Document/Exhibit Description Pages Size
1: 10-K Annual Report 57± 245K
2: EX-3 Exhibit 3(B) Bylaws 21± 82K
4: EX-10 Exhibit 10-E 2± 7K
5: EX-10 Exhibit 10-R 13± 55K
3: EX-10 Exhibit 10A 10± 38K
6: EX-10 Exhibit 10T 3± 12K
7: EX-10 Exhibit 10T2 4± 20K
8: EX-24 Exhibit 24 Power of Attorney 2± 12K
9: EX-27 ƒ Financial Data Schedule 1 6K
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, 1996
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 14, 1997, 57,972,721 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 $4,400 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 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 aircraft and electronics industry segments of the broadly defined
aerospace industry. The aircraft segment includes the design, development
and manufacturing of aircraft and aircraft subassemblies. The electronics
segment includes the design, development, manufacturing and integration of
electronic systems for military and commercial use and the operation and
support of 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 that use the property
described, are indicated in the following table.
Location Property Interest
Annapolis, Maryland (2) (a) (b) (c) (d) Owned
Arlington, Virginia (1) (3) (a) Leased
Auburn, Washington (1) (c) Leased
Baltimore, Maryland (2) (b) (c) (d) Leased
Benton, Pennsylvania (2) (b) Leased
*Bethpage, New York (2) (3) (a) (b) (c) (d) Owned, Leased
Bohemia, New York (2) (a) Owned, Leased
Bridgeport, West Virginia (2) (a) (b) Owned, Leased
Burlington, Canada (2) (a) (b) (c) (d) Owned
Calverton, New York (2) (a) (b) (c) (d) (e) Owned
Carson, California (1) (c) Leased
Chandler, Arizona (1) (a) (b) Owned
Cincinnati, Ohio (2) (b) Leased
Cleveland, Ohio (2) (b) Owned
College Station, Texas (2) (b) Owned
Compton, California (1) (b) (c) Owned, Leased
El Segundo, California (1) (a) (b) (c) (d) Owned
Fairborn, Ohio (2) (a) Leased
Fort Tejon, California (1) (d) Owned, Leased
Gardena, California (1) (c) Owned
Glen Arm, Maryland (2) (b) Owned
Glen Burnie, Maryland (2) (a) Owned
Grand Prairie, Texas (1) (a) (b) (c) (d) Owned, Leased
Great River, New York (2) (a) (b) Owned
Hanover, Maryland (2) (b) Leased
Hawthorne, California (1) (2) (3) (a) (b) (c) (d) Owned, Leased
Herndon, Virginia (1) (2) (a) Leased
*Hicksville, New York (2) (a) (d) (e) Owned
Houston, Texas (2) (a) Leased
Hunt Valley, Maryland (2) (b) Leased
Kent, Washington (1) (c) Leased
NORTHROP GRUMMAN CORPORATION
Lake Charles, Louisiana (1) (a) (b) (c) Leased
Lawton, Oklahoma (1) (a) (c) Owned, Leased
Lexington, South Carolina (1) (a) (c) Owned
Linthicom, Maryland (2) (a) (b) (c) Owned, Leased
Los Angeles, California (1) (2) (3) (a) Leased
Melbourne, Florida (2) (a) (b) (c) (e) Owned, Leased
Melville, New York (2) (b) Leased
Milledgeville, Georgia (1) (b) (c) (e) Owned
Mojave, California (1) (e) Owned, Leased
Montgomery, Pennsylvania (1) (b) Owned
New Town, North Dakota (2) (b) (c) Owned, Leased
Newbury Park, California (3) (a) (b) (c) (d) Owned
Norwalk, Connecticut (2) (a) (b) (c) (d) Leased
Norwood, Massachusetts (3) (b) (c) (e) Owned, Leased
Orlando, Florida (2) (a) (b) (c) (d) Leased
Palatine, Illinois (2) (c) Leased
Palmdale, California (1) (a) (b) (c) (d) (e) Owned, Leased
Perry, Georgia (1) (3) (a) (b ) (c) Owned
Pico Rivera, California (1) (a) (b) (c) (d) Owned, Leased
Pittsburgh, Pennsylvania (2) (d) Leased
Portsmouth, Rhode Island (1) (b) (e) Owned, Leased
Rolling Meadows, Illinois (2) (a) (b) Owned, Leased
St. Augustine, Florida (1) (a) (b) (c) (e) Owned, Leased
Stuart, Florida (1) (b) (c) Leased
Sturgis, Michigan (1) (a) (b) (c) Owned, Leased
Sunnyvale, California (2) (a) (b) (c) (d) Owned
Sykesville, Maryland (2) (b) Owned
Titusville, Florida (2) (a) (d) Owned, Leased
Torrance, California (1) (b) (c) Owned, Leased
Tulare, California (1) (b) Owned
Warner Robins, Georgia (2) (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) Aircraft
(2) Electronics
(3) 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 9 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
did not completely specify the total amount being sought but, rather,
sought damages in excess of $1.2 million. On May 7, 1990, the Court ruled
that the original plaintiffs could proceed with portions of the lawsuit
that the government had 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.
A Federal jury trial commenced in the first quarter of 1996 with
respect to the government's remaining allegations. The relators' severed
allegations were resolved prior to trial. The government had asserted
three separate claims totaling approximately $13.5 million, including a
claim for alleged mischarging of approximately $12 million in violation of
the False Claims Act. Damages awarded under the False Claims Act are
subject to doubling or trebling and possible additional penalties including
disallowance of attorneys' fees. In the second quarter of 1996, the
Federal jury returned a unanimous verdict for the company. The
government's motion for a new trial, filed May 30, 1996, was denied on
August 16, 1996. A notice of appeal was filed by the government on
October 10, 1996.
NORTHROP GRUMMAN CORPORATION
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 that are filed under seal pursuant to the False
Claims Act. Since these matters remain under seal, the company does not
possess sufficient information to report accurately 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
NORTHROP GRUMMAN CORPORATION
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 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.
NORTHROP GRUMMAN CORPORATION
Executive Officers of the Registrant
The following individuals were the elected officers of the company as
of February 1997:
Business Experience
Name Age Office Held Since Last Five Years
Kent Kresa 58 Chairman, 1990
President & CEO
Herbert W. Anderson 57 Corporate Vice 1995 Vice President and
President and Deputy General
General Manager, Manager, Data
Data Systems & Systems and
Services Division Services Division;
Prior to 1994,
Vice President and
Center General
Manager, Northrop
Information
Services Center
Ralph D. Crosby, Jr. 49 Corporate Vice 1996 Corporate Vice
President and President and
General Manager, Deputy General
Commercial Manager, Commercial
Aircraft Division Aircraft Division;
Prior to March 1996,
Corporate Vice President
and Deputy General
Manager, Military
Aircraft Systems
Division; Prior to
January 1996
Corporate Vice
President and
General Manager,
B-2 Division;
Prior to 1994,
Vice President
Business and
Advanced Systems
Development at
the B-2 Division;
Prior to 1992,
Vice President
Business Development
and Administration
B-2 Division
Marvin Elkin 60 Corporate Vice 1996 Corporate Vice President
President and Chief and Chief Human Resources
Human Resources, and Administrative Officer;
Communications and Prior to 1994, Corporate
Administrative Officer Vice President
Administration and Services
Nelson F. Gibbs 59 Corporate Vice 1992 Vice President and
President and Controller
Controller
John E. Harrison 61 Corporate Vice 1994 Senior Vice President
President and and General Manager,
General Manager, Electronics Programs,
Electronics and Systems Aerospace and Electronics
Integration Division Group, Grumman Corporation;
Prior to 1992, President,
Electronics Division,
Grumman Corporation
Robert W. Helm 45 Corporate Vice 1994 Vice President,
President, Legislative Affairs
Government Relations
James C. Johnson 44 Corporate Vice 1996 Corporate Vice
President and President and
Secretary and Assistant Secretary; Prior
General Counsel to 1995, Senior
Corporate Counsel;
Prior to 1992,
Senior Counsel
Charles L. Jones, Jr. 55 Corporate Vice 1996 Corporate Vice
President and President, Quality
Chief Strategic Operations; Prior
Planning Advanced to 1992, Vice
Development and President, Quality
Programs Officer Operations
William H. Lawler 56 Corporate Vice 1997 Vice President and
President and Deputy General
General Manager, Manager, Military
Military Aircraft Aircraft Systems
Systems Division Division; Prior to
1996, Vice President
and Deputy General
Manager, B-2 Division;
Prior to 1995, Vice
President and B-2
Program Manager;
Prior to June 1994,
Vice President,
Business and Advanced
Systems Development,
B-2 Division; Prior to
1994, Vice President
and Deputy, Chief
Engineer, Business
and Advanced
Systems Development,
B-2 Division; Prior
to 1993, Vice President
Engineering and B-2
Chief Engineer, B-2
Division
Richard R. Molleur 64 Corporate Vice 1991
President and
General Counsel
Albert F. Myers 51 Corporate Vice 1994 Vice President, Business
President and Strategy; Prior to 1992,
Treasurer Vice President, Test
Operations, at B-2
Division
James G. Roche 57 Corporate Vice 1996 Corporate Vice
President and President and Chief
General Manager, Advanced Development,
Electronic Sensors Planning, and Public
and Systems Division Affairs Officer; Prior
to 1993, Corporate Vice
President Advanced
Development and
Planning Officer;
Prior to 1992, Vice
President, Advanced
Development and Planning
Richard B. Waugh, Jr. 53 Corporate Vice 1993 Vice President,
President and Chief Taxes, Risk
Financial Officer Management and
Business Analysis
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 - aircraft and electronics - are each
a factor in the broadly defined aerospace industry. While Northrop Grumman
is subject to the usual vagaries of the marketplace, it is also affected by
the unique characteristics of the aerospace industry and by certain
elements peculiar to its own business mix.
