The F/A-18 single-
seat E and two-seat F are enhanced versions currently in the test phase
of development and will serve as the U.S. Navy's next-generation
multimission aircraft.
The company manufactures portions of the Boeing 747, 757, 767 and
777 jetliners, the Gulfstream IV and V business jets, and the Boeing
(formerly McDonnell Douglas) C-17 military transport. Northrop Grumman
has been a principal airframe subcontractor for the Boeing 747 jetliner
since the program began in 1966, producing the fuselage and aft body
section for the 747 as well as cargo and passenger doors, the vertical
and horizontal body stabilizers, floor beams and smaller structural
components. The majority of the Boeing jetliner work is performed at
the aircraft segment's production sites in Hawthorne, California; Grand
Prairie, Texas; and Stuart, Florida. Northrop Grumman manufactures
engine nacelles for the Gulfstream IV and other business jets and has
begun production of the wings for Gulfstream's newest business jet, the
Gulfstream V. The company also produces the empennage, engine nacelles
and control surfaces for the C-17, the U.S. Air Force's most advanced
airlifter. The work performed on the C-17, Gulfstream IV and V, 757, 767,
777 and some of the components of the 747 were added as a result of the
Grumman and Vought acquisitions.
Northrop Grumman also is a major producer of early warning and
surveillance/battle management aircraft. The company designed and
built all-weather E-2C Hawkeye airborne early warning
command-and-control aircraft that has been in active service with the
U.S. Navy since 1973, also is employed by the air forces of five other
nations. The E-2C is produced by the company's electronics segment.
The company also serves as prime contractor for the E-8 Joint
Surveillance Target Attack Radar System (Joint STARS). Joint STARS
detects, locates, classifies, tracks and targets potentially hostile
ground movement in all weather conditions. It is designed to operate
around the clock, in constant communication through secure data links
with air force command posts, army mobile ground stations or centers of
military analysis far from the point of conflict. The Joint STARS
platform is a remanufactured Boeing 707-300 airframe. The 707 is
remanufactured at Northrop Grumman's Lake Charles, Louisiana site.
Final installation of electronics and testing are performed at the
electronics segment integration and test facility in Melbourne,
Florida.
-33-
<PAGE>
NORTHROP GRUMMAN CORPORATION
ECM denotes electronic countermeasures equipment manufactured by
the company's electronics segment. The company's Rolling Meadows,
Illinois site produces the AN/ALQ-135, currently the largest program in
this business area. The AN/ALQ-135 is an internally mounted radar
jammer deployed on F-15 fighter aircraft as part of that aircraft's
Tactical Electronic Warfare System. The AN/ALQ-162 Shadowbox, a
jammer built specifically to counter continuous wave radars, has been
installed on the AV-8B and certain foreign F/A-18 aircraft. It is also
being deployed on U.S. Army helicopters and special mission aircraft
and has been sold to the air forces of three other nations. The
company is also under contract to develop and produce a directional
infrared countermeasures (DIRCM) system for the United Kingdom and the
U.S. Special Operations Command slated for use on British helicopters,
transports, and U.S. Special Operations Command C-130 transports to
reduce vulnerability to heatseeking missiles. DIRCM is designed to
provide high-powered jamming required to counter more advanced seekers
expected in the twenty-first century. The company's Baltimore,
Maryland site produces the Airborne Self-Protection Jammer (ASPJ) in a
joint venture with ITT-Avionics. The ASPJ is an internally mounted
system that protects tactical aircraft against numerous radar guided
threats. It is currently installed on selected F/A-18 and F-14
aircraft.
Northrop Grumman as the prime contractor to the U.S. Army is
developing a "brilliant" anti-armor submunition, designated as BAT,
with production scheduled to commence in 1998. BAT is a three-foot-
long, 44 pound, wide-area-attack submunition that will be used to
disable and destroy armored vehicles and trucks. BATs are meant to be
carried and dispensed by a larger missile and designed to be ejected over
an armored vehicle column or attacking formation. Each BAT has an acoustic
sensor that can home in on the noise created by the tank's or truck's engine
and an infrared sensor that can home in on the heat generated by a vehicle's
engine.
