Document/Exhibit Description Pages Size
1: 10-K Annual Report 53± 241K
2: EX-10 Material Contract 24± 70K
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9: EX-10 Material Contract 16± 39K
10: EX-10 Material Contract 6± 24K
11: EX-10 Material Contract 6± 22K
12: EX-21 Subsidiaries of the Registrant 1 6K
13: EX-24 Power of Attorney 2± 12K
14: EX-27 Financial Data Schedule (Pre-XBRL) 1 7K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from Commission file number
to 1-3229
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-1055798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Century Park East
Los Angeles, California 90067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 553-6262
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1 par value New York Stock Exchange
Pacific Stock Exchange
Securities Registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of February 12, 1996, 49,559, 670 shares of Common Stock were
outstanding, and the aggregate market value of the Common Stock (based upon
the closing price of the stock on the New York Stock Exchange) of the
Registrant held by nonaffiliates was approximately $3,270 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1995 Annual Meeting of Stockholders.
Part III
NORTHROP GRUMMAN CORPORATION
PART I
Item 1. Business
Northrop Corporation was incorporated in Delaware in 1985. Effective
May 18, 1994, Northrop Corporation was renamed Northrop Grumman
Corporation. Northrop Grumman is an advanced technology company operating
in the aerospace industry. The company designs, develops and manufactures
aircraft, aircraft subassemblies and electronic systems for military and
commercial use and designs and develops, operates and supports computer
systems for scientific and management information.
Additional information required by this Item is contained in Part II
Item 7 of this Annual Report on Form 10-K.
NORTHROP GRUMMAN CORPORATION
Item 2. Properties
The major locations, general status of the company's interest in the
property and identity of the industry segments which use the property
described, are indicated in the following table.
Location Property Interest
Arlington, Virginia (1) (5) (a) Leased
Benton, Pennsylvania (2) (b) Leased
*Bethpage, New York (1) (2) (3) (5) (a) (b) (c) (d) Owned, Leased
Bohemia, New York (3) (a) Owned, Leased
Bridgeport, West Virginia (2) (a) (b) Owned, Leased
Calverton, New York (2) (a) (b) (c) (d) (e) Owned
Chandler, Arizona (1) (a) (b) Owned
Compton, California (1) (b) (c) Owned, Leased
El Segundo, California (1) (4) (a) (b) (c) (d) Owned, Leased
Fairborn, Ohio (3) (a) (c) Leased
Fort Tejon, California (1) (d) Owned, Leased
Gardena, California (1) (c) Owned
Glen Arm, Maryland (2) (b) Owned
Grand Prairie, Texas (1) (a) (b) (c) (d) Owned, Leased
Great River, New York (2) (a) (b) Owned
Hawthorne, California (1) (2) (4) (5) (a) (b) (c) (d) Owned, Leased
*Hicksville, New York (2) (a) (d) (e) Owned
Hondo, Texas (3) (e) Leased
Houston, Texas (3) (a) Leased
Irvine, California (2) (d) Leased
Kent, Washington (1) (c) Leased
Lake Charles, Louisiana (1) (a) (b) (c) Leased
Lawton, Oklahoma (3) (a) (c) Owned, Leased
Lexington, South Carolina (1) (a) (c) Owned, Leased
Los Angeles, California (1) (2) (5) (a) Leased
Mayfield, Pennsylvania (1) (b) Owned
Melbourne, Florida (2) (a) (b) (c) (e) Owned, Leased
Milledgeville, Georgia (1) (b) (c) (e) Owned, Leased
Mojave, California (1) (e) Owned, Leased
Montebello, California (1) (c) Leased
Montgomery, Pennsylvania (1) (b) Owned
NORTHROP GRUMMAN CORPORATION
New Town, North Dakota (2) (b) (c) Owned, Leased
Newbury Park, California (5) (a) (b) (c) (d) Owned
Norwood, Massachusetts (5) (b) (c) (e) Owned, Leased
Palatine, Illinois (2) (c) Leased
Palmdale, California (1) (a) (b) (c) (d) (e) Owned, Leased
Perry, Georgia (1) (4) (a) (b ) (c) Owned
Pico Rivera, California (1) (a) (b) (c) (d) Owned, Leased
Portsmouth, Rhode Island (1) (b) (e) Owned, Leased
Rolling Meadows, Illinois (2) (a) Owned, Leased
Sherman, Texas (1) (b) Owned
St. Augustine, Florida (1) (a) (b) (c) (e) Owned, Leased
Stuart, Florida (1) (b) (c) Leased
Sturgis, Michigan (1) (a) (b) (c) Owned, Leased
Torrance, California (1) (b) (c) Owned, Leased
Tulare, California (1) (b) Owned
Warner Robins, Georgia (2) (3) (a) Owned, Leased
Warren, Michigan (1) (b) Leased
__________
* Certain portions of the properties at each of these locations are leased
or subleased to others. The company believes that in the aggregate the
property covered by such leases or subleased to others is not material
compared to the property actually utilized by the company in its
business.
NORTHROP GRUMMAN CORPORATION
Following each described property are numbers indicating the industry
segments utilizing the property:
(1) Military and Commercial Aircraft
(2) Electronics and Systems Integration
(3) Data Systems and Other Services
(4) Missiles and Unmanned Vehicle Systems
(5) General Corporate Asset
Following each described property are letters indicating the types of
facilities located at each location:
(a) office
(b) manufacturing
(c) warehouse
(d) research and testing
(e) other
Government-owned facilities used or administered by the company
consist of 10.2 million square feet at various locations across the United
States.
The company believes its properties are well-maintained and in good
operating condition. Under present business conditions and the company's
volume of business, productive capacity is currently in excess of
requirements.
NORTHROP GRUMMAN CORPORATION
Item 3. Legal Proceedings
False Claims Act Litigation
On June 9, 1987, a Complaint, entitled U.S. ex rel, David Peterson and
Jeff Kroll v. Northrop Corporation, was filed in the U.S. District Court
for the Central District of California alleging violations by the Company
of the False Claims Act in connection with the operation of petty cash
funds, inspection, testing, and pricing for the MX Peacekeeper Missile
program. On September 1, 1989, the government intervened and reduced the
scope of the lawsuit by filing an amended complaint. The amended complaint
does not completely specify the total amount being sought but, rather,
seeks damages in excess of $1.2 million. On May 7, 1990, the Court ruled
that the original plaintiffs may proceed with portions of the lawsuit that
the government declined to include in the amended complaint. In 1994, the
court granted summary judgment for the Company on the government's fraud
allegations related to petty cash, integrated test stations, extended work
week and experimental change orders. Trial on the remaining allegations is
scheduled for March 1996.
In addition, the Company is a party to a number of civil actions
brought by private parties alleging violation of the False Claims Act in
which the government has declined to intervene. These actions, which have
been previously reported, relate to the MX Peacekeeper Missile, the Air
Launched Cruise Missile and the Advanced Technology Bomber (B-2) programs.
In a number of these actions, plaintiffs also allege employment related
claims including claims of wrongful termination. Damages sought include
claims for compensatory and punitive damages. A number of these civil
actions were initially reported when it was unclear what position, if any,
the government would take in the litigation. In light of the government's
decision not to intervene or otherwise pursue the litigation, as well as
the amounts involved, the cases will not be individually reported.
Further, the Company learns from time to time that it has been named as a
defendant in lawsuits which are filed under seal pursuant to the False
Claims Act. Since these matters remain under seal, the Company does not
possess sufficient information to accurately report on the particular
allegations.
Walsh, et al. v. Northrop Grumman Corporation
In November 1994, a class action complaint was filed against Northrop
Grumman Corporation, Grumman Corporation, Renso Caporali, Howard J. Dunn,
Jr., Robert Denien and Robert E. Foster in the U.S. District Court for the
Eastern District of New York, Case No. CV 94-5105 (Platt C.J.). A first
amended complaint was filed on November 29, 1994 alleging that Grumman
Corporation's March 8 and April 4, 1994 Form 14D-9 filings with the
Securities and Exchange Commission incorporated a statement concerning the
Grumman Severance Plan which violated Sections 10(b) and 14(e) of the
Securities and Exchange Act of 1934 (the "Act") and Rule 10b-5 of the Rules
and Regulations under the Act. The complaint also contains a cause of
action for equitable estoppel based upon the same statement and plaintiffs'
alleged reliance thereon. The complaint also alleges that the trustees of
Grumman's Investment Plan violated their fiduciary obligations by voting
the Plan's shares in favor of the merger without consulting the class
members. The complaint seeks an order enjoining the defendants from
amending or discontinuing the Severance Plan for a period of thirty (30)
months from the date of the merger and an order mandating that defendants
permit class members who have accepted voluntary termination with severance
pay to rescind their elections. On December 8, 1994 the court denied
plaintiffs' application for a preliminary injunction but declined to
dismiss the action. On April 7, 1995 the court granted plaintiffs' motion
to amend their complaint to add a claim for damages based on post-acquisition
changes to Grumman benefit plans. In July 1995, the court certified a class
of plaintiffs consisting of all employees who, at the time of the tender offer,
were Grumman employees, owned Grumman stock either directly or beneficially
through the Employee Investment Plan, and were injured as a result of
defendants conduct. Absent dispositive motions, this matter will proceed
to trial in late 1996 or early 1997. The defendants intend to vigorously
defend this litigation and the Company does not expect this matter to have
a material adverse effect on its financial condition.
U.S. Government Investigation
The Company, as a government contractor, is from time to time subject
to U.S. Government investigations relating to its operations. Government
contractors that are found to have violated the False Claims Act, or are
indicted or convicted for violations of other Federal laws, or are
considered not to be responsible contractors may be suspended or debarred
from, government contracting for some period of time. Such convictions
could also result in fines. Given the Company's dependence on government
contracting, suspension or debarment could have a material adverse effect
on the Company.
On May 3, 1995 federal agents executed search warrants at the Military
Aircraft Division facilities in Hawthorne and El Segundo, California.
Since that time, the Company has learned that the United States Attorney
for the Central District of California is conducting a Grand Jury
investigation of the F/A-18 and Targets Programs at the Military Aircraft
Division. Although the Government has declined to inform the Company of
the details of the investigation, it has confirmed that there are no issues
regarding flight safety.
NORTHROP GRUMMAN CORPORATION
Executive Officers of the Registrant
[Enlarge/Download Table]
The following individuals were the elected officers of the company as
of February 1996:
Business Experience
Name Age Office Held Since Last Five Years
Kent Kresa 57 Chairman, President & CEO 1990 President and Chief Executive Officer.
Herbert W. Anderson 56 Corporate Vice President 1995 Vice President and Deputy
and General Manager, General Manager, Data
Data Systems & Services Systems and Services Division
Division; Prior to 1994,
Vice President and Center General Manager
of Northrop Information Services
Center; Prior to 1991, Vice President
Information Resource Management, B-2
Program
Ralph D. Crosby, Jr. 48 Corporate Vice President 1996 Corporate Vice President
and Deputy General Manager, and General Manager,
Military Aircraft Systems B-2 Division; Prior to
Division 1994, Vice President
Business and Advanced
Systems Development at
B-2 Division; Prior to
1992, Vice President
Business Development and
Administration; Prior to
1991, Vice President
and Manager of Northrop
Washington Office.
Marvin Elkin 59 Corporate Vice President 1994 Corporate Vice President
and Chief Human Resources Administration and
and Administrative Officer Services; prior to 1991
Vice President, Materiel
and Services
Nelson F. Gibbs 58 Corporate Vice President 1992 Vice President
and Controller and Controller; Prior
to 1991, Partner, Deloitte
& Touche LLP
John E. Harrison 60 Corporate Vice President 1994 Senior Vice President
and General Manager, and General Manager,
Electronics and Systems Electronics Programs,
Integration Division Aerospace and Electronics
Group, Grumman Corporation;
Prior to 1992, President,
Electronics Division,
Grumman Corporation
Robert W. Helm 44 Corporate Vice 1994 Vice President,
President, Government Legislative Affairs
Relations
James C. Johnson 43 Corporate Vice 1995 Senior Corporate Counsel;
President and Secretary Prior to 1992, Senior Counsel
Charles L. Jones, Jr. 54 Corporate Vice 1992 Vice
President, Quality President, Quality
Operations Operations; Prior to 1991
Vice President and Manager
Operations, Electronics
Division
Richard R. Molleur 63 Corporate Vice President 1991 Senior Vice President and
and General Counsel General Counsel; Prior to
1991, Partner, Winston & Strawn
Albert F. Myers 50 Corporate Vice President 1994 Vice President, Business
and Treasurer Strategy; Prior to 1992,
Vice President, Test
Operations at B-2 Division
James G. Roche 56 Corporate Vice President 1993 Corporate Vice President
and Chief Advanced Advanced Development and
Development, Planning, Planning Officer; Prior to
and Public Affairs Officer 1992 Vice President,
Advanced Development and
Planning; Prior to 1991,
Vice President and Special
Assistant to the Chairman,
President and CEO
Wallace G. Solberg 64 Corporate Vice President 1996 Corporate Vice President
and General Manager, and General Manager,
Military Aircraft Systems Military Aircraft Division;
Division Prior to 1994, Corporate
Vice President and General
Manager-Aircraft Division;
Prior to 1991, Vice
President and General
Manager, Electronics
Systems Division
Richard B. Waugh, Jr. 52 Corporate Vice President 1993 Vice President, Taxes,
and Chief Financial Officer Risk Management and
Business Analysis
Gordon L. Williams 63 Corporate Vice President 1994 President & CEO, Vought
and General Manager, Aircraft Company; Prior to
Commercial Aircraft Division 1992, President, Aircraft
Division, LTV Aerospace &
Defense
NORTHROP GRUMMAN CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
No information is required in response to this Item.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information required by this Item is contained in Part II, Item 8
of this Annual Report on
Form 10-K.