Northrop Grumman is one of the major companies that compete for the
relatively small number of large, long-term programs that characterize both
the defense and commercial segments of the aerospace business. It is
common in the aerospace industry for work on major programs to be shared
between a number of companies. A company competing to be a prime
contractor can turn out to be a subcontractor. It is not uncommon to
compete with customers, and simultaneously to be both a supplier to and
customer of a given competitor. Over the past several years the aerospace
industry has been going through a consolidation process and along with it,
significant downsizing. These actions, in which Northrop Grumman has
participated, have made competition even more intense than in the
past. The nature of major aerospace programs, conducted under binding
contracts, allows companies that perform well to benefit from a level of
program continuity unknown in many industries. Lockheed Martin and The
Boeing Company, which in late 1996 announced its intention to acquire
McDonnell Douglas, are the largest companies in the aerospace industry at
this time. Northrop Grumman also competes against these and other
companies for a number of large and smaller programs in the electronics and
systems integration areas. Thus, intense competition and long operating
cycles are both characteristic of the industry's - and Northrop Grumman's -
business.
In the first quarter of 1996 Northrop Grumman acquired the defense and
electronics systems business (ESG) of Westinghouse Electric Corporation at
a cost of $2.9 billion. The business acquired is being operated as a
component of the electronics industry segment. The company purchased the
outstanding common stock of Grumman Corporation (Grumman) for $2.1 billion
in the second quarter of 1994. Northrop Corporation was renamed Northrop
Grumman Corporation effective May 18, 1994. In August 1994 the company
purchased the remaining 51 percent interest in Vought Aircraft Company
(Vought) for $130 million. The company had purchased a 49 percent interest
in Vought in 1992.
NORTHROP GRUMMAN CORPORATION
The B-2 bomber, for which the company is the prime contractor, is
Northrop Grumman's largest program. The aircraft segment is responsible
for final assembly of the B-2's airframe and systems integration at its
Palmdale, California facility. The company also manufactures the fuselage
and elements of the B-2's navigation and electronic warfare/situation
awareness system. Major subcontractors include Boeing, which produces the
aft center section, outboard wing sections, landing gear and fuel system,
and Hughes Electronics Corporation, which produces the radar systems. The
U. S. Air Force currently plans to operate two B-2 bomber squadrons of
eight aircraft each with an additional five aircraft available to fill in
for those in depot for periodic maintenance.
The company also is the principal subcontractor to McDonnell Douglas
on the F/A-18 program. The F/A-18 is a fighter/ground-attack aircraft with
configurations equipped for either one or two crew members. Principally
deployed by the U.S. Navy on aircraft carriers, it has also been purchased
by several other nations as a land-based combat aircraft. The company
builds approximately 40 percent of the aircraft including the center and
aft fuselage, vertical tails, and associated subsystems. Of the versions
of the F/A-18 currently in production, the C is a single-seat combat
aircraft that was first delivered to the U.S. Navy in 1987 and the D is a
two-seat version principally used for training. The F/A-18 single-seat E
and two-seat F are enhanced versions currently in the test phase of
development and will serve as the U.S. Navy's next-generation multimission
aircraft.
The company manufactures portions of the Boeing 747, 757, 767 and 777
jetliners, the Gulfstream IV and V business jets, and the McDonnell Douglas
C-17 military transport. Northrop Grumman has been a principal airframe
subcontractor for the Boeing 747 jetliner since the program began in 1966,
producing the fuselage and aft body section for the 747 as well as cargo
and passenger doors, the vertical and horizontal body stabilizers, floor
beams and smaller structural components. The majority of the Boeing
jetliner work is performed at the aircraft segment's production sites in
Hawthorne, California; Grand Prairie, Texas; and Stuart, Florida. Northrop
Grumman manufactures engine nacelles for the Gulfstream IV and other
business jets and has begun production of the wings for Gulfstream's newest
business jet, the Gulfstream V. The company also produces the empennage,
engine nacelles and control surfaces for the McDonnell Douglas C-17, the
U.S. Air Force's most advanced airlifter. The work performed on the C-17,
Gulfstream IV and V, 757, 767, 777 and some of the components of the 747
were added as a result of the Grumman and Vought acquisitions.
NORTHROP GRUMMAN CORPORATION
Northrop Grumman also is a major producer of early warning and
surveillance/battle management aircraft. The company designed and built
all-weather E-2C Hawkeye airborne early warning command-and-control
aircraft that has been in active service with the U.S. Navy since 1973,
also is employed by the air forces of five other nations. The E-2C is
produced by the company's electronics segment.
The company also serves as prime contractor for the E-8 Joint
Surveillance Target Attack Radar System (Joint STARS). Joint STARS
detects, locates, classifies, tracks and targets potentially hostile ground
movement in all weather conditions. It is designed to operate around the
clock, in constant communication through secure data links with air force
command posts, army mobile ground stations or centers of military analysis
far from the point of conflict. The Joint STARS platform is a
remanufactured Boeing 707-300 airframe. The 707 is remanufactured at
Northrop Grumman's Lake Charles, Louisiana site. Final installation of
electronics and testing are performed at the electronics segment
integration and test facility in Melbourne, Florida.
ECM denotes electronic countermeasures equipment manufactured by the
company's electronics segment. The company's Rolling Meadows, Illinois
site produces the AN/ALQ-135, currently the largest program in this
business area. The AN/ALQ-135 is an internally mounted radar jammer
deployed on F-15 fighter aircraft as part of that aircraft's Tactical
Electronic Warfare System. The AN/ALQ-162 Shadowbox, a jammer built
specifically to counter continuous wave radars, has been installed on the
AV-8B and certain foreign F/A-18 aircraft. It is also being deployed on
U.S. Army helicopters and special mission aircraft and has been sold to the
air forces of three other nations. The company is also under contract to
develop and produce a directional infrared countermeasures (DIRCM) system
for the United Kingdom and the U.S. Special Operations Command slated for
use on British helicopters, transports, and U.S. Special Operations Command
C-130 transports to reduce vulnerability to heatseeking missiles. DIRCM is
designed to provide high-powered jamming required to counter more advanced
seekers expected in the twenty-first century.
The company's Baltimore, Maryland site produces the Airborne Self-
Protection Jammer (ASPJ) in a joint venture with ITT-Avionics. The ASPJ is
an internally mounted system that protects tactical aircraft against
numerous radar guided threats. It is currently installed on selected F/A-18
and F-14 aircraft.
Northrop Grumman as the prime contractor to the U.S. Army is
developing a "brilliant" anti-armor submunition, designated as BAT, with
production scheduled to commence in 1998. BAT is a three-foot-long, 44
pound, wide-area-attack submunition that will be used to disable and
destroy armored vehicles and trucks.
NORTHROP GRUMMAN CORPORATION
BATs are meant to be carried and dispensed by a larger missile and designed
to be ejected over an armored vehicle column or attacking formation. Each
BAT has an acoustic sensor that can home in on the noise created by the
tank's or truck's engine and an infrared sensor that can home in on the
heat generated by a vehicle's engine.
The company's electronics segment is a major producer of airborne
radar systems. Included in this business area are the AN/APG-66 and
AN/APG-68 fire control radars for the F-16 aircraft of which more than
6,000 have been produced since 1976. The AN/APG-66 is presently on 16
airborne platforms and is deployed in 20 countries. Northrop Grumman is
currently leading a joint venture with Texas Instruments to develop the
AN/APG-77 radar for the F-22 aircraft. The AN/APG-77 is designed for
air-superiority and strike operations and features a low observable,
active aperture, electronically-scanned array with multi-target all-weather
capability. The company's electronics segment also produces the AN/APY-1/2
surveillance radar system which provides air-to-air surveillance capability for
the E-3 Airborne Warning And Control System (AWACS). AWACS is designed to
detect and track both enemy and friendly aircraft throughout a large volume of
airspace.
The company is a leader in producing marine machinery and advanced
propulsion systems, missile launchers, shipboard instrumentation and
control systems, mine countermeasures and undersea vehicles. Every Nimitz-
class aircraft carrier is fitted with eight turbine generator sets that are
produced at the electronics segment Sunnyvale, California site. Each
shipset of these powerful generators develops enough power to supply a
city of 75,000 people. The company also produces the main propulsion
system for the Navy's Seawolf-class attack submarines.
In addition, the company produces air defense and air traffic control
radar systems for airspace management for both domestic and foreign
customers. The three-dimensional AN/TPS-70/75 radars and predecessor
AN/TPS-43 are among the products in this business area. They have been the
U.S. Air Force air defense system standard since 1968. They are currently
in operation in more than 30 countries, supporting air defense, air
sovereignty, air traffic control and counternarcotics needs. The ASR-9
Terminal Radar detects and displays aircraft and weather simultaneously,
helping air traffic controllers guide aircraft through the crowded skies
surrounding airports.
NORTHROP GRUMMAN CORPORATION
Northrop Grumman 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.
The company also provides military base support functions and aircraft
maintenance at a number of U.S. Government facilities.
