<PAGE>
NORTHROP GRUMMAN CORPORATION
Exhibit 99.1
Management's Discussion and Analysis of the Company's
Financial Condition and Results of Operations
BUSINESS CONDITIONS
Northrop Grumman is one of the major companies that competes in both the
domestic and international markets of the aerospace and defense industry. While
Northrop Grumman is subject to the usual vagaries of the marketplace, it is also
affected by the unique characteristics of the aerospace and defense industry and
by certain elements peculiar to its own business mix. It is common in this
industry for work on major programs to be shared among 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 on other
contracts, to be either a supplier to or a customer of such competitor. 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. While Northrop Grumman conducts most of its business
with the U.S. Government, principally the Department of Defense, domestic and
international commercial sales still represent a significant portion of total
revenue.
The collapse of communism and the subsequent reductions in the U.S. defense
budget have fundamentally altered the landscape of the global aerospace and
defense industry. Since the early 1990's the 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. Lockheed Martin Corporation, The Boeing Company, and
Raytheon Company are the largest companies in the aerospace and defense industry
at this time. Northrop Grumman competes against these and other companies for a
number of large and smaller programs. Intense competition and long operating
cycles are both characteristics of the industry's - and Northrop Grumman's -
business.
The current composition of Northrop Grumman resulted from a series of
strategic acquisitions and mergers by the former Northrop Corporation beginning
in 1992, when the company acquired a 49 percent interest in the Vought Aircraft
Company, a designer and builder of commercial and military aerostructures. The
remaining 51 percent interest in Vought Aircraft was purchased in 1994. Also in
1994, the company purchased the outstanding common stock of Grumman Corporation
and the company was renamed Northrop Grumman Corporation. In 1996, Northrop
Grumman acquired the defense electronic systems group of Westinghouse Electric
Corporation. Effective August 1, 1997, the company consummated its merger with
Logicon, Inc. (Logicon), a leading defense information technology company.
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NORTHROP GRUMMAN CORPORATION
On July 3, 1997, the company announced that it had entered into a
definitive agreement with Lockheed Martin Corporation to combine the companies.
On February 26, 1998, shareholders of Northrop Grumman approved the merger. On
March 23, 1998, the U.S. Government filed suit to block the merger and on July
16, 1998, Lockheed Martin notified the company that it was terminating its
merger agreement with the company pursuant to the terms of the agreement. The
company recorded charges totaling $186 million in 1998 for costs related to the
terminated merger. The charges cover vesting of restricted stock which became
issuable following shareholder approval of the merger and other costs associated
with the terminated merger, including investment banking fees, legal and
accounting fees, and costs related to responding to the Government's request for
information.
In 1998 and 1999 the company acquired several businesses. Inter-
National Research Institute Inc. (INRI) was acquired in 1998 and the Information
Systems Division of California Microwave, Inc., Data Procurement Corporation
(DPC), and Ryan Aeronautical, an operating unit of Allegheny Teledyne
Incorporated, were all acquired in 1999.
Effective July 24, 2000, the company completed the sale of its
commercial aerostructures ("Aerostructures") business to The Carlyle Group,
pursuant to an Asset Purchase Agreement dated as of June 9, 2000 between
Northrop Grumman and Vought Aircraft Industries, Inc., an entity owned by The
Carlyle Group. Aerostructures is a major producer of commercial and military
aircraft subassemblies, the majority of which are sold to The Boeing Company
and, for military contracts, ultimately to the U. S. Government. The company's
Consolidated Statements of Income and related disclosures have been restated to
reflect Aerostructures as discontinued operations for all periods presented. See
the footnote titled "Discontinued Operations" for additional information.
Northrop Grumman's three reportable segments are its three operating
units: Integrated Systems (ISS), Electronic Sensors and Systems (ESS) and
Logicon, the company's information technology sector.
Integrated Systems Segment
Air Combat Systems (ACS), Airborne Early Warning and Electronics Warfare
(AEW/EW), and Airborne Ground Surveillance and Battle Management (AGS/BM) are
the three major business areas within the ISS segment.
The ACS business area includes Northrop Grumman's largest program, the
B-2 bomber, for which the company is the prime contractor. The company continues
to perform modifications to Block 20 aircraft to bring them to the fully
operational Block 30 configuration. 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
B-2 work is performed at the ISS segment's California facilities in Palmdale and
Pico Rivera.
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NORTHROP GRUMMAN CORPORATION
The company is the principal subcontractor to The Boeing Company on the
F/A-18 program, which is also included in the ACS business area. 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
also has 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. The F/A-
18 single-seat E and two-seat F, enhanced versions of the F/A-18C and D models,
are currently in production and will serve as the U.S. Navy's next-generation
multimission aircraft. The F/A-18 work is performed at the company's facility in
El Segundo, California.
In July 1999, the company purchased Ryan Aeronautical and combined its
products with the existing sub-scale targets programs to form the unmanned
systems business element reported in the ACS business area. The purchase
included two major development projects, Global Hawk and the Miniature Air
Launched Decoy (MALD). Global Hawk is being developed for the U.S. Air Force to
provide battlefield commanders with intelligence imagery from high altitudes for
long periods of time. MALD is a small jet powered aerial vehicle designed to
imitate manned jet fighters in radar images and confuse enemy air defense
systems.
The AEW/EW business area produces the E-2C Hawkeye and performs
upgrades to EA-6B aircraft. Northrop Grumman is a major producer of airborne
early warning and control systems, including the all-weather E-2C Hawkeye
aircraft. The E-2C has been in active service with the U.S. Navy since 1973 and
is employed by the air forces of five other nations. The EA-6B is the armed
services only offensive tactical radar jamming aircraft. Manufacturing for both
aircraft is performed at Northrop Grumman's St. Augustine, Florida site while
engineering, program management and product development is performed in
Bethpage, New York.
The company is the prime contractor for the E-8 Joint Surveillance
Target Attack Radar System (Joint STARS), which is included in the AGS/BM
business area. 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 Boeing
707-300 airframe that is remanufactured at Northrop Grumman's Lake Charles,
Louisiana site. Final installation of electronics and testing are performed at
the company's test facility in Melbourne, Florida.
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NORTHROP GRUMMAN CORPORATION
Electronic Sensors and Systems Segment
The ESS segment comprises four business areas: Aerospace Electronic Systems;
Command, Control, Communications, Intelligence and Naval Systems (C3I&N);
Defensive Electronic Systems; and several smaller business elements referred to
as "Other". The segment's primary expertise is the ability to conceive, design,
produce and support high performance sensors and intelligence systems operating
in all environments from underseas to outer space.
Aerospace Electronic Systems includes four business elements: combat
avionics systems, land combat systems, airborne surveillance systems, and space
systems. Combat avionics systems is focused on providing radar and electro-opti
c-based avionics systems to meet the needs for targeting and strike missions for
armed forces worldwide. The AN/APG-66/68 airborne fire control radar series
aboard F-16 fighters throughout the world has set a new standard for performance
and reliability over the last two decades. More than six thousand AN/APG-66/68
radars have been produced since 1976. The basic radar, with multiple variants,
is currently on 16 airborne platforms deployed in 20 countries. Northrop Grumman
currently is leading a team developing the next-generation air-dominance radar
(AN/APG-77) featuring a low observable, active electronically scanned array with
multiple target, all-weather capability for the U. S. Air Force's F-22 aircraft.
Advanced radar concepts for the next generation Joint Strike Fighter have been
developed and flown aboard Northrop Grumman flight test aircraft. These radar
systems are produced at the company's Linthicum, Maryland facility.
Northrop Grumman's land combat systems business element, teamed with
Lockheed Martin, is producing the Longbow APG-78 fire control radar and the
Longbow Hellfire missile for the U. S. Army's AH-64 Apache attack helicopter and
the British WAH-64 Westland Apache. There is extensive international interest in
the Apache Longbow battlefield tactical weapon system. Longbow fire control
radar work is performed at the ESS segment's Linthicum facility and the Longbow
missile work is performed in Huntsville, Alabama. Additionally, Northrop Grumman
is currently in Low Rate Initial Production (LRIP) for the BAT "brilliant" anti-
armor submunition at the company's new BAT production facility at Huntsville.
BAT is an autonomous submunition that uses passive acoustic and infrared sensors
to find, attack and destroy moving tanks and other armored vehicles in hostile
territory. BAT is designed to be carried and dispensed by the U. S. Army's TACMS
(Tactical Missile System) Block II surface-to-surface missile with potential
application for ground-, air-, and sea-launched cruise missiles, artillery
rockets, and munitions dispensers.
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NORTHROP GRUMMAN CORPORATION
Airborne surveillance systems products include the Airborne Warning and
Control System (AWACS) radar (AN/APY-1, APY-2), which, integrated in the highly
reliable Boeing 707 and 767 aircraft, has been the surveillance system of choice
for U.S. and allied forces worldwide. The AWACS Radar System Improvement Program
(RSIP) is currently in production for the U.S. Air Force, the United Kingdom and
NATO. RSIP will enhance the performance of the AWACS radar against smaller cross
section targets. A new surveillance product, the Multirole Electronically
Scanned Array (MESA), is currently being developed for installation on seven
Boeing 737 aircraft for the Royal Australian Air Force. These systems are
produced at the Linthicum, Maryland facility. The E-8 Joint STARS is equipped
with the Northrop Grumman Norden Systems AN/APY-3 air-to-ground surveillance
system, which provides long-range, standoff, real-time surveillance of the
battlefield. An advanced Radar Technology Insertion Program (RTIP) is currently
under development. With its advanced active aperture, the RTIP will provide
significant performance upgrades on Joint STARS for its current mission and
opens the way for incorporation of new missions. These systems are produced at
the company's Norwalk, Connecticut facility. The space systems business element
develops space sensors and systems, with subsegments of military and
civil/commercial space, and intelligence, surveillance, reconnaissance ground-
based processing systems.
