FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 29549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----------------------to------------------
Commission File Number 1-3229
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE No. 95-1055798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Century Park East, Los Angeles, California 90067
(address of principal executive offices)
(310) 553-6262
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock outstanding as of July 26, 1999 69,429,095 shares
<PAGE>
Northrop Grumman Corporation and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS
OF FINANCIAL POSITION
<TABLE>
<CAPTION>
June 30, December 31,
Dollars in millions 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 87 $ 44
Accounts receivable, net of progress payments of
$1,829 in 1999 and $1,388 in 1998 1,505 1,507
Inventoried costs, net of progress payments of
$592 in 1999 and $521 in 1998 1,336 1,373
Deferred income taxes 23 24
Prepaid expenses 88 85
- -------------------------------------------------------------------------------
Total current assets 3,039 3,033
- -------------------------------------------------------------------------------
Property, plant and equipment 3,044 3,058
Accumulated depreciation (1,802) (1,784)
- -------------------------------------------------------------------------------
1,242 1,274
- -------------------------------------------------------------------------------
Goodwill, net of accumulated amortization of $387 in 1999
and $338 in 1998 3,454 3,381
Other purchased intangibles, net of accumulated amortization
of $340 in 1999 and $295 in 1998 750 795
Prepaid pension cost, intangible pension
asset and benefit trust fund 989 787
Deferred income taxes 99 166
Assets available for sale 30 37
Investments in and advances to affiliates and sundry assets 54 63
- -------------------------------------------------------------------------------
5,376 5,229
- -------------------------------------------------------------------------------
$ 9,657 $ 9,536
================================================================================
I-1
</TABLE>
<PAGE>
Northrop Grumman Corporation and Subsidiaries
<TABLE>
<CAPTION>
June 30, December 31,
Dollars in millions 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Notes payable to banks $ $ 69
Current portion of long-term debt 200 200
Trade accounts payable 440 416
Accrued employees' compensation 357 337
Advances on contracts 294 354
Income taxes payable including deferred income taxes
of $572 in 1999 and $527 in 1998 578 527
Other current liabilities 492 464
- ----------------------------------------------------------------------------------------------
Total current liabilities 2,361 2,367
- ----------------------------------------------------------------------------------------------
Long-term debt 2,500 2,562
Accrued retiree benefits 1,723 1,704
Other long-term liabilities 42 53
Paid-in capital
Preferred stock, 10,000,000 shares authorized; none issued
Common stock, 200,000,000 shares authorized; issued and outstanding:
1999 - 69,410,539; 1998 - 68,836,810 1,024 989
Retained earnings 2,038 1,892
Accumulated other comprehensive loss (31) (31)
- ----------------------------------------------------------------------------------------------
3,031 2,850
- ----------------------------------------------------------------------------------------------
$9,657 $9,536
==============================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
I-2
<PAGE>
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
Dollars in millions, except per share 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $2,274 $2,139 $4,367 $4,153
Cost of sales
Operating costs 1,777 1,631 3,386 3,167
Administrative and general expenses 259 300 527 571
- ---------------------------------------------------------------------------------------
Operating margin 238 208 454 415
Merger costs (6) (186)
Interest expense (54) (59) (109) (114)
Other, net (4) 4 (1) 13
- ---------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of accounting
change 180 147 344 128
Federal and foreign income taxes 67 54 127 47
- ---------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 113 93 217 81
Cumulative effect of change in accounting
for start-up costs, net of income tax
benefit of $11 (16)
- ---------------------------------------------------------------------------------------
Net income $ 113 $ 93 $ 201 $ 81
=======================================================================================
Weighted average shares outstanding,
in millions 68.6 68.6 68.7 68.2
=======================================================================================
Basic earnings per share:
Before cumulative effect of
accounting change $ 1.65 $ 1.36 $ 3.16 $ 1.19
Accounting change (.24)
- ---------------------------------------------------------------------------------------
Basic earnings per share $ 1.65 $ 1.36 $ 2.92 $ 1.19
=======================================================================================
Diluted earnings per share:
Before cumulative effect of
accounting change $ 1.64 $ 1.34 $ 3.13 $ 1.17
Accounting change (.24)