Item 6. Selected Financial Data
The information required by this Item is contained in Part II, Item 7
of this Annual Report on
Form 10-K.
NORTHROP GRUMMAN CORPORATION
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Business Conditions
Northrop Grumman's industry segments - military and commercial aircraft,
electronics and systems integration, data systems and other services, and
missiles and unmanned vehicle systems (MUVS) - are each a factor in the
broadly defined aerospace industry. While Northrop Grumman is subject to
the usual vagaries of the marketplace, it is also affected by the unique
characteristics of the aerospace industry and by certain elements peculiar
to its own business mix.
In the second quarter of 1994 the company purchased the outstanding
common stock of Grumman Corporation (Grumman) for $2.1 billion. Northrop
Corporation was renamed Northrop Grumman Corporation effective May 18,
1994. In August 1994 the company purchased the remaining 51 percent
interest in Vought Aircraft Company (Vought) for $130 million. The company
had purchased a 49 percent interest in Vought in 1992. As a result of
these acquisitions the company reorganized, effective January 1, 1995, into
five operating divisions - B-2 Division, Military Aircraft Division,
Commercial Aircraft Division(CAD), Electronics and Systems Integration
Division(ESID) and the Data Systems and Services Division(DSSD). To
further strengthen and streamline operations, the B-2 and Military Aircraft
Divisions were combined, effective January 1, 1996. The combined division
has been designated the Military Aircraft Systems Division (MASD).
Northrop Grumman is one of the major companies that compete for the
relatively small number of large, long-term programs that characterize both
the defense and commercial segments of the aerospace business. It is common
in the aerospace industry for work on major programs to be shared between a
number of companies. A company competing to be a prime contractor can turn
out to be a subcontractor. It is not uncommon to compete with customers,
and to simultaneously be both a supplier to and customer of a given
competitor. Boeing, Lockheed Martin and McDonnell Douglas are the largest
companies in the aerospace industry at this time. Northrop Grumman also
competes against many other companies for a number of large and smaller
programs, notably in the electronics and systems integration areas.
Competition is intense, yet 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.
Thus, intense competition and long operating cycles are both characteristic
of the industry's - and Northrop Grumman's - business.
The B-2 bomber, for which the company is the prime contractor, is
Northrop Grumman's largest program. The MASD headquartered in El Segundo,
California is responsible for final assembly of the B-2's airframe and
systems integration (in Palmdale, California), and the manufacture of the
fuselage and parts of the B-2's navigation and electronic warfare/situation
awareness system. Major subcontractors include Boeing, which makes the aft
center section, outboard wing sections, landing gear and fuel system, and
GM Hughes, which produces the radar systems. The Air Force currently plans
to operate two B-2 bomber squadrons of eight aircraft each with an
additional four aircraft available to fill in for those in depot for
periodic maintenance.
NORTHROP GRUMMAN CORPORATION
The MASD is also the principal subcontractor on the McDonnell Douglas
F/A-18 program. The F/A-18 is a fighter/ground-attack aircraft that can
carry either one or two crew members. It is principally deployed by the
U.S. Navy on aircraft carriers, but several other nations have purchased
the aircraft and use it as a land-based combat aircraft. The company
builds approximately 40 percent of the aircraft including the center and
aft fuselage sections and vertical tails. Of the versions of the F/A-18
currently in production, the C is a single-seat combat aircraft that was
first delivered to the Navy in 1987 and the D is a two-seat version
principally used for training. The F/A-18E/F is an enhanced version
currently under development for the U.S. Navy as its next generation multi-
mission aircraft.
MASD also produces aerial targets, principally the BQM-74/Chukar. The
BQM-74 series has been in production since the 1960s. It is used by the
Navy for air defense training, gunnery practice and weapon system
evaluation. The company builds the airframe and the electronics that are
used to guide the drone with the drone's engine being produced by Williams
International.
The CAD manufactures portions of the Boeing 747, 757, 767 and 777
jetliners, the Gulfstream IV and V business jets, and the McDonnell Douglas
C-17. Northrop Grumman has been a principal airframe subcontractor for the
Boeing 747 jetliner since the program began in 1966. The company produces
the fuselage and aft body section for the 747 as well as cargo and
passenger doors, the vertical and horizontal body stabilizers, floor beams
and smaller structural components. The majority of the Boeing jetliner
work is performed at CAD's primary production sites in Hawthorne,
California; Grand Prairie, Texas; and Stuart, Florida. CAD manufactures
engine nacelles for the Gulfstream IV and other business jets and recently
initiated production of the wings for Gulfstream's newest business jet, the
Gulfstream V. CAD also produces the empennage, engine nacelles and control
surfaces for the McDonnell Douglas C-17 program, the U.S. Air Force's most
advanced airlifter, at various locations. The work performed on the C-17,
Gulfstream IV and V, 757, 767, 777 and some of the components of the 747
were added as a result of the Grumman and Vought acquisitions.
The Northrop Grumman designed and built all-weather E-2C Hawkeye
Airborne Early Warning Command and Control aircraft has been in active
service with the U.S. Navy since 1973 and is also employed by the air
forces of five other nations. The E-2C is produced by the company's ESID.
ECM denotes electronic countermeasures equipment manufactured by the
ESID. The largest program in this business area is the AN/ALQ-135, which
is an internally mounted radar jammer deployed on F-15 fighter aircraft as
part of that aircraft's Tactical Electronic Warfare System. The AN/ALQ-162
Shadowbox is a jammer built specifically to counter continuous wave radars.
The AN/ALQ-162 has been installed on the AV-8B and certain foreign F/A-18
aircraft. It is also being deployed on U.S. Army helicopters and special
mission aircraft and it has been sold to the air forces of three other
nations.
ESID also produces the E-8 Joint Surveillance Target Attack Radar
System (Joint STARS). Joint STARS detects, locates, classifies, tracks and
targets potentially hostile ground movement in all weather. It is designed
to operate around the clock, in constant communication through secure data
links with air force command posts, army mobile ground stations or centers
of military analysis far from the point of conflict. The Joint STARS
platform is a remanufactured Boeing 707-300 airframe. The 707 is
remanufactured at Northrop Grumman's Lake Charles, Louisiana site. Final
installation of electronics and testing are performed at the ESID
integration and test facility in Melbourne, Florida.
NORTHROP GRUMMAN CORPORATION
The ESID, as the prime contractor to the U.S. Army, is developing a
"brilliant" anti-armor submunition, designated as BAT, with production
scheduled to commence in 1998. BAT is a three foot long, 44 pound, wide-
area-attack submunition that will be used to disable and destroy armored
vehicles and trucks. BATs are meant to be carried and dispensed by a
larger missile. BATs are designed to be ejected over an armored vehicle
column or attacking formation. Each BAT has an infrared sensor that can
home in on the heat generated by a vehicle's engine, and an acoustic sensor
that can home in on the noise created by the tank or truck's engine.
Northrop Grumman's DSSD designs, develops, operates and supports
computer systems for scientific and management information. Services
provided include systems integration, systems service, information
conversion and training for federal, state and local governments and
private industry. DSSD also provides military base support functions and
aircraft maintenance at a number of U.S. Government facilities.
Tables of contract acquisitions, sales and funded order backlog by
major program, follow and complement industry segment data. B-2, F/A-18,
Boeing Jetliners (the 747, 757, 767 and 777) and C-17 are currently the
major programs of the military and commercial aircraft industry segment. E-
2C Hawkeye, ECM, E-8 Joint STARS and BAT are included in the electronics
and systems integration industry segment. The Tri-Service Standoff Attack
Missile (TSSAM), the segment's principal program in 1994 and prior years,
and aerial targets are included in the company's MUVS industry segment.
The "all other" category includes the data systems and other services as
well as the balance of the company's numerous other contracts, classified
and unclassified.
Individual companies prosper in the competitive aerospace/defense
environment according to their ability to develop and market innovative
products. They must also have the ability to provide the people,
facilities, equipment and financial capacity needed to deliver those
products with maximum efficiency. It is necessary to maintain, as the
company has, sources for raw materials, fabricated parts, electronic
components and major subassemblies. In this manufacturing and systems
integration environment, effective oversight of subcontractors and
suppliers is as vital to success as managing internal operations. Northrop
Grumman's operating policies are designed to enhance these capabilities.
The company also believes that it maintains good relations with its
employees, a relatively small number of whom are covered by collective
bargaining agreements.
U.S. Government programs in which Northrop Grumman either
participates, or strives to participate, must compete with other programs
for consideration during our nation's budget formulation and appropriation
processes. As a consequence of the end of the Cold War and pressure to
reduce the federal budget deficit, the U.S. defense budget is not expected
to increase substantially in the near term. Budget decisions made in this
environment will have long-term consequences for the size and structure of
Northrop Grumman and the entire defense industry. An important factor in
determining Northrop Grumman's ability to successfully compete for future
contracts will be its cost structure vis-a-vis other bidders.
NORTHROP GRUMMAN CORPORATION
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) and other business for the
company to pursue well into the future.
Northrop Grumman has historically concentrated its efforts in such
high technology areas as stealth, airborne surveillance, battle management,
precision weapons and systems integration. Even though a high priority has
been assigned by the Department of Defense to the company's major programs,
there remains the possibility that one or more of them may be reduced,
stretched or terminated.
In the commercial aircraft market, many airlines have recently
deferred deliveries and purchases of new aircraft. This has caused The
Boeing Company to reduce scheduled production of various jetliners,
including the 747. As a result, Northrop Grumman's subcontract workload
for the 747, the company's largest commercial program, was stretched out
beginning in late 1993, with deliveries declining 43 percent in 1994, with
a further 23 percent decline in 1995. Business conditions in the
commercial aircraft industry appear to be on the upswing. The three major
producers of jetliners recorded more than twice the number of new aircraft
orders in 1995 than in 1994. This positive trend is expected to continue
in 1996, potentially signifying a new commercial airplane buying cycle.
Northrop Grumman, with its involvement on various Boeing jetliners, remains
optimistic about the long-term prospects for its commercial structures
business.
Northrop Grumman pursues new business opportunities when justified by
acceptable financial returns and technological risks. The company examines
opportunities to acquire or invest in new businesses and technologies to
strengthen its traditional business areas. Northrop Grumman continues to
capitalize on its technologies and skills by entering into joint ventures,
partnerships or associations with other companies.