The C/3/I&N business area produces air defense and air traffic control
radar systems for domestic and international customers. The new highly mobile,
solid-state AN/TPS-70 family of radars and U. S. Air Force AN/TPS-75 are among
the products in this business area. They have been the front line U.S. Air Force
air defense system standard since 1968. These systems currently operate in more
than 30 countries, supporting air defense, air sovereignty, air traffic control,
and counter-narcotics needs. The ASR-12, a solid-state, new generation
derivative of the company's FAA standard ASR-9 terminal radar is now in full
production, with 12 systems on order and three systems operational in Peru,
Mexico, and El Salvador.
C/3/I&N is also a leader in producing marine machinery and advanced
propulsion systems, missile launchers, shipboard electronics and control
systems, mine countermeasures, and underseas vehicles. Every Nimitz-class
aircraft carrier is fitted with eight turbine generator sets. The company
produces these generators as well as the main propulsion system for the U.S.
Navy's Seawolf- and Virginia-class attack submarines at its Sunnyvale,
California site. Late in 1999, the company was one of two selected by the Navy
to develop the next generation Electro-Magnetic Launcher (EMALS), which could
ultimately replace the steam catapult. The Sunnyvale facility also has
responsibility for integration of the intercooled recuperated (ICR) gas turbine
engine, which is a candidate for the DD-21 next generation
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NORTHROP GRUMMAN CORPORATION
destroyer. The company's Annapolis, Maryland facility has responsibility for the
Advanced SEAL Delivery System (ASDS) mini-submarine and the SPQ-9B shipboard
radar, and is a significant participant in the DD-21 competition.
The Defensive Electronic Systems business area includes radio frequency
and infrared countermeasures equipment. The company's Rolling Meadows, Illinois
site produces the AN/ALQ-135, 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
owned F/A-18 aircraft. It also is 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 currently producing a directional infrared
countermeasures (DIRCM) system for the United Kingdom and the U.S. Special
Operations Command. DIRCM is slated for use on British helicopters and
transports and U.S. Special Operations Command C-130 transports to protect the
aircraft from heat-seeking missiles. DIRCM is the first infrared countermeasures
system of its kind and was developed to accommodate laser capabilities currently
in development. The company's Linthicum, Maryland site produces the AN/ALQ-165
airborne self-protection jammer in a joint venture with ITT Avionics. The AN/A
LQ-165 is an internally mounted system that protects tactical aircraft against
numerous radar-guided threats. It currently is installed on U. S. and
international F/A-18 and F-14 aircraft.
Included in the business area labeled "Other" is California Microwave
Systems, which was acquired by Northrop Grumman in April 1999. This unit
specializes in airborne reconnaissance and surveillance systems, government
ground-based satellite communications systems, communications gateway systems,
and mission planning. California Microwave Systems' customers include the U.S.
military services, other U.S. government agencies, and international defense
organizations. Other elements included in "Other" are systems development and
technology and automation and information systems.
Logicon Segment
The three major business areas reported in Logicon, the company's information
technology sector, are: Government Information Technology, Technology Services,
and Commercial Information Technology.
Logicon is a leading provider of advanced information technologies,
systems and services. Its areas of expertise include: command, control,
communications, computers, intelligence, surveillance and reconnaissance
(C4ISR); weapon systems; information systems; training and simulation; science
and technology; base and range support; and systems support services. Customers
include the U.S.
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NORTHROP GRUMMAN CORPORATION
Government, both Department of Defense(DoD) and non-DoD Federal agencies, state
and local governments, and commercial enterprises. Contracts with the U.S.
Government account for most of the segment's revenues.
In the following table of segment and major customer data, revenue from the
United States Government includes revenue from contracts on which Northrop
Grumman is the prime contractor as well as those on which the company is a
subcontractor and the ultimate customer is the U.S. Government.
RESULTS OF OPERATIONS BY SEGMENT AND MAJOR CUSTOMER
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Integrated Systems
United States Government $ 3,574 $ 3,464 $ 3,643
Other customers 38 94 269
Intersegment sales 6 5 13
------------------------------------------------------------------------------------
3,618 3,563 3,925
------------------------------------------------------------------------------------
Electronic Sensors & Systems
United States Government 1,894 2,014 2,394
Other customers 673 708 490
Intersegment sales 146 177 180
------------------------------------------------------------------------------------
2,713 2,899 3,064
------------------------------------------------------------------------------------
Logicon
United States Government 1,248 948 884
Other customers 189 139 118
Intersegment sales 22 20 20
------------------------------------------------------------------------------------
1,459 1,107 1,022
Intersegment eliminations (174) (202) (213)
------------------------------------------------------------------------------------
Total net sales $ 7,616 $ 7,367 $ 7,798
====================================================================================
Operating Margin
Integrated Systems $ 387 $ 272 $ 343
Electronic Sensors & Systems 199 218 248
Logicon 80 60 67
------------------------------------------------------------------------------------
666 550 658
Adjustments to reconcile to total operating margin:
Corporate expenses (26) (58) (30)
Deferred state tax (provision)benefit (29) (10) 8
Mark-to-market restricted stock rights (39)
Pension income 343 270 144
------------------------------------------------------------------------------------
Total operating margin $ 954 $ 752 $ 741
====================================================================================
</TABLE>
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NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Contract Acquisitions
Integrated Systems $ 3,164 $ 2,489 $ 3,126
Electronic Sensors & Systems 3,055 2,388 2,983
Logicon 1,481 1,205 938
-----------------------------------------------------------------------------------
Total acquisitions $ 7,700 $ 6,082 $ 7,047
===================================================================================
Funded Order Backlog
Integrated Systems $ 4,451 $ 4,899 $ 5,968
Electronic Sensors & Systems 3,439 2,951 3,285
Logicon 609 565 447
-----------------------------------------------------------------------------------
Total backlog $ 8,499 $ 8,415 $ 9,700
===================================================================================
Assets
Integrated Systems $ 3,497 $ 3,797 $ 3,847
Electronic Sensors & Systems 3,883 3,913 3,990
Logicon 618 618 559
-----------------------------------------------------------------------------------
Segment assets 7,998 8,328 8,396
General corporate 1,287 1,208 1,281
-----------------------------------------------------------------------------------
Total assets $ 9,285 $ 9,536 $ 9,677
===================================================================================
Capital Expenditures
Integrated Systems $ 85 $ 110 $ 125
Electronic Sensors & Systems 97 82 94
Logicon 19 19 17
General corporate 2
-----------------------------------------------------------------------------------
Total expenditures $ 201 $ 211 $ 238
===================================================================================
Depreciation and Amortization
Integrated Systems $ 133 $ 142 $ 173
Electronic Sensors & Systems 222 211 208
Logicon 32 38 35
General corporate 2 2 2
-----------------------------------------------------------------------------------
Total depreciation and amortization $ 389 $ 393 $ 418
===================================================================================
</TABLE>
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NORTHROP GRUMMAN CORPORATION
An individual company's success in the competitive aerospace/defense
environment depends upon its ability to develop and market its products, as well
as, its 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 16 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. 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, systems integration, defense electronics, and information technology.
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, extended or terminated.
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.
In the event of termination for the government's 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 Tri-Service Standoff Attack Missile (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 on the program. In prior years,
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NORTHROP GRUMMAN CORPORATION
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 of its claims, none of which are recorded on the balance sheet, from the
U.S. Government on the TSSAM contract.
Prime contracts with various agencies of the U.S. Government and
subcontracts with other prime contractors are subject to a profusion of
procurement regulations, including the International Traffic in Arms Regulations
promulgated under the Arms Export Control Act, 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 effect on the company's future. Moreover, these contracts may be
terminated at the U.S. Government's convenience.
Environmental Issues
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 the company has determined that 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
13 hazardous waste sites and under state Superfund laws at eight 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. The company does not anticipate and record
insurance recoveries before collection is probable. Management estimates that at
December 31, 1999, the range of reasonably possible future costs for
environmental remediation, including Superfund sites, is $80 million to $111
million, of which $87 million has been accrued. Should other PRPs not pay their
allocable share of remediation costs, the company may have to
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NORTHROP GRUMMAN CORPORATION
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, results of operations, or cash flows.
Year 2000 Issues
The company established and implemented its program to address the possibility
of computer failure upon entering the year 2000 (Year 2000), beginning in 1996.
The program encompassed the entire company and all aspects of Year 2000
compliance including software applications, mainframe environment, desktop
equipment, networks, telecommunications, department supported systems,
facilities systems, embedded systems in product deliverables, review of major
suppliers and major customers' Year 2000 status, and development of contingency
plans and year end support plans. All phases of the program were completed by
the end of 1999.
The company has separately identified the costs of Year 2000 remedial
efforts only for internal information services personnel, principally as a
planning and control tool. The total cost of these efforts incurred during the
years 1996 through 1999 was approximately $41 million. Year 2000 costs are
allowable costs under applicable government contracting regulations.
Accordingly, the portion of Year 2000 costs allocable to contracts are charged
as part of normal overhead pursuant to approved methods established for this
purpose.
To date, the company has not experienced any major system failures or other
adverse consequences due to Year 2000 noncompliance. While the possibility still
exists for future computer failures, internally or among its customers and
suppliers, management does not expect that these developments, should they
occur, would have a material adverse impact on the financial position, results
of operations, or cash flows of Northrop Grumman.
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NORTHROP GRUMMAN CORPORATION
MEASURES OF VOLUME
Contract Acquisitions
Contract acquisitions tend to fluctuate from year to year 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.