- ---------------------------------------------------------------------------------------
Diluted earnings per share $ 1.64 $ 1.34 $ 2.89 $ 1.17
=======================================================================================
Dividends per share $ .40 $ .40 $ .80 $ .80
=======================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
I-3
<PAGE>
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six months ended June 30,
Dollars in millions 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Paid-in Capital
At beginning of year $ 989 $ 838
Stock issued in purchase of affiliate 30
Employee stock awards and options exercised 5 121
- ------------------------------------------------------------------------------------
1,024 959
- ------------------------------------------------------------------------------------
Retained Earnings
At beginning of year 1,892 1,807
Net income 201 81
Cash dividends (55) (54)
- ------------------------------------------------------------------------------------
2,038 1,834
- ------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss (31) (22)
- ------------------------------------------------------------------------------------
Total shareholders' equity $3,031 $2,771
====================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
I-4
<PAGE>
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30,
Dollars in millions 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 947 $ 861
Other collections 3,475 3,354
Income tax refunds received 23 8
Interest received 1 1
Other cash receipts 5 4
- ------------------------------------------------------------------------------------
Cash provided by operating activities 4,451 4,228
- ------------------------------------------------------------------------------------
Uses of Cash
Cash paid to suppliers and employees 3,900 4,092
Interest paid 106 106
Income taxes paid 59 29
Other cash disbursements 8 29
- ------------------------------------------------------------------------------------
Cash used in operating activities 4,073 4,256
- ------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 378 (28)
- ------------------------------------------------------------------------------------
Investing Activities
Additions to property, plant and equipment (72) (86)
Payment for businesses purchased, net of cash acquired (97)
Proceeds from sale of property, plant and equipment 16 13
Other investing activities (1)
- ------------------------------------------------------------------------------------
Net cash used in investing activities (153) (74)
- ------------------------------------------------------------------------------------
Financing Activities
Borrowings under lines of credit 23 251
Repayment of borrowings under lines of credit (53)
Principal payments of long-term debt (100) (150)
Proceeds from issuance of stock 3 32
Dividends paid (55) (54)
- ------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (182) 79
- ------------------------------------------------------------------------------------
Increase(decrease) in cash and cash equivalents 43 (23)
Cash and cash equivalents balance at beginning of period 44 63
- ------------------------------------------------------------------------------------
Cash and cash equivalents balance at end of period $ 87 $ 40
====================================================================================
</TABLE>
I-5
<PAGE>
Northrop Grumman Corporation and Subsidiaries
<TABLE>
<CAPTION>
Six months ended June 30,
Dollars in millions 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by(Used in) Operating Activities
Net income $ 201 $ 81
Adjustments to reconcile net income to net
cash provided(used)
Depreciation 98 95
Amortization of intangible assets 95 92
Common stock issued to employees 88
Loss on disposals of property, plant and equipment 1 4
Retiree benefits income (114) (97)
Decrease(increase) in
Accounts receivable (82) (261)
Inventoried costs (57) (354)
Prepaid expenses 12 (16)
Increase(decrease) in
Progress payments 206 310
Accounts payable and accruals (27) 42
Provisions for contract losses 11 24
Deferred income taxes 112 16
Income taxes payable 6 32
Retiree benefits (91) (88)
Other transactions 7 4
- ------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 378 $ (28)
====================================================================================
Noncash Investing Activities:
Purchase of businesses
Assets acquired $ 156
Cash paid (97)
Stock issued (30)
- ------------------------------------------------------------------------------------
Liabilities assumed $ 29
====================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
I-6
<PAGE>
Northrop Grumman Corporation and Subsidiaries
SELECTED INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended June 30,Six months ended June 30,
Dollars in millions 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales
Integrated Systems & Aerostructures $ 1,293 $ 1,210 $ 2,466 $ 2,415
Electronic Sensors & Systems 659 695 1,274 1,314
Information Technology (Logicon) 365 288 718 523
Intersegment sales (43) (54) (91) (99)
- ------------------------------------------------------------------------------------
$ 2,274 $ 2,139 $ 4,367 $ 4,153