The company's electronics segment is a major producer of airborne
radar systems. Included in this business area are the AN/APG-66 and
AN/APG-68 fire control radars for the F-16 aircraft of which more than
6,000 have been produced since 1976. The AN/APG-66 is presently on 16
airborne platforms and is deployed in 20 countries. Northrop Grumman
is currently leading a joint venture with Raytheon (formerly Texas
Instruments) to develop the AN/APG-77 radar for the F-22 aircraft. The
AN/APG-77 is designed for air-superiority and strike operations and
features a low observable, active aperture, electronically-scanned
array with multi-target all-weather capability. The company's
electronics segment also produces the AN/APY-1/2 surveillance radar
system which provides air-to-air surveillance capability for the E-3
Airborne Warning And Control System (AWACS). AWACS is designed to
detect and track both enemy and friendly aircraft throughout a large
volume of airspace.
The company is a leader in producing marine machinery and advanced
propulsion systems, missile launchers, shipboard instrumentation and
control systems, mine countermeasures and undersea vehicles. Every
Nimitz-class aircraft carrier is fitted with eight turbine generator
sets that are produced at the electronics segment Sunnyvale,
California site. Each shipset of these powerful generators develops
enough power to supply a city of 75,000 people. The company also
produces the main propulsion system for the Navy's Seawolf-class attack
submarines.
-34-
<PAGE>
NORTHROP GRUMMAN CORPORATION
In addition, the company produces air defense and air traffic
control radar systems for airspace management for both domestic and
foreign customers. The three-dimensional AN/TPS-70/75 radars and
predecessor AN/TPS-43 are among the products in this business area.
They have been the U.S. Air Force air defense system standard since
1968. They are currently in operation in more than 30 countries,
supporting air defense, air sovereignty, air traffic control and
counternarcotics needs. The ASR-9 Terminal Radar detects and displays
aircraft and weather simultaneously, helping air traffic controllers
guide aircraft through the crowded skies surrounding airports.
Northrop Grumman designs, develops, operates and supports computer
systems for scientific and management information. This business is
included in the information technology and services segment. Services
provided include systems integration, systems service, information
conversion and training for federal, state and local governments and
private industry. The company also provides military base support functions
and aircraft maintenance at a number of U.S. Government facilities. Logicon,
included in the information technology and services segment, provides advanced
technology systems and services to support national security, civil and
industrial needs in the following areas: communications and intelligence;
weapon systems; information systems; training and simulation; science and
technology. Contracts with the U.S. government account for substantially
all of Logicon's revenues.
Tables of contract acquisitions, net sales and funded order
backlog follow and complement industry segment data. The reporting of
industry segment data has been realigned based upon the company's
current mix of products. Operating results for aircraft services
programs previously included in the aircraft segment are now included
in the information technology and services segment.
Information services business formerly included in the electronics
segment has been included in the information technology and services
segment as has all of the Logicon business. All of the
operations of ESG are included in the electronics industry segment.
Data for prior years has been restated. B-2, F/A-18, Boeing Jetliners
(the 747, 757, 767 and 777) and C-17 are currently the major programs
of the aircraft industry segment. Surveillance Aircraft (the E-2C
Hawkeye and E-8 Joint STARS), ECM, Airborne Radar, Marine, Space and
Airspace Management are included in the electronics industry segment.
-35-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Individual companies prosper in the competitive aerospace/defense
environment according to their ability to develop and market their
products. They also must have the ability to provide the people,
facilities, equipment and financial capacity needed to deliver those
products with maximum efficiency. It is necessary to maintain, as the
company has, sources for raw materials, fabricated parts, electronic
components and major subassemblies. In this manufacturing and systems
integration environment, effective oversight of subcontractors and
suppliers is as vital to success as managing internal operations.
Northrop Grumman's operating policies are designed to enhance these
capabilities. The company also believes that it maintains good
relations with its employees, approximately 12 percent of whom are
covered by collective bargaining agreements.
U.S. Government programs in which Northrop Grumman either
participates, or strives to participate, must compete with other
programs for consideration during our nation's budget formulation and
appropriation processes. As a consequence of the continued pressure to
reduce the federal budget deficit, the U.S. defense budget is not
expected to increase substantially in the near term. Budget decisions
made in this environment will have long-term consequences for the size
and structure of Northrop Grumman and the entire defense industry. An
important factor in determining Northrop Grumman's ability to compete
successfully for future contracts will be its cost structure vis-a-vis
other bidders.
Although the ultimate size of future defense budgets remains
uncertain, the defense needs of the nation are expected to provide
substantial research and development (R&D) funding and other business
for the company to pursue well into the future.
Northrop Grumman has historically concentrated its efforts in such
high technology areas as stealth, airborne surveillance, battle
management, precision weapons and systems integration. Even though a
high priority has been assigned by the Department of Defense to the
company's major programs, there remains the possibility that one or
more of them may be reduced, stretched or terminated.