Contract Acquisitions
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Integrated Systems
ACS $ 1,421 $ 1,428 $ 1,681
AEW/EW 1,106 679 728
AGS/BM 686 434 761
Intrasegment eliminations (43) (47) (31)
-----------------------------------------------------------------------------------
3,170 2,494 3,139
-----------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,375 1,047 1,496
C/3/I&N 727 907 964
Defensive Electronic Systems 708 311 508
Other 308 225 176
-----------------------------------------------------------------------------------
3,118 2,490 3,144
-----------------------------------------------------------------------------------
Logicon
Government Information Technology 1,015 813 711
Technology Services 347 300 150
Commercial Information Technology 140 113 97
-----------------------------------------------------------------------------------
1,502 1,226 958
-----------------------------------------------------------------------------------
Intersegment eliminations (90) (128) (194)
-----------------------------------------------------------------------------------
Total acquisitions $ 7,700 $ 6,082 $ 7,047
===================================================================================
</TABLE>
ISS acquisitions in 1999 were 27 percent higher than in 1998 reflecting
increases in both the AEW/EW and AGS/BM business areas. Included in the AEW/EW
business area in 1999 is funding for the multiyear buy for 25 E-2C aircraft. The
AGS/BM business area received orders for two, one and two Joint STARS aircraft
in 1999, 1998 and 1997, respectively.
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NORTHROP GRUMMAN CORPORATION
The ACS business area recorded incremental B-2 funding for ongoing
development work, spares and other customer support for the operational aircraft
program in each of the last three years. The company still stands to gain future
post production business, such as airframe depot maintenance, repair of
components, operational software changes, and product improvement modifications.
The company received orders for 30, 20 and 12 F/A-18E/F shipsets in 1999, 1998
and 1997, respectively. Acquisitions in 1998 included orders for 6 F/A-18C/D
shipsets.
ESS acquisitions in 1999 were 25 percent higher than in 1998. The Aerospace
Electronic Systems business area received funding in 1999 for the Longbow
missile multiyear contract and the BAT LRIP contract. In the C/3/I&N business
area, a lower level of international awards for air traffic control radar
systems was posted in 1999 than in 1998. The Defensive Electronic Systems
business area recorded increased orders in 1999 for the ALQ-135 and DIRCM
programs.
Logicon acquisitions increased by 23 percent in 1999 over 1998, reflecting
higher volume in all three business areas. The increase in Government
Information Technology acquisitions is due to a higher win rate on contracts bid
as well as the inclusion of two new businesses acquired: INRI, purchased in
September 1998, and DPC, purchased in June 1999. In the third quarter of 1998,
Logicon won the Joint Base Operations Support Contract (J-BOSC), which is
reported in the Technology Services business area. Under this contract, which
has a five-year basic performance period with a five-year option, the segment
provides base operations support for NASA's Kennedy Space Center and the U.S.
Air Force's 45th Space Wing, which includes Cape Canaveral Air Station and
Patrick Air Force Base.
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NORTHROP GRUMMAN CORPORATION
Sales
Year-to-year sales vary less than contract acquisitions and reflect performance
under new and ongoing contracts.
Net Sales
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Integrated Systems
ACS $ 2,059 $ 2,114 $ 2,586
AEW/EW 888 780 739
AGS/BM 714 716 631
Intrasegment Eliminations (43) (47) (31)
-----------------------------------------------------------------------------------
3,618 3,563 3,925
-----------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,105 1,265 1,240
C/3/I&N 843 904 887
Defensive Electronic Systems 536 544 656
Other 229 186 281
-----------------------------------------------------------------------------------
2,713 2,899 3,064
-----------------------------------------------------------------------------------
Logicon
Government Information Technology 971 787 770
Technology Services 346 213 156
Commercial Information Technology 142 107 96
-----------------------------------------------------------------------------------
1,459 1,107 1,022
-----------------------------------------------------------------------------------
Intersegment eliminations (174) (202) (213)
-----------------------------------------------------------------------------------
Total sales $ 7,616 $ 7,367 $ 7,798
===================================================================================
</TABLE>
ISS segment sales increased by 2 percent in 1999 as compared to 1998. The
decreasing trend in ACS revenues is primarily attributable to the B-2 program,
which decreased by $86 million in 1999 as compared to 1998, following a $291
million decrease in 1998 as compared to 1997. Current planning data indicate
that the level of overall B-2 revenue for 2000, when production is expected to
be substantially completed, will decline by approximately 40 percent from the
1999 level. Sales on the F/A-18 program increased by $74 million in 1999 as
compared to 1998. The last 17 shipsets of the C/D version of the F/A-18 were
delivered in 1999; shipsets delivered in 1998 and 1997 were 34 and 35,
respectively. In 1999 the
-14-
<PAGE>
NORTHROP GRUMMAN CORPORATION
company delivered the first twelve shipsets under the F/A-18E/F production
contract and the last five shipsets under the F/A-18E/F LRIP contract.
The production contract is accounted for under the units-of-delivery
method, which results in revenue being recorded as deliveries are made. The LRIP
contract, which began in 1996 and was completed in 1999, is accounted for under
the cost-to-cost type of percentage-of-completion method, resulting in revenue
being recorded as costs are incurred. In 2000 the company plans to deliver 28
F/A-18E/F shipsets under production contracts. Sales on the Kistler K-1 program
were recorded on a cost recovery basis as cash was received. Such sales declined
$10 million in 1998 from the $63 million recorded in 1997. Work on this program
was discontinued in December 1998 due to difficulties encountered by Kistler
Aerospace Corporation in obtaining financing. No operating margin was recorded
on this program.
AEW/EW sales increased in 1999 over 1998 primarily due to increased EA-6B
revenue. AGS/BM sales in 1999 were unchanged from the level reported in 1998.
Overall ISS revenue for 2000 is expected to be approximately 12 percent to 15
percent lower than 1999.
ESS segment sales declined by 6 percent in 1999 as compared to 1998. Lower
Aerospace Electronic Systems business area sales are attributable to lower space
systems and combat avionics systems sales. The C3I&N business area reflects
lower marine volume. The improvement in the "Other" business area is due to the
inclusion of California Microwave Systems, which was acquired by Northrop
Grumman in April 1999. ESS segment sales for 1998 declined 5 percent as compared
to 1997 due to lower Defensive Electronic Systems volume as well as lower
revenues on a number of programs included in the "Other" business area. Within
the C/3/I&N business area, increased 1998 airspace management sales more than
offset lower marine sales. For 2000, the company expects ESS segment sales to be
between $2.8 billion and $3.1 billion.
Logicon sales in 1999 increased by 32 percent over 1998 sales, which
follows an 8 percent increase in 1998 sales over 1997. All three business areas
improved in both 1999 and 1998 over prior year sales.
The Government Information Technology and Commercial Information Technology
business area improvements in 1999 reflect the higher level of acquisitions and
higher win rate on contracts bid. Most of the additional sales generated in the
Technology Services business area, in both 1999 and 1998, is attributable to the
commencement of work in the fourth quarter of 1998 on the J-BOSC contract, which
was won earlier in that year. The company expects Logicon sales to increase by
approximately ten percent in 2000 over 1999.
-15-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Funded Order Backlog
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 60 percent of the 1999 year-end
backlog will be converted into sales in 2000.
Funded Order Backlog
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Integrated Systems
ACS $ 2,360 $2,998 $3,684
AEW/EW 1,209 991 1,092
AGS/BM 882 910 1,192
-------------------------------------------------------------------------------------------------
4,451 4,899 5,968
-------------------------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,761 1,491 1,709
C/3/I&N 775 891 888
Defensive Electronic Systems 789 617 850
Other 199 120 81
-------------------------------------------------------------------------------------------------
3,524 3,119 3,528
-------------------------------------------------------------------------------------------------
Logicon
Government Information Technology 412 368 342
Technology Services 149 148 61
Commercial Information Technology 48 50 44
-------------------------------------------------------------------------------------------------
609 566 447
-------------------------------------------------------------------------------------------------
Intersegment Eliminations (85) (169) (243)
-------------------------------------------------------------------------------------------------
Total backlog $ 8,499 $8,415 $9,700
=================================================================================================
</TABLE>
-16-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Total U.S. Government orders, including those made on behalf of foreign
governments (FMS), comprised 86 percent of the backlog at the end of 1999
compared with 85 percent at the end of 1998 and 86 percent at the end of 1997.
Total foreign customer orders, including FMS, accounted for 16 percent of the
backlog at the end of 1999 compared with 17 percent in 1998 and 20 percent in
1997. Domestic commercial business in backlog was 3 percent at the end of both
1999 and 1998 and was 2 percent at the end of 1997.
MEASURES OF PERFORMANCE
The company's operating margin for 1999 was $954 million compared to $752
million for 1998, reflecting increases in the ISS and Logicon segments, as well
as increased pension income.
ISS segment operating margin in 1999 was $387 million as compared to
$272 million in 1998, reflecting increases in both the ACS and AGS/BM business
areas. In 1999 the ACS business area benefited from upward cumulative margin
rate adjustments totaling $70 million on the B-2 program and $11 million on the
F/A-18E/F program. In 1997, ACS recorded a $55 million cumulative margin rate
adjustment on the B-2 production contract. In 1999, five B-2's were delivered
under the production contract as compared to five in 1998 and four in 1997.
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 were 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 is then recorded. In this fashion it is
believed that margin improvements will be recognized on a more demonstrable
basis. All 15 production units have been initially delivered. Three units remain
to be retrofitted and are scheduled for delivery in the first half of 2000.