====================================================================================
Operating Margin
Integrated Systems & Aerostructures $ 91 $ 84 $ 173 $ 169
Electronic Sensors & Systems 54 56 99 114
Information Technology (Logicon) 21 21 40 35
- ------------------------------------------------------------------------------------
Total 166 161 312 318
Other items included in operating margin:
Corporate expenses (8) (14) (16) (22)
Deferred state tax provision (4) (7) (9) (14)
Pension income 84 68 167 133
- ------------------------------------------------------------------------------------
Operating margin $ 238 $ 208 $ 454 $ 415
Contract Acquisitions
Integrated Systems & Aerostructures $ 782 $ 1,013 $ 2,211 $ 1,977
Electronic Sensors & Systems 954 453 1,529 939
Information Technology (Logicon) 317 260 726 510
Intersegment acquisitions (24) (60) (53) (81)
- ------------------------------------------------------------------------------------
$ 2,029 $ 1,666 $ 4,413 $ 3,345
====================================================================================
Funded Order Backlog
Integrated Systems & Aerostructures $ 6,678 $ 7,692
Electronic Sensors & Systems 3,374 3,153
Information Technology (Logicon) 574 434
Intersegment backlog (131) (225)
- ------------------------------------------------------------------------------------
$10,495 $11,054
====================================================================================
</TABLE>
I-7
<PAGE>
Northrop Grumman Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared by management in accordance with the instructions
to Form 10-Q of the Securities and Exchange Commission. They do not
include all information and notes necessary for a complete
presentation of financial position, results of operations, changes in
shareholders' equity, and cash flows in conformity with generally
accepted accounting principles. They do, however, in the opinion of
management, include all adjustments necessary for a fair statement of
the results for the periods presented. The financial statements
should be read in conjunction with the Notes and Independent Auditors'
Report contained in the company's 1998 annual report on Form 10-K
report.
New Accounting Standards
In January 1999, the company adopted Statement of Position (SOP) 98-5 -
Reporting on the Costs of Start-up Activities, which requires that
certain costs, that previously had been deferred, be expensed and
reported as a cumulative effect of a change in accounting principle,
and all such future costs be expensed as incurred.
In the first quarter of 1999, the company recorded a $16 million
after-tax charge, or $.24 per share, as the cumulative effect of a
change in accounting principle.
Earnings per Share
Basic earnings per share are calculated using the weighted average
number of shares of common stock outstanding during each period, after
giving recognition to stock splits and stock dividends. Diluted
earnings per share reflect the dilutive effect of stock options and
other stock awards granted to employees under stock-based compensation
plans.
I-8
<PAGE>
Northrop Grumman Corporation and Subsidiaries
<TABLE>
<CAPTION>
Basic and diluted earnings per share are calculated as follows:
Earnings
Three months ended June 30, Net Income Shares per Share
------------ -------- -----------
(millions) (millions)
<S> <C> <C> <C>
1999
Basic EPS before accounting change $ 113 68.6 $ 1.65
===== ======
Dilutive effect of stock options and awards .5
------
Diluted EPS before accounting change $ 113 69.1 $ 1.64
===== ====== ======
1998
Basic EPS before accounting change $ 93 68.6 $ 1.36
===== ======
Dilutive effect of stock options and awards 1.0
------
Diluted EPS before accounting change $ 93 69.6 $ 1.34
===== ====== ======
Six months ended June 30,
1999
Basic EPS before accounting change $ 217 68.7 $ 3.16
===== ======
Dilutive effect of stock options and awards .7
------
Diluted EPS before accounting change $ 217 69.4 $ 3.13
===== ====== ======
1998
Basic EPS before accounting change $ 81 68.2 $ 1.19
===== ======
Dilutive effect of stock options and awards 1.3
------
Diluted EPS before accounting change $ 81 69.5 $ 1.17
===== ====== ======
</TABLE>
I-9
<PAGE>
Northrop Grumman Corporation and Subsidiaries
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND THE RESULTS OF ITS OPERATIONS
Sales were 6 percent higher in the second quarter and 5 percent higher
in the first half of 1999 versus the same periods, respectively, of
1998, reflecting increases in both the Integrated Systems and
Aerostructures (ISA) and Information Technology (Logicon) segments and
a decrease in the Electronic Sensors and Systems (ESS) segment.
ISA sales in the second quarter increased 7 percent over the
second quarter of 1998, primarily due to increased F/A-18E/F sales, as
this program transitions from development to production. Sales on the
EA-6B program, which is reported in the Airborne Early Warning and
Electronics Warfare (AEW/EW) business area, increased in both the
second quarter and first half of 1999 versus comparable periods of
1998. The Aerostructures sales increase for the first six months of
1999 over the same period a year ago was due to higher C-17 sales.