Tables of contract acquisitions, net sales and funded order backlog
follow and complement industry segment data. The reporting of industry
segment data has been realigned based upon the company's current mix of
products. Operating results for those programs formerly reported in the
missiles and unmanned vehicles segment along with aircraft services
programs previously included in the data systems and other services segment
(DSOS) are now included in the aircraft segment. The balance of the
programs included in the DSOS and all of the operations of ESG are included
in the electronics industry segment. Data for prior years has been
restated. B-2, F/A-18, Boeing Jetliners (the 747, 757, 767 and 777) and
C-17 are currently the major programs of the aircraft industry segment.
Surveillance Aircraft (the E-2C Hawkeye and E-8 Joint STARS), ECM, Airborne
Radar, Marine, Space and Airspace Management are included in the
electronics industry segment.
Individual companies prosper in the competitive aerospace/defense
environment according to their ability to develop and market innovative
products. They also must have the ability to provide the people,
facilities, equipment and financial capacity needed to deliver those
products with maximum efficiency. It is necessary to maintain, as the
company has, sources for raw materials, fabricated parts, electronic
components and major subassemblies. In this manufacturing and systems
integration environment, effective oversight of subcontractors and
suppliers is as vital to success as managing internal operations. Northrop
Grumman's operating policies are designed to enhance these capabilities.
The company also believes that it maintains good relations with its
employees, approximately 13 percent of whom are covered by collective
bargaining agreements.
U.S. Government programs in which Northrop Grumman either
participates, or strives to participate, must compete with other programs
for consideration during our nation's budget formulation and appropriation
processes. As a consequence of the continued pressure to reduce the
federal budget deficit, the U.S. defense budget is not expected to increase
substantially in the near term. Budget decisions made in this environment
will have long-term consequences for the size and structure of Northrop
Grumman and the entire defense industry. An important factor in
determining Northrop Grumman's ability to compete successfully for future
contracts will be its cost structure vis-a-vis other bidders.
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) funding and other business for
the company to pursue well into the future.
Northrop Grumman has historically concentrated its efforts in such
high technology areas as stealth, airborne surveillance, battle management,
precision weapons and systems integration. Even though a high priority has
been assigned by the Department of Defense to the company's major programs,
there remains the possibility that one or more of them may be reduced,
stretched or terminated.
Business conditions in the commercial aircraft industry appear to be
on the upswing. The major producers of jetliners recorded more than twice
the number of new aircraft orders in 1995 than in 1994. This positive
trend continued in 1996, potentially signifying a new commercial airplane
buying cycle. Northrop Grumman, with its involvement on various Boeing
jetliners, remains optimistic about the long-term prospects for its
commercial structures business.
Northrop Grumman pursues new business opportunities when justified by
acceptable financial returns and technological risks. The company examines
opportunities to acquire or invest in new businesses and technologies to
strengthen its traditional business areas. Northrop Grumman continues to
capitalize on its technologies and skills by entering into joint ventures,
partnerships or associations with other companies.
NORTHROP GRUMMAN CORPORATION
Results Of Operations By Industry Segment And Major Customer
[Enlarge/Download Table]
Year ended December 31, $ in millions 1996 1995 1994 1993 1992
Revenue
Aircraft
United States Government $ 3,217 $ 3,735 $ 4,434 $ 3,899 $ 4,281
Other customers 802 837 703 567 583
Intersegment sales 256 188 74 1 1
4,275 4,760 5,211 4,467 4,865
Electronics
United States Government 3,482 1,969 1,238 582 677
Other customers 570 277 336 15 9
Intersegment sales 42 103 106 114 120
4,094 2,349 1,680 711 806
Intersegment eliminations (298) (291) (180) (115) (121)
Total revenue $ 8,071 $ 6,818 $ 6,711 $ 5,063$ 5,550
Operating Profit
Aircraft $ 515 $ 471 $ 487 $ 251 $ 269
Electronics 344 211 141 59 65
Total operating profit 859 682 628 310 334
Adjustments to reconcile
operating profit to operating margin:
Other income included above (17) (6) (3) (2)
State and local income taxes (48) (37) (28) (18) (12)
General corporate expenses (123) (109) (113) (96) (102)
Mark-to-market restricted stock rights (13)
Special termination benefits (282)
Operating margin $ 658 $ 536 $ 199 $ 193 $ 218
NORTHROP GRUMMAN CORPORATION
[Download Table]
Year ended December 31, $ in millions 1996 1995 1994 1993 1992
Contract Acquisitions
Aircraft $ 4,056 $ 1,986 $ 8,580 $ 4,191 $ 3,596
Electronics 6,468 2,606 3,385 616 568
Total acquisitions $10,524 $ 4,592 $11,965 $ 4,807 $ 4,164
Funded Order Backlog
Aircraft $ 7,114 $ 7,077 $ 9,663 $ 6,220 $ 6,495
Electronics 5,286 2,870 2,510 699 680
Total backlog $12,400 $ 9,947 $12,173 $ 6,919 $ 7,175
Identifiable Assets
Aircraft $ 2,387 $ 2,537 $ 3,222 $ 1,993 $ 2,148
Electronics 5,970 2,367 2,181 404 448
Operating assets 8,357 4,904 5,403 2,397 2,596
General corporate 1,065 551 644 542 566
Total assets $ 9,422 $ 5,455 $ 6,047 $ 2,939 $ 3,162
Capital Expenditures
Aircraft $ 85 $ 86 $ 89 $ 80 $ 54
Electronics 108 44 44 54 67
General corporate 1 3 1 1 2
Total expenditures $ 194 $ 133 $ 134 $ 135 $ 123
Depreciation and Amortization
Aircraft $ 118 $ 172 $ 166 $ 150 $ 96
Electronics 247 110 103 63 63
General corporate 2 1 1 1
Total depreciation and amortization $ 367 $ 283 $ 269 $ 214 $ 160
NORTHROP GRUMMAN CORPORATION
Northrop Grumman, as well as many other companies in the defense
industry, suffered the effects of the Department of Defense's practice in
the 1980s of structuring high-risk research and development contracts,
such as the Tri-Service Standoff Attack Missile (TSSAM), as fixed-price or
capped cost-reimbursement type contracts. Although Northrop Grumman has
stopped accepting these types of contracts, it has experienced financial
losses on TSSAM and other similar programs acquired under them in the past.
In the event of termination for convenience, contractors are normally
protected by provisions covering reimbursement for costs incurred
subsequent to termination. The company received a termination for
convenience notice on the TSSAM program in February 1995. In December
1996, the company filed a lawsuit against the U.S. Government in the U.S.
Court of Federal Claims seeking the recovery of approximately $750 million
for uncompensated performance costs, investments, and a reasonable profit.
In prior years, the company had charged to operations in excess of $600
million related to this program. Northrop Grumman is unable to predict
whether it will realize some or all its claims against the U.S. Government
from the TSSAM contract. The company does not expect that these actions
will have a material adverse effect on the company's financial position.
Prime contracts with various agencies of the U.S. Government and
subcontracts with other prime contractors are subject to a profusion of
procurement regulations, with noncompliance found by any one agency
possibly resulting in fines, penalties, debarment or suspension from
receiving additional contracts with all agencies. Given the company's
dependence on U. S. Government business, suspension or debarment could have
a material adverse affect on the company's future. Moreover, these
contracts may be terminated at the U. S. Government's convenience as was
done with the TSSAM program. While Northrop Grumman conducts most of its
business with the U.S. Government, principally the Department of Defense,
commercial sales still represent a significant portion of total revenue.
NORTHROP GRUMMAN CORPORATION
Federal, state and local laws relating to the protection of the
environment affect the company's manufacturing operations. The company has
provided for the estimated cost to complete remediation where it is
probable that the company will incur such costs in the future, including
those for which it has been named a Potentially Responsible Party (PRP) by
the Environmental Protection Agency or similarly designated by other
environmental agencies. The company has been designated a PRP under
federal Superfund laws at 16 hazardous waste sites and under state
Superfund laws at six sites. It is difficult to estimate the timing and
ultimate amount of environmental cleanup costs to be incurred in the future
due to the uncertainties regarding the extent of the required cleanup and
the status of the law, regulations and their interpretations. Nonetheless,
to assess the potential impact on the company's financial statements,
management estimates the total reasonably possible remediation costs that
could be incurred by the company. Such estimates take into consideration
the professional judgment of the company's environmental engineers and,
when necessary, consultation with outside environmental specialists. In
most instances, only a range of reasonably possible costs can be estimated.
However, in the determination of accruals the most probable amount is used
when determinable and the minimum is used when no single amount is more
probable. The company records accruals for environmental cleanup costs in
the accounting period in which the company's responsibility is
established and the costs can be reasonably estimated. Management
estimates that at December 31, 1996, the reasonable range of future costs
for environmental remediation, including Superfund sites, is $63 million to
$107 million, of which $64 million has been accrued. The amount accrued
has not been offset by potential recoveries from insurance carriers or
other PRPs. Should other PRPs not pay their allocable share of remediation
costs, the company may have to incur costs in addition to those already
estimated and accrued. The company is making the necessary investments to
comply with environmental laws; the amounts, while not insignificant, are
not considered material to the company's financial position or results of
its operations.
NORTHROP GRUMMAN CORPORATION
Measures of Volume
Contract acquisitions tend to fluctuate and are determined by the size and
timing of new and add-on orders. The effects of multiyear orders and/or
funding can be seen in the highs and lows shown in the following table.
The funded order backlog of ESG, Grumman and Vought on the date the
businesses were acquired are reflected as acquisitions in the years they
were acquired. The Airborne Radar, Marine and Airspace Management business
areas were added as part of the ESG acquisition. The 757, 767, 777
(included in Boeing Jetliners category), Surveillance Aircraft (E-2 and E-8
Joint STARS) and C-17 programs were acquired as part of Grumman and Vought.