Since the beginning of the Joint STARS program, the company (and prior
to 1994, the Grumman Corporation) as of December 31, 1998 had incurred over $100
million of costs in excess of revenues in the performance of the development and
production phases of the program. Including support and other work, the company
recorded on the Joint STARS program operating losses of $25 million and $29
million in 1998 and 1997, respectively. 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 to attempt
to resolve these REAs, and in April 1999 the company filed these REAs as
certified claims. In December
-17-
<PAGE>
NORTHROP GRUMMAN CORPORATION
1999, the company reached a settlement of these contract claims with the U.S.
Air Force. The company is now able to recognize underlying improved performance
on the production phase of this program. As a result, cumulative margin rate
adjustments totaling $37 million were recorded in the fourth quarter. The
company expects to record margin on Joint STARS in 2000 and beyond. Revenue on
the Joint STARS program is recognized using the cost-to-cost percentage-of-
completion method of accounting.
ESS segment operating margin in 1999 was $199 million, down from the
$218 million reported for 1998. The decrease is a result of lower sales volume
as well as a reduction of approximately $44 million resulting from the pension
plan merger, which is described below. The decrease also reflects lower margins
in the Defensive Electronic Systems business area, due in part to additional
costs incurred in transitioning a development program to production. ESS segment
1998 operating margin was reduced by a $21 million fourth quarter charge for
estimated future costs not considered recoverable from future revenues on the
DIRCM program. The charge resulted from increased costs associated with solving
technical design issues as well as difficulties in achieving timely completion
of the second series of live-fire tests on the large turret version. In 1997,
increases in the cost estimate to complete the company's work on DIRCM resulted
in cumulative margin rate adjustments totaling $33 million. Partially offsetting
these downward adjustments was the settlement of a claim involving work
performed in the 1980's on the MX missile Interface Test Adapter (ITA), which
resulted in an $8 million increase in operating margin and $12 million in
interest income.
Logicon operating margin in 1999 was $80 million, a 33 percent increase
over the $60 million recorded in 1998. The increase is attributable to increased
sales volume in all business areas and improved performance in the Technology
Services business area. These improvements were somewhat offset by $4 million of
nonrecurring charges related to employee termination costs and legal accruals.
Logicon operating margin in 1998 was reduced by $8 million for consolidation and
reorganization charges.
Operating margin in 1999 included $343 million of pension income
compared with $270 million in 1998 and $144 million in 1997. The increases are
primarily attributable to the high market returns on investments experienced
over the last several years. Northrop Grumman has again experienced a high rate
of return on plan assets in 1999, which in turn will affect 2000 pension income
calculations. Additionally, the discount rate on obligations used to determine
pension income for 2000 has been increased to 7.5 percent in order to reflect
market conditions at December 31, 1999. For 2000, these two factors are expected
to result in a significant increase in pension income and a small reduction to
company contributions to the plans.
-18-
<PAGE>
NORTHROP GRUMMAN CORPORATION
In July 1999, the company 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 does not
result in any changes to any participant's existing pension benefits, nor does
it alter individual plan designs. The retirement plan merger resulted in a
reduction to 1999 net income of approximately $16 million, or $.24 per share.
Included in the 1998 results are pretax costs totaling $58 million
related to activities to realign operating units, consolidate facilities and
laboratories and exit certain business areas, which reduced operating margin by
$43 million and other income by $15 million. The operating margin amount was
reflected in segment results as follows: ISS, $6 million; ESS, $13 million; and
Logicon, $8 million. The remaining $16 million was included in Corporate
expenses. The charge included $20 million for employee termination costs, $12
million for write-down to estimated fair value of assets available for sale, $3
million for losses on disposals of assets, $9 million for write-off of purchased
intangible assets no longer considered recoverable from future revenues, $9
million for loss on sale of a business, and $5 million for excess capacity lease
costs, net of estimated sublease income through 2008. The employee termination
costs represent cash severance payments made to employees.
Capital assets are transferred to assets available for sale when a
decision is made to sell the facility and selling efforts are actively underway.
In some cases, operations continue and, when costs are allowable under
government contracts, depreciation expense is recorded until the facility is
vacated or sold. In 1999, $2 million was transferred to assets available for
sale and assets with a carrying value of $13 million were sold. In 1998, $37
million was transferred to assets available for sale, $2 million in depreciation
expense on these assets was recorded, and assets with a carrying value of $46
million were sold. Assets available for sale are evaluated at least annually for
recoverability and written down to estimated fair value as necessary. In 1998, a
write down adjustment of $12 million was recorded. In 1997, recovery of $24
million of the 1996 write-down, related to the sale of the company's Perry,
Georgia, facility, was included in Other Income(Deductions). The assets
available for sale at the end of 1999 are expected to be sold in 2000.
Included in the 1998 results is a $30 million write-off of an
investment related to Kistler Aerospace Corporation's K-1 program. The
investment consisted of advances on behalf of Kistler Aerospace that were made
in 1998 to continue the company's efforts in support of the K-1. The write off
resulted from the company's assessment that the near-term likelihood of Kistler
obtaining additional financing made recovery of the investment uncertain.
-19-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Interest expense for 1999 was $224 million, an $8 million decrease from
1998, which in turn was down $25 million from the 1997 level. The 1999 interest
expense includes $11 million related to settlement of various legal and tax
issues. Total debt stood at $2.2 billion at the end of 1999 compared to $2.8
billion at the end of both 1998 and 1997.
The company's effective federal income tax rate was 36.5 percent in
1999, 37.5 percent in 1998, and 37.9 percent in 1997.
Aerostructures, reported as discontinued operations, had net income of
$9 million in 1999, $1 million in 1998, and $89 million in 1997. Included in
these amounts are related pretax pension income(expense) of $10 million, $(4)
million, and $(11) million in 1999, 1998, and 1997, respectively.
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, approximately $7 million before tax, were expensed as incurred and
included in cost of sales.
MEASURES OF LIQUIDITY AND CAPITAL RESOURCES
In 1999 cash provided by operations was $1,207 million, a record level
and considerably more than the $244 million generated in 1998 and the $730
million generated in 1997. The improvement in 1999 cash from operations is
attributable to many factors, the more significant of which are: increased
operating margin, improved cash management of working capital, lower pension
plan contributions as a result of the pension plan merger, and accelerated cash
collections in part due to customers' Year 2000 concerns. The lower generation
of cash from operations in 1998 was driven by expenses related to the terminated
merger with Lockheed Martin Corporation, as well as, an increase in working
capital for Boeing jetliners in support of increased production levels.
Cash generated from operating activities in 1999 was sufficient to
finance capital expenditures, pay dividends to shareholders, acquire new
businesses for approximately $240 million in cash, and reduce
-20-
<PAGE>
NORTHROP GRUMMAN CORPORATION
net debt (total debt less cash balances) by $704 million. In 1998 additional
borrowings under the revolving credit facility along with the cash generated by
operating activities provided sufficient cash flows to service debt, finance
capital expenditures, and pay dividends to shareholders.
The following table is a condensed summary of the detailed cash flow
information contained in the Consolidated Statements of Cash Flows.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash came from
Customers 98% 95% 94%
Lenders 3 4
Buyers of assets/other 2 2 2
-------------------------------------------------------------------------------------------------
100% 100% 100%
=================================================================================================
Cash went to
Employees and suppliers of services and materials 84% 90% 83%
Sellers of assets 5 3 2
Lenders 9 5 10
Suppliers of facilities/other 1 1 4
Shareholders 1 1 1
-------------------------------------------------------------------------------------------------
100% 100% 100%
=================================================================================================
</TABLE>
The company has a credit agreement with a group of domestic and foreign
banks to provide for two credit facilities: $1.8 billion available on a
revolving credit basis through March 2002; and a variable interest rate $450
million term loan payable in quarterly installments of $50 million plus interest
through March 2002.
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.
Cash generated from operations, supplemented by borrowings under the
credit agreement, are expected to be sufficient in 2000 to service debt, finance
capital expansion projects, and continue paying dividends to the shareholders.
With the completion of the B-2 EMD contract, federal and state income taxes that
have been deferred since the inception of the contract in 1981, will become
payable. The contract is expected to be completed in 2002 with taxes of
approximately $1 billion due, to be paid that year. The company plans to use
cash generated from operations supplemented by additional borrowings under the
credit agreement and/or additional borrowings from public or private capital
markets to pay these taxes.
Capital expenditure commitments at December 31, 1999, were
approximately $145 million including $20 million for Aerostructures and $5
million for environmental control and compliance purposes. Capital expenditures
for 1999
-21-
<PAGE>
NORTHROP GRUMMAN CORPORATION
were $201 million including $29 million for Aerostructures and $22 million for
capitalized software costs. For 2000, capital expenditures are expected to be
approximately $250 to $275 million, including approximately $30 to $40 million
for Aerostructures and $40 million for capitalized software costs.
The company will continue to provide the productive capacity to perform
its existing contracts, 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 and
elsewhere in of this Form 8-K contain or are based on "forward-looking"
information (that the company believes to be within the definition 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The company has fixed-rate long-term debt obligations, most of which are not
callable. 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 December 31,
1999, no interest rate swap agreements were in effect. The company does not hold
or issue derivative financial instruments for trading purposes.
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.