ESS sales for the second quarter and first six months of 1999
declined as compared to the same periods last year due to lower volume
on combat electronic systems programs and surveillance sensors
programs, which are included in the Aerospace Electronic Systems
business area.
Logicon sales were 27 percent higher in the second quarter and 37
percent higher in the first half of 1999 versus the same periods,
respectively, of 1998. The Joint Base Operations Support Contract
(J-BOSC), which was won in the third quarter of 1998, accounted for most
of the increase in the Technology Services business area. The increase
for the first six months of 1999 in the Government Information
Technology business area is attributable to Inter-National Research
Institute Inc. (INRI), which was acquired in the third quarter of 1998,
as well as increased orders on the Integrated Computer Aided Software
Engineering (I-CASE) contract, on which Logicon is a value-added
reseller of hardware and software.
I-10
<PAGE>
Northrop Grumman Corporation and Subsidiaries
<TABLE>
<CAPTION>
Sales by business area and units delivered were:
Three months ended June 30, Six months ended June 30,
$ in millions 1999 1998 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Integrated Systems & Aerostructures
Air Combat Systems (ACS) $ 544 $ 509 $ 995 $1,049
Aerostructures 367 365 758 707
Airborne Early Warning and
Electronic Warfare (AEW/EW) 218 176 410 332
Airborne Ground Surveillance and
Battle Management (AGS/BM) 188 189 349 374
Intrasegment Eliminations (24) (29) (46) (47)
- ----------------------------------------------------------------------------------------
1,293 1,210 2,466 2,415
- ----------------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 257 312 511 599
Command, Control, Communications,
Intelligence and Naval Systems (C3I&N) 218 202 432 379
Defensive Electronic Systems 124 131 235 250
Other 60 50 96 86
- ----------------------------------------------------------------------------------------
659 695 1,274 1,314
- ----------------------------------------------------------------------------------------
Information Technology (Logicon)
Government Information Technology 248 218 489 391
Technology Services 85 40 168 74
Commercial Information Technology 32 30 61 58
- ----------------------------------------------------------------------------------------
365 288 718 523
- ----------------------------------------------------------------------------------------
Intersegment eliminations (43) (54) (91) (99)
- ----------------------------------------------------------------------------------------
Total sales $2,274 $2,139 $4,367 $4,153
========================================================================================
Units
- ----------------------------------------------------------------------------------------
B-2 1 1 2 2
F/A-18 C/D 7 8 16 17
F/A-18 E/F 3 0 3 0
747 8 13 20 26
C-17 4 0 6 2
- ----------------------------------------------------------------------------------------
</TABLE>
I-11
<PAGE>
Northrop Grumman Corporation and Subsidiaries
In the ISA segment, the amount and rate of operating margin earned
on sales increased in the second quarter and first six months of 1999
as compared with the same periods of 1998. The 1999 second quarter
results reflect upward cumulative margin rate adjustments of $36 million
on the B-2 contract and $11 million on the F/A-18E/F. These
improvements were more than offset by downward cumulative margin rate
adjustments on several Boeing aerostructures contracts totaling $40 million
and lower overall margin rates on Boeing aerostructures work.
Last year's second quarter results included downward cumulative margin
rate adjustments totaling $25 million on the E-8 Joint STARS and E-2C
programs.
In the second quarter of 1999, the company resolved its claims
with Boeing regarding recovery of out-of-scope work and related delay
and disruption costs associated with the Accurate Fuselage Assembly
(AFA) program, which is now substantially complete. The settlement had
no material effect on the company's financial results.
Since the beginning of the Joint STARS program, the company (and
prior to 1994, the Grumman Corporation) has incurred over $100 million
of costs in excess of revenues in the performance of the development
and production phases of the program. In 1998, the company submitted
Requests for Equitable Adjustment (REAs) to the U. S. Air Force seeking
adjustment to production contracts for cost increases incurred during
the refurbishment and conversion of used Boeing 707 aircraft to Joint
STARS platforms. The company and the U. S. Air Force executed an
Alternate Dispute Resolution Agreement(ADR) to attempt to resolve these
REAs and, in April 1999, the company filed these REAs as certified
claims. If the ADR process is unsuccessful, the company will pursue
its claims pursuant to the Contracts Disputes Act. The company cannot
predict the outcome of this claim process or the effect of the ultimate
resolution on the company's results of operations, financial position,
and cash flows.