Business conditions in the commercial aircraft industry appear to
be on the upswing. The major producers of jetliners recorded more than
twice the number of new aircraft orders in 1995 than in 1994. This
positive trend continued in 1996, potentially signifying a new
commercial airplane buying cycle. Northrop Grumman, with its
involvement on various Boeing jetliners, remains optimistic about the
long-term prospects for its commercial structures business.
Northrop Grumman pursues new business opportunities when justified
by acceptable financial returns and technological risks. The company
examines opportunities to acquire or invest in new businesses and
technologies to strengthen its traditional business areas. Northrop
Grumman continues to capitalize on its technologies and skills by
entering into joint ventures, partnerships or associations with other
companies.
-36-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Results Of Operations By Industry Segment And Major Customer
Year ended December 31, $ in millions 1996 1995 1994
Revenue
Aircraft
United States Government $ 3,060 $ 3,556 $ 4,227
Other customers 798 835 704
Intersegment sales 254 187 52
4,112 4,578 4,983
Electronics
United States Government 3,336 1,831 1,047
Other customers 508 228 307
Intersegment sales 39 103 106
3,883 2,162 1,460
Information Technology and Services
United States Government 828 761 706
Other customers 77 61 34
Intersegment sales 5 1 22
910 823 762
Intersegment eliminations (298) (291) (180)
Total revenue $ 8,607 $ 7,272 $ 7,025
Operating Profit
Aircraft $ 499 $ 465 $ 481
Electronics 360 197 132
Information Technology and Services 49 58 42
Total operating profit 908 720 655
Adjustments to reconcile operating
profit to operating margin:
Other income included above (17) (6)
State and local income taxes (52) (39) (30)
General corporate expenses (123) (109) (113)
Mark-to-market restricted stock rights (13)
Special termination benefits (282)
Operating margin $ 703 $ 572 $ 224
-37-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Year ended December 31, $ in millions 1996 1995 1994
Contract Acquisitions
Aircraft $ 3,890 $ 1,808 $ 8,468
Electronics 6,228 2,408 3,121
Information Technology and Services 977 836 736
Total acquisitions $11,095 $ 5,052 $12,325
Funded Order Backlog
Aircraft $ 7,044 $ 7,012 $ 9,595
Electronics 5,112 2,728 2,379
Information Technology and Services 511 439 425
Total backlog $12,667 $10,179 $12,399
Identifiable Assets
Aircraft $ 2,357 $ 2,481 $ 3,196
Electronics 5,583 1,948 1,797
Information Technology and Services 640 662 555
Operating assets 8,580 5,091 5,548
General corporate 1,065 551 644
Total assets $ 9,645 $ 5,642 $ 6,192
Capital Expenditures
Aircraft $ 84 $ 85 $ 89
Electronics 91 36 33
Information Technology and Services 22 16 14
General corporate 1 3 1
Total expenditures $ 198 $ 140 $ 137
Depreciation and Amortization
Aircraft $ 117 $ 172 $ 167
Electronics 230 84 76
Information Technology and Services 26 33 31
General corporate 2 1
Total depreciation and amortization $ 375 $ 290 $ 274
-38-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Northrop Grumman, as well as many other companies in the defense
industry, suffered the effects of the Department of Defense's practice in
the 1980s of structuring high-risk research and development contracts,
such as the Tri-Service Standoff Attack Missile (TSSAM), as fixed-price
or capped cost-reimbursement type contracts. Although Northrop Grumman
has stopped accepting these types of contracts, it has experienced
financial losses on TSSAM and other similar programs acquired under them
in the past. In the event of termination for convenience, contractors
are normally protected by provisions covering reimbursement for costs
incurred subsequent to termination. The company received a termination
for convenience notice on the TSSAM program in February 1995. In
December 1996, the company filed a lawsuit against the U.S. Government in
the U.S. Court of Federal Claims seeking the recovery of approximately
$750 million for uncompensated performance costs, investments, and a
reasonable profit. In prior years, the company had charged to operations
in excess of $600 million related to this program. Northrop Grumman is
unable to predict whether it will realize some or all its claims against
the U.S. Government from the TSSAM contract. The company does not expect
that these actions will have a material adverse effect on the company's
financial position.