-22-
<PAGE>
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31, $ in millions 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current assets
Cash and cash equivalents $ 142 $ 44
Accounts receivable 1,402 1,507
Inventoried costs 1,190 1,373
Deferred income taxes 23 24
Prepaid expenses 36 85
-----------------------------------------------------------------------------------------------------------
Total current assets 2,793 3,033
-----------------------------------------------------------------------------------------------------------
Property, plant and equipment at cost
Land and land improvements 163 170
Buildings 777 785
Machinery and other equipment 1,860 2,014
Leasehold improvements 95 89
-----------------------------------------------------------------------------------------------------------
2,895 3,058
Accumulated depreciation (1,655) (1,784)
-----------------------------------------------------------------------------------------------------------
1,240 1,274
-----------------------------------------------------------------------------------------------------------
Other assets
Goodwill, net of accumulated amortization of
$441 in 1999 and $338 in 1998 3,469 3,381
Other purchased intangibles, net of accumulated
amortization of $388 in 1999 and $295 in 1998 761 795
Prepaid retiree benefits cost, intangible pension
asset and benefit trust fund 946 787
Deferred income taxes 166
Assets available for sale 26 37
Investments in and advances to affiliates and sundry assets 50 63
-----------------------------------------------------------------------------------------------------------
5,252 5,229
-----------------------------------------------------------------------------------------------------------
$ 9,285 $ 9,536
===========================================================================================================
</TABLE>
-23-
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
December 31, $ in millions 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities
Notes payable to banks $ 25 $ 69
Current portion of long-term debt 200 200
Trade accounts payable 490 416
Accrued employees' compensation 366 337
Advances on contracts 316 354
Income taxes payable 58
Deferred income taxes 550 527
Other current liabilities 459 464
-----------------------------------------------------------------------------------------------------
Total current liabilities 2,464 2,367
-----------------------------------------------------------------------------------------------------
Long-term debt 2,000 2,562
Accrued retiree benefits 1,458 1,704
Other long-term liabilities 42 53
Deferred income taxes 64
Shareholders' equity
Paid-in capital
Preferred stock, 10,000,000 shares authorized; none issued
Common stock, 200,000,000 shares authorized; issued and outstanding:
1999 - 69,719,164
1998 - 68,836,810 1,028 989
Retained earnings 2,248 1,892
Accumulated other comprehensive loss (19) (31)
-----------------------------------------------------------------------------------------------------
3,257 2,850
-----------------------------------------------------------------------------------------------------
$ 9,285 $ 9,536
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-24-
<PAGE>
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, $ in millions, except per share 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 7,616 $ 7,367 $ 7,798
Cost of sales
Operating costs 5,634 5,604 5,980
Administrative and general expenses 1,028 1,011 1,077
-----------------------------------------------------------------------------------------------------------
Operating margin 954 752 741
Other income (deductions)
Interest income 18 11 17
Merger costs (186) (18)
Interest expense (224) (232) (257)
Investment losses (30)
Other, net (1) (6) 29
-----------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change 747 309 512
Federal and foreign income taxes 273 116 194
-----------------------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting change 474 193 318
Income from discontinued operations, net of tax 9 1 89
-----------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 483 194 407
Cumulative effect of accounting change, net of income
tax benefit of $11 in 1999 (16)
-----------------------------------------------------------------------------------------------------------
Net income $ 467 $ 194 $ 407
===========================================================================================================
Weighted average common shares outstanding, in millions 69.3 68.5 66.7
===========================================================================================================
Basic earnings per share:
Continuing operations $ 6.84 $ 2.82 $ 4.76
Discontinued operations .13 .01 1.34
-----------------------------------------------------------------------------------------------------------
Before cumulative effect of accounting change 6.97 2.83 6.10
Accounting change (.24)
-----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 6.73 $ 2.83 $ 6.10
===========================================================================================================
Diluted earnings per share:
Continuing operations $ 6.80 $ 2.78 $ 4.67
Discontinued operations .13 .01 1.31
-----------------------------------------------------------------------------------------------------------
Before cumulative effect of accounting change 6.93 2.79 5.98
Accounting change (.24)
-----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 6.69 $ 2.79 $ 5.98
===========================================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 467 $ 194 $ 407
Other comprehensive income
Minimum pension liability adjustments, before tax 19 (13) (28)
Income tax expense(benefit) 7 (4) (10)
------------------------------------------------------------------------------------------------------------
Other comprehensive income(loss), net of tax 12 (9) (18)
------------------------------------------------------------------------------------------------------------
Comprehensive income $ 479 $ 185 $ 389
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Year ended December 31, $ in millions, except per share 1999 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Paid-in Capital
At beginning of year $ 989 $ 838 $ 784
Stock issued in purchase of business 30
Employee stock awards and options exercised, net of forfeitures 9 151 60
Treasury stock transactions (6)
------------------------------------------------------------------------------------------------------------
At end of year 1,028 989 838
------------------------------------------------------------------------------------------------------------
Retained Earnings
At beginning of year 1,892 1,807 1,502
Net income 467 194 407
Cash dividends (111) (109) (102)
------------------------------------------------------------------------------------------------------------
At end of year 2,248 1,892 1,807
------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss
At beginning of year (31) (22) (4)
Change in excess of additional minimum pension liability over
unrecognized prior service costs, net of tax 12 (9) (18)
------------------------------------------------------------------------------------------------------------
At end of year (19) (31) (22)
------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 3,257 $2,850 $ 2,623
============================================================================================================
Book value per share $ 46.72 $41.39 $ 38.99
============================================================================================================
Cash dividends per share $ 1.60 $ 1.60 $ 1.60
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-26-
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 1,691 $1,844 $ 2,264
Other collections 7,450 6,929 7,050
Interest received 18 11 17
Income tax refunds received 75 26 13
Other cash receipts 7 6 7
------------------------------------------------------------------------------------------------
Cash provided by operating activities 9,241 8,816 9,351
------------------------------------------------------------------------------------------------
Uses of Cash
Cash paid to suppliers and employees 7,715 8,273 8,280
Interest paid 216 219 251
Income taxes paid 85 46 64
Other cash payments 18 34 26
------------------------------------------------------------------------------------------------
Cash used in operating activities 8,034 8,572 8,621
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,207 244 730
------------------------------------------------------------------------------------------------
Investing Activities
Payment for businesses purchased, net of cash acquired (232) (50)
Additions to property, plant and equipment (201) (211) (238)
Proceeds from sale of property, plant and equipment 40 63 106
Proceeds from sale of affiliates/operations 19
Advances to affiliate (30)
Funding of retiree benefit trust (2)
Other investing activities 1 (5)
------------------------------------------------------------------------------------------------
Net cash used in investing activities (392) (235) (113)
------------------------------------------------------------------------------------------------
Financing Activities
Borrowings under lines of credit 22 295 422
Repayment of borrowings under lines of credit (434) (55) (808)
Principal payments of long-term debt/capital leases (200) (200) (200)
Proceeds from issuance of stock 6 36 17
Dividends paid (111) (109) (102)
Other financing activities 5 (6)
------------------------------------------------------------------------------------------------
Net cash used in financing activities (717) (28) (677)
------------------------------------------------------------------------------------------------
Increase(decrease) in cash and cash equivalents 98 (19) (60)
Cash and cash equivalents balance at beginning of year 44 63 123
------------------------------------------------------------------------------------------------
Cash and cash equivalents balance at end of year $ 142 $ 44 $ 63
================================================================================================
</TABLE>
-27-
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 467 $ 194 $ 407
Adjustments to reconcile net income to net cash provided
Depreciation 193 207 232
Amortization of intangible assets 196 186 186
Common stock issued to employees 2 88 24
Loss on disposals of property, plant and equipment 21 30 18
Loss(gain) on assets available for sale 15 (8)
Loss on investment 30
Retiree benefits income (249) (194) (44)
Decrease(increase) in
Accounts receivable 170 1,212 (81)
Inventoried costs 172 (111) (147)
Prepaid expenses 45 (18) 2
Increase(decrease) in
Progress payments 21 (1,280) 66
Accounts payable and accruals (2) (115) 91
Provisions for contract losses (8) 54 (30)
Deferred income taxes 230 112 188
Income taxes payable 58 (16) (9)
Retiree benefits (129) (178) (180)
Other noncash transactions 20 28 15
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,207 $ 244 $ 730
===============================================================================================
Noncash Investing and Financing Activities:
Purchase of businesses
Fair value of assets acquired $ 328 $ 71
Cash paid (232) (51)
Stock issued (30)
-----------------------------------------------------------------------------------------------
Liabilities assumed $ 66 $ 20
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
<PAGE>
NORTHROP GRUMMAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Significant Accounting Estimates
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.
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 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.
The company's three reportable segments are its three operating units:
Integrated Systems (ISS), Electronic Sensors and Systems (ESS), and Logicon, the
company's information technology sector. Included in the Management's Discussion
and Analysis section of this report are general descriptions of the company's
principal products and services under the titles Integrated Systems Segment,
Electronic Sensors and Systems Segment, and Logicon Segment (see pages 2 through
6) and segment data in the table titled Results of Operations by Segment and
Major Customer (see pages 7 and 8), which are considered to be an integral
part of these financial statements. Only these portions of Management's
Discussion and Analysis are incorporated by reference into these financial
statements.
Sales to the U.S. Government (including foreign military sales) are
reported within each 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. Intersegment sales are transacted at cost
incurred with no profit added. Management principally uses operating margin as
the measure to evaluate segment profitability. The company does not allocate
federal income tax expense, pension income, the deferred portion of state income
tax expense, interest income, or interest expense to segments. General corporate
assets include cash and cash equivalents, corporate office furnishings and
equipment, other unallocable property, investments in affiliates, prepaid
retiree benefits cost, intangible pension asset, benefit trust fund assets,
deferred tax assets and certain assets available for sale.
-29-
<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.
-30-
<PAGE>
NORTHROP GRUMMAN CORPORATION
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.
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.
-31-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Earnings per Share
Basic earnings per share is 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.