The amount and rate of operating margin earned on sales decreased
in the ESS segment in the second quarter and first six months of 1999
as compared with the same periods of 1998. The decrease reflects lower
margins in the Defensive Electronic Systems business area, due in part
to additional costs incurred in transitioning a development program to
production.
Logicon reported a lower rate of operating margin earned on sales
in both the second quarter and first half of 1999 as compared with the
same periods of 1998, principally as a result of lower rates on new
business and higher administrative costs.
I-12
<PAGE>
Northrop Grumman Corporation and Subsidiaries
The company has merged three of its retirement plans into one, to
include the former Northrop Grumman Pension Plan, the Electronic
Sensors and Systems Sector Employees Pension Plan (non-represented),
and the Commercial Aircraft Employees Pension Plan (salaried). The
pension plan merger will not result in any changes to any participant's
existing pension benefits, nor will it alter individual plan designs.
The retirement plan merger, effective in July 1999, has no impact
on the company's financial results for the first six months of this
year. The plan merger is expected to result in a reduction to net
income of approximately $20 million, or $.27 per share, and improved
cash flow after taxes of approximately $25 million in the last six
months of 1999. The merged plan has assets in excess of $2.5 billion
over projected benefit obligations and the company does not anticipate
the need for contributions to the plan in the foreseeable future.
Last year's first half results included a $186 million pretax
charge ($1.73 per share after tax) for costs associated with the
company's terminated merger with Lockheed Martin Corporation
Interest expense was $54 million for the second quarter 1999 and
$109 million for the first half of 1999, down from the $59 million and
$114 million, respectively, reported in the same periods last year.
The decreases resulted principally from a lower average level of
borrowings in the first half of 1999 compared with the first half of
1998.
The company's effective federal income tax rate was 37 percent for
the first six months of 1999, unchanged from the same period in 1998.
Effective January 1, 1999, the company adopted the new accounting
standard, SOP 98-5 - Reporting on the Costs of Start-Up Activities,
which requires that certain costs that previously had been deferred be
expensed and reported as a cumulative effect of a change in accounting
principle. The company reported a $16 million after-tax charge, or
$.24 per share, to write off the previously deferred start-up costs.
All such costs incurred after January 1, 1999, are being expensed as
incurred and are expected to be approximately $8 million, before tax,
for all of 1999.
During the first half of 1999, $378 million of cash was generated
by operations versus the $28 million that was used by operations in the
first half of 1998. The increase reflects increased sales and improved
cash collections in 1999. Last year's use of cash by operating
activities was driven by merger related expenses as well as an increase
in working capital for Boeing jetliners in support of increased
production levels. Cash generated from operating activities for the
remainder of 1999 is expected to be more than sufficient to finance
capital expenditures and dividends and make required debt service
payments. The company's liquidity and financial flexibility will
continue to be provided by cash flow generated by operating activities,
supplemented by the unused borrowing capacity available under the company's
credit agreement and other short-term credit facilities.
I-13
<PAGE>
Northrop Grumman Corporation and Subsidiaries
Year 2000 Issues
The company continues to implement its program to address the Year 2000
issue. The program, which began in 1996, consists of the following
four phases: assessing, planning, remediating, and testing-validating.
The project encompasses the entire company and all aspects of Year 2000
compliance including software applications, mainframe environment,
desktop equipment, networks, telecommunications, department supported
systems, facilities systems, and embedded systems in product
deliverables.
All four phases were substantially completed by the end of 1998.
The company has surveyed all major suppliers to determine their state
of readiness, reviewed major customers' Year 2000 status, reviewed
contracts for any potential Year 2000 liabilities, and developed
contingency plans and year end support plans where appropriate.
Activities scheduled to be completed in the remainder of 1999 are
largely comprised of low risk equipment upgrades, and various upgrades
that suppliers have only recently made available. Additional focus has
been placed on contingency plans, year-end plans, and follow-up
assessments for critical suppliers and major customers.