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
Results Of Operations By Industry Segment And Major Customer
Year ended December 31,$ in millions 1995 1994 1993 1992 1991
Revenue:
Military and Commercial Aircraft
United States Government $ 3,371 $ 3,896 $ 3,570 $ 3,864 $ 3,728
Other customers 826 687 543 560 553
Intersegment sales 187 52 1 1 1
4,384 4,635 4,114 4,425 4,282
Electronics and Systems Integration
United States Government 1,831 1,135 582 677 738
Other customers 228 306 15 9 18
Intersegment sales 103 106 114 120 118
2,162 1,547 711 806 874
Data Systems and OtherServices
United States Government 363 309 79 88 95
Other customers 52 30
Intersegment sales 11 22
426 361 79 88 95
Missiles and Unmanned Vehicle Systems
United States Government 138 332 250 329 541
Other customers 9 16 24 23 21
147 348 274 352 562
Intersegment eliminations (301) (180) (115) (121) (119)
Total revenue $ 6,818 $ 6,711 $ 5,063 $ 5,550 $ 5,694
Operating Profit(Loss)
Military and Commercial Aircraft $ 437 $ 463 $ 387 $ 357 $ 384
Electronics and Systems Integration 179 122 56 63 54
Data Systems and Other Services 15 14 4 3 4
Missiles and Unmanned Vehicle Systems 1 (18) (185) (135) 33
Total operating profit 632 581 262 288 475
Adjustments to reconcile
operating profit to operating margin:
Other(income)deductions included above (6) (3) (2) 10
State and local income taxes (37) (28) (18) (12) (30)
General corporate expenses (109) (113) (96) (105) (107)
Retiree benefit cost included
in contract costs 114 80 9 7 22
Retiree benefit income(cost) (64) (33) 39 42 (24)
Special termination benefits (282)
Operating margin $ 536 $ 199 $ 193 $ 218 $ 346
NORTHROP GRUMMAN CORPORATION
[Download Table]
Year ended December 31, $ in millions 1995 1994 1993 1992 1991
Contract Acquisitions
Military and Commercial Aircraft $ 1,906 $ 8,122 $ 3,764 $ 3,072 $ 6,297
Electronics and Systems Integration 2,408 3,121 616 568 722
Data Systems and Other Services 419 526 75 89 83
Missiles and Unmanned Vehicle Systems (141) 196 352 435 450
Total acquisitions $ 4,592 $11,965 $ 4,807 $ 4,164 $ 7,552
Funded Order Backlog
Military and Commercial Aircraft $ 6,898 $ 9,189 $ 5,650 $ 5,999 $ 7,351
Electronics and Systems Integration 2,728 2,379 699 680 798
Data Systems and Other Services 234 230 43 47 46
Missiles and Unmanned Vehicle Systems 87 375 527 449 366
Total backlog $ 9,947 $12,173 $ 6,919 $ 7,175 $ 8,561
Identifiable Assets
Military and Commercial Aircraft $ 2,369 $ 2,974 $ 1,793 $ 1,849 $ 1,913
Electronics and Systems Integration 1,948 1,754 325 360 445
Data Systems and Other Services 497 485 104 115 109
Missiles and Unmanned Vehicle Systems 90 190 175 272 280
Operating assets 4,904 5,403 2,397 2,596 2,747
General corporate 551 644 542 566 381
Total assets $ 5,455 $ 6,047 $ 2,939 $ 3,162 $ 3,128
Capital Expenditures
Military and Commercial Aircraft $ 80 $ 75 $ 71 $ 46 $ 57
Electronics and Systems Integration 36 33 30 34 22
Data Systems and Other Services 11 14 25 34 31
Missiles and Unmanned Vehicle Systems 3 11 8 7 7
General corporate 3 1 1 2 1
Total expenditures $ 133 $ 134 $ 135 $ 123 $ 118
Depreciation and Amortization
Military and Commercial Aircraft $ 165 $ 155 $ 142 $ 85 $ 96
Electronics and Systems Integration 84 76 40 39 42
Data Systems and Other Services 27 27 24 25 21
Missiles and Unmanned Vehicle Systems 6 11 7 10 10
General Corporate 1 1 1 2
Total depreciation and amortization $ 283 $ 269 $ 214 $ 160 $ 171
NORTHROP GRUMMAN CORPORATION
Northrop Grumman, as well as many other companies in the defense
industry, suffered the effects of the Department of Defense's practice in
the 1980s of structuring new, high-risk research and development contracts,
such as TSSAM, as fixed-price or capped cost-reimbursement type contracts.
Although Northrop Grumman has stopped accepting these types of contracts,
it has experienced financial losses on TSSAM and other similar programs
acquired under them in the past. The company received a termination for
convenience notice on the TSSAM program in February 1995. In the event of
termination for convenience, contractors are normally protected by
provisions covering reimbursement for all costs incurred subsequent to
termination. The company does not expect that the TSSAM termination will
have a material financial effect on the company's financial position.
Prime contracts with various agencies of the U.S. Government and
subcontracts with other prime contractors are subject to a profusion of
procurement regulations, with noncompliance found by any one agency
possibly resulting in fines, penalties, debarment or suspension from
receiving additional contracts with all agencies. Given the company's
dependence on U. S. Government business, suspension or debarment could have
a material adverse affect on the company's future. Moreover, these
contracts may be terminated at the Government's convenience as was done
with the TSSAM program. While Northrop Grumman conducts most of its
business with the U.S. Government, principally the Department of Defense,
commercial sales still represent a significant portion of total revenue.
Federal, state and local laws relating to the protection of the
environment affect the company's manufacturing operations. The company has
provided for the estimated cost to complete remediation where it is
probable that the company will incur such costs in the future, including
those for which it has been named a Potentially Responsible Party (PRP) by
the Environmental Protection Agency or similarly designated by other
environmental agencies. The company has been designated a PRP under
federal Superfund laws at 11 hazardous waste sites and under state
Superfund laws at seven sites. It is difficult to estimate the timing and
ultimate amount of environmental cleanup costs to be incurred in the future
due to the uncertainties, regarding the extent of the required cleanup and
the status of the law, regulations and their interpretations. Nonetheless,
to assess the potential impact on the company's financial statements,
management estimates the total reasonably possible remediation costs that
could be incurred by the company. Such estimates take into consideration
the professional judgment of the company's environmental engineers and,
when necessary, consultation with outside environmental specialists. In
most instances, only a range of reasonably possible costs can be estimated.
However, in the determination of accruals the most probable amount is used
when determinable and the minimum is used when no single amount is more
probable. The company records accruals for environmental cleanup costs in
the accounting period in which the company's responsibility is established
and the costs can be reasonably estimated. Management estimates that at
December 31, 1995, the reasonable range of future costs for environmental
remediation, including Superfund sites, is $39 million to $63 million, of
which $41 million has been accrued. The amount accrued has not been offset
by potential recoveries from insurance carriers or other PRPs. Should
other PRPs not pay their allocable share of remediation costs the company
may have to incur costs in addition to those already estimated and accrued.
The company is making the necessary investments to comply with
environmental laws; the amounts, while not insignificant, are not
considered material to the company's financial position or results of its
operations.
NORTHROP GRUMMAN CORPORATION
Measures of Volume
Contract acquisitions tend to fluctuate and are determined by the size and
timing of new and add-on orders. The effects of multi-year orders and/or
funding can be seen in the highs and lows shown in the following table.
The funded order backlog of Grumman and Vought on the date the companies
were acquired are reflected as acquisitions in 1994. The 757, 767, 777
(included in Boeing Jetliners category), E-2, E-8 Joint STARS, and C-17
programs were acquired as part of Grumman and Vought.
B-2 acquisitions in 1995 include incremental funding for ongoing
development work, spares and other customer support for the 20 operational
aircraft program. In 1994 $2.4 billion of funding to complete the last
five B-2 production aircraft was received as well as incremental funding
for ongoing development work, spares and other customer support. The
company still stands to gain future new post-production business, such as
airframe depot maintenance, repair of components, operational software
changes and product improvement modifications. The debate over the future
of the B-2, which is built in the nation's only active bomber producing
facility, is now taking place. Without future production orders the
nation's multi-billion dollar investment in this capability will be
disassembled and become retrievable only at a large additional cost.
Contract Acquisitions
$ in millions 1995 1994 1993 1992 1991
B-2 $ 475 $ 3,646 $ 2,632 $ 2,235 $ 4,794
E-8 Joint STARS 608 1,151
Boeing Jetliners 464 1,177 242 76 870
E-2 475 1,136
F/A-18C/D 650 211 89 576 564
F/A-18E/F 238 249 743 131 10
ECM 590 323 445 361 431
C-17 208 434
BAT 87 88 90 147 82
TSSAM (153) 157 248 349 369
All other 950 3,393 318 289 432
$ 4,592 $11,965 $ 4,807 $ 4,164 $ 7,552
Orders for 128 F/A-18C/D shipsets were finalized in 1995.
Acquisitions in 1994 and 1993 included long-lead funding received from the
McDonnell Douglas Corporation for new F/A-18C/D shipsets.
Advance funding for the next phase of the 747 jetliner programs was
received from the Boeing Company in 1995. In 1993, additional contract
value was received for, among other things, extending the delivery schedule
of the current phase of the 747 into 1996.
ECM acquisitions for 1995 included an award of $279 million from the
United Kingdom Ministry of Defence to develop and produce directed infrared
countermeasures systems.
NORTHROP GRUMMAN CORPORATION
The balance of Grumman and Vought funded order backlog at the dates of
acquisition, for those programs not listed in the table, is included in the
"all other" category and accounts for the major increase in 1994 over 1993.
Year-to-year sales vary less than contract acquisitions and reflect
performance under new and ongoing contracts. The 1994 results of
operations include Grumman and Vought since the acquisitions in April and
August 1994, respectively. Comparative results for 1993 and prior do not
include Grumman and Vought data.
Sales for 1995 were the highest in the company's history and were 2
percent higher than in 1994. Without the Grumman and Vought acquisitions,
sales for 1994 would have declined 10 percent from the 1993 level.
Net Sales
$ in millions 1995 1994 1993 1992 1991
B-2 $1,914 $2,392 $2,881 $3,212 $3,100
E-8 Joint STARS 613 345
Boeing Jetliners 569 483 531 549 540
E-2 566 409
F/A-18C/D 418 309 362 492 562
F/A-18E/F 404 508 279 118 10
ECM 351 357 372 378 415
C-17 244 121
BAT 90 88 100 135 71
TSSAM 81 276 179 265 390
All other 1,568 1,423 359 401 606
$6,818 $6,711 $5,063 $5,550 $5,694
The decreasing trend in the B-2 revenues from both EMD and
production work continued in 1995. The level of EMD effort, included in
amounts reported as contract R&D, constituted 30 percent of the total B-2
revenue, up from 26 percent in 1994 and 28 percent in 1993. Current
planning data indicate that the level of overall B-2 revenue will decline
roughly 20 percent per year for the remainder of the decade.
Sales increased in 1995 for the C/D version of the F/A-18 program
with an increase of deliveries to 56, as compared to 42 shipsets delivered
in 1994 and the 52 delivered in 1993. In 1996 and 1997, the company
currently plans to deliver 68 and 36 F/A-18C/D shipsets respectively. A
total of seven shipsets were delivered under the F/A-18E/F EMD contract in
1995. F/A-18E/F revenue is expected to drop below $300 million in 1996
with the final three shipsets for the EMD phase of the program scheduled
for delivery. The Low Rate Initial Production phase of the F/A-18E/F
program is expected to begin in 1996.
Deliveries of 747 center fuselages were 24 in 1995, 31 in 1994 and 54
in 1993. Twenty-eight fuselages are expected to be delivered in 1996.
The electronics and systems integration segment revenues increased 40
percent in 1995 as a result of higher revenues on the E-2 Hawkeye and E-8
Joint STARS programs. The increase in 1994 was due to the acquisition of
Grumman which more than offset the decrease from lower BAT development
revenue and lower ECM sales. Reduced electronics segment revenues in 1993
stemmed from lower BAT development revenue, lower MX Peacekeeper sales and
lower sales in the sensor product area.
NORTHROP GRUMMAN CORPORATION
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 50 percent of
the 1995 year-end backlog will be converted into sales in 1996.
Funded Order Backlog
$ in millions 1995 1994 1993 1992 1991
B-2 $ 3,736 $ 5,175 $ 3,921 $ 4,170 $ 5,147
E-8 Joint STARS 801 806
Boeing Jetliners 1,312 1,417 723 1,012 1,485
E-2 637 727
F/A-18C/D 577 345 443 716 632
F/A-18E/F 54 220 477 13
ECM 747 506 540 467 484
C-17 277 313
BAT 17 20 20 30 18
TSSAM 14 248 367 298 214
All other 1,775 2,396 428 469 581
$ 9,947 $12,173 $ 6,919 $ 7,175 $ 8,561
Total U.S. Government orders, including those made on behalf of
foreign governments (FMS), comprised 77 percent of the backlog at the end
of 1995 compared with 80 percent at the end of 1994 and 89 percent at the
end of 1993. Total foreign customer orders, including FMS, accounted for
10 percent of the backlog at the end of 1995 compared with nine percent in
1994 and three percent in 1993. Domestic commercial business in backlog at
the end of 1995 was 16 percent, 14 percent at the end of 1994 and 11
percent at the end of 1993.
Measures of Performance
The company's operating profit for 1995 was a record high and has improved
in its electronics and systems integration segment for the last two years.
These improvements stem from both increased revenue and improved operating
margin rates in that segment. Company-wide efforts to reduce costs,
install tighter business controls, improve cash management, dispose of
excess assets and more effectively utilize productive assets, are all goals
aimed at contributing to the future success of Northrop Grumman. This
financial report demonstrates the degree to which the accomplishment of
these goals is being achieved.
Operating profit in the military and commercial aircraft segment
decreased in 1995 primarily as a result of lower overall sales volume and
$31 million in expenditures for company sponsored research and development
for commercial aerostructures. The rate and amount of operating margin on
the F/A-18E/F increased in 1995 due to an increase in the rate of operating
margin being recorded on the EMD contract, which was made during the third
quarter. This resulted from the continuing evaluation of the overall
operating margin to be earned on this phase of the program. The increase
on the F/A-18E/F more than offset reduced operating margin earned, on
higher sales volume, for the F/A-18C/D.
NORTHROP GRUMMAN CORPORATION
The military and commercial aircraft industry segment operating profit
increased to its highest level ever in 1994, exceeding the previous high
reached in 1993, as margin rates improved on the B-2 and F/A-18 programs.
The rate and amount of operating margin recorded on the F/A-18E/F increased
in 1994 due to an approximately one and one half percent increase in the
rate of operating margin being recorded on the EMD contract. The F/A-18
program operating margin improved in 1994 and 1993 despite reduced F/A-
18C/D shipset deliveries in each of these years versus the previous year.
The rate and amount of operating margin recorded on the B-2 production
contract increased in 1995 as a result of negotiated contract adjustments
and a revised estimate of the overall operating margin expected to be
earned. This increase was offset by lower operating margin recorded on
decreased revenue on the other phases of the B-2 program.