Prime contracts with various agencies of the U.S. Government and
subcontracts with other prime contractors are subject to a profusion of
procurement regulations, with noncompliance found by any one agency
possibly resulting in fines, penalties, debarment or suspension from
receiving additional contracts with all agencies. Given the company's
dependence on U. S. Government business, suspension or debarment could
have a material adverse affect on the company's future. Moreover, these
contracts may be terminated at the U. S. Government's convenience as was
done with the TSSAM program. While Northrop Grumman conducts most of its
business with the U.S. Government, principally the Department of Defense,
commercial sales still represent a significant portion of total revenue.
Federal, state and local laws relating to the protection of the
environment affect the company's manufacturing operations. The company
has provided for the estimated cost to complete remediation 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 (PRP)
by the Environmental Protection Agency or similarly designated by other
environmental agencies. The company has been designated a PRP under
federal Superfund laws at 16 hazardous waste sites and under state
Superfund laws at six sites. It is difficult to estimate the timing and
ultimate amount of environmental cleanup costs to be incurred in the
future due to the uncertainties regarding the extent of the required
cleanup and the status of the law, regulations and their interpretations.
Nonetheless, 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. Such estimates
take into consideration the professional judgment of the company's
environmental engineers and, when necessary, consultation with outside
environmental specialists. In most instances, only a range of reasonably
possible costs can be estimated. However, in the determination of
accruals the most probable amount is used when determinable and the
minimum is used when no single amount is more probable. The company
records accruals for environmental cleanup costs in the accounting period
in which the company's responsibility is established and the costs can be
reasonably estimated. Management estimates that at December 31, 1996,
the reasonable range of future costs for environmental remediation,
including Superfund sites, is $63 million to $107 million, of which
$64 million has been accrued. The amount accrued has not been offset by
potential recoveries from insurance carriers or other PRPs. Should other
PRPs not pay their allocable share of remediation costs, the company may
have to incur costs in addition to those already estimated and accrued.
The company is making the necessary investments to comply with
environmental laws; the amounts, while not insignificant, are not
considered material to the company's financial position or results of its
operations.
-39-
<PAGE>
NORTHROP GRUMMAN CORPORATION
MEASURES OF VOLUME
Contract acquisitions tend to fluctuate and are determined by the size
and timing of new and add-on orders. The effects of multiyear orders
and/or funding can be seen in the highs and lows shown in the following
table. The funded order backlog of ESG, Grumman and Vought on the date
the businesses were acquired are reflected as acquisitions in the years
they were acquired. The Airborne Radar, Marine and Airspace Management
business areas were added as part of the ESG acquisition. The 757, 767,
777 (included in Boeing Jetliners category), Surveillance Aircraft
(E-2 and E-8 Joint STARS) and C-17 programs were acquired as part of
Grumman and Vought.
B-2 acquisitions in 1996 included $453 million for the upgrade of
test vehicle AV-1 to operational status increasing the program to 21
operational aircraft. The balance of B-2 acquisitions in 1996 and
acquisitions for 1995 include incremental funding for ongoing development
work, spares and other customer support for the operational aircraft program.
In 1994, $2.4 billion of funding to complete five B-2 production aircraft was
received as well as incremental funding for ongoing development work, spares
and other customer support. The company still stands to gain future new post
production business, such as airframe depot maintenance, repair of components,
operational software changes and product improvement modifications. The
debate over the future of the B-2, which is built in the nation's only active
bomber producing facility, is now taking place. Without future
production orders the nation's multibillion-dollar investment in this
capability will be disassembled and become retrievable only at a large
additional cost.
Contract Acquisitions
$ in millions 1996 1995 1994
B-2 $ 1,682 $ 475 $ 3,646
Surveillance Aircraft 1,330 1,084 2,287
F/A-18 759 888 462
Boeing Jetliners 737 464 1,177
Airborne Radar 1,639
Marine 901
ECM 335 592 323
Space 414
C-17 383 208 434
Airspace Management 629
Information Technology and Services 977 836 736
All other 1,309 505 3,260
$11,095 $ 5,052 $12,325
Acquisitions in 1996 included orders for 62 F/A-18C/D shipsets. In 1996 the
company also received long-lead funding for the first phase of the Low Rate
Initial Production (LRIP) of the F/A-18E/F along with continued funding of
the engineering and manufacturing development (EMD) phase of the program.
Orders for 128 F/A-18C/D shipsets were finalized in 1995. In 1994 the company
received long-lead funding from The Boeing Company (formerly McDonnell
Douglas Corporation) for new F/A-18C/D shipsets.