Contingency plans have been developed to address potential
computer failures that either 1) are of greatest risk for potential
failure or 2) might impact mission critical systems. Assessment of
Year 2000 progress is a critical input to the development of
contingency plans. Follow-up assessments are being conducted for all
critical suppliers and major customers. Year 2000 readiness letters
were sent to all critical suppliers during the second quarter of 1999.
All critical suppliers will be tracked until they are deemed Year 2000
ready or appropriate alternate sourcing strategies are in place. Major
customers are also being reevaluated to assess their state of Year 2000
readiness. All business areas have reviewed their critical processes
and systems and have completed Business Impact Assessments to identify
potential risks, mitigation strategies, and critical resources. These
are reflected in Year 2000 contingency plans that have been developed
for each Northrop Grumman sector. Year-end support plans and site
staffing requirements have been developed and are being refined.
The company has a formal planning, measurement and reporting
process for the Year 2000 project. This process includes regular
progress briefings to senior management and to the audit committee of
the Board of Directors.
The company separately identifies the costs of Year 2000 remedial
efforts only for internal information services personnel, principally
as a planning and control tool. The total costs of these efforts
incurred during the years 1996 through 1999 are expected to be
approximately $42 million, of which approximately $39 million was
expended through June 30, 1999. Year 2000 costs are allowable costs
under applicable government contracting regulations. Accordingly, the
portion of Year 2000 costs allocable to contracts is being so charged
as part of normal overhead pursuant to approved methods established for
this purpose. Based on information available to date, management does
not anticipate that future expenditures for required modifications and
conversions will have a material adverse effect on the company's
financial position, results of operations, or cash flows.
I-14
<PAGE>
Northrop Grumman Corporation and Subsidiaries
Northrop Grumman cannot predict the eventual outcome associated
with the innumerable possible situations that could result from
whatever computer failures might occur, internally or among its
customers and suppliers, and the impact that such failures might have
on Northrop Grumman's ability to perform its day to day operations.
If required modifications and conversions are not made as planned,
serious adverse impact to the operations of the company could
result. In addition, Year 2000 problems could adversely affect the
ability of customers and critical suppliers to meet their contractual
commitments to the company. Some of these developments, should they occur,
could have a material adverse impact on the financial position, results of
operations, or cash flows of Northrop Grumman.
Forward-Looking Information
There are statements in this quarterly report on Form 10-Q, and, not by way
of limitation, in Management's Discussion and Analysis, that we believe are
"forward-looking" statements and information within the meaning of Private
Securities Litigation Reform Act of 1995 that involve risk and uncertainties,
including statements and assumptions that reflect the company's views 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; the ability of the company, its customers and suppliers to
become Year 2000 compliant; 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, including risks detailed in the
company's filings with the Securities and Exchange Commission,
including, not by way of limitation, any Form 10-K, Form 10-Q and proxy
statements, among others.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The company has fixed-rate long-term debt obligations, most of which
are not callable until maturity. The company also has financial
instruments that are subject to interest rate risk, principally
variable-rate short-term debt outstanding under the Credit Agreement.
The company may enter into interest rate swap agreements to offset the
variable-rate characteristics of these loans. At June 30, 1999, no
interest rate swap agreements were in effect.
Only a small portion of the company's transactions are contracted
in foreign currencies. The company does not consider the market risk
exposure relating to foreign currency exchange to be material.
I-15
<PAGE>
Northrop Grumman Corporation and Subsidiaries
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
General
- -------
The company, as a government contractor, is from time to time
subject to U.S. Government investigations relating to its operations.
Government contractors that are found to have violated the False Claims
Act, or are indicted or convicted for violations of other Federal laws,
or are considered not to be responsible contractors may be suspended or
debarred from government contracting for some period of time. Such
convictions could also result in fines. Given the company's dependence
on government contracting, suspension or debarment could have a
material adverse effect on the company. The company is involved in
certain other legal proceedings arising in the ordinary course of
business, none of which the company's management believes will have a
material adverse effect on the company's financial condition.
Walsh, et al. v. Northrop Grumman Corporation
- ---------------------------------------------
In November 1994, a class action complaint was filed against Northrop
Grumman Corporation, Grumman Corporation and four named individuals in
the U.S. District Court of the Eastern District of New York, Case No.
CV94-5105 (Platt C.J.).