B-2 operating margin improved in 1994 as the amount of margin recorded
on the delivery of four aircraft more than offset reduced operating margin
from lower production and EMD sales. Following the award of the last
increment of production funding for the B-2, the company began recording
future operating margin increases on all production aircraft as these units
are delivered and accepted by the customer. At the time each unit is
delivered an assessment is made of the status of the production contract so
as to estimate the amount of any probable additional margin available
beyond that previously recognized. That unit's proportionate share of any
such unrecognized remaining balance will then be recorded. In this fashion
it is believed that margin improvements will be recognized on a more
demonstrable basis. The current 15 production units are scheduled for
their initial delivery over a five year period, which began in December
1993. All but two units (four equivalent units for this purpose) will be
returned for scheduled retrofitting with final deliveries beginning in 1997
and ending in 2000. It is anticipated that the total of 30 equivalent
units will be delivered at a rate of from three to five per year.
Fewer deliveries and cost increases related to a stretch-out of the
current production contract for the Boeing 747 jetliner resulted in a lower
rate and amount of operating margin in 1995. The current phase of the
program is now expected to be completed in the fall of 1996. A reduction
in the rate of operating margin due to increased costs allocated, as a
result of establishing a separate commercial aircraft operating element and
fewer deliveries than in 1993, caused decreased operating profit on the 747
program in 1994.
Operating profit in the electronics and systems integration segment
reached a record level in 1995. This was a result of an increased rate of
operating margin and higher sales volume on the E-2 Hawkeye and increased
sales volume on the E-8 Joint STARS program. The electronics and systems
integration segment operating profit increased in 1994 due primarily to the
addition of the E-2 Hawkeye, E-8 Joint STARS and various other military
electronics programs associated with the Grumman acquisition and an
increased rate of margin recorded in the company's electronic
countermeasures business, which more than offset the $8 million in
provisions recorded by the ESID-Norwood operation for unrecoverable costs
incurred.
The 13 percent sales decline in the electronics and systems
integration segment for 1993 from the level achieved in 1992 was
accompanied by an 11 percent decline in operating profit. Lower margins in
the sensor product area and on the BAT program more than offset the
increase in ECM operating margin.
A loss provision of $20 million was made during 1994 on the TSSAM
development contract and followed a similar provision of $201 million in
1993. The recording of the expected loss from the performance of this
long-term fixed-price R&D contract caused major losses in the MUVS segment
during three of the last five years. Production delays caused increased
amounts of sustaining labor to be absorbed by the development phase of the
program in which the company has invested over $600 million. The ultimate
loss on this contract will depend on
the resolution of pending claims against the U.S. Government. The company
is unable to predict whether it will realize some or all of its claims
against the U.S. Government from the TSSAM contract. The company does not
expect the termination of the program to have a material adverse financial
impact on the company.
NORTHROP GRUMMAN CORPORATION
Operating margin in 1995 included $23 million of pension income
compared with $36 million in 1994, and $71 million in 1993. Also
contributing to the change from net retiree benefit income in 1993 to a net
retiree benefit cost in 1994 and 1995 was the increase in the cost of
providing retiree health care and life insurance benefits - $87 million in
1995 versus $69 million in 1994 and $32 million in 1993. A major
contributor to the net retiree benefit cost was the addition of the Grumman
and Vought retiree plans in 1994. Operating margin in 1994 was reduced by
$282 million to record the effect of an early retirement incentive program.
The Financial Accounting Standards Board's (FASB) accounting standard
No. 106 - Employers' Accounting for Postretirement Benefits Other Than
Pensions - was adopted by the company in 1991. The liability representing
previously unrecognized costs of $145 million for all years prior to 1991
was recorded as of January 1, 1991, with an after-tax effect on earnings of
$88 million or $1.86 per share.
In 1994 the company recorded a $42 million pretax charge for the
planned disposal of excess real estate and other assets. This was a result
of the company's continuing efforts to reduce operating costs and dispose
of assets which have become excess due to changes in the company's business
strategy. This charge is reported in Other Deductions in the Consolidated
Statements of Income.
Interest expense increased $28 million in 1995, following a $71
million increase in 1994 after declining $9 million in 1993. The increases
in 1995 and 1994 came primarily from the issuance of debt to finance the
acquisition of Grumman. Total debt at December 31, 1995 stood at $1.4
billion compared to $1.9 billion at the end of 1994 and $160 million at the
end of 1993.
In 1991 the company adopted FASB standard No. 109 - Accounting for
Income Taxes - and recorded, as of January 1, 1991, a benefit of $21
million, or 43 cents per share. As described in the accounting policy
footnote to the financial statements, any future change in the tax rate
would result in the immediate recognition in current earnings of the
cumulative effect on deferred tax assets and liabilities.
The company's effective federal income tax rate was 38.4 percent in
1995, 46.2 percent in 1994 and 43.5 percent in 1993. The decrease in the
1995 rate was due to a reduction in the ratio of expenses not deductible
for income taxes to the tax provision at the statutory rate of 35 percent.
The change in the 1994 rate was caused by an increase in the amount of
expenses not deductible for income taxes, primarily the amortization of
goodwill. The rate for 1993 would have been 31.8 percent but for the
effects of the retroactive application of The Revenue Reconciliation Act of
1993. The one percentage point increase in the federal statutory income
tax rate, now 35 percent, required the redetermination of the December 31,
1992 deferred tax asset and liability balances. This redetermination added
$18 million to 1993's tax provision thereby reducing earnings per share by
38 cents. During 1989, final regulations were issued concerning the
research tax credit. The company had taken a conservative approach in
calculating its tax provisions since 1981 pursuant to uncertain proposed
regulations. An exhaustive study was undertaken throughout the company to
redetermine qualifying expenditures in compliance with the final
regulations so as to recalculate prior years' tax credits and amend its tax
returns as appropriate. The benefit resulting from the conclusion of that
study was the $90 million in additional research credits recognized in the
determination of the 1991 effective tax rate of 3.2 percent.
NORTHROP GRUMMAN CORPORATION
Measures of Liquidity and Capital Resources
The improvement of the company's financial condition and liquidity
continued in 1995. Over the last three years operating cash flows have
averaged over $500 million annually. The $744 million of cash flow from
operations in 1995 was an increase of $303 million over 1994 which was an
increase of $61 million over 1993 which in turn was a $96 million increase
over that of 1992.
The trend and relationship of sales volume with accounts receivable
and inventoried cost balances, before and after the benefit of progress
payments, is a useful measure in assessing liquidity. In 1993 the
company's net investment in these balances represented 27 percent of sales.
It rose to 33 percent at the end of 1994 with the acquisition of Grumman
and Vought before decreasing to 29 percent at year-end 1995.
The following table is a condensed summary of the detailed cash flow
information contained in the Consolidated Statements of Cash Flows.
Year ended December 31 1995 1994 1993 1992 1991
Cash came from
Customers 96% 71% 99% 98% 100%
Lenders 2% 29% 1% 2%
Buyers of assets/other 2%
100% 100% 100% 100% 100%
Cash went to
Employees and suppliers of services
and materials 83% 65% 89% 93% 88%
Sellers of assets 2% 18% 1%
Lenders 12% 15% 8% 3% 9%
Suppliers of facilities/other 2% 1% 2% 2% 2%
Shareholders 1% 1% 1% 1% 1%
100% 100% 100% 100% 100%
The increased cash received from lenders in 1994 resulted from the
acquisition of Grumman, which was financed mainly through new borrowings.
Other important indicators of short-term liquidity are the trend in working
capital, the current ratio, and the ratio of long-term debt to
shareholders' equity. This information is reported in the table captioned
Selected Financial Data.
In connection with the financing of the Grumman acquisition the
company, in April 1994, replaced the $400 million credit agreement with a
new $2.8 billion Credit Agreement. The new facility provided for $600
million, available on a revolving credit basis through March 1999 and a
$2.2 billion term loan payable through March 1999. The Credit Agreement
was amended in May 1994 to increase the revolving credit line to
$800 million and reduce the term loan to $2 billion. In October 1994, the
company issued $350 million of notes due in 2004 and $250 million of
debentures due in 2024 pursuant to a public offering. The net proceeds
from the offering, along with other available funds, were used to prepay
$900 million in addition to paying the $100 million September quarterly
installment due under the term loan facility. In December 1994, the
company amended the Credit Agreement to provide for the repayment of the
remaining $1 billion balance of the term loan in 14 quarterly installments
of $62.5 million plus interest beginning in September 1995, with a final
installment of $125 million due in March 1999. Cash flow from operations
during 1994 enabled the company to prepay the $160 million of notes payable
to institutional investors due in 1995 and acquire, in the open market,
$58 million of notes due in 1999, while paying a net premium of $5 million
for the early payments of these notes. The charge for the premium is
included in Other Deductions in the Consolidated Statements of Income. Cash
flow from operations in 1995 was sufficient to allow the company to make the
$125 million required term loan payment as well as $312 million in voluntary
payments for amounts which were due through March 1997.
During 1995 the company entered into an agreement with a financial
institution to sell designated pools of its commercial accounts receivable,
in amounts up to $75 million. The company acts as an agent for the
purchaser by performing record keeping and collections functions. At
December 31, 1995, $34 million of accounts receivable had been sold.
On January 3, 1996 the company entered into a definitive agreement to
acquire the defense and electronics systems business of Westinghouse
Electric Corporation for $3 billion in cash. The company has obtained bank
commitments totaling $4.8 billion to finance the transaction and replace
its current credit agreement. The sale, which is expected to close in
March 1996, is subject to normal governmental and regulatory reviews. Any
future near-term borrowing needs will be met through the use of short-term
credit lines and the company's revolving credit agreement.
To provide for long-term liquidity the company believes it can obtain
additional capital from such sources as: the public or private capital
markets, the further sale of assets, sale and leaseback of operating
assets, and leasing rather than purchasing new assets.
The cash improvement program underway throughout the company has
produced favorable results, with the expectation that further efforts will
result in minimizing, the need to incur additional borrowings during 1996.
Cash generated from operations is expected to be sufficient in 1996 to
service debt, finance capital expansion projects and continue paying
dividends to the shareholders.
Capital expenditure commitments at December 31, 1995, were
approximately $110 million including $2 million for environmental control
and compliance purposes.
The company will continue to provide the productive capacity to
perform its existing contracts, dispose of assets no longer needed to
fulfill operating requirements, prepare for future contracts and conduct
R&D in the pursuit of developing opportunities. While these expenditures
tend to limit short-term liquidity, they are made with the intention of
improving the long-term growth and profitability of the company.
New Accounting Standards
During 1995 the company adopted the new FASB No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. The adoption thereof had no material effect on the company's financial
position or operating results.
In October 1995, the Financial Accounting Standards Board issued FASB
No. 123 - Accounting for Stock-Based Compensation. This standard changes
the manner in which compensation for employee stock options is measured and
reported. The company's management is presently evaluating the impact of
this standard on the company's financial statements to determine if it will
adopt this standard. The company must decide whether or not to adopt this
new standard by the end of the first quarter of 1996.