B-2 acquisitions in 1996 included $453 million for the upgrade of test
vehicle AV-1 to operational status increasing the program to 21 operational
aircraft. The balance of B-2 acquisitions in 1996 and acquisitions for
1995 include incremental funding for ongoing development work, spares and
other customer support for the operational aircraft program. In 1994,
$2.4 billion of funding to complete five B-2 production aircraft was
received as well as incremental funding for ongoing development work,
spares and other customer support. The company still stands to gain future
new post production business, such as airframe depot maintenance, repair of
components, operational software changes and product improvement
modifications. The debate over the future of the B-2, which is built in
the nation's only active bomber producing facility, is now taking place.
Without future production orders the nation's multibillion-dollar
investment in this capability will be disassembled and become retrievable
only at a large additional cost.
Contract Acquisitions
$ in millions 1996 1995 1994 1993 1992
B-2 $ 1,682 $ 475 $ 3,646 $ 2,632 $ 2,235
Surveillance Aircraft 1,330 1,084 2,287
F/A-18 759 888 462 832 707
Boeing Jetliners 737 464 1,177 242 76
Airborne Radar 1,639
Marine 901
ECM 335 592 323 445 361
Space 414
C-17 383 208 434
Airspace Management 629
Data Systems 240 198 251
All other 1,475 683 3,385 656 785
$10,524 $ 4,592 $11,965 $ 4,807 $ 4,164
NORTHROP GRUMMAN CORPORATION
Acquisitions in 1996 included orders for 62 F/A-18C/D shipsets. In
1996 the company also received long-lead funding for the first phase of the
Low Rate Initial Production (LRIP) of the F/A-18E/F along with continued
funding of the engineering and manufacturing development (EMD) phase of the
program. Orders for 128 F/A-18C/D shipsets were finalized in 1995. In
1994 the company received long-lead funding from the McDonnell Douglas
Corporation for new F/A-18C/D shipsets.
The company received final authorization to produce 50 additional 747
jetliner shipsets in 1996. Advance funding was received from The Boeing
Company in 1995 for the current phase of the 747 jetliner program.
The company recorded orders for 18, 16, and 5 wing shipsets for the
Gulfstream V business jet in 1996, 1995 and 1994 respectively. The company
is producing the Gulfstream V wings under a revenue-sharing agreement with
Gulfstream Aerospace (Gulfstream). The company will recognize revenue for
its proportionate share of the revenue of each business jet when they are
delivered to the ultimate customer by Gulfstream. Gulfstream has received
70 orders for the Gulfstream V through December 1996. The Gulfstream V
received provisional certification in December 1996 and full certification
is expected late in the first quarter of 1997. The company is using
program accounting for the Gulfstream V with an estimated program of 250
shipsets to be delivered over a ten-year period. Inventoried costs at
December 31, 1996 include $56 million of learning-curve costs for this
program. The learning-curve costs represent the excess of production cost
of delivered and in process items over the estimated average unit cost.
This concept assumes that production cost per unit decreases over time due
to efficiencies from continuous improvements in the performance of
repetitive tasks. All nonrecurring costs for the development of the wings
have been expensed as incurred.
ECM acquisitions for 1995 included an award of $279 million from the
United Kingdom Ministry of Defence to develop and produce the DIRCM
systems.
The balance of ESG, Grumman and Vought funded order backlog at the
dates of acquisition, for those programs not listed in the table, is
included in the "all other" category. ESG accounts for the major increase
in the "all other" category in 1996 over 1995 and Grumman and Vought
account for the increase in 1994 over 1993.
NORTHROP GRUMMAN CORPORATION
Year-to-year sales vary less than contract acquisitions and reflect
performance under new and ongoing contracts. The 1996 results of
operations include ESG since the acquisition in March 1996. Comparative
results for 1995 and prior do not include ESG data. The 1994 results of
operations include Grumman and Vought since the acquisitions in April and
August 1994, respectively. Comparative results for 1993 and prior do not
include Grumman and Vought data.
Sales for 1996 were the highest in the company's history and were 18
percent higher than the previous record registered in 1995. Without the
ESG acquisition, sales for 1996 would have declined 11 percent from the
1995 level. Sales for 1995 were 2 percent higher than in 1994 and without
the Grumman and Vought acquisitions, sales for 1994 would have declined 10
percent from the 1993 level.
Net Sales
$ in millions 1996 1995 1994 1993 1992
B-2 $ 1,725 $ 1,914 $ 2,392 $ 2,881 $ 3,212
Surveillance Aircraft 1,104 1,179 754
F/A-18 715 822 817 641 610
Boeing Jetliners 569 569 483 531 549
Airborne Radar 560
Marine 496
ECM 398 351 357 372 378
Space 315
C-17 249 244 121
Airspace Management 223
Data Systems 208 187 120
All other 1,509 1,552 1,667 638 801
$ 8,071 $ 6,818 $ 6,711 $ 5,063 $ 5,550
The decreasing trend in the B-2 revenues from both EMD and production
work continued in 1996. The level of EMD effort, included in amounts
reported as contract R&D, constituted 33 percent of the total B-2 revenue,
up from 30 percent in 1995 and 26 percent in 1994. Current planning data
indicate that the level of overall B-2 revenue will decline roughly 20
percent per year for the remainder of the decade.
Sales increased in 1996 for the C/D version of the F/A-18 program with
an increase of deliveries to 68, as compared to 56 shipsets delivered in
1995 and 42 delivered in 1994. The company currently plans to deliver 35
F/A-18C/D shipsets in 1997. F/A-18E/F revenue was lower in 1996 with the
delivery of the final three shipsets for the EMD phase of the program. A
total of seven shipsets were delivered under the F/A-18E/F EMD contract in
1995. The LRIP phase of the F/A-18E/F program began in late 1996.
NORTHROP GRUMMAN CORPORATION
Deliveries of 747 shipsets were 28 in 1996, 24 in 1995 and 31 in 1994.
The change in the mix of Boeing jetliners delivered in 1996 resulted in the
same level of sales as in 1995. Forty-eight 747 shipsets are expected to
be delivered in 1997. Increased deliveries of all Boeing jetliners planned
for 1997 is expected to result in more than a 50 percent increase in
revenue from these programs.
The electronics industry segment revenues increased 74 percent in 1996
as a result of the inclusion of the ESG operations, which more than offset
the reduction in revenue on the company's other electronics programs.
Higher revenues on the E-2 Hawkeye and E-8 Joint STARS programs were the
primary reason for the 40 percent increase in 1995 electronics revenues.
The 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.
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 54 percent of
the 1996 year-end backlog will be converted into sales in 1997.
Funded Order Backlog
$ in millions 1996 1995 1994 1993 1992
B-2 $ 3,693 $ 3,736 $ 5,175 $ 3,921 $ 4,170
Surveillance Aircraft 1,664 1,438 1,533
F/A-18 675 631 565 920 729
Boeing Jetliners 1,480 1,312 1,417 723 1,012
Airborne Radar 1,079
Marine 405
ECM 684 747 506 540 467
Space 99
C-17 411 277 313
Airspace Management 406
Data Systems 174 142 131
All other 1,630 1,664 2,533 815 797
$12,400 $ 9,947 $12,173 $ 6,919 $ 7,175
Total U.S. Government orders, including those made on behalf of
foreign governments (FMS), comprised 76 percent of the backlog at the end
of 1996 compared with 77 percent at the end of 1995 and 80 percent at the
end of 1994. Total foreign customer orders, including FMS, accounted for
17 percent of the backlog at the end of 1996 compared with 13 percent in
1995 and 9 percent in 1994. Domestic commercial business in backlog at the
end of both 1996 and 1995 was 16 percent and 14 percent at the end of 1994.
NORTHROP GRUMMAN CORPORATION
Measures of Performance
The company's operating profit for 1996 was a record high and has improved
in its electronics segment for the last three years. The improvement in
1996 is due to the addition of ESG. The improvements in 1995 and 1994 stem
from both increased revenue and improved operating margin rates in the
electronics segment. Company-wide efforts to reduce costs, install tighter
business controls, improve cash management, dispose of excess assets and
more effectively utilize productive assets are all goals aimed at
contributing to the future success of Northrop Grumman. This financial
report demonstrates the degree to which the accomplishment of these goals
is being achieved.
Operating profit in the aircraft segment increased to its highest
level ever in 1996 principally as a result of increased operating margin on
the C-17 military transport and Boeing jetliners. These items offset the
reduced operating margin on the B-2 program due to lower sales volume. The
amount and rate of operating margin recognized on the 747 increased in 1996
due to increased deliveries and higher operating margin on the deliveries
of the last phase of a 300-shipset production contract.
Aircraft segment operating profit decreased in 1995 primarily as a
result of lower overall sales volume and $31 million in expenditures for
company-sponsored research and development for commercial aerostructures.
The rate and amount of operating margin recorded on the B-2 production
contract increased in 1995 as a result of negotiated contract adjustments
and a revised estimate of the overall operating margin expected to be
earned. This increase was offset by lower operating margin recorded on
decreased revenue on the other phases of the B-2 program. The rate and
amount of operating margin on the F/A-18E/F increased in 1995 due to an
increase in the rate of operating margin being recorded on the EMD
contract. This resulted from the continuing evaluation of the overall
operating margin to be earned on this phase of the program. The increase
on the F/A-18E/F more than offset reduced operating margin earned, on
higher sales volume, for the F/A-18C/D. Fewer deliveries and cost
increases related to a stretch-out of the 300-shipset production contract
for the Boeing 747 jetliner resulted in a lower rate and amount of
operating margin in 1995.