Basic and diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
Earnings
Net Income Shares per share
---------- ------ ---------
(millions) (millions)
<S> <C> <C> <C>
1999
Basic earnings per share from continuing operations $ 474 69.3 $ 6.84
========= =======
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share from continuing operations $ 474 69.7 $ 6.80
========- ========== =======
Basic earnings per share from discontinued operations $ 9 69.3 $ .13
========= =======
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share from discontinued operations $ 9 69.7 $ .13
========= ========== =======
Basic earnings per share before cumulative effect of
accounting change $ 483 69.3 $ 6.97
========= =======
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share before cumulative effect of
accounting change $ 483 69.7 $ 6.93
========= ========== =======
Basic earnings per share $ 467 69.3 $ 6.73
========= =======
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share $ 467 69.7 $ 6.69
========= ========== =======
</TABLE>
-32-
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Earnings
Net Income Shares per share
---------- ------ ---------
(millions) (millions)
<S> <C> <C> <C>
1998
Basic earnings per share from continuing operations $ 193 68.5 $ 2.82
========= ========
Dilutive effect of stock options and awards 1.0
----------
Diluted earnings per share from continuing operations $ 193 69.5 $ 2.78
========= ========== ========
Basic earnings per share from discontinued operations $ 1 68.5 $ .01
========= ========
Dilutive effect of stock options and awards 1.0
----------
Diluted earnings per share from discontinued operations $ 1 69.5 $ .01
========= ========== ========
Basic earnings per share $ 194 68.5 $ 2.83
========= ========
Dilutive effect of stock options and awards 1.0
----------
Diluted earnings per share $ 194 69.5 $ 2.79
========= ========== ========
1997
Basic earnings per share from continuing operations $ 318 66.7 $ 4.76
========= ========
Dilutive effect of stock options and awards 1.4
----------
Diluted earnings per share from continuing operations $ 318 68.1 $ 4.67
========= ========== ========
Basic earnings per share from discontinued operations $ 89 66.7 $ 1.34
========= ========
Dilutive effect of stock options and awards 1.4
----------
Diluted earnings per share from discontinued operations $ 89 68.1 $ 1.31
========= ========== ========
Basic earnings per share $ 407 66.7 $ 6.10
========= ========
Dilutive effect of stock options and awards 1.4
----------
Diluted earnings per share $ 407 68.1 $ 5.98
========= ========== ========
</TABLE>
-33-
<PAGE>
NORTHROP GRUMMAN CORPORATION
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 that are probable of
recovery, and amounts retained by the customer pending contract completion.
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 2-20
Buildings 3-45
Machinery and other equipment 2-33
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 weighted average periods of 38 years and 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
margin. The recoverability of goodwill and other
-34-
<PAGE>
NORTHROP GRUMMAN CORPORATION
purchased intangibles is evaluated at least annually considering the projected
future profitability and cash flow of the operations to which they relate. When
it is determined that an impairment has occurred, an appropriate charge to
operations is recorded. Charges of $7 million and $9 million were recorded in
1999 and 1998, respectively, for purchased intangible assets no longer
considered recoverable from future revenues.
Assets Available for Sale
Capital assets are transferred to assets available for sale when a decision is
made to sell a facility and selling efforts are actively underway. In some
cases, operations continue and, when costs are allowable under government
contracts, depreciation expense is recorded until the facility is vacated or
sold. Assets available for sale are evaluated at least annually for
recoverability and written down to estimated fair value as necessary. When an
asset is written down to estimated fair value, depreciation ceases.
Financial Statement Reclassification
To conform to the presentation in 1999, certain amounts for 1998 and 1997 have
been reclassified in the Consolidated Financial Statements. The
reclassifications had no effect on net income or earnings per share for any
period presented.
DISCONTINUED OPERATIONS
Effective July 24, 2000, the company completed the sale of its commercial
aerostructures (Aerostructures) business to The Carlyle Group, pursuant to an
Asset Purchase Agreement dated as of June 9, 2000 between Northrop Grumman and
Vought Aircraft Industries, Inc., an entity owned by The Carlyle Group. The
purchase price was composed of $667.7 million in cash and a promissory note for
$175 million, maturing in nine years, with interest payable in kind for four
years and interest payable in kind or cash thereafter. An estimated loss on the
sale of $15 million will be recorded in the second quarter of 2000.
Aerostructures is a major producer of commercial and military aircraft
subassemblies, the majority of which are sold to The Boeing Company and, for
military contracts, ultimately to the U.S. Government.
The company's Consolidated Statements of Income and related footnote disclosures
have been restated to reflect Aerostructures as discontinued operations for all
periods presented. Balance sheet and cash flow data have not been restated.
Operating results of the discontinued Aerostructures business are as follows:
$ in millions 1999 1998 1997
----------------------------------------------------------------------------
Net Sales $ 1,379 $ 1,535 $ 1,355
============================================================================
Income before income taxes $ 15 $ 3 $ 139
Federal and foreign income taxes 6 2 50
----------------------------------------------------------------------------
Net income from discontinued operations $ 9 $ 1 $ 89
============================================================================
-35-
<PAGE>
NORTHROP GRUMMAN CORPORATION
BUSINESS COMBINATIONS
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. The merger was
accounted for as a pooling of interests.
ACQUISITIONS
In 1998 the company acquired Inter-National Research Institute Inc. for $55
million in cash. In 1999 the company acquired three businesses, the Information
Systems Division of California Microwave, Inc., Data Procurement Corporation,
and Ryan Aeronautical, an operating unit of Allegheny Teledyne Incorporated, for
a total of $271 million in cash and stock. The results of operations of the
acquired companies were included in the consolidated results of Northrop Grumman
Corporation from their respective acquisition dates.
The purchase method of accounting was used to record all four
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 was assigned to goodwill.
Unaudited pro forma consolidated results, after giving effect to the
businesses acquired in 1998 and 1999, would not have been materially different
from the reported amounts for 1997, 1998 or 1999.
-36-
<PAGE>
NORTHROP GRUMMAN CORPORATION
TERMINATED MERGER AGREEMENT
On July 3, 1997, the company announced that it had entered into a definitive
agreement with Lockheed Martin Corporation to combine the companies. On February
26, 1998, shareholders of Northrop Grumman approved the merger. On March 23,
1998, the U.S. Government filed suit to block the merger. On July 16, 1998,
Lockheed Martin notified the company that it was terminating its merger
agreement with the company pursuant to the terms of the agreement.
The company recorded charges totaling $186 million in 1998 for costs
related to the terminated merger. The charges cover vesting of restricted stock
which became issuable following shareholder approval of the merger and other
costs associated with the terminated merger, including investment banking fees,
legal and accounting fees, and costs related to responding to the Government's
request for information.
NEW ACCOUNTING STANDARDS
In January 1999, the company adopted Statement of Position (SOP) 98-1 -
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which requires capitalization of certain costs incurred after the date of
adoption to develop or obtain software for internal use. Adoption of this
standard had no material effect on the company's results of operations,
financial position, or cash flows.
In January 1999, the company adopted 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133- Accounting for Derivative Instruments and Hedging Activities, which becomes
effective for fiscal years beginning after June 15, 2000. This standard provides
authoritative guidance on accounting and financial reporting for derivative
instruments. Management is currently evaluating the effect that adoption of this
standard will have on the company's results of operations, financial position,
and cash flows.
-37-
<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.
The claim receivable as of December 31, 1998, represents costs incurred
to date on the Accurate Fuselage Assembly (AFA) program that the company
expected to recover from The Boeing Company for out-of-scope work and related
delay and disruption costs incurred on the program. In the second quarter of
1999, the company resolved its claims with Boeing. The settlement had no
material effect on the company's financial results for 1999.
Accounts receivable were comprised of the following:
$ in millions 1999 1998
-----------------------------------------------------------------------------
Due from U.S. Government, long-term contracts
Current accounts
Billed $ 424 $ 362
Unbilled 1,879 2,145
Progress payments received (1,283) (1,388)
-----------------------------------------------------------------------------
1,020 1,119
-----------------------------------------------------------------------------
Due from other customers, long-term contracts
Current accounts
Billed 122 141
Unbilled 165 137
Claim 29
-----------------------------------------------------------------------------
287 307
-----------------------------------------------------------------------------
Total due, long-term contracts 1,307 1,426
-----------------------------------------------------------------------------
Trade and other accounts receivable
Due from U.S. Government 57 63
Due from other customers 76 65
-----------------------------------------------------------------------------
Total due, trade and other 133 128
-----------------------------------------------------------------------------
1,440 1,554
Allowances for doubtful amounts (38) (47)
-----------------------------------------------------------------------------
$ 1,402 $ 1,507
=============================================================================
-38-
<PAGE>
NORTHROP GRUMMAN CORPORATION
INVENTORIED COSTS
Inventoried costs were comprised of the following:
$ in millions 1999 1998
-----------------------------------------------------------------------------
Production costs of contracts in process $ 1,320 $ 1,487
Excess of production cost of delivered items
over the estimated average unit cost 161 162
Administrative and general expenses 230 245
-----------------------------------------------------------------------------
1,711 1,894
Progress payments received (521) (521)
-----------------------------------------------------------------------------
$ 1,190 $ 1,373
=============================================================================
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.
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.
-39-
<PAGE>
NORTHROP GRUMMAN CORPORATION
INCOME TAXES
Income tax expense, both federal and foreign, was comprised of the following:
$ in millions 1999 1998 1997
----------------------------------------------------------------------------
Currently payable
Federal income taxes $ 77 $ (13) $ 24
Foreign income taxes 4 5 3
----------------------------------------------------------------------------
81 (8) 27
Change in deferred federal income taxes 192 124 167
----------------------------------------------------------------------------
$ 273 $ 116 $194
============================================================================
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:
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense on continuing
operations at statutory rate $ 261 $ 108 $ 179
Goodwill amortization 15 15 16
Benefit from ESOP dividends (3) (3) (3)
Other, net (4) 2
------------------------------------------------------------------------------
$ 273 $ 116 $ 194
==============================================================================
</TABLE>
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.