On March 25, 1999, the District Court entered an order approving a
settlement and dismissing the class action case with prejudice. On
July 6, 1999, after time to appeal the District Court's order had
lapsed with no appeal having been filed, Northrop Grumman Corporation
paid six million dollars to the settlement administrator for
distribution to the class members. This matter is now closed.
Item 2. Changes in Securities and Use of Proceeds
(c) Sale of Unregistered Securities.
On June 29, 1999 the Company issued 457,926 shares of Common Stock, par
value $1 per share, to six individuals and/or trusts in exchange for
all outstanding shares of Data Procurement Corporation, Inc., a
Maryland corporation ("DPC"). DPC is engaged in providing information
technology services to U.S. Federal agencies. The transaction was in
the form of a statutory merger of a transitory acquisition subsidiary
into DPC. In connection with the issuance, the Company claimed
exemption from registration under Section 4(2) of the Act. The shares
were issued to the six employee-owners and/or their related trusts
pursuant to investor undertakings restricting distribution in violation
of the Securities Act of 1933. The recipients obtained registration
rights in the transaction. The shares bear restrictive legends. The
recipients have the right to request that the Company file a
registration statement under the Act with respect to resale of such
securities. The transaction also involved a cash payment by the
Company to or for the benefit of the individuals and/or trusts and
aggregate value of the consideration received was commensurate with the
value of the shares and cash exchanged.
II-1
<PAGE>
Northrop Grumman Corporation and Subsidiaries
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting --
The annual meeting of stockholders of Northrop Grumman Corporation
was held on May 19, 1999.
(b) Election of Directors --
The following Class II Director nominees were elected at the
annual meeting:
Phillip Frost
Robert A. Lutz
John E. Robson
John Brooks Slaughter
The Directors whose terms of office continue are:
Jack R. Borsting
John T. Chain, Jr.
Jack Edwards
Kent Kresa
Aulana L. Peters
Richard M. Rosenberg
Richard J. Stegemeier
II-2
Northrop Grumman Corporation and Subsidiaries
(c) The matters voted upon at the meeting and the results of each vote
are as follows:
Votes Votes
For Directors: For Withheld
--------- --------
Phillip Frost 54,814,475 3,911,721
Robert A. Lutz 54,786,048 3,940,148
John E. Robson 54,794,420 3,931,776
John Brooks Slaughter 54,790,406 3,935,790
<TABLE>
<CAPTION>
Votes Votes Shares Broker
For Against Abstaining Non-Votes
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Ratification of the appointment
of Deloitte & Touche LLP as the
Company's independent auditors 57,961,484 459,399 305,313
Proposal to approve Incentive
Compensation Plan of Northrop
Grumman Corporation, as
amended and restated 55,592,083 2,608,876 524,337 900
Shareholder Proposal
regarding military contracts 2,433,402 48,747,467 2,388,600 5,156,727
Shareholder Proposal regarding
super majority vote 33,314,214 19,596,676 666,529 5,148,777
Shareholder Proposal regarding
classified board 26,105,267 26,869,880 602,270 5,148,779
Shareholder Proposal regarding
Shareholder Rights Plan 34,232,862 18,609,933 644,625 5,238,776
</TABLE>
II-3
<PAGE>
Northrop Grumman Corporation and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Northrop Grumman Corporation (Registrant)
Date: July 30, 1999 by/s/N. F. Gibbs
N. F. Gibbs.
Corporate Vice President and Controller
Date: July 30, 1999 by/s/J. H. Mullan
John H. Mullan
Corporate Vice President and Secretary
II-4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 1,622
<ALLOWANCES> 117
<INVENTORY> 1,336
<CURRENT-ASSETS> 3,039
<PP&E> 3,044
<DEPRECIATION> (1,802)
<TOTAL-ASSETS> 9,657
<CURRENT-LIABILITIES> 2,361
<BONDS> 2,700
0
0
<COMMON> 1,024
<OTHER-SE> 2,007
<TOTAL-LIABILITY-AND-EQUITY> 9,657
<SALES> 4,367
<TOTAL-REVENUES> 4,367
<CGS> 3,913
<TOTAL-COSTS> 3,913
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> 344
<INCOME-TAX> 127
<INCOME-CONTINUING> 217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (16)
<NET-INCOME> 201
<EPS-BASIC> 2.92
<EPS-DILUTED> 2.89
</TABLE>