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
Selected Financial Data
Year ended December 31,
$ in millions, except per share 1995 1994 1993 1992 1991
Net sales to
United States Government $5,703 $5,672 $4,481 $4,958 $5,102
The Boeing Company 569 483 531 549 540
Other customers 546 556 51 43 52
Total net sales 6,818 6,711 5,063 5,550 5,694
Net income 252 35 96 121 201
Earnings per share 5.11 .72 1.99 2.56 4.26
Cash dividends per share 1.60 1.60 1.60 1.20 1.20
Net working capital 357 467 481 354 611
Current ratio 1.21 to 1 1.24 to 1 1.45 to 1 1.25 to 1 1.51 to 1
Total assets $5,455 $6,047 $2,939 $3,162 $3,128
Long-term debt 1,163 1,633 160 160 470
Total long-term obligations 2,234 2,757 468 426 688
Long-term debt as a percentage of
shareholders' equity 79.7% 126.6% 12.1% 12.8% 39.8%
Operating margin as a percentage of
Net sales 7.9 3.0 3.8 3.9 6.1
Average operating assets 10.4 5.2 7.7 8.2 12.4
Net income as a percentage of
Net sales 3.7 .5 1.9 2.2 3.5
Average assets 4.4 .8 3.1 3.8 6.5
Average shareholders' equity 18.3 2.7 7.5 9.9 18.1
Research and development expenses
Contract $1,175 $1,477 $1,603 $1,693 $1,601
Noncontract 164 121 97 93 102
Payroll and employee benefits 2,656 2,661 1,906 2,001 2,109
Number of employees at year-end 37,300 42,400 29,800 33,600 36,200
Number of shareholders at year-end 10,834 11,241 11,618 12,599 13,607
Depreciation $ 226 $ 227 $ 214 $ 160 $ 171
Amortization of
Goodwill 36 27
Other purchased intangibles 21 15
Maintenance and repairs 80 105 87 106 97
Rent expense 89 84 47 52 51
Floor area (millions of square feet)
Owned 20.1 21.3 12.9 12.6 12.2
Commercially leased 7.0 7.5 3.2 4.2 4.5
Leased from United States
Government 10.2 9.7 2.1 1.9 1.7
NORTHROP GRUMMAN CORPORATION
Item 8. Financial Statements and Supplementary Data
[Enlarge/Download Table]
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, $ in millions 1995 1994 1993 1992 1991
Assets:
Current assets
Cash and cash equivalents $ 18 $ 17 $ 100 $ 230 $ 203
Accounts receivable 1,197 1,202 820 791 860
Inventoried costs 771 1,043 569 670 693
Deferred income taxes 25 38 46 38 28
Prepaid expenses 61 47 25 31 23
Refundable federal income taxes 84
Total current assets 2,072 2,431 1,560 1,760 1,807
Property, plant and equipment at cost
Land and land improvements 192 203 118 117 117
Buildings 780 857 744 719 703
Machinery and other equipment 1,864 2,024 1,898 1,982 1,990
Leasehold improvements 64 62 29 59 65
2,900 3,146 2,789 2,877 2,875
Accumulated depreciation (1,724) (1,768) (1,773) (1,753) (1,698)
1,176 1,378 1,016 1,124 1,177
Other assets
Goodwill, net of amortization of $63 in 1995
and $27 in 1994 1,403 1,359
Other purchased intangibles, net of
amortization of $36 in 1995 and $15
in 1994 356 376
Prepaid pension cost, intangible
pension asset and benefit trust fund 99 222 278 190 98
Deferred income taxes 255 203 7 7 12
Investments in and advances to
affiliates and sundry assets 94 78 78 81 34
2,207 2,238 363 278 144
$ 5,455 $ 6,047 $ 2,939 $ 3,162 $ 3,128
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
December 31, $ in millions 1995 1994 1993 1992 1991
Liabilities and Shareholders' Equity:
Current liabilities
Notes payable to banks $ 65 $ 171 $ $ 100 $
Current portion of long-term debt 144 130 250 80
Trade accounts payable 360 396 324 363 407
Accrued employees' compensation 203 228 146 144 157
Advances on contracts 98 184 40 39 28
Income taxes payable 57 55 12 25
Deferred income taxes 471 413 426 389 353
Other current liabilities 317 387 131 121 146
Total current liabilities 1,715 1,964 1,079 1,406 1,196
Long-term debt 1,163 1,633 160 160 470
Accrued retiree benefits 1,048 1,070 308 266 218
Other long-term obligations 23 54
Deferred gain on sale/leaseback 16 20 23 26 29
Deferred income taxes 31 16 47 50 33
Shareholders' equity
Paid-in capital
Preferred stock, 10,000,000 shares authorized;
and none issued
Common stock, 200,000,000 shares authorized;
issued and outstanding
1995 - 49,462,615; 1994 - 49,241,642;
1993 - 48,913,403; 1992 - 47,398,303;
1991 - 47,090,248 272 265 256 207 199
Retained earnings 1,199 1,026 1,070 1,051 987
Unvested employee restricted award shares (1) (2) (2) (4)
Unfunded pension losses, net of taxes (12) (2) (2)
1,459 1,290 1,322 1,254 1,182
$ 5,455 $ 6,047 $ 2,939 $ 3,162 $ 3,128
The accompanying notes are an integral part of these consolidated financial
statements.
NORTHROP GRUMMAN CORPORATION
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CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
$ in millions, except per share 1995 1994 1993 1992 1991
Net sales $ 6,818 $ 6,711 $ 5,063 $ 5,550 $ 5,694
Cost of sales
Operating costs 5,319 5,477 4,385 4,877 4,817
Administrative and general expenses 963 753 485 455 531
Special termination benefits 282
Operating margin 536 199 193 218 346
Other income(deductions)
Interest income 1 6 2 4 11
Other, net 9 (31) 13 5
Interest expense (137) (109) (38) (47) (80)
Income before income taxes and cumulative
effect of accounting principle changes 409 65 170 180 277
Federal and foreign income taxes 157 30 74 59 9
Income before cumulative effect
of accounting principle changes 252 35 96 121 268
Cumulative effect on prior years of
changes in accounting principles for
Income taxes 21
Retiree health care and life
insurance benefits (88)
Net income $ 252 $ 35 $ 96 $ 121 $ 201
Weighted average common shares
outstanding, in millions 49.4 49.2 48.1 47.2 47.1
Earnings per share before cumulative
effect of accounting principle changes $ 5.11 $ .72 $ 1.99 $ 2.56 $ 5.69
Cumulative effect on prior years of
changes in accounting principles,
per share, for Income taxes .43
Retiree health care and life insurance benefits (1.86)
Earnings per share $ 5.11 $ .72 $ 1.99 $ 2.56 $ 4.26
The accompanying notes are an integral part of these consolidated financial
statements
NORTHROP GRUMMAN CORPORATION
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CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
Year ended December 31, $ in millions,
except per share 1995 1994 1993 1992 1991
Paid-in Capital
At beginning of year $ 265 $ 256 $ 207 $ 199 $ 196
Employee stock awards and options
exercised, net of forfeitures 7 9 49 8 3
At end of year 272 265 256 207 199
Retained Earnings
At beginning of year 1,026 1,070 1,051 987 843
Net income 252 35 96 121 201
Cash dividends (79) (79) (77) (57) (57)
At end of year 1,199 1,026 1,070 1,051 987
Unvested Employee Restricted Award Shares
At beginning of year (1) (2) (2) (4) (6)
Forfeitures, net of grants 1
Amortization 1 1 1 2
At end of year (1) (2) (2) (4)
Unfunded Pension Losses, Net of Taxes
At beginning of year (2) (2)
Change in excess of additional minimum
liability over unrecognized
prior service costs (12) 2 (2)
At end of year (12) (2) (2)
Total shareholders' equity $ 1,459 $ 1,290 $ 1,322 $ 1,254 $ 1,182
Book value per share $ 29.50 $ 26.20 $ 27.04 $ 26.46 $ 25.11
Cash dividends per share 1.60 1.60 1.60 1.20 1.20
The accompanying notes are an integral part of these consolidated financial
statements.
NORTHROP GRUMMAN CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, $ in millions 1995 1994 1993 1992 1991
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 2,289 $ 2,616 $ 2,028 $ 2,647 $ 2,647
Other collections 4,355 4,767 2,924 2,914 3,050
Interest received 1 6 2 4 11
Income tax refunds received 48 11 3 3
Other cash receipts 7 13 6 5 13
Cash provided by operating activities 6,700 7,413 4,963 5,570 5,724
Uses of Cash
Cash paid to suppliers and employees 5,750 6,786 4,484 5,186 4,986
Interest paid 144 94 42 47 85
Income taxes paid 59 90 52 48 32
Other cash payments 3 2 5 5 12
Cash used in operating activities 5,956 6,972 4,583 5,286 5,115
Net cash provided by operating activities 744 441 380 284 609
Investing Activities
Payment for purchase, net of cash acquired, of
Grumman Corporation (1,842)
Vought Aircraft Company (12)
Additions to property, plant and equipment (133) (134) (135) (123) (118)
Proceeds from sale of property, plant and
equipment 33 17 2 5 3
Proceeds from sale of affiliates 5 8
Proceeds from sale of marketable securities 28
Funding of retiree benefit trust (31)
Dividends from affiliates, net of
investments 5 2 (47)
Other investing activities (21) 6 (8)
Net cash used in investing activities (116) (1,963) (123) (165) (123)
Financing Activities
Borrowings under lines of credit 153 2,371 55 100
Repayment of borrowings under
lines of credit (259) (1,200) (155)
Proceeds from issuance of long-term debt 600
Principal payments of long-term debt/capital
leases (446) (251) (251) (140) (400)
Proceeds from issuance of stock 4 7 41 5 1
Dividends paid (79) (79) (77) (57) (57)
Other financing activities (9)
Net cash provided by (used in)
financing activities (627) 1,439 (387) (92) (456)
Increase(decrease) in cash
and cash equivalents 1 (83) (130) 27 30
Cash and cash equivalents balance
at beginning of year 17 100 230 203 173
Cash and cash equivalents balance
at end of year $ 18 $ 17 $ 100 $ 230 $ 203
NORTHROP GRUMMAN CORPORATION
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Year ended December 31, $ in millions 1995 1994 1993 1992 1991
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 252 $ 35 $ 96 $ 121 $ 201
Adjustments to reconcile net income
to net cash provided
Depreciation 226 227 214 160 171
Amortization of intangible assets 57 42
Common stock issued to employees 1 3 3 4
Amortization of restricted award shares 1 1 1 2
Loss on disposals of property,
plant and equipment 34 33 26 11 6
Cumulative effect on prior years of
changes in accounting principles for
Income taxes (21)
Retiree health care and life insurance benefits 88
Noncash retiree pension cost(income) (50) (47) (40) (43) 14
Special termination benefits 282
Amortization of deferred gain on
sale/leaseback (4) (3) (3) (3) (3)
Decrease(increase) in
Accounts receivable 197 209 (4) 339 1,058
Inventoried costs 426 (368) 142 63 123
Prepaid expenses 108 (41) (10) (17) (8)
Refundable income taxes 84 (84)
Increase(decrease) in
Progress payments (282) 407 (90) (340) (1,054)
Accounts payable and accruals (234) (268) (29) (44) 114
Provisions for contract losses (143) (84) 36 9 (100)
Provisions for disposal of
real estate and other assets (8) 42 1 1 2
Deferred income taxes 84 78 26 48
Income taxes payable 2 (25) 12 (25) 13
Other noncash transactions (6) 4 (1)
Net cash provided by operating activities $ 744 $ 441 $ 380 $ 284 $ 609
Noncash Investing and Financing Activities:
Purchase of Grumman Corporation
Fair value of assets acquired $ 3,495
Cash paid (2,129)
Liabilities assumed $ 1,366
Purchase of Vought Aircraft Company
Fair value of assets acquired $ 722
Cash paid (130)
Liabilities assumed $ 592
The accompanying notes are an integral part of these consolidated financial
statements
NORTHROP GRUMMAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
corporation and its subsidiaries. All material intercompany accounts,
transactions and profits are eliminated in consolidation.
The company's financial statements are in conformity with generally
accepted accounting principles. The preparation thereof requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingencies at
the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Estimates have been
prepared on the basis of the most current and best available information
and actual results could differ from those estimates.
Nature of Operations
Northrop Grumman is a major producer of military and commercial aircraft
sub-assemblies and defense electronics and is the prime contractor on the
U.S. Air Force B-2 Stealth Bomber. The company operates in the military
and commercial aircraft, electronics and systems integration, data systems
and other services, and missiles and unmanned vehicle systems industry
segments within the broadly defined aerospace industry. The majority of
the company's products and services are sold to the U.S. Government and the
company is therefore affected by the federal budget process and the
competition in the aerospace and defense environment.
Sales to the U.S. Government (including foreign military sales) are
reported within each industry segment and in total in the Selected
Financial Data. The company does not conduct a significant volume of
activity through foreign operations or in foreign currencies.
Descriptions of the company's principal products and services along
with industry segment data, which is considered to be an integral part of
these financial statements, can be found in the Management's Discussion and
Analysis section of this report. Intersegment sales are transacted at cost
incurred with no profit added. Operating profit is defined to include the
Other Income earned by each industry segment, but to exclude costs
allocated to segments for General Corporate Expenses and State and Local
Income Taxes. For segment reporting, the amount of the costs of retiree
benefit plans (pension and nonpension) allocable to contracts as determined
by government cost accounting standards captioned Retiree Benefit Cost
Included in Contract Costs and the income(cost) of retiree benefit plans
(pension and nonpension) as calculated in conformity with financial
accounting standards captioned Retiree Benefit Income(Cost) are shown
separately from general corporate expenses so as not to distort operating
profit as reported by industry segment. General corporate assets include
cash and cash equivalents, corporate office furnishings and equipment,
other unallocable property, investments in affiliates, prepaid pension
cost, intangible pension asset, benefit trust fund assets and certain
assets held for sale.
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) while
company-sponsored research and development costs are charged against income
as incurred.
NORTHROP GRUMMAN CORPORATION
Environmental Costs
Environmental liabilities are accrued when the company determines its
responsibility for cleanup 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.
State and local income and franchise tax provisions are included in
administrative and general expenses.
Earnings per Share
Earnings per share are based on the weighted average number of shares of
common stock outstanding during each period, after giving recognition to
stock splits and stock dividends. The dilutive effect of common stock
equivalents, shares under stock options, was insignificant.
Cash and Cash Equivalents
Cash and cash equivalents include interest-earning debt instruments that
mature in three months or less from the date purchased.
Accounts Receivable
Accounts receivable include amounts billed and currently due from customers
under all types of contracts; amounts currently due but unbilled (primarily
related to contracts accounted for under the cost-to-cost type of
percentage-of-completion method of accounting), certain estimated contract
changes, claims in negotiation and amounts retained by the customer pending
contract completion.