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:
-40-
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
$ in millions 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Deductible temporary differences
Provision for estimated expenses $ 33 $ 41
Retiree benefit plan expense 364
Other 12
-------------------------------------------------------------------------------------
33 417
-------------------------------------------------------------------------------------
Taxable temporary differences
Income on contracts (10) (12)
Purchased intangibles (89)
Excess tax over book depreciation (69)
Other (57)
-------------------------------------------------------------------------------------
(10) (227)
-------------------------------------------------------------------------------------
$ 23 $ 190
=====================================================================================
Deferred tax liabilities
Taxable temporary differences
Income on contracts $ 913 $ 865
Goodwill amortization 95
Purchased intangibles 89
Excess tax over book depreciation 72
Administrative and general expenses
period costed for tax purposes 14 18
Other 14
-------------------------------------------------------------------------------------
1,197 883
-------------------------------------------------------------------------------------
Deductible temporary differences
Provision for estimated expenses (207) (174)
Retiree benefit plan expense (197) (16)
Other (50) (30)
-------------------------------------------------------------------------------------
(454) (220)
-------------------------------------------------------------------------------------
Tax carryforwards
Tax credits (75) (82)
Alternative minimum tax credit (54) (54)
-------------------------------------------------------------------------------------
(129) (136)
-------------------------------------------------------------------------------------
$ 614 $ 527
=====================================================================================
Net deferred tax liability
Total deferred tax liabilities (taxable
temporary differences above) $1,207 $ 1,110
Less total deferred tax assets (deductible
temporary differences and tax carryforwards above) 616 773
-------------------------------------------------------------------------------------
$ 591 $ 337
=====================================================================================
</TABLE>
The tax carryforward benefits are expected to be used in the periods in
which net deferred tax liabilities mature. These tax credit carryforwards are in
various amounts and expire over the years 2001 through 2007. The alternative
minimum tax credit can be carried forward indefinitely.
-41-
<PAGE>
NORTHROP GRUMMAN CORPORATION
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, 1999, $25 million was outstanding at a weighted
average interest rate of 6.75 percent. At December 31, 1998, $67 million was
outstanding at a weighted average interest rate of 5.60 percent.
Additionally, the company has a credit agreement with a group of
domestic and foreign banks to provide for two credit facilities: $1.8 billion
available on a revolving credit basis through March 2002; and a term loan
payable in nine quarterly installments of $50 million plus interest through
March 1, 2002. 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, 1999, $150 million at a weighted average interest rate
of 6.76 percent was outstanding under the company's revolving credit facility.
At December 31, 1998, $512 million at a weighted average interest rate of 5.66
percent was outstanding. At December 31, 1999, the $450 million term loan had a
weighted average interest rate of 6.61 percent. At December 31, 1998, $650
million was outstanding at a weighted average interest rate of 5.68 percent.
Principal payments permanently reduce the amount available under this agreement
as well as the debt outstanding. 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, 1999, $880 million of
retained earnings were unrestricted as to the payment of dividends.
-42-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Long-term debt consisted of the following:
$ in millions 1999 1998
------------------------------------------------------------------------
Notes due 2004, 8.625% $ 350 $ 350
Notes due 2006, 7% 400 400
Debentures due 2016, 7.75% 300 300
Debentures due 2024, 9.375% 250 250
Debentures due 2026, 7.875% 300 300
Revolving credit facility 150 512
Term loans payable to banks 450 650
------------------------------------------------------------------------
2,200 2,762
Less current portion 200 200
------------------------------------------------------------------------
$2,000 $2,562
========================================================================
The debt indenture contains restrictions relating to limitations on
liens, sale and leaseback arrangements and funded debt of subsidiaries.
The principal amount of long-term debt outstanding at December 31,
1999, due in each of the years 2000 and 2001 is $200 million, with $50 million
due in 2002, $350 million due in 2004 and $1,400 million due thereafter.
-43-
<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:
Due to the short-term nature of these items, the carrying amount
reported in the Consolidated Statements of Financial Position for Cash
and Cash Equivalents and amounts borrowed under the company's short-
term credit lines are estimated to approximate fair value.
The fair value of the long-term debt at the respective year-ends 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 its term loans, the company has from time to time entered
into interest rate swap agreements. No interest rate swap agreements were in
effect at December 31, 1999, or December 31, 1998. If any interest rate swap
agreements had existed, unrealized gains(losses) would be calculated based upon
the amounts at which they could have been settled at then current interest
rates.
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 1999 1998
------------------------------------------------------------------------------
Long-term debt
Carrying amount $ 2,200 $2,762
Fair value 2,154 2,914
------------------------------------------------------------------------------
-44-
<PAGE>
NORTHROP GRUMMAN CORPORATION
RETIREMENT BENEFITS
The company sponsors several defined-benefit pension plans covering over 80
percent of 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 fourteen qualified plans, which
cover more than 70 percent of all employees, were in a legally defined full-
funding limitation status at December 31, 1999.
The company and subsidiaries also sponsor defined-contribution plans
in which most employees are eligible to participate. Company contributions for
most plans are based on a matching of employee contributions up to 4 percent of
compensation.
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 70 percent of
the company's current retirees participate in the medical plans. 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.
-45-
<PAGE>
NORTHROP GRUMMAN CORPORATION
The cost to the company of these plans in each of the last three years
is shown in the following table.
<TABLE>
<CAPTION>
Pension Benefits Medical and Life Benefits
$ in millions 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost(income)
Service cost $ 200 $ 187 $ 162 $ 34 $ 27 $ 27
Interest cost 659 642 618 102 95 98
Expected return on plan assets (1,136) (1,008) (834) (30) (34) (26)
Amortization of
Prior service costs 35 35 34
Transition assets, net (42) (42) (42)
Net gain from previous years (69) (80) (71) (2) (16) (10)
-----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost(income)
including discontinued operations (353) (266) (133) 104 72 89
Discontinued operations 10 (4) (11) (12) (13) (9)
-----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost(income)
from continuing operations $ (343) $ (270) $ (144) $ 92 $ 59 $ 80
===================================================================================================================================
Defined contribution plans cost $ 92 $ 89 $ 84
===================================================================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate for obligations 7.50% 6.50% 7.00%
Rate of increase for compensation 5.00 4.00 4.50
Expected long-term rate of return on plan assets 9.50 9.50 9.50
------------------------------------------------------------------------------------------------------
</TABLE>
These assumptions also were 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 9.5 percent
expected rate of return on plan assets was reduced accordingly to 6 percent
after taxes. A significant factor used in estimating future per capita cost of
covered health care benefits for the company and its retirees is the health care
cost trend rate assumption. The rate used was 10 percent for 1999 and is assumed
to decrease gradually to 6 percent for 2006 and thereafter. A one-percentage-
point change in that rate would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
$ in millions Point Increase Point Decrease
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $ 18 $ (15)
Effect on postretirement benefit obligation 166 (146)
</TABLE>
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<PAGE>
NORTHROP GRUMMAN CORPORATION
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. Pension benefits data includes the qualified plans as well as
thirteen unfunded non-qualified plans for benefits provided to directors,
officers and employees either beyond those provided by, or payable under, the
company's main plans.
<TABLE>
<CAPTION>
Pension Benefits Medical and Life Benefits
$ in millions 1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 10,164 $ 9,056 $ 1,559 $ 1,443
Service cost 200 187 34 27
Interest cost 659 642 102 95
Plan participants' contributions 7 7 26 25
Amendments 4 3
Actuarial loss(gain) (771) 851 (72) 67
Benefits paid (612) (582) (115) (98)
-------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 9,651 10,164 1,534 1,559
-------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 12,033 10,832 570 538
Actual return on plan assets 2,284 1,651 154 61
Employer contributions 80 125 58 44
Plan participants' contributions 7 7 26 25
Benefits paid (612) (582) (115) (98)
-------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 13,792 12,033 693 570
-------------------------------------------------------------------------------------------------------------------------------
Funded status 4,141 1,869 (841) (989)
Unrecognized prior service cost 169 200 2 2
Unrecognized net transition asset (120) (162)
Unrecognized net gain (3,573) (1,723) (319) (125)
-------------------------------------------------------------------------------------------------------------------------------
Net asset(liability) recognized $ 617 $ 184 $ (1,158) $ (1,112)
-------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of
financial position
Prepaid benefit cost $ 851 $ 712 $ 30 $
Accrued benefit liability (234) (528) (1,188) (1,112)
Additional minimum liability (36) (64)
Intangible asset 7 16
Accumulated other comprehensive loss 29 48
-------------------------------------------------------------------------------------------------------------------------------
Net asset(liability) recognized $ 617 $ 184 $ (1,158) $ (1,112)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For pensions plans with benefit obligations in excess of assets as of
December 31, 1999, the projected benefit obligation was $224 million, the
accumulated benefit obligation was $203 million, and the
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<PAGE>
NORTHROP GRUMMAN CORPORATION
fair value of assets was $7 million. As of December 31, 1998, the projected
benefit obligation was $1,451 million, the accumulated benefit obligation was
$1,285 million, and the fair value of assets was $784 million.
Pension plan assets at December 31, 1999, comprised 48 percent domestic
equity investments in listed companies (including 2 percent in Northrop Grumman
common stock); 14 percent equity investments listed on international exchanges;
22 percent in fixed income investments; 5 percent in venture capital and real
estate investments; and 11 percent in cash and cash equivalents. The investment
in Northrop Grumman represents 4,111,669 shares, or 6 percent of the company's
total shares outstanding.
Retiree health care and life insurance plan assets at December 31,
1999, comprised 64 percent domestic equity investments in listed companies; 24
percent equity investments on international exchanges; and 12 percent in cash
and equivalents.