-40-
<PAGE>
NORTHROP GRUMMAN CORPORATION
The company received final authorization to produce 50 additional
747 jetliner shipsets in 1996. Advance funding was received from The
Boeing Company in 1995 for the current phase of the 747 jetliner program.
The company recorded orders for 18, 16, and 5 wing shipsets for the
Gulfstream V business jet in 1996, 1995 and 1994 respectively. The
company is producing the Gulfstream V wings under a revenue-sharing
agreement with Gulfstream Aerospace (Gulfstream). The company will
recognize revenue for its proportionate share of the revenue of each
business jet when they are delivered to the ultimate customer by
Gulfstream. Gulfstream has received 70 orders for the Gulfstream V
through December 1996. The Gulfstream V received provisional
certification in December 1996 and aircraft certification in April 1997.
The company is using program accounting for the Gulfstream V with an
estimated program of 250 shipsets to be delivered over a ten-year period.
Inventoried costs at December 31, 1996 include $56 million of learning-
curve costs for this program. The learning-curve costs represent the
excess of production cost of delivered and in process items over the
estimated average unit cost. This concept assumes that production cost
per unit decreases over time due to efficiencies from continuous
improvements in the performance of repetitive tasks. All nonrecurring
costs for the development of the wings have been expensed as incurred.
ECM acquisitions for 1995 included an award of $279 million from the
United Kingdom Ministry of Defence to develop and produce the DIRCM
systems.
The balance of ESG, Grumman and Vought funded order backlog at the
dates of acquisition, for those programs not listed in the table, is
included in the "all other" category. ESG accounts for the major
increase in the "all other" category in 1996 over 1995 and Grumman and
Vought account for the majority of "all other" in 1994.
Year-to-year sales vary less than contract acquisitions and reflect
performance under new and ongoing contracts. The 1996 results of
operations include ESG since the acquisition in March 1996. Comparative
results for 1995 and prior do not include ESG data. The 1994 results of
operations include Grumman and Vought since the acquisitions in April and
August 1994, respectively.
Sales for 1996 were the highest in the company's history and were
18 percent higher than the previous record registered in 1995.
Without the ESG acquisition, sales for 1996 would have declined 8
percent from the 1995 level. Sales for 1995 were 4 percent higher than
in 1994.
Net Sales
$ in millions 1996 1995 1994
B-2 $ 1,725 $ 1,914 $ 2,392
Surveillance Aircraft 1,104 1,179 754
F/A-18 715 822 817
Boeing Jetliners 569 569 483
Airborne Radar 560
Marine 496
ECM 398 351 357
Space 315
C-17 249 244 121
Airspace Management 223
Information Technology and Services 905 822 740
All other 1,348 1,371 1,361
$ 8,607 $ 7,272 $ 7,025
-41-
<PAGE>
NORTHROP GRUMMAN CORPORATION
The decreasing trend in the B-2 revenues from both EMD and
production work continued in 1996. The level of EMD effort, included
in amounts reported as contract R&D, constituted 33 percent of the
total B-2 revenue, up from 30 percent in 1995 and 26 percent in 1994.
Current planning data indicate that the level of overall B-2 revenue
will decline roughly 20 percent per year for the remainder of the
decade.
Sales increased in 1996 for the C/D version of the F/A-18 program
with an increase of deliveries to 68, as compared to 56 shipsets
delivered in 1995 and 42 delivered in 1994. The company currently
plans to deliver 35 F/A-18C/D shipsets in 1997. F/A-18E/F revenue was
lower in 1996 with the delivery of the final three shipsets for the EMD
phase of the program. A total of seven shipsets were delivered under
the F/A-18E/F EMD contract in 1995. The LRIP phase of the F/A-18E/F
program began in late 1996.
Deliveries of 747 shipsets were 28 in 1996, 24 in 1995 and 31 in
1994. The change in the mix of Boeing jetliners delivered in 1996
resulted in the same level of sales as in 1995. Forty-eight 747
shipsets are expected to be delivered in 1997. Increased deliveries of
all Boeing jetliners planned for 1997 is expected to result in more
than a 50 percent increase in revenue from these programs.
The electronics industry segment revenues increased 80 percent in
1996 as a result of the inclusion of the ESG operations, which more
than offset the reduction in revenue on the company's other electronics
programs. Higher revenues on the E-2 Hawkeye and E-8 Joint STARS
programs were the primary reason for the 40 percent increase in 1995
electronics revenues.
The year-end funded order backlog is the sum of the previous year-
end backlog plus the year's contract acquisitions minus the year's
sales. Backlog is converted into the following years' sales as costs
are incurred or deliveries are made. It is expected that approximately
57 percent of the 1996 year-end backlog will be converted into sales in
1997.
Funded Order Backlog
$ in millions 1996 1995 1994
B-2 $ 3,693 $ 3,736 $ 5,175
Surveillance Aircraft 1,664 1,438 1,533
F/A-18 675 631 565
Boeing Jetliners 1,480 1,312 1,417
Airborne Radar 1,079
Marine 405
ECM 684 747 506
Space 99
C-17 411 277 313
Airspace Management 406
Information Technology and Services 511 439 425
All other 1,560 1,599 2,465
$12,667 $10,179 $12,399
Total U.S. Government orders, including those made on behalf of
foreign governments (FMS), comprised 76 percent of the backlog at the
end of 1996 compared with 77 percent at the end of 1995 and 80 percent
at the end of 1994. Total foreign customer orders, including FMS,
accounted for 17 percent of the backlog at the end of 1996 compared
with 13 percent in 1995 and 8 percent in 1994. Domestic commercial
business in backlog at the end of both 1996 and 1995 was 16 percent and
14 percent at the end of 1994.
-42-
<PAGE>
NORTHROP GRUMMAN CORPORATION
MEASURES OF PERFORMANCE
The company's operating profit for 1996 was a record high and has
improved in its electronics segment for the last two years. The
improvement in 1996 is due to the addition of ESG. The improvement in
1995 stems from both increased revenue and improved operating margin
rates in the electronics segment. Company-wide efforts to reduce
costs, install tighter business controls, improve cash management,
dispose of excess assets and more effectively utilize productive assets
are all goals aimed at contributing to the future success of Northrop
Grumman. This financial report demonstrates the degree to which the
accomplishment of these goals is being achieved.
Operating profit in the aircraft segment increased to its highest
level ever in 1996 principally as a result of increased operating
margin on the C-17 military transport and Boeing jetliners. These
items offset the reduced operating margin on the B-2 program due to
lower sales volume. The amount and rate of operating margin recognized
on the 747 increased in 1996 due to increased deliveries and higher
operating margin on the deliveries of the last phase of a 300-shipset
production contract.
Aircraft segment operating profit decreased in 1995 primarily as a
result of lower overall sales volume and $31 million in expenditures
for company-sponsored research and development for commercial
aerostructures. The rate and amount of operating margin recorded on the
B-2 production contract increased in 1995 as a result of negotiated
contract adjustments and a revised estimate of the overall operating
margin expected to be earned. This increase was offset by lower
operating margin recorded on decreased revenue on the other phases of
the B-2 program. The rate and amount of operating margin on the F/A-18E/F
increased in 1995 due to an increase in the rate of operating margin being
recorded on the EMD contract. This resulted from the continuing evaluation
of the overall operating margin to be earned on this phase of the program.
The increase on the F/A-18E/F more than offset reduced operating margin
earned, on higher sales volume, for the F/A-18C/D. Fewer deliveries and
cost increases related to a stretch-out of the 300-shipset production
contract for the Boeing 747 jetliner resulted in a lower rate and amount of
operating margin in 1995.
Following the award of the last increment of production funding
for the B-2, the company began recording future operating margin
increases on all production aircraft as these units are delivered and
accepted by the customer. At the time each unit is delivered an
assessment is made of the status of the production contract so as to
estimate the amount of any probable additional margin available beyond
that previously recognized. That unit's proportionate share of any
such unrecognized remaining balance will then be recorded. In this
fashion it is believed that margin improvements will be recognized on a
more demonstrable basis. The current 15 production units are scheduled
for their initial delivery over a five-year period, which began in
December 1993. All but two units (four equivalent units for this
purpose) will be returned for scheduled retrofitting with final
deliveries beginning in 1997 and ending in 2000.
-43-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Operating profit in the electronics segment reached a record level
in 1996. The improvement in 1996 is due to the addition of ESG which
more than offset the reductions in the company's other electronics
programs. The reductions were primarily due to reduced volume and a
$29 million charge recorded as a result of the write-down of a claim
related to avionics work performed by Grumman Corporation prior to its
acquisition by Northrop.
The increase in 1995 operating profit in the electronics segment
was a result of an increased rate of operating margin and higher sales
volume on the E-2 Hawkeye and increased sales volume on the E-8 Joint
STARS program. The electronics segment operating profit in 1994
includes $8 million in provisions recorded by the electronics segment
Norwood operation for unrecoverable costs incurred.