NORTHROP GRUMMAN CORPORATION
Inventoried Costs
Inventoried costs primarily relate to work in process under fixed-price
type contracts (excluding those included in unbilled accounts receivable as
previously described). They represent accumulated contract costs less the
portion of such costs allocated to delivered items. Accumulated contract
costs include direct production costs, factory and engineering overhead,
production tooling costs, and allowable administrative and general expenses
(except for general corporate expenses and IR&D allocable to commercial
contracts, which are charged against income as incurred).
In accordance with industry practice, inventoried costs are classified
as a current asset and include amounts related to contracts having
production cycles longer than one year.
Depreciable Properties
Property, plant and equipment owned by the company are depreciated over the
estimated useful lives of individual assets. Capital leases providing for
the transfer of ownership upon their expiration or containing bargain
purchase options are amortized over the estimated useful lives of
individual assets. Most of these assets are depreciated using
declining-balance methods, with the remainder using the straight-line
method, with the following lives:
Years
Land improvements 4-25
Buildings 4-45
Machinery and other equipment 2-20
Leasehold improvements Length of lease
Goodwill and Other Purchased Intangible Assets
Goodwill and other purchased intangible assets are amortized on a straight-
line basis over periods of 40 years and a weighted average 23 years,
respectively. Goodwill and other purchased intangibles balances are
included in the identifiable assets of the industry segment to which they
have been assigned and amortization is charged against the respective
industry segment operating profit. The future profitability and cash flow
of the operations to which they relate are evaluated annually. These
factors, along with management's plans with respect to the operations are
considered in assessing the recoverability of goodwill and other purchased
intangibles.
NORTHROP GRUMMAN CORPORATION
Acquisitions
In April 1994, the company purchased the outstanding stock of Grumman
Corporation (Grumman) at a cost of $2.1 billion and financed the
transaction mainly with new borrowings. The operations of Grumman since
acquisition are included in the industry segments to which products are
associated.
In August 1994 the company purchased the remaining 51 percent interest
in Vought Aircraft Company (Vought) for $130 million cash. The company had
previously purchased a 49 percent interest in Vought for $45 million in
September 1992. The operations of Vought since August 1994 are included in
the military and commercial aircraft industry segment.
The purchase method of accounting was used to record both 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 balance to goodwill.
The following unaudited proforma financial information combines
Northrop's, Grumman's and Vought's results of operations as if the
acquisitions had taken place on January 1, 1993, and is not necessarily
indicative of future operating results for Northrop Grumman.
$ in millions, except per share 1994 1993
Sales $7,770 $8,653
Net income 57 112
Earnings per share 1.16 2.33
ACCOUNTS RECEIVABLE
Unbilled amounts represent sales for which billings have not been presented
to customers at year end, including differences between actual and
estimated overhead and margin rates. These amounts are usually billed and
collected within one year, progress payments are however received on a
number of fixed-price contracts accounted for using the cost-to-cost type
percentage-of-completion method.
Amounts due upon contract completion are retained by customers until
work is completed and customer acceptance is obtained.
The company entered into an agreement in 1995 with a financial
institution to sell designated pools of its commercial accounts
receivables, with limited recourse, in amounts up to $75 million. Under
the agreement, new receivables are sold as previously sold amounts are
collected. The accounts receivable are sold at a loss which is included in
cost of sales in the period incurred. The company acts as an agent for the
purchaser by performing record keeping and collection function. At
December 31, 1995, $34 million of accounts receivable had been sold.
Accounts receivable at December 31, 1995, are expected to be collected
in 1996 except for approximately $93 million due in 1997 and $29 million
due in 1998 and later. These amounts principally relate to long-term
contracts with the U.S. Government.
Allowances for doubtful amounts represent mainly estimates of overhead
type costs which may not be successfully negotiated and collected.
NORTHROP GRUMMAN CORPORATION
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Accounts receivable were comprised of the following:
$ in millions 1995 1994 1993 1992 1991
Due from U.S. Government, long-term contracts
Current accounts
Billed $ 261 $ 420 $ 65 $ 82 $ 70
Unbilled 3,235 3,140 3,050 3,100 3,518
Progress payments received (2,426) (2,532) (2,410) (2,467) (2,777)
Net current accounts 1,070 1,028 705 715 811
Due upon contract completion 9 55 14 19 4
1,079 1,083 719 734 815
Due from other customers, long-term contracts
Current accounts
Billed 14 74 66 31 37
Unbilled 50 41 43 48 15
64 115 109 79 52
Total due, long-term contracts 1,143 1,198 828 813 867
Trade and other accounts receivable
Due from U.S. Government 61 34 36 28 38
Due from other customers 61 34 13 7 7
Total due, trade and other 122 68 49 35 45
1,265 1,266 877 848 912
Allowances for doubtful amounts (68) (64) (57) (57) (52)
$ 1,197 $ 1,202 $ 820 $ 791 $ 860
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INVENTORIED COSTS
Inventoried costs were comprised of the following:
$ in millions 1995 1994 1993 1992 1991
Production costs of contracts in process $ 1,033 $ 1,384 $ 800 $ 920 $ 976
Administrative and general expenses 166 270 95 109 106
1,199 1,654 895 1,029 1,082
Progress payments received (428) (611) (326) (359) (389)
$ 771 $ 1,043 $ 569 $ 670 $ 693
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. However, no material amount
representing claims, learning curve, unamortized tooling or other deferred
costs is included in inventoried costs.
The ratio of inventoried administrative and general expenses to total
inventoried costs is assumed to be the same as the ratio of total
administrative and general expenses to total contract costs.
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.
NORTHROP GRUMMAN CORPORATION
INCOME TAXES
Income tax expense, both federal and foreign (which arises primarily from
work performed abroad by domestic operations), was comprised of the
following:
[Download Table]
$ in millions 1995 1994 1993 1992 1991
Currently payable
Federal income taxes $ 76 $ 61 $ 41 $ 7 $ 11
Foreign income taxes 1 1 1 1
77 62 42 8 11
Change in deferred federal income taxes 80 (32) 32 51 (2)
$ 157 $ 30 $ 74 $ 59 $ 9
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:
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$ in millions 1995 1994 1993 1992 1991
Income tax expense at statutory rate $ 143 $ 23 $ 59 $ 61 $ 94
Goodwill amortization 13 9
Provision for nondeductible expenses 4 4 1 1 8
Benefit from ESOP dividends (3) (4) (4) (3) (3)
Dividend exclusion (2)
Retroactive effect of statutory rate increase 18
Research and experimentation tax credit (90)
$ 157 $ 30 $ 74 $ 59 $ 9
The research and experimentation tax credit shown for 1991 was the
result of an internal company study that determined the amount earned over
the years 1981 through 1990 in excess of the amount previously recognized
for those years pending final government regulations which were not issued
until 1989.
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. Effective January, 1991, the company adopted
FASB Statement No. 109 - Accounting for Income Taxes.
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:
NORTHROP GRUMMAN CORPORATION
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$ in millions 1995 1994 1993 1992 1991
Deferred tax assets
Deductible temporary differences
Retiree benefit plan expense $ 421 $ 409 $ 21 $ 21 $ 16
Provision for estimated expenses 25 39 28 27 26
Income on contracts 14 17 21 13 8
Other 35 52 2 2 3
495 517 72 63 53
Taxable temporary differences
Purchased intangibles (124) (133)
Excess tax over book depreciation (71) (94)
Retiree benefit plan income (18) (48) (19) (15) (7)
Administrative and general expenses
period costed for tax purposes (2) (1) (3) (6)
(215) (276) (19) (18) (13)
$ 280 $ 241 $ 53 $ 45 $ 40
Deferred tax liabilities
Taxable temporary differences
Income on contracts $ 795 $ 744 $ 811 $ 789 $ 772
Administrative and general expenses
period costed for tax purposes 1 18 18 18 19
Retiree benefit plan income 94 64 33
Excess tax over book depreciation 2 70 89 93
Other 15 9
813 771 993 960 917
Deductible temporary differences
Provision for estimated expenses (117) (145) (135) (120) (116)
Retiree benefit plan expense (2) (2) (106) (93) (76)
Other (9) (11) (17)
(119) (147) (250) (224) (209)
Tax carryforwards
Tax credits (102) (105) (129) (140) (150)
Alternative minimum tax credit (90) (90) (87) (40) (21)
Operating losses (54) (117) (151)
(192) (195) (270) (297) (322)
$ 502 $ 429 $ 473 $ 439 $ 386
Net deferred tax liability
Total deferred tax liabilities (taxable
temporary differences above) $ 1,028 $ 1,047 $ 1,012 $ 978 $ 930
Less total deferred tax assets (deductible
temporary differences and
tax carryforwards above) 806 859 592 584 584
$ 222 $ 188 $ 420 $ 394 $ 346
The tax carryforward benefits are expected to be used in the periods
that net deferred tax liabilities mature. The expiration dates for these
tax credit carryforwards are in various amounts over the years 1996 through
2007. The alternative minimum tax credit can be carried forward
indefinitely.
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, 1995, $65 million was
outstanding at a weighted average interest rate of 6.15 percent. At
December 31, 1994, $171 million was outstanding at a weighted average
interest rate of 7 percent.
Additionally, the company has a credit agreement with a group of
domestic and foreign banks. The Credit Agreement provides for two credit
facilities: $800 million available on a revolving credit basis through
March 1999 and a floating interest rate term loan payable quarterly through
March 1999.
In December 1994 the company amended the Credit Agreement to provide
for repayment of the $1 billion balance of the term loan in 14 quarterly
installments of $62.5 million plus interest beginning in September 1995,
with a final installment of $125 million due in March 1999. During 1995
the company made the $125 million required term loan payments as well as
$312 in voluntary prepayments for amounts which were due through March
1997. The borrowings under the term loans bear interest at various rates
generally equal to the London Interbank Offered Rate (LIBOR) plus .43
percent. At December 31, 1995, $563 million was outstanding at a weighted
average interest rate of 6.31 percent. Principal payments permanently
reduce the amount available under this agreement as well as the debt
outstanding.
In 1995 there were no borrowings under the company's revolving credit
facility. The company paid an average facility fee in 1995 of .18 percent
per annum on the total amount of the revolving credit facility. Under
these agreements, in the event of a "change in control," the banks are
relieved of their commitments. Compensating balances are not required
under these agreements.
The company's credit agreements contain restrictions relating to the
payment of dividends, acquisition of the company's stock, aggregate
indebtedness for borrowed money and the maintenance of shareholders'
equity. At December 31, 1995, $413 million of retained earnings were
unrestricted as to the payment of dividends. Total indebtedness for all
types of borrowed money is limited under the company's credit agreement
covenants. At December 31, 1995, indebtedness was limited to $3.1 billion.
NORTHROP GRUMMAN CORPORATION
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Long-term debt consisted of the following:
$ in millions 1995 1994 1993 1992 1991
Notes due 1999, 8.4% $ 143 $ 153 $ $ $
Notes due 2004, 8.625% 350 350
Debentures due 2024, 9.375% 250 250
Notes payable to institutional investors 160 370 370
Mortgages and notes payable at rates from
9.5% to 12.5% with maturities through 2001 1 10
Term loans payable to banks due in quarterly
installments through 1999 at floating rates 563 1,000
Term loans payable to banks at floating rates 40 180
1,307 1,763 160 410 550
Less current portion 144 130 250 80
$ 1,163 $ 1,633 $ 160 $ 160 $ 470
In November 1995 the notes due in 1999 were called for redemption at
face value, on January 2, 1996. The December 31, 1995 balance of $143
million was classified as current. The debentures due in 2024 are callable
after October 15, 2004 at a premium of 4 percent declining to par after
2013.
The principal amount of long-term debt outstanding at December 31,
1995, is due in: 1997 - $188 million, 1998 - $250 million, 1999 - $125
million and after five years $600 million.
NORTHROP GRUMMAN CORPORATION
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the consolidated Statements of
Financial Position for Cash and Cash Equivalents, Accounts Receivable
and amounts borrowed under the company's short-term credit lines
approximate their fair value.
The fair value of the long-term debt was calculated based on interest
rates available for debt with terms and due dates similar to the
company's existing debt arrangements.
The company has limited involvement with financial instruments and
does not use them for trading purposes. To mitigate the variable rate
characteristic of the term loans, the company entered into interest rate
swap agreements through May 1997 with several banks resulting in a fixed
interest rate of 6.47 percent on a notional amount of $300 million at
December 31, 1995 and $200 million at December 31, 1994. Unrealized
gain(loss) on interest rate swap agreements are calculated based upon the
amounts at which they could be settled at current interest rates. The
unrealized market gain(loss) on interest rate swaps was $(7) million and
$7 million at December 31, 1995 and 1994 respectively. The institutions have
options to extend $200 million of the swaps through May 1998. The company
anticipates that the banks will fully satisfy their obligations under the
arrangements.