COMMITMENTS AND 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, 1999, the range of reasonably possible future
costs for environmental remediation is $80 million to $111 million, of which $87
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, financial position, or cash flows.
The company has entered into standby letter of credit agreements and
other arrangements with financial institutions primarily relating to the
guarantee of future performance on certain contracts. Contingent liabilities on
these agreements aggregated approximately $535 million at December 31, 1999.
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<PAGE>
NORTHROP GRUMMAN CORPORATION
The company has agreed to invest an additional $30 million in Kistler
Aerospace Corporation preferred stock. This investment will only be made when
Kistler Aerospace Corporation has obtained additional funding from other sources
and will represent the last increment of funding required to complete and test
the first K-1 vehicle, and is subject to the company's then determination that
the K-1 is a viable launch system.
Minimum rental commitments under long-term noncancellable operating
leases total $394 million which is payable as follows: 2000 - $93 million, 2001-
$70 million, 2002 - $60 million, 2003 - $51 million, 2004 - $42 million, and
2005 and thereafter - $78 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 $250.
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 $.01 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 2008. 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.
STOCK COMPENSATION PLANS
At December 31, 1999, 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). The LTISP contains
change in control provisions which were activated in February 1998 upon approval
by the shareholders of the proposed merger of the company with Lockheed Martin
Corporation, causing all then unvested stock awards to become immediately
vested.
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<PAGE>
NORTHROP GRUMMAN CORPORATION
The LTISP permits grants to key employees of three general types of
stock incentive awards: stock options, stock appreciation rights (SARs) and
stock awards. Under the LTISP, each stock option grant is made with an exercise
price either at the closing price of the stock on the date of grant (market
options) or at a premium over the closing price of the stock on the date of
grant (premium options). 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, unearned rights
up to 100 percent of the original grant for five elected officers and, up to 70
percent of the original grant for all other recipients, will be forfeited.
Termination of employment can result in forfeiture of some or all of the
benefits extended under the plan. Each year 1.5% of the company's total issued
and outstanding common stock at the end of the preceding fiscal year become
available for issuance pursuant to incentive awards. During 1998 and 1999, a
number of awards granted under the LTISP contained terms, including limitations
and conditions on exercisability and vesting, that took into account and were
predicated upon future annual share availability.
The SOPND permits 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, 1999, 244,500 shares were available for future grants
under the SOPND.
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 $15 million
in 1999, $163 million in 1998, and $57 million in 1997.
-50-
<PAGE>
NORTHROP GRUMMAN CORPORATION
Stock option activity for the last three years is summarized below:
<TABLE>
<CAPTION>
Weighted-
Average
Shares Exercise Shares
Under Option Prices Exercisable
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 4,027,272 $ 47 1,384,026
Granted, market options 15,000 85
Cancelled (100,932) 58
Exercised (570,182) 34
---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 3,371,158 49 1,556,475
Granted, market options 992,000 74
Granted, premium options 1,986,450 95
Cancelled (5,700) 65
Exercised (766,182) 48
---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 5,577,726 70 2,624,276
Granted, market options 69,200 62
Granted, premium options 106,800 93
Cancelled (221,015) 88
Exercised (702,628) 22
---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 4,830,083 76 1,926,899
===========================================================================================================================
</TABLE>
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<PAGE>
NORTHROP GRUMMAN CORPORATION
Had compensation expense been determined based on the fair value at the
grant dates for stock option awards granted in 1999, 1998 and 1997, consistent
with the method of Financial Accounting Standards Board Statement 123 -
Accounting for Stock Based Compensation, net income, basic earnings per share,
and diluted earnings per share in 1999 would have been lower by $11 million,
seventeen cents and sixteen cents, respectively. For 1998 net income, basic
earnings per share and diluted earnings per share would have been lower by $5
million, seven cents and seven cents, respectively. For 1997 net income, basic
earnings per share and diluted earnings per share would have been lower by $5
million, eight cents, and eight cents, respectively. These amounts were
determined using weighted-average per share fair values for premium options
granted in 1999 of $15 and 1998 of $15 and for market options granted in 1999,
1998 and 1997 of $18, $20 and $25 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 1999, 1998 and 1997,
respectively, the following additional assumptions: dividend yield - 2.1
percent, 1.9 percent and 1.9 percent; expected volatility - 29 percent, 27
percent and 22 percent; and risk-free interest rate - 5.8 percent, 4.4 percent
and 6.7 percent.
At December 31, 1999 the following stock options were outstanding:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- ----------------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Contractual Life Prices at 12/31/99 Prices
--------------- ----------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$ 16 to 35 123,458 2.8 years $ 25 123,458 $ 25
36 to 55 580,619 5.0 years 41 552,119 41
56 to 75 1,490,122 7.9 years 68 531,622 59
76 to 95 1,599,459 8.1 years 85 674,700 81
96 to 118 1,036,425 9.0 years 101 45,000 105
------------ ------------
4,830,083 1,926,899
============ ============
</TABLE>
Restricted performance stock rights were granted with weighted-average
grant-date fair values per share as follows: 1999 - 75,300 at $64; 1998 -794,050
at $73; and 1997 - 7,700 at $80.
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<PAGE>
NORTHROP GRUMMAN CORPORATION
UNAUDITED SELECTED QUARTERLY DATA
Quarterly financial results are set forth in the following tables together with
dividend and common stock price data.
1999 Quarters
<TABLE>
<CAPTION>
$ in millions, except per share 4 3 2 1
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,180 $ 1,805 $ 1,921 $ 1,710
Operating margin 255 242 254 203
Income from continuing operations 139 116 123 96
Income before cumulative effect of accounting change 138 128 113 104
Net income 138 128 113 88
Basic earnings per share from continuing operations 1.99 1.68 1.79 1.39
Basic earnings per share before
cumulative effect of accounting change 1.97 1.84 1.65 1.51
Basic earnings per share 1.97 1.84 1.65 1.27
Diluted earnings per share from continuing operations 1.98 1.66 1.78 1.38
Diluted earnings per share before
cumulative effect of accounting change 1.96 1.83 1.64 1.50
Diluted earnings per share 1.96 1.83 1.64 1.26
Dividend per share .40 .40 .40 .40
Stock price:
High 62 5/16 75 11/16 73 5/16 73 1/4
Low 49 59 15/16 57 3/4 57
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the fourth quarter of 1999 the company reached a settlement of its
contract claims with the U.S. Air Force relating to the remanufacturing of
Joint STARS aircraft. The company was able to recognize underlying improved
performance on the production phase of the program and recorded upward
cumulative margin rate adjustments totaling $37 million. Operating margin
includes positive cumulative margin rate adjustments on the B-2 program of $23
million, $11 million and $36 million in the fourth, third and second quarters,
respectively.
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<PAGE>
NORTHROP GRUMMAN CORPORATION
1998 Quarters
<TABLE>
<CAPTION>
$ in millions, except per share 4 3 2 1
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,079 $ 1,818 $ 1,789 $ 1,681
Operating margin 189 208 176 179
Income(loss) from continuing operations 54 97 73 (31)
Net income(loss) (3) 116 93 (12)
Basic earnings(loss) per share from continuing operations .78 1.40 1.07 (.44)
Basic earnings(loss) per share (.04) 1.68 1.36 (.18)
Diluted earnings(loss) per share from continuing operations .77 1.39 1.05 (.43)
Diluted earnings(loss) per share (.04) 1.67 1.34 (.18)
Dividend per share .40 .40 .40 .40
Stock price:
High 84 108 5/8 110 3/4 139
Low 68 7/16 59 5/16 97 3/16 102 3/4
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Operating margin in the fourth quarter of 1998 includes a $21 million charge due
to an increase in the cost estimate to complete work on the test phase of
development for the Directional Infrared Countermeasures (DIRCM) program. Pretax
costs of $16 million and $42 million are included in the third and fourth
quarter, respectively, related to activities to realign operating units,
consolidate facilities and exit certain business areas. Cumulative margin rate
adjustments on the Joint STARS and E-2C programs reduced operating margin in the
second quarter by $25 million. Charges related to the company's terminated
merger with Lockheed Martin Corporation of $180 million and $6 million were
recorded in the first and second quarter, respectively. Included in the 1998
fourth quarter results is the write off of the company's $30 million investment
comprised of advances on behalf of the Kistler Aerospace Corporation. The write
off resulted from the company's assessment that the near-term likelihood of
Kistler obtaining additional financing made recovery of the investment
uncertain.
The corporation's common stock is traded on the New York and Pacific
Stock Exchanges (trading symbol NOC). The approximate number of holders of
record of the corporation's common stock at February 14, 2000, was 11,135.
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<PAGE>
NORTHROP GRUMMAN CORPORATION
Item 14
I - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(Dollars in Thousands)
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Other
Balance at Changes-- Balance
Beginning Additions Add at End
Classification of Period At Cost (Deduct)/(1)/ of Period
-------------- ---------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Description:
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $55,445 $17,279 $(17,746) $54,978
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $54,978 $ 8,076 $(16,013) $47,041
Year ended December 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $47,041 $21,088 $(30,455) $37,674
</TABLE>
___________
(1) Uncollectible amounts written off, net of recoveries.
-55-
<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,
1999 and 1998, and the related consolidated statements of income, comprehensive
income, changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. Our audit also included the
financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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.
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in the footnotes to the consolidated financial statements,
in 1999 the Company changed its method of accounting for start-up activities by
adopting Statement of Position 98-5 -- Reporting on the Costs of Start-up
Activities.
Deloitte & Touche LLP
Los Angeles, California
January 26, 2000,
except for discontinued operations footnote,
as to which the date is July 24, 2000.
-56-