NORTHROP GRUMMAN CORPORATION
Aircraft industry segment operating profit increased in 1994 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 despite reduced F/A-18C/D shipset deliveries.
These increases were partially offset by a reduction in the rate of
operating margin on the 747 program due to increased costs allocated as a
result of establishing a separate commercial aircraft operating element in
1994 and fewer deliveries than in 1993.
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.
Operating profit in the electronics segment reached a record level in
1996. The improvement in 1996 is due to the addition of ESG which more
than offset the reductions in the company's other electronics programs.
The reductions were primarily due to reduced volume and a $29 million
charge recorded as a result of the write-down of a claim related to
avionics work performed by Grumman Corporation prior to its acquisition by
Northrop.
NORTHROP GRUMMAN CORPORATION
The increase in 1995 operating profit in the electronics segment was a
result of an increased rate of operating margin and higher sales volume on
the E-2 Hawkeye and increased sales volume on the E-8 Joint STARS program.
The electronics segment operating profit 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 electronics segment Norwood operation for
unrecoverable costs incurred.
Operating margin in 1996 included $39 million of pension income
compared with $23 million in 1995 and $36 million in 1994. Also impacting
operating margin is the cost of providing retiree health care and life
insurance benefits - $91 million in 1996 versus $87 million in 1995 and $69
million in 1994. A major contributor to the increase in retiree health
care and life insurance benefits cost was the addition of the Grumman and
Vought retiree plans in 1994. Operating margin in 1994 was reduced by $282
million to record the effect of an early retirement incentive program.
In 1996 the company recorded a $90 million pretax charge related to
the closure of four plants. The charge included $30 million for costs
related to the reduction of personnel and other closure activities, which
lowered operating profit in the aircraft and electronics industry segments
by $22 million and $8 million, respectively, and $60 million for the write-
down of facilities included in Other Deductions in the Consolidated
Statements of Income. The company recorded a $42-million pretax charge in
1994 for the planned disposal of excess real estate and other assets. This
charge is reported in Other Deductions in the Consolidated Statements of
Income. These charges were a result of the company's continuing efforts to
reduce operating costs and dispose of assets that have become excess due to
changes in the company's business strategy.
Interest expense increased $133 million in 1996, following increases
of $28 million in 1995 and $71 million in 1994. The increase in 1996 came
primarily from the issuance of debt to finance the ESG acquisition. The
increases in 1995 and 1994 came primarily from the issuance of debt related
to the financing of the acquisition of Grumman. Total debt at
December 31, 1996 stood at $3.4 billion compared to $1.4 billion at the end
of 1995 and $1.9 billion at the end of 1994.
The company's effective federal income tax rate was 39.1 percent in
1996, 38.4 percent in 1995 and 46.2 percent in 1994. The decrease in the
1995 rate was due to a reduction in the ratio of expenses not deductible
for income taxes to the tax provision at the statutory rate of 35 percent.
The higher rates in 1996 and 1994 were due to the amount of expenses not
deductible for income taxes, primarily the amortization of goodwill.
NORTHROP GRUMMAN CORPORATION
Measures of Liquidity and Capital Resources
The trend and relationship of sales volume with net accounts receivable and
inventoried costs is a useful measure in assessing the company's liquidity.
In 1994, the company's net investment in these balances represented 33
percent of sales. It decreased to 29 percent at the end of 1995 before
increasing to 30 percent at year-end 1996 with the acquisition of ESG.
Cash flows from operations over the last three years have averaged
over $600 million annually. The $701 million of cash flow from operations
in 1996 was a decrease of $43 million from 1995 which was an increase of
$303 million over 1994 which in turn was a $61 million increase over that
of 1993. These cash flows have been sufficient to service debt, finance
capital expansion projects and continue paying dividends to shareholders.
The following table is a condensed summary of the detailed cash flow
information contained in the Consolidated Statements of Cash Flows.
Year ended December 31 1996 1995 1994 1993 1992
Cash came from
Customers 65% 96% 71% 99% 98%
Lenders 30 2 29 1 2
Shareholders 4
Buyers of assets/other 1 2
100% 100% 100% 100% 100%
Cash went to
Employees and suppliers of
services and materials 57% 83% 65% 89% 93%
Sellers of assets 23 2 18 1
Lenders 14 12 15 8 3
Suppliers of facilities/other 5 2 1 2 2
Shareholders 1 1 1 1 1
100% 100% 100% 100% 100%
The increased cash received from lenders in 1996 and 1994 resulted
from borrowing for the acquisitions of ESG and Grumman respectively. The
cash received from shareholders in 1996 was from a public stock offering in
which the company issued approximately 8 million shares of common stock at
$63.25 per share. The net proceeds of $493 million were used to pay down
outstanding debt under the company's Credit Agreement.
NORTHROP GRUMMAN CORPORATION
In connection with the financing of the Grumman acquisition, the
company in April 1994, replaced its $400 million Credit Agreement with a
new $2.8 billion Credit Agreement. The new facility provided for
$600 million, available on a revolving credit basis through March 1999 and a
$2.2 billion term loan payable through March 1999. The Credit Agreement
was amended in May 1994 to increase the revolving credit line to
$800 million and reduce the term loan to $2 billion. In October 1994, the
company issued $350 million of notes due in 2004 and $250 million of
debentures due in 2024 pursuant to a public offering. The net proceeds
from the offering, along with other available funds, were used to prepay
$900 million under the term loan facility in addition to paying the $100
million September quarterly installment due under that facility. In
December 1994, the company amended the Credit Agreement to provide for the
repayment of the remaining $1 billion balance of the term loan in 14
quarterly installments of $62.5 million plus interest beginning in
September 1995, with a final installment of $125 million due in March 1999.
Cash flow from operations during 1994 enabled the company to prepay the
$160 million of notes payable to institutional investors due in 1995 and
acquire, in the open market, $58 million of notes due in 1999, while paying
a net premium of $5 million for the early payments of these notes. The
charge for the premium is included in Other Deductions in the Consolidated
Statements of Income. Cash flow from operations in 1995 was sufficient to
allow the company to make the $125 million required term loan payment as
well as $312 million in voluntary payments for amounts that were due
through March 1997.
During the first quarter of 1996 the company sold to institutional
investors $400 million of 7 percent notes due 2006, $300 million of 7 3/4
percent debentures due 2016 and $300 million of 7 7/8 percent debentures
due 2026. The proceeds from this issuance were used to finance a portion
of the purchase price of ESG. The debt indentures contain restrictions
relating to limitations on liens, sale and leaseback arrangements and
funded debt of subsidiaries.
To finance the balance of the purchase price of ESG the company
amended its Credit Agreement with a group of domestic and foreign banks to
provide for three credit facilities: $1.8 billion available on a revolving
credit basis through March 2002; a variable interest $500 million two-year
term loan due March 1, 1998, which was repaid in July 1996; and a variable
interest rate $1.5 billion six-year term loan due in 24 quarterly
installments of $62.5 million plus interest beginning June 1996. Effective
November 1, 1996, the Credit Agreement was further amended to reduce the
$1.5 billion term loan to $1.05 billion payable in 21 quarterly
installments of $50 million plus interest beginning March 1, 1997.
NORTHROP GRUMMAN CORPORATION
During 1995 the company entered into an agreement with a financial
institution to sell designated pools of its commercial accounts receivable,
in amounts up to $75 million. At December 31, 1995, $34 million of
accounts receivable had been sold. Northrop Grumman terminated this
agreement in 1996.
To provide for long-term liquidity the company believes it can obtain
additional capital from such sources as: the public or private capital
markets, the further sale of assets, sale and leaseback of operating
assets, and leasing rather than purchasing new assets.
The cost reduction and cash improvement programs underway throughout
the company have produced favorable results, with the expectation that
further efforts will result in minimizing the need to incur additional
borrowings during 1997. Cash generated from operations is expected to be
sufficient in 1997 to service debt, finance capital expansion projects and
continue paying dividends to the shareholders.
Capital expenditure commitments at December 31, 1996, were
approximately $127 million including $4 million for environmental control
and compliance purposes.
The company will continue to provide the productive capacity to
perform its existing contracts, dispose of assets no longer needed to
fulfill operating requirements, prepare for future contracts and conduct
R&D in the pursuit of developing opportunities. While these expenditures
tend to limit short-term liquidity, they are made with the intention of
improving the long-term growth and profitability of the company.
Forward-Looking Information
Certain statements and assumptions in Management's Discussion and Analysis
contain or are based on "forward-looking" information (as defined in the
Private Securities Litigation and Reform Act of 1995) that involves risk
and uncertainties, including statements and assumptions with respect to
future revenues, program performance and cash flows, the outcome of
contingencies including litigation and environmental remediation, and
anticpated costs of capital investments and planned dispostions. The
company's operations are necessarily subject to various risks and
uncertainties; actual outcomes are dependent upon many factors, including,
without limitation, the company's successful performance of internal plans;
government customers' budgetary restraints; customer changes in short-range
and long-range plans; domestic and international competition in both the
defense and commercial areas; product performance; continued development
and acceptance of new products; performance issues with key suppliers and
subcontractors, government import and export policies; termination of
government contracts; the outcome of political and legal processes; legal,
financial, and governmental risks related to international transactions and
global needs for military and commercial aircraft and electronic systems
and support; as well as other economic, political and technological risks
and uncertainties.
NORTHROP GRUMMAN CORPORATION
Selected Financial Data
[Enlarge/Download Table]
Year ended December 31, $ in millions,
except per share 1996 1995 1994 1993 1992
Net sales to
United States Government $ 6,699 $ 5,703 $ 5,672 $ 4,481 $ 4,958
The Boeing Company 569 569 483 531 549
Other customers 803 546 556 51 43
Total net sales 8,071 6,818 6,711 5,063 5,550
Net income 234 252 35 96 121
Earnings per share 4.33 5.11 .72 1.99 2.56
Cash dividends per share 1.60 1.60 1.60 1.60 1.20
Net working capital (3) 357 467 481 354
Current ratio 1.00 to 1 1.21 to 1 1.24 to 1 1.45 to 1 1.25 to 1
Total assets $ 9,422 $ 5,455 $ 6,047 $ 2,939 $ 3,162
Long-term debt 2,950 1,163 1,633 160 160
Total long-term obligations 4,619 2,234 2,757 468 426
Long-term debt as a percentage of
shareholders'equity 138.6% 79.7% 126.6% 12.1% 12.8%
Operating margin as a percentage of
Net sales 8.2 7.9 3.0 3.8 3.9
Average operating assets 9.9 10.4 5.2 7.7 8.2
Net income as a percentage of
Net sales 2.9 3.7 .5 1.9 2.2
Average assets 3.1 4.4 .8 3.1 3.8
Average shareholders' equity 13.1 18.3 2.7 7.5 9.9
Research and development expenses
Contract $ 1,628 $ 1,175 $ 1,477 $ 1,603 $ 1,693
Noncontract 255 164 121 97 93
Payroll and employee benefits 3,096 2,656 2,661 1,906 2,001
Number of employees at year-end 46,600 37,300 42,400 29,800 33,600
Number of shareholders at year-end 10,136 10,834 11,241 11,618 12,599
Depreciation $ 204 $ 226 $ 227 $ 214 $ 160
Amortization of
Goodwill 81 36 27
Other purchased intangibles 82 21 15
Maintenance and repairs 93 80 105 87 106
Rent expense 90 89 84 47 52
Floor area (millions of square feet)
Owned 22.5 20.1 21.3 12.9 12.6
Commercially leased 8.7 7.0 7.5 3.2 4.2
Leased from United States Government 9.0 10.2 9.4 2.1 1.9
NORTHROP GRUMMAN CORPORATION
Item 8. Financial Statements and Supplementary Data
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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, $ in millions 1996 1995 1994 1993 1992
Assets:
Current assets
Cash and cash equivalents $ 44 $ 18 $ 17 $ 100 $ 230
Accounts receivable 1,356 1,197 1,202 820 791
Inventoried costs 1,053 771 1,043 569 670
Deferred income taxes 77 25 38 46 38
Prepaid expenses 67 61 47 25 31
Refundable federal income taxes 84
Total current assets 2,597 2,072 2,431 1,560 1,760
Property, plant and equipment at cost
Land and land improvements 207 192 203 118 117
Buildings 801 780 857 744 719
Machinery and other equipment 2,078 1,864 2,024 1,898 1,982
Leasehold improvements 68 64 62 29 59
3,154 2,900 3,146 2,789 2,877
Accumulated depreciation (1,752) (1,724) (1,768) (1,773) (1,753)
1,402 1,176 1,378 1,016 1,124
Other assets
Goodwill, net of amortization
of $144 in 1996,
$63 in 1995 and $27 in 1994 3,436 1,403 1,359
Other purchased intangibles, net of
amortization of $116 in 1996,
$36 in 1995 and $15 in 1994 988 356 376
Prepaid pension cost, intangible
pension asset and benefit trust fund 229 99 222 278 190
Deferred income taxes 520 255 203 7 7
Investments in and advances to
affiliates and sundry assets 250 94 78 78 81
5,423 2,207 2,238 363 278
$ 9,422 $ 5,455 $ 6,047 $ 2,939 $ 3,162
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
December 31, $ in millions 1996 1995 1994 1993 1992
Liabilities and Shareholders' Equity:
Current liabilities
Notes payable to banks $ 228 $ 65 $ 171 $ $ 100
Current portion of long-term debt 200 144 130 250
Trade accounts payable 452 360 396 324 363
Accrued employees' compensation 315 203 228 146 144
Advances on contracts 230 98 184 40 39
Income taxes payable 25 57 55 12
Deferred income taxes 629 471 413 426 389
Other current liabilities 521 317 387 131 121
Total current liabilities 2,600 1,715 1,964 1,079 1,406
Long-term debt 2,950 1,163 1,633 160 160
Accrued retiree benefits 1,624 1,048 1,070 308 266
Other long-term liabilities 59 39 74 23 26
Deferred income taxes 61 31 16 47 50
Shareholders' equity
Paid-in capital
Preferred stock, 10,000,000 shares authorized;
none issued
Common stock, 200,000,000 shares authorized;
issued and outstanding
1996 - 57,928,466; 1995 - 49,462,615;
1994 - 49,241,642; 1993 - 48,913,403;
1992 - 47,398,303 784 272 264 254 205
Retained earnings 1,348 1,199 1,026 1,070 1,051
Unfunded pension losses, net of taxes (4) (12) (2) (2)
2,128 1,459 1,290 1,322 1,254
$ 9,422 $ 5,455 $ 6,047 $ 2,939 $ 3,162
The accompanying notes are an integral part of these consolidated financial
statements.
NORTHROP GRUMMAN CORPORATION
[Download Table]
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, $ in millions,
except per share 1996 1995 1994 1993 1992
Net sales $8,071 $6,818 $6,711 $5,063 $5,550
Cost of sales
Operating costs 6,216 5,319 5,477 4,385 4,877
Administrative and general expenses 1,197 963 753 485 455
Special termination benefits 282
Operating margin 658 536 199 193 218
Other income(deductions)
Interest income 9 1 6 2 4
Other, net (13) 9 (31) 13 5
Interest expense (270) (137) (109) (38) (47)
Income before income taxes 384 409 65 170 180
Federal and foreign income taxes 150 157 30 74 59
Net income $ 234 $ 252 $ 35 $ 96 $ 121
Weighted average common shares outstanding,
in millions 54.0 49.4 49.1 48.1 47.2
Earnings per share $ 4.33 $ 5.11 $ .72 $ 1.99 $ 2.56
The accompanying notes are an integral part of these consolidated financial
statements
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
Year ended December 31, $ in millions,
except per share 1996 1995 1994 1993 1992
Paid-in Capital
At beginning of year $ 272 $ 264 $ 254 $ 205 $ 195
Stock issuance 493
Employee stock awards and options
exercised, net of forfeitures 19 8 10 49 10
At end of year 784 272 264 254 205
Retained Earnings
At beginning of year 1,199 1,026 1,070 1,051 987
Net income 234 252 35 96 121
Cash dividends (85) (79) (79) (77) (57)
At end of year 1,348 1,199 1,026 1,070 1,051
Unfunded Pension Losses, Net of Taxes
At beginning of year (12) (2) (2)
Change in excess of additional minimum
liability over unrecognized
prior service costs 8 (12) 2 (2)
At end of year (4) (12) (2) (2)
Total shareholders' equity $ 2,128 $ 1,459 $ 1,290 $ 1,322 $ 1,254
Book value per share $ 36.74 $ 29.50 $ 26.20 $ 27.04 $ 26.46
Cash dividends per share 1.60 1.60 1.60 1.60 1.20
The accompanying notes are an integral part of these consolidated financial
statements.
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, $ in millions 1996 1995 1994 1993 1992
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 2,226 $ 2,289 $ 2,616 $ 2,028 $ 2,647
Other collections 5,822 4,355 4,767 2,924 2,914
Interest received 9 1 6 2 4
Income tax refunds received 12 48 11 3
Other cash receipts 8 7 13 6 5
Cash provided by operating activities 8,077 6,700 7,413 4,963 5,570
Uses of Cash
Cash paid to suppliers and employees 7,040 5,750 6,786 4,484 5,186
Interest paid 219 144 94 42 47
Income taxes paid 117 59 90 52 48
Other cash payments 3 2 5 5
Cash used in operating activities 7,376 5,956 6,972 4,583 5,286
Net cash provided by operating activities 701 744 441 380 284
Investing Activities
Payment for purchase, net of cash acquired, of
ESG (2,886)
Grumman Corporation (1,842)
Vought Aircraft Company (12)
Additions to property, plant
and equipment (194) (133) (134) (135) (123)
Proceeds from sale of property, plant
and equipment 58 33 17 2 5
Proceeds from sale of affiliates/
operations 45 5 8
Proceeds from sale of marketable securities 28
Funding of retiree benefit trust (25) (31)
Dividends from affiliates, net
of investments 5 2 (47)
Other investing activities 4 (21) 6
Net cash used in investing activities (2,998) (116) (1,963) (123) (165)
Financing Activities
Borrowings under lines of credit 2,734 153 2,371 55 100
Repayment of borrowings under
lines of credit (635) (259) (1,200) (155)
Proceeds from issuance of
long-term debt 1,000 600
Principal payments of long-term debt (1,090) (446) (251) (251) (140)
Proceeds from issuance of stock 499 4 7 41 5
Dividends paid (85) (79) (79) (77) (57)
Other financing activities (100) (9)
Net cash provided by (used in)
financing activities 2,323 (627) 1,439 (387) (92)
Increase(decrease) in cash and
cash equivalents 26 1 (83) (130) 27
Cash and cash equivalents balance at
beginning of year 18 17 100 230 203
Cash and cash equivalents balance
at end of year $ 44 $ 18 $ 17 $ 100 $ 230
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
Year ended December 31, $ in millions 1996 1995 1994 1993 1992
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 234 $ 252 $ 35 $ 96 $ 121
Adjustments to reconcile net income to
net cash provided
Depreciation 204 226 227 214 160
Amortization of intangible assets 163 57 42
Common stock issued to employees 10 1 3 3
Loss on disposals of property, plant and
equipment 32 34 33 26 11
Retiree benefits cost(income) 52 64 33 (39) (42)
Special termination benefits 282
Decrease(increase) in
Accounts receivable (101) 197 209 (4) 339
Inventoried costs 7 426 (368) 142 63
Prepaid expenses 12 (15) 10 (5) 4
Refundable income taxes 84 (84)
Increase(decrease) in
Progress payments 84 (282) 407 (90) (340)
Accounts payable and accruals 25 (111) (319) (34) (65)
Provisions for contract losses (1) (143) (84) 36 9
Provisions for disposal of real
estate and other assets 50 (8) 42 1 1
Deferred income taxes 126 84 78 26 48
Income taxes payable (32) 2 (25) 12 (25)
Retiree benefits (170) (114) (80) (1) (1)
Other noncash transactions 6 (9) 2 (3) (2)
Net cash provided by operating activities $ 701 $ 744 $ 441 $ 380 $ 284
Noncash Investing and Financing Activities:
Purchase of ESG
Fair value of assets acquired $ 4,003
Cash paid (2,888)
Liabilities assumed $ 1,115
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
subassemblies and defense electronics and is the prime contractor on the
U.S. Air Force B-2 Stealth Bomber. The company operates in the aircraft
and electronics industry segments within the broadly defined aerospace
industry. The majority of the company's products and services are
ultimately sold to the U.S. Government and the company is therefore
affected by 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. General corporate assets include cash and cash equivalents,
corporate office furnishings and equipment, other unallocable property,
investments in affiliates, prepaid pension cost, intangible pension asset,
benefit trust fund assets, deferred tax assets and certain assets held for
sale.
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.
NORTHROP GRUMMAN CORPORATION
Contract Research and Development
Customer-sponsored research and development costs (direct and indirect
costs incurred pursuant to contractual arrangements) are accounted for like
other contracts.
Noncontract Research and Development
This category includes independent research and development costs and
company-sponsored research and development costs (direct and indirect costs
not recoverable under contractual arrangements). Independent research and
development (IR&D) costs are included in administrative and general
expenses (indirect costs allocable to U.S. Government contracts) whereas
company-sponsored research and development costs are charged against income
as incurred.
Environmental Costs
Environmental liabilities are accrued when the company determines it is
responsible for remediation costs and such amounts are reasonably
estimable. When only a range of amounts is established and no amount
within the range is better than another, the minimum amount in the range is
recorded. The company does not anticipate and record insurance recoveries
before collection is probable.
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.
NORTHROP GRUMMAN CORPORATION
Income Taxes
Provisions for federal, state and local income taxes are calculated on
reported financial statement pretax income based on current tax law and
also include, in the current period, the cumulative effect of any changes
in tax rates from those used previously in determining deferred tax assets
and liabilities. Such provisions differ from the amounts currently payable
because certain items of income and expense are recognized in different
time periods for financial reporting purposes than for income tax purposes.
The company accounts for certain contracts in process using different
methods of accounting for financial statements and tax reporting and thus
provides deferred taxes on the difference between the financial and taxable
income reported during the performance of such contracts.
In accordance with industry practice, state and local income and
franchise tax provisions are included in administrative and general
expenses.
Earnings per Share
Earnings per share are based on the weighted average number of shares of
common stock outstanding during each period, after giving recognition to
stock splits and stock dividends. The dilutive effect of common stock
equivalents, shares under stock options, was insignificant.
Cash and Cash Equivalents
Cash and cash equivalents include interest-earning debt instruments that
mature in three months or less from the date purchased.
Accounts Receivable
Accounts receivable include amounts billed and currently due from
customers, amounts currently due but unbilled (primarily related to
contracts accounted for under the cost-to-cost type of
percentage-of-completion method of accounting), certain estimated contract
changes, claims in negotiation and amounts retained by the customer pending
contract completion.
NORTHROP GRUMMAN CORPORATION
Inventoried Costs
Inventoried costs primarily relate to work in process under fixed-price
type contracts (excluding those included in unbilled accounts receivable as
previously described). They represent accumulated contract costs less the
portion of such costs allocated to delivered items. Accumulated contract
costs include direct production costs, factory and engineering overhead,
production tooling costs, and allowable administrative and general expenses
(except for general corporate expenses and IR&D allocable to commercial
contracts, which are charged against income as incurred).
In accordance with industry practice, inventoried costs are classified
as a current asset and include amounts related to contracts having
production cycles longer than one year.
Depreciable Properties
Property, plant and equipment owned by the company are depreciated over the
estimated useful lives of individual assets. Capital leases providing for
the transfer of ownership upon their expiration or containing bargain
purchase options are amortized over the estimated useful lives of
individual assets. Most of these assets are depreciated using
declining-balance methods, with the remainder using the straight-line
method, with the following lives:
Years
Land improvements 5-20
Buildings 5-45
Machinery and other equipment 1-18
Leasehold improvements Length of lease
NORTHROP GRUMMAN CORPORATION
Goodwill and Other Purchased Intangible Assets
Goodwill and other purchased intangible assets are amortized on a straight-
line basis over periods of 40 years and a weighted average 15 years,
respectively. Goodwill and other purchased intangibles balances are
included in the identifiable assets of the industry segment to which they
have been assigned and amortization is charged against the respective
industry segment operating profit. The recoverability of goodwill and
other purchased intangibles is evaluated at least annually considering the
projected future profitability and cash flow at the operations to which
they relate. When it is determined that an impairment has occurred, an
appropriate charge to operations is recorded.
Acquisitions
On March 1, 1996 the company purchased substantially all of the defense and
electronics systems business (ESG) of Westinghouse Electric Corporation at
a cost of $2.9 billion and financed the transaction with new borrowings.
The operations of ESG have been consolidated with Northrop Grumman
effective March 1, 1996 and are included in the electronics industry
segment.
In April 1994 the company purchased the outstanding stock of Grumman
Corporation (Grumman) at a cost of $2.1 billion and financed the
transaction mainly with new borrowings. The operations of Grumman since
acquisition are included in the industry segments to which products are
associated.
In August 1994 the company purchased the remaining 51 percent interest
in Vought Aircraft Company (Vought) for $130 million cash. The company had
previously purchased a 49 percent interest in Vought for $45 million in
September 1992. The operations of Vought since August 1994 are included in
the aircraft industry segment.
NORTHROP GRUMMAN CORPORATION
The purchase method of accounting was used to record all three
acquisitions with estimated fair values being assigned to assets and
liabilities. The excess of the purchase price over the net tangible assets
acquired was assigned to identifiable intangible assets and the remaining
balance to goodwill.
The following unaudited pro forma financial information combines
Northrop Grumman's and ESG's results of operations as if the acquisitions
had taken place on January 1, 1995, and is not necessarily indicative of
future operating results for Northrop Grumman.
$ in millions, except per share 1996 1995
Sales $8,318 $9,158
Net income 214 136
Earnings per share 3.95 2.76
The following unaudited pro forma 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
Financial Statement Reclassification
To conform to the presentation in 1996, certain amounts for 1995 and prior
years have been reclassified in the Consolidated Financial Statements. The
reclassifications had no effect on net income or earnings per share for any
period presented.
NORTHROP GRUMMAN CORPORATION
ACCOUNTS RECEIVABLE
Unbilled amounts represent sales for which billings have not been presented
to customers at year end, including differences between actual and
estimated overhead and margin rates. These amounts are usually billed and
collected within one year. Progress payments are, however, received on a
number of fixed-price contracts accounted for using the cost-to-cost type
percentage-of-completion method.
Amounts due upon contract completion are retained by customers until
work is completed and customer acceptance is obtained.
In 1996 the company terminated an agreement that was entered into in
1995 with a financial institution to sell designated pools of its
commercial accounts receivables, with limited recourse, in amounts up to
$75 million. At December 31, 1995, $34 million of accounts receivable had
been sold.
Accounts receivable at December 31, 1996, are expected to be collected
in 1997 except for approximately $255 million due in 1998 and $188 million
due in 1999 and later. These amounts principally relate to long-term
contracts with the U.S. Government.
Allowances for doubtful amounts represent mainly estimates of overhead
type costs which may not be successfully negotiated and collected.
[Download Table]
Account receivable were comprised of the following:
$ in millions 1996 1995 1994 1993 1992
Due from U.S. Government, long-term contracts
Current accounts
Billed $ 396 $ 261 $ 420 $ 65 $ 82
Unbilled 3,463 3,235 3,140 3,050 3,100
Progress payments received (2,721) (2,426) (2,532) (2,410) (2,467)
Net current accounts 1,138 1,070 1,028 705 715
Due upon contract completion 2 9 55 14 19
1,140 1,079 1,083 719 734
Due from other customers, long-term contracts
Current accounts
Billed 78 14 74 66 31
Unbilled 47 50 41 43 48
125 64 115 109 79
Total due, long-term contracts 1,265 1,143 1,198 828 813
Trade and other accounts receivable
Due from U.S. Government 75 61 34 36 28
Due from other customers 71 61 34 13 7
Total due, trade and other 146 122 68 49 35
1,411 1,265 1,266 877 848
Allowances for doubtful amounts (55) (68) (64) (57) (57)
$ 1,356 $ 1,197 $ 1,202 $ 820 $ 791
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
INVENTORIED COSTS
Inventoried costs were comprised of the following:
$ in millions 1996 1995 1994 1993 1992
Production costs of contracts in process $ 1,169 $ 924 $ 1,314 $ 800 $ 920
Excess of production cost of delivered items
over the estimated average unit cost 105 85 43
Administrative and general expenses 199 166 270 95 109
1,473 1,175 1,627 895 1,029
Progress payments received (533) (428) (611) (326) (359)
940 747 1,016 569 670
Product inventories - at the lower of
average cost or market 113 24 27
$ 1,053 $ 771 $ 1,043 $ 569 $ 670
Inventoried costs relate to long-term contracts in process and include
expenditures for raw materials and work in process beyond what is required
for recorded orders. These expenditures are incurred to help maintain
stable and efficient production schedules. The excess of production costs
of delivered and in process items over the estimated average costs is
carried in inventory under the learning curve concept. Under this concept,
production costs per unit are expected to decrease over time due to
efficiencies arising from continuous improvement in the performance of
repetitive tasks. However, no material amount representing claims,
unamortized tooling or other deferred costs is included in inventoried
costs.