Carrying amounts and the related estimated fair values of the
company's financial instruments at December 31 of each year are as follows:
$ in millions 1995 1994 1993 1992
Cash and Cash Equivalents
Carrying amount $ 18 $ 17 $ 100 $ 230
Fair value 18 17 100 230
Accounts Receivable
Carrying amount 1,197 1,202 820 791
Fair value 1,197 1,202 820 791
Notes payable
Carrying amount 65 171 100
Fair value 65 171 100
Long-term debt
Carrying amount 1,307 1,763 160 410
Fair value 1,405 1,758 160 443
Interest rate swap agreements
Notional amount 300 200
Unrealized gains(losses) (7) 7
NORTHROP GRUMMAN CORPORATION
RETIREMENT BENEFITS
The company sponsors several defined-benefit pension plans covering
substantially all employees. Pension benefits for most employees are based
on the employee's years of service and compensation during the last ten
years before retirement. It is the policy of the company to fund at least
the minimum amount required for all qualified plans, using actuarial cost
methods and assumptions acceptable under U.S. Government regulations, by
making payments into a trust separate from the company. Four of the
company's seven qualified plans which cover over 80 percent of all
employees, were in a legally defined full-funding limitation status at
December 31, 1995. To protect the assets in the master trust from a
"change in control" the trust agreement and the Northrop Grumman Pension
Plan were appropriately amended during 1991.
The company and subsidiaries also sponsor defined-contribution plans
in which most employees are eligible to participate. Company contributions,
up to 4 percent of compensation, are based on a matching of employee
contributions.
In addition, the company and its subsidiaries provide certain health
care and life insurance benefits for retired employees. Employees achieve
eligibility to participate in these contributory plans upon retirement from
active service and if they meet specified age and years of service
requirements. Election to participate must be made at the date of
retirement. Qualifying dependents are also eligible for medical coverage.
Approximately 85 percent of the company's current retirees participate in
the medical plans. The cost and funded status for the medical and life
benefits are combined in the tables that follow because (1) life benefits
constitute an insignificant amount of the combined cost, and (2) for those
plans with assets, the assets in trust for each plan can be used to pay
benefits under either plan. Plan documents reserve the company's right to
amend or terminate the plans at any time. Premiums charged retirees for
medical coverage are based on years of service and are adjusted annually
for changes in the cost of the plans as determined by an independent
actuary. In addition to this medical inflation cost-sharing feature, the
plans also have provisions for deductibles, copayments, coinsurance
percentages, out-of-pocket limits, schedule of reasonable fees, managed
care providers, maintenance of benefits with other plans, Medicare
carve-out and a maximum lifetime benefit of from $250,000 to $1,000,000 per
covered individual. It is the policy of the company to fund the maximum
amount deductible for income taxes into the VEBA trust established for the
Northrop Retiree Health Care Plan for Retired Employees for payment of
benefits. The company elected to implement the accounting standard, FASB
Statement No. 106 - Employer's Accounting for Postretirement Benefits Other
Than Pensions, for 1991 by immediately recognizing the January 1, 1991,
accumulated postretirement benefit obligation of $437 million. This amount
was offset by $292 million, the fair value of plan assets held in trust
outside the company, in recording a net obligation and pretax charge to
operations of $145 million.
NORTHROP GRUMMAN CORPORATION
The cost to the company of these plans in each of the last five years
is shown in the following table.
[Enlarge/Download Table]
$ in millions 1995 1994 1993 1992 1991
Defined benefit pension plans
Actual return on assets $(1,856) $ 25 $ (449) $ (298) $ (825)
Deferral of actual return on assets 1,233 (541) 153 38 604
Expected return on assets (623) (516) (296) (260) (221)
Service cost 125 176 104 99 88
Interest cost 520 372 190 175 158
Amortization of unrecognized items
Transition asset, net (42) (42) (42) (42) (42)
Prior service costs 31 14 15 13 14
Net gain from previous years (34) (40) (42) (68) (20)
Net periodic pension income $ (23) $ (36) $ (71) $ (83) $ (23)
Defined contribution plans $ 54 $ 59 $ 47 $ 48 $ 45
Retiree health care and life insurance benefit plans
Actual return on assets $ (95) $ 22 $ (19) $ (10) $ (85)
Deferral of actual return on assets 76 (42) (1) (10) 69
Expected return on assets (19) (20) (20) (20) (16)
Service cost 20 28 21 25 24
Interest cost 89 61 37 39 39
Amortization of unrecognized gain from
previous years (3) (2) (6) (3)
Excess dependent cost 2
Net periodic postretirement benefit cost $ 87 $ 69 $ 32 $ 41 $ 47
In addition to the net periodic pension income and postretirement
benefit cost, in 1994 the company recognized the effect of an early
retirement incentive program of $250 million for pension and $32 million
for postretirement benefits. The total $282 million effect on the
company's 1994 operating margin is shown in the Consolidated Statements of
Income under the caption Special Termination Benefits.
NORTHROP GRUMMAN CORPORATION
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 preceeding year,
whereas the funded status of the plans, shown later, uses only the first
two factors, as of the end of each year.
1995 1994 1993 1992 1991
Discount rate for obligations 7.00% 8.25% 7.00% 8.00% 8.00%
Rate of increase for compensation 5.00 5.25 5.50 5.50 5.50
Expected long term rate of return
on plan assets 9.00 8.75 8.25 8.25 8.25
These assumptions were also used in retiree health care and life
insurance benefit calculations with one modification. Since, unlike the
pension trust, the earnings of the VEBA trust are taxable, the above
9 percent expected rate of return on plan assets was reduced accordingly to
5.25 percent after taxes. A significant factor used in estimating future
per capita cost, for the company and its retirees, of covered health care
benefits is the health care cost trend rate assumption. The rate used was 8
percent for 1995 and is assumed to decrease gradually to 6 percent for 2006
and remain at that level thereafter. An additional one-percentage-point of
increase each year in that rate would result in an $11 million annual
increase in the aggregate of the service and interest cost components of
net periodic postretirement benefit cost, and a $113 million increase in
the accumulated postretirement benefit obligation at December 31, 1995.
The following tables set forth the funded status and amounts
recognized in the Consolidated Statements of Financial Position at each
year-end for the company's defined-benefit pension and retiree health care
and life insurance benefit plans. The summary showing pension plans whose
accumulated benefits are in excess of assets at December 31, 1995, is
comprised of two qualified plans along with thirteen unfunded nonqualified
plans for benefits provided to directors, officers and employees either
beyond those provided by, or payable under, the company's main plans.
The company changed the discount rate for obligations and rate of
increase for compensation assumptions in calculating the funded status of
the plans at December 31, 1995. The changes resulted in a $922 million
increase in the projected benefit obligation for pension plans and a $167
million increase in the accumulated postretirement benefit obligation.
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
$ in millions 1995 1994 1993 1992 1991
Pension plans whose assets exceed accumulated benefits
Actuarial present value of benefit obligations
Vested benefits $ 6,572 $ 2,487 $ 2,059 $ 1,690 $ 1,538
Nonvested benefits 320 228 175 153 147
Accumulated benefit obligations 6,892 2,715 2,234 1,843 1,685
Effect of assumed salary rate increases 469 409 453 421 387
Projected benefit obligations 7,361 3,124 2,687 2,264 2,072
Less market value of plan assets 8,319 4,210 3,970 3,642 3,458
Excess of assets over projected
benefit obligations (958) (1,086) (1,283) (1,378) (1,386)
Unrecognized items
Net transition asset 289 332 374 415 458
Prior service costs (286) (307) (114) (133) (135)
Net gain 921 897 764 916 972
Accrued retiree benefits pension asset
included in Consolidated Statements
of Financial Position $ (34) $ (164) $ (259) $ (180) $ (91)
Pension plans whose accumulated benefits exceed assets
Actuarial present value of benefit obligations
Vested benefits $ 311 $ 2,865 $ 57 $ 33 $ 32
Nonvested benefits 8 252 3
Accumulated benefit obligations 319 3,117 60 33 32
Effect of assumed salary rate increases 15 16 19 3 3
Projected benefit obligations 334 3,133 79 36 35
Less market value of plan assets 177 2,872 16
Excess of projected benefit
obligations over assets 157 261 63 36 35
Unrecognized items
Net transition obligation (3) (4) (5) (4) (5)
Prior service costs (5) (8) (14) 5 (7)
Net gain(loss) (31) 1 (7) (3) 9
Additional minimum liability 29 6 12 7 3
Accrued retiree benefits liability included in
Consolidated Statements of
Financial Position $ 147 $ 256 $ 49 $ 41 $ 35
NORTHROP GRUMMAN CORPORATION
Pension plan assets at December 31, 1995, were comprised of 50 percent
domestic equity type investments in listed companies (including four
percent in Northrop Grumman common stock), 13 percent equity investments
listed on international exchanges, eight percent in cash and venture
capital real estate and 29 percent in fixed income type investments,
principally U.S. Government securities. The investment in Northrop Grumman
represents 5,974,826 shares, or 12 percent of the company's total shares
outstanding.
Effective January 1, 1995, the company adopted amendments to two of
the company's retirement plans to cap the maximum years of service credit
that an employee can earn and adjusted the amount of service credit earned
each year. The effect of these changes was to increase the projected
benefit obligation at December 31, 1994 by $210 million.
[Enlarge/Download Table]
$ in millions 1995 1994 1993 1992 1991
Retiree health care and life insurance benefit plans
Accumulated postretirement benefit obligation (APBO)
Retirees $ 960 $ 575 $ 274 $ 243 $ 240
Fully eligible active employees 88 172 86 82 97
Active employees not yet eligible 288 258 192 194 172
1,336 1,005 552 519 509
Less market value of plan assets 433 353 373 369 372
Excess of APBO over assets 903 652 179 150 137
Unrecognized items
Prior service cost (1)
Net gain(loss) (15) 156 74 72 45
Accrued retiree benefits liability included in
Consolidated Statements of
Financial Position $ 887 $ 808 $ 253 $ 222 $ 182
Retiree health care and life insurance plan assets at December 31, 1995,
were almost entirely comprised of equity type investments in listed
companies.
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. Minimum rental commitments under long-term
noncancellable operating leases total $158 million which is payable as
follows; 1996 - $47 million, 1997 - $35 million, 1998 - $24 million, 1999 -
$19 million, and 2000 - $11 million, and 2001 and thereafter - $22 million.
NORTHROP GRUMMAN CORPORATION
STOCK RIGHTS
On September 21, 1988, the company adopted a Common Stock Purchase Rights
plan. One right for each outstanding share of common stock was issued to
shareholders of record on October 5, 1988. The rights will become
exercisable on the tenth business day after a person or group has acquired
15 percent or more of the general voting power of the company, or announces
an intention to make a tender offer for 30 percent or more of such voting
power, without the prior consent of the Board of Directors. If the rights
become exercisable, a holder will be entitled to purchase one share of
common stock from the company at an initial exercise price of $105.
If a person acquires more than 15 percent of the then outstanding
voting power of the company or if the company is combined with an acquiror,
each right will entitle its holder to receive, upon exercise, shares of the
company's or the acquiror's (depending upon which is the surviving company)
common stock having a value equal to two times the exercise price of the
right.
The company will be entitled to redeem the rights at $.02 per right at
any time prior to the earlier of the date that a person has acquired or
obtained the right to acquire 15 percent of the general voting power of the
company or the expiration of the rights in October 1998. The rights are not
exercisable until after the date on which the company's prerogative to
redeem the rights has expired. The rights do not have voting or dividend
privilege and cannot be traded independently from the company's common
stock until such time as they become exercisable.
LONG-TERM INCENTIVE STOCK PLAN
The company's 1993 Long-Term Incentive Stock Plan(LTISP) provides for stock
options, stock appreciation rights (SARs) and stock awards to key
employees. This plan added 2,300,000 shares, of which up to one-half may be
in the form of stock awards, to the pool available for future grants. The
1993 LTISP was amended in 1995, adding 1,800,000 shares, along with 300,000
shares added from the adoption of a stock option plan for non-employee
directors, to the pool available for grants. The number of shares reserved
for future grants shown in the following table reflects both stock options
and stock awards.
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 beginning
three years after grant. If at the end of the five year period the
performance objectives have not been met, 70 percent of the original grant
will be forfeited. Compensation expense is estimated and accrued over the
vesting period.
Each grant of a stock option is made at the closing market price on
the date of the grant. When stock options are exercised, the amount of the
cash proceeds to the company is added to paid-in capital. Under current
accounting standards there are no additions to or deductions from income in
connection with these options.
Termination of employment can result in forfeiture of some or all of
the benefits extended under the plans.