Operating profit in the information technology and services segment
decreased in 1996 due to increased costs in the information systems area.
Partially offsetting this is an increase in operating margin due to the
acquisition of Geodynamics. The increase in 1995 operating profit is
primarily the result of the acquisition of Syscon Corporation.
Operating margin in 1996 included $39 million of pension income
compared with $23 million in 1995 and $36 million in 1994. Also
impacting operating margin is the cost of providing retiree health care
and life insurance benefits - $91 million in 1996 versus $87 million in
1995 and $69 million in 1994. A major contributor to the increase in
retiree health care and life insurance benefits cost was the addition
of the Grumman and Vought retiree plans in 1994. Operating margin in
1994 was reduced by $282 million to record the effect of an early
retirement incentive program.
In 1996 the company recorded a $90 million pretax charge related
to the closure of four plants. The charge included $30 million for
costs related to the reduction of personnel and other closure
activities, which lowered operating profit in the aircraft and
electronics industry segments by $22 million and $8 million,
respectively, and $60 million for the write-down of facilities included
in Other Deductions in the Consolidated Statements of Income. The
company recorded a $42-million pretax charge in 1994 for the planned
disposal of excess real estate and other assets. This charge is
reported in Other Deductions in the Consolidated Statements of Income.
These charges were a result of the company's continuing efforts to
reduce operating costs and dispose of assets that have become excess
due to changes in the company's business strategy.
Interest expense increased $133 million in 1996, following an
increase of $28 million in 1995. The increase in 1996 came primarily
from the issuance of debt to finance the ESG acquisition. The increase
in 1995 came primarily from the issuance of debt related to the
financing of the acquisition of Grumman. Total debt at December 31,
1996 stood at $3.4 billion compared to $1.4 billion at the end of 1995
and $1.9 billion at the end of 1994.
The company's effective federal income tax rate was 38.9 percent
in 1996, 38.2 percent in 1995 and 43.0 percent in 1994. The decrease
in the 1995 rate was due to a reduction in the ratio of expenses not
deductible for income taxes to the tax provision at the statutory rate
of 35 percent. The higher rate in 1996 was due to the amount of
expenses not deductible for income taxes, primarily the amortization of
goodwill.
-44-
<PAGE>
NORTHROP GRUMMAN CORPORATION
MEASURES OF LIQUIDITY AND CAPITAL RESOURCES
The trend and relationship of sales volume with net accounts receivable
and inventoried costs is a useful measure in assessing the company's
liquidity. In 1994, the company's net investment in these balances
represented 33 percent of sales. It decreased to 28 percent at the end
of 1995 before increasing to 29 percent at year-end 1996 with the
acquisition of ESG.
Cash flows from operations over the last three years have averaged
over $600 million annually. The $743 million of cash flow from
operations in 1996 was a decrease of $34 million from 1995 which was an
increase of $309 million over 1994. These cash flows have been
sufficient to service debt, finance capital expansion projects and
continue paying dividends to shareholders.
The following table is a condensed summary of the detailed cash
flow information contained in the Consolidated Statements of Cash
Flows.
Year ended December 31, 1996 1995 1994
Cash came from
Customers 66% 96% 71%
Lenders 29 2 28
Shareholders 4
Buyers of assets/other 1 2 1
100% 100% 100%
Cash went to
Employees and suppliers of
services and materials 58% 84% 65%
Sellers of assets 24 2 19
Lenders 13 10 13
Suppliers of facilities/other 4 3 2
Shareholders 1 1 1
100% 100% 100%
The cash received from lenders in 1996 and 1994 resulted from
borrowing for the acquisitions of ESG and Grumman, respectively. The
cash received from shareholders in 1996 was from a public stock
offering in which the company 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.
-45-
<PAGE>
NORTHROP GRUMMAN CORPORATION
In connection with the financing of the Grumman acquisition, the
company in April 1994, replaced its $400 million Credit Agreement with
a new $2.8 billion Credit Agreement. The new facility provided for
$600 million available on a revolving credit basis through March 1999
and a $2.2 billion term loan payable through March 1999. The Credit
Agreement was amended in May 1994 to increase the revolving credit line
to $800 million and reduce the term loan to $2 billion. In October
1994, the company issued $350 million of notes due in 2004 and $250
million of debentures due in 2024 pursuant to a public offering. The
net proceeds from the offering, along with other available funds, were
used to prepay $900 million under the term loan facility in addition to
paying the $100 million September quarterly installment due under that
facility. In December 1994, the company amended the Credit Agreement
to provide for the repayment of the remaining $1 billion balance of the
term loan in 14 quarterly installments of $62.5 million plus interest
beginning in September 1995, with a final installment of $125 million
due in March 1999. Cash flow from operations during 1994 enabled the
company to prepay the $160 million of notes payable to institutional
investors due in 1995 and acquire, in the open market, $58 million of
notes due in 1999, while paying a net premium of $5 million for the
early payments of these notes. The charge for the premium is included
in Other Deductions in the Consolidated Statements of Income. Cash
flow from operations in 1995 was sufficient to allow the company to
make the $125 million required term loan payment as well as $312
million in voluntary payments for amounts that were due through March
1997.
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 ESG. The debt indentures
contain restrictions relating to limitations on liens, sale and
leaseback arrangements and funded debt of subsidiaries.
To finance the balance of the purchase price of ESG 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 $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. 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.
During 1995 the company entered into an agreement with a financial
institution to sell designated pools of its commercial accounts
receivable, in amounts up to $75 million. At December 31, 1995,
$34 million of accounts receivable had been sold. Northrop Grumman
terminated this agreement in 1996.
To provide for long-term liquidity the company believes it can
obtain additional capital from such sources as: the public or private
capital markets, the further sale of assets, sale and leaseback of
operating assets, and leasing rather than purchasing new assets.
The cost reduction and cash improvement programs underway
throughout the company have produced favorable results, with the
expectation that further efforts will result in minimizing the need to
incur additional borrowings during 1997. Cash generated from
operations is expected to be sufficient in 1997 to service debt,
finance capital expansion projects and continue paying dividends to the
shareholders.
-46-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Capital expenditure commitments at December 31, 1996, were
approximately $127 million including $4 million for environmental
control and compliance purposes.
The company will continue to provide the productive capacity to
perform its existing contracts, dispose of assets no longer needed to
fulfill operating requirements, prepare for future contracts and
conduct R&D in the pursuit of developing opportunities. While these
expenditures tend to limit short-term liquidity, they are made with the
intention of improving the long-term growth and profitability of the
company.
FORWARD-LOOKING INFORMATION
Certain statements and 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 involves risk and uncertainties, including statements and
assumptions with respect to future revenues, program performance and
cash flows, the outcome of contingencies including litigation and
environmental remediation, and anticipated costs of capital investments
and planned dispositions. The company's operations are necessarily
subject to various risks and uncertainties; actual outcomes are
dependent upon many factors, including, without limitation, 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; the outcome of political and legal
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.
-47-
<PAGE>
NORTHROP GRUMMAN CORPORATION
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Northrop Grumman Corporation
Los Angeles, California
We have audited the accompanying consolidated statements of financial
position of Northrop Grumman Corporation and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The consolidated financial statements give retroactive effect to the
merger of Northrop Grumman Corporation and Subsidiaries and Logicon, Inc. on
August 1, 1997, which has been accounted for as a pooling-of-interests as
described in the note captioned "Merger with Logicon, Inc."
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Northrop Grumman
Corporation and Subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Los Angeles, California
February 5, 1997
(except for the combination described in the note captioned
"Merger with Logicon, Inc." as to which the date is November 13, 1997.)
-48-
<PAGE>
NORTHROP GRUMMAN CORPORATION
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 hereunto duly authorized.
Northrop Grumman Corporation
Date: November 13, 1997 By:\s\Nelson F. Gibbs
Nelson F. Gibbs
Corporate Vice President and Controller
Date: November 13, 1997 By:\s\James C. Johnson
James C. Johnson
Corporate Vice President and Secretary
-49-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 123
<SECURITIES> 0
<RECEIVABLES> 1,508
<ALLOWANCES> 55
<INVENTORY> 1,053
<CURRENT-ASSETS> 2,775
<PP&E> 3,195
<DEPRECIATION> 1,783
<TOTAL-ASSETS> 9,645
<CURRENT-LIABILITIES> 2,669
<BONDS> 3,150
0
0
<COMMON> 784
<OTHER-SE> 1,498
<TOTAL-LIABILITY-AND-EQUITY> 9,645
<SALES> 8,607
<TOTAL-REVENUES> 8,607
<CGS> 7,904
<TOTAL-COSTS> 7,904
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 270
<INCOME-PRETAX> 432
<INCOME-TAX> 168
<INCOME-CONTINUING> 264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264
<EPS-PRIMARY> 4.22
<EPS-DILUTED> 4.22
</TABLE>