The ratio of inventoried administrative and general expenses to total
inventoried costs is estimated to be the same as the ratio of total
administrative and general expenses incurred to total contract costs
incurred.
According to the provisions of U.S. Government contracts, the customer
has title to, or a security interest in, substantially all inventories
related to such contracts.
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 1996 1995 1994 1993 1992
Currently payable
Federal income taxes $ 41 $ 76 $ 61 $ 41 $ 7
Foreign income taxes 2 1 1 1 1
43 77 62 42 8
Change in deferred federal income taxes 107 80 (32) 32 51
$ 150 $ 157 $ 30 $ 74 $ 59
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:
[Download Table]
$ in millions 1996 1995 1994 1993 1992
Income tax expense at statutory rate $ 135 $ 143 $ 23 $ 59 $ 61
Goodwill amortization 16 13 9
Provision for nondeductible expenses 2 4 4 1 1
Benefit from ESOP dividends (3) (3) (4) (4) (3)
Dividend exclusion (2)
Retroactive effect of statutory rate increase 18
$ 150 $ 157 $ 30 $ 74 $ 59
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.
NORTHROP GRUMMAN CORPORATION
The tax effects of significant temporary differences and carryforwards
that gave rise to year-end deferred federal and state tax balances, as
categorized in the Consolidated Statements of Financial Position, were as
follows:
[Download Table]
$ in millions 1996 1995 1994 1993 1992
Deferred tax assets
Deductible temporary differences
Retiree benefit plan expense $ 602 $ 421 $ 409 $ 21 $ 21
Provision for estimated expenses 79 25 39 28 27
Income on contracts 49 14 17 21 13
Other 41 35 52 2 2
771 495 517 72 63
Taxable temporary differences
Purchased intangibles (110) (124) (133)
Excess tax over book depreciation (64) (71) (94)
Retiree benefit plan income (18) (48) (19) (15)
Administrative and general expenses
period costed for tax purposes (2) (1) (3)
(174) (215) (276) (19) (18)
$ 597 $ 280 $ 241 $ 53 $ 45
Deferred tax liabilities
Taxable temporary differences
Income on contracts $ 868 $ 795 $ 744 $ 811 $ 789
Administrative and general expenses
period costed for tax purposes 1 1 18 18 18
Retiree benefit plan income 9 94 64
Excess tax over book depreciation 10 2 70 89
Other 14 15 9
902 813 771 993 960
Deductible temporary differences
Provision for estimated expenses (82) (117) (145) (135) (120)
Retiree benefit plan expense (1) (2) (2) (106) (93)
Other (9) (11)
(83) (119) (147) (250) (224)
Tax carryforwards
Tax credits (39) (102) (105) (129) (140)
Alternative minimum tax credit (90) (90) (90) (87) (40)
Operating losses (54) (117)
(129) (192) (195) (270) (297)
$ 690 $ 502 $ 429 $ 473 $ 439
Net deferred tax liability
Total deferred tax liabilities (taxable
temporary differences above) $1,076 $1,028 $1,047 $1,012 $ 978
Less total deferred tax
assets (deductible temporary
differences and tax
carryforwards above) 983 806 859 592 584
$ 93 $ 222 $ 188 $ 420 $ 394
NORTHROP GRUMMAN CORPORATION
The tax carryforward benefits are expected to be used in the periods
in which net deferred tax liabilities mature. The expiration dates for
these tax credit carryforwards are in various amounts over the years 1997
through 2007. The alternative minimum tax credit can be carried forward
indefinitely.
NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
The company has available short-term credit lines in the form of money
market facilities with several banks. The amount and conditions for
borrowing under these credit lines depend on the availability and terms
prevailing in the marketplace. No fees or compensating balances are
required for these credit facilities. At December 31, 1996, $226 million
was outstanding at a weighted average interest rate of 6.44 percent. At
December 31, 1995, $65 million was outstanding at a weighted average
interest rate of 6.15 percent. At December 31, 1994, $171 million was
outstanding at a weighted average interest rate of 7 percent.
Additionally, the company has a credit agreement with a group of
domestic and foreign banks to provide for three credit facilities:
$1.8 billion available on a revolving credit basis through March 2002; a
variable interest rate $500 million two-year term loan due March 1, 1998,
that was repaid in July 1996; and a variable interest rate $1.5 billion
six-year term loan due in 24 quarterly installments of $62.5 million plus
interest beginning June 1996. Effective November 1, 1996, the Credit
Agreement was further amended to reduce the $1.5 billion term loan to
$1.05 billion payable in 21 quarterly installments of $50 million plus
interest beginning March 1, 1997. The company pays, at least quarterly,
interest on the outstanding debt under the Credit Agreement at rates that
vary based in part on the company's credit rating and leverage ratio.
At December 31, 1996, $1.05 billion under the term loan was outstanding
at a weighted average interest rate of 5.97 percent. Principal payments
permanently reduce the amount available under this agreement as well as
the debt outstanding.
At December 31, 1996, $500 million at a weighted average interest rate
of 5.79 percent was outstanding under the company's revolving credit
facility. In 1995 there were no borrowings under the company's revolving
credit facility. Under these agreements, in the event of a "change in
control," the banks are relieved of their commitments. Compensating
balances are not required under these agreements.
The company's credit agreements contain restrictions relating to the
payment of dividends, acquisition of the company's stock, aggregate
indebtedness for borrowed money and interest coverage. At
December 31, 1996, $326 million of retained earnings were unrestricted as
to the payment of dividends. Total indebtedness for all types of borrowed
money is limited under the company's credit agreement covenants. At
December 31, 1996, indebtedness was limited to $7.4 billion.
NORTHROP GRUMMAN CORPORATION
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Long-term debt consisted of the following:
$ in millions 1996 1995 1994 1993 1992
Notes due 1999, 8.4% $ $ 143 $ 153 $ $
Notes due 2004, 8.625% 350 350 350
Notes due 2006, 7% 400
Debentures due 2016, 7.75% 300
Debentures due 2024, 9.375% 250 250 250
Debentures due 2026, 7.875% 300
Notes payable and mortgages 1 10 160 370
Revolving credit facility 500
Term loans payable to banks due in quarterly
installments through 2002 at floating rates 1,050 563 1,000 40
3,150 1,307 1,763 160 410
Less current portion 200 144 130 250
$2,950 $ 1,163 $ 1,633 $ 160 $ 160
During the first quarter of 1996 the company sold to institutional
investors $400 million of 7 percent notes due 2006, $300 million of 7 3/4
percent debentures due 2016 and $300 million of 7 7/8 percent debentures
due 2026. The proceeds from this issuance were used to finance a portion
of the purchase price of ESG. The debt indenture contains restrictions
relating to limitations on liens, sale and leaseback arrangements and
funded debt of subsidiaries.
In November 1995 the notes due in 1999 were called for redemption at
face value, on January 2, 1996. The December 31, 1995 balance of $143
million was classified as current. The debentures due in 2024 are callable
after October 15, 2004 at a premium of 4 percent declining to par after
2013.
The principal amount of long-term debt outstanding at December 31, 1996,
due in each of the years 1997 through 2001 is $200 million with $2,150 million
due after five years.
NORTHROP GRUMMAN CORPORATION
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the consolidated Statements of
Financial Position for Cash and Cash Equivalents, Accounts Receivable
and amounts borrowed under the company's short-term credit lines
approximate their fair value.
The fair value of the long-term debt was calculated based on interest
rates available for debt with terms and due dates similar to the
company's existing debt arrangements.
The company has limited involvement with derivative financial instruments
and does not use them for trading purposes. To mitigate the variable rate
characteristic of the term loans, the company entered into interest rate
swap agreements maturing at various dates through May 1999 with several
banks resulting in a fixed interest rate of 6.23 percent on a notional
amount of $425 million at December 31, 1996. Unrealized gain(loss) on
interest rate swap agreements are calculated based upon the amounts at
which they could be settled at current interest rates. The market
gain(loss) on interest rate swaps was $(1) million, $(7) million and
$7 million at December 31, 1996, 1995 and 1994 respectively. The institutions
have options to extend $200 million of the swaps through May 1998. The
company expects the banks to fully satisfy their obligations under the
arrangements.
Carrying amounts and the related estimated fair values of the
company's financial instruments at December 31 of each year are as follows:
$ in millions 1996 1995 1994 1993 1992
Long-term debt
Carrying amount 3,150 1,307 1,763 160 410
Fair value 3,221 1,405 1,758 160 443
Interest rate swap agreements
Notional amount 425 300 200
Gains(losses) (1) (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. Five of the
company's fifteen qualified plans which cover over 80 percent