NORTHROP GRUMMAN CORPORATION
Stock option activity for the last five years is summarized below:
[Enlarge/Download Table]
Shares
Shares Shares Reserved for
Under Option Exercisable Future Grants
Outstanding at January 1, 1991, nonstatutory
options with 1,800,000 SARs, at $15 to $47
per share 2,846,320 1,491,420 1,161,149
Granted 67,000
Cancelled (54,420)
Exercised or surrendered, at $17 to $19
per share (35,030)
Outstanding at December 31, 1991, nonstatutory
options with 1,800,000 SARs, at $15 to $47
per share 2,823,870 1,841,070 1,152,902
Granted 635,700
Cancelled (43,380)
Exercised or surrendered, at $16 to $29
per share (281,660)
Outstanding at December 31, 1992, nonstatutory
options at $15 to $47 per share 3,134,530 1,798,550 413,780
Granted 515,300
Cancelled (96,640)
Exercised or surrendered, at $15 to $30
per share (1,405,330)
Outstanding at December 31, 1993, nonstatutory
options at $15 to $36 per share 2,147,860 738,300 1,618,640
Granted 708,700
Cancelled (61,215)
Exercised or surrendered, at $15 to $36
per share (265,430)
Outstanding at December 31, 1994, nonstatutory
options at $15 to $43 per share 2,529,915 817,660 816,485
Granted 762,500
Cancelled (130,885)
Exercised or surrendered, at $15 to $43 per share (170,810)
Outstanding at December 31, 1995, nonstatutory
options at $15 to $62 per share 2,990,720 1,064,925 2,297,775
NORTHROP GRUMMAN CORPORATION
SUBSEQUENT EVENT
On January 3, 1996 the company entered into a definitive agreement to
acquire the defense and electronics systems business of Westinghouse
Electric Corporation for $3 billion in cash. The company has obtained bank
commitments totaling $4.8 billion to finance the transaction and replace
its current credit agreement. The transaction is subject to normal
governmental and regulation reviews and is expected to close in March 1996.
UNAUDITED SELECTED QUARTERLY DATA
Quarterly financial results, previously reported are set forth in the
following tables together with dividend and common stock price data.
1995 Quarters, $ in millions, except per share 4 3 2 1
Net sales $1,812 $1,630 $1,759 $1,617
Operating margin 121 131 167 117
Net income 58 61 79 54
Earnings per share 1.17 1.25 1.59 1.10
Dividend per share .40 .40 .40 .40
Stock price:
High 64 1/4 62 5/8 54 49 3/4
Low 56 51 7/8 47 39 3/4
The operating margin in the second quarter of 1995 benefited from a
net $34 million in cumulative operating margin adjustments. Positive
adjustments on the B-2 stealth bomber and C-17 military transport programs
were partially offset by a downward adjustment on the Boeing 747 jetliner
program. The 747 adjustment reflected cost increases related to the
stretch-out of the current production contract, which is now scheduled to
conclude in the fall of 1996. The B-2 adjustment was made as a result of
negotiated contract adjustments and a revised estimate of the overall
operating margin expected to be earned on the B-2 production contract. The
positive adjustment on the C-17 reflected improved operating performance on
this program.
1994 Quarters, $ in millions, except per share 4 3 2 1
Net sales $1,880 $1,927 $1,686 $1,218
Operating margin(loss) (107) 99 126 81
Net income(loss) (121) 39 65 52
Earnings(loss) per share (2.45) .79 1.33 1.05
Dividend per share .40 .40 .40 .40
Stock price:
High 47 3/8 45 3/8 39 3/4 45 7/8
Low 40 1/4 35 3/4 34 1/2 36 7/8
Operating margin(loss) for the first three quarters of 1994 has been
restated to reflect the reclassification of losses on disposals of
machinery and other equipment previously included in the "Other, net"
classification in the Consolidated Statements of Income. The operating
loss in the fourth quarter of 1994 resulted from a $282 million charge for
a voluntary early retirement incentive program offered in 1994 and a $42
million provision for the planned disposal of real estate and other assets.
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 January 31, 1996, was 10,858.
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
for each of the years 1991 through 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for
the years then ended. Our audits 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 the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
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 for each of the years 1991
through 1995, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. 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 1991 the company changed its method of computing income
taxes by adopting Financial Accounting Standards Board Statement No. 109 -
Accounting for Income Taxes and its accounting for nonpension benefit plans
by adopting Financial Accounting Standards Board Statement No. 106 -
Employers' Accounting for Postretirement Benefits Other Than Pensions.
Deloitte & Touche LLP
Los Angeles, California
February 7, 1996
NORTHROP GRUMMAN CORPORATION
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
No information is required in response to this Item.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information as to Directors will be incorporated herein by
reference to the Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
The information as to Executive Officers is contained in Part I of
this report as permitted by General Instruction G(3).
Item 11. Executive Compensation
The information required by this Item will be incorporated herein by
reference to the Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item will be incorporated herein by
reference to the Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item will be incorporated herein by
reference to the Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Consolidated Statements of Financial Position
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted either because they are not applicable
or not required or because the required information is included in the
financial statements or notes thereto.
Separate financial statements of the parent company are omitted since
it is primarily an operating company and minority equity interests in
and/or nonguaranteed long-term debt of subsidiaries held by others than the
company are in amounts which together do not exceed 5 percent of the total
consolidated assets at December 31, 1995.
NORTHROP GRUMMAN CORPORATION
Exhibits:
3(a) Certificate of Incorporation, as amended (incorporated by reference
to Form S-3 Registration Statement, filed August 18, 1994)
3(b) Northrop Grumman Corporation Bylaws, amended as of May 18, 1994
(incorporated by reference to Form S-3 Registration Statement, filed
August 18, 1994) and amended as of August 17, 1994
4(a) Common Stock Purchase Rights Agreement (incorporated by reference to
Form 8-A filed September 22, 1988, amended on August 2, 1991
(incorporated by reference to Form 8 filed August 2, 1991) and
amended on September 28, 1994 (incorporated by reference to Form 8/A-
A filed October 7, 1994)
4(b) Indenture Agreement dated as of October 15, 1994 (incorporated by
reference to Form 8-K filed October 25, 1994)
10(a) Northrop Grumman Corporation Amended and Restated Credit Agreement
dated as of April 15, 1994, as amended and restated as of
April 18, 1994 (incorporated by reference to Report on Form 10-Q filed
May 9, 1994), amended as of May 11, 1994, and amended as of
December 9, 1994 (incorporated by reference to Form 10-K filed
March 21, 1995)
10(b) Uncommitted Credit Facility dated October 10, 1994, between Northrop
Grumman Corporation and Wachovia Bank of Georgia, N.A., which is
substantially identical to facilities between Northrop Grumman
Corporation and certain banks some of which are parties to the
Credit Agreement filed as Exhibit 10(a) hereto
*10(c) 1973 Incentive Compensation Plan (incorporated by reference to
Form 8-B filed June 21, 1985)
*10(d) 1973 Performance Achievement Plan (incorporated by reference to
Form 8-B filed June 21, 1985)
*10(e) Northrop Supplemental Plan 2
*10(f) Northrop Grumman Corporation ERISA Supplemental Plan 1 (incorporated
by reference to Form 10-K filed February 28, 1994).
*10(g) Retirement Plan for Independent Outside Directors (incorporated by
reference to Form SE filed March 29, 1991), amended September 21,
1994 (incorporated by reference to Form 10-K filed March 21, 1995)
*10(h) 1987 Long-Term Incentive Plan, as amended (incorporated by
reference to Form SE filed March 30, 1989)
*10(i) Executive Life Insurance Policy
*10(j) Executive Accidental Death, Dismemberment and Plegia Insurance Policy
*10(k) Executive Long-Term Disability Insurance Policy
*10(l) Key Executive Medical Plan Benefit Matrix
NORTHROP GRUMMAN CORPORATION
*10(m) Executive Dental Insurance Policy Group Numbers 5134 and 5135
*10(n) Group Excess Liability Policy
*10(o) Northrop Grumman 1993 Long-Term Incentive Stock Plan, as amended
(incorporated by reference to Northrop Grumman Corporation Proxy
Statement filed March 30, 1995)
*10(p) Northrop Corporation 1993 Stock Plan for Non-Employee Directors
(incorporated by reference to Northrop Corporation 1993 Proxy
Statement filed March 30, 1993), amended as of September 21, 1994
(incorporated by reference to Form 10-K filed March 21, 1995)
*10(q) Northrop Grumman Corporation 1995 Stock Option Plan for Non-Employee
Directors (incorporated by reference to 1995 Proxy Statement filed
March 30, 1995)
*10(r) Northrop Corporation Special Severance Pay Agreement (incorporated
by reference to Northrop Corporation Report on Form 10-K filed
February 28, 1994), amended and restated as of July 13, 1995
*10(s) Employment Agreement effective January 1, 1996 between Northrop
Grumman Corporation and Gordon L. Williams
*10(t) Executive Deferred Compensation Plan (effective December 29,1994)
*10(u) Northrop Grumman Transition Project Incentive Plan (incorporated by
reference to Form 10-K filed March 21, 1995)
10(v) Agreement and Plan of Merger dated April 3, 1994 (incorporated by
reference to Form 8-K filed May 2, 1994)
11 Statement Re Computation of Per Share Earnings
21 Significant subsidiaries of registrant
23 Independent Auditors' Consent
24 Power of Attorney
27 Financial Data Schedule
________________
* Listed as Exhibits pursuant to Item 601(b)(10) of Regulation S-K
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
NORTHROP GRUMMAN CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
23rd day of February 1996.
Northrop Grumman Corporation
By: Nelson F. Gibbs
Nelson F. Gibbs
Corporate Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the registrant this 23rd day of
February 1996, by the following persons and in the capacities indicated.
Signature Title
Kent Kresa* Chairman of the Board, President and Chief Executive
Officer and Director (Principal Executive Officer)
Jack R. Borsting* Director
John T. Chain, Jr.* Director
Jack Edwards* Director
Aulana L. Peters* Director
John E. Robson* Director
Richard R. Rosenberg* Director
Brent Scowcroft* Director
John Brooks Slaughter* Director
Wallace C. Solberg* Director
Richard J. Stegemeier* Director
Richard B. Waugh, Jr.* Corporate Vice President and Chief
Financial Officer
*By James C. Johnson
James C. Johnson, Attorney-in-Fact
pursuant to a power of attorney
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
COL. A COL. B COL. C COL. D COL. E
Other
Balance at Changes-- Balance
Classification Beginning Additions Add at End
of Period At Cost (Deduct)(1) of Period
Description:
Year ended December 31, 1991
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $82,081 $ 8,900 $(38,980) $52,001
Year ended December 31, 1992
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $52,001 $ 7,571 $ (2,412) $57,160
Year ended December 31, 1993
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $57,160 $ 9,304 $ (9,759) $56,705
Year ended December 31, 1994
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $56,705 $25,283(2) $(18,262) $63,726
Year ended December 31, 1995
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $63,726 $ 6,357 $ (2,129) $67,954
____________
(1) Uncollectible amounts written off, net of recoveries.
(2) Additions include $15,625 of allowance for bad debts from acquired company.
NORTHROP GRUMMAN CORPORATION
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EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share)
1995 1994 1993 1992 1991
Primary:
Average shares outstanding 49,364 49,139 48,085 47,179 47,075
Net effect of the assumed exercise of
stock options - based on the treasury
stock method 1,111 758 792 251 187
Totals 50,475 49,897 48,877 47,430 47,262
Income before cumulative effect
of accounting principle changes $252,159 $35,264 $95,755 $120,922 $268,256
Cumulative effect on prior years of
changes in accounting principles:
Income Taxes 20,282
Retiree healthcare and life
insurance benefits (87,717)
Net Income $252,159 $35,264 $95,755 $120,922 $200,821
Earnings per share before
cumulative effect of accounting
principle changes $ 5.00 $ .71 $ 1.96 $ 2.55 $ 5.68
Cumulative effect on prior years
of change in accounting principles, per share:
Income Taxes .43
Retiree healthcare and life
insurance benefits (1.86)
Earnings per share(1) $ 5.00 $ .71 $ 1.96 $ 2.55 $ 4.25
Fully diluted:
Average shares outstanding 49,364 49,139 48,085 47,179 47,075
Net effect of the assumed exercise
of stock options - based on the
treasury stock method 1,356 837 872 805 225
Totals 50,720 49,976 48,957 47,984 47,300
Income before cumulative effect
of accounting principle changes $252,159 $35,264 $95,755 $120,922 $268,256
Cumulative effect on prior years of
changes in accounting principles:
Income Taxes 20,282
Retiree healthcare and life
insurance benefits (87,717)
Net Income $252,159 $35,264 $95,755 $120,922 $200,821
Earnings per share before
cumulative effect of accounting
principle changes $ 4.97 $ .71 $ 1.96 $ 2.52 $ 5.67
Cumulative effect on prior years
of change in accounting principles, per share:
Income Taxes .43
Retiree healthcare and life
insurance benefits (1.85)
Earnings per share(1) $ 4.97 $ .71 $ 1.96 $ 2.52 $ 4.25
(1) This calculation was made in compliance with Item 601 of Regulation
S-K. Earnings per share presented elsewhere in this report exclude from
their calculation shares issuable under employee stock options, since
their dilutive effect is less than 3%.
NORTHROP GRUMMAN CORPORATION
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 2-73293, 2-98614, 33-15764, 33-49667, 33-55141, 33-55146, 33-59815 and
33-59853 of Northrop Grumman Corporation on Form S-8 of our report dated
February 7,1996, appearing in this Annual Report on Form 10-K of Northrop
Grumman Corporation for the year ended December 31, 1995.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 22, 1996
Dates Referenced Herein and Documents Incorporated by Reference
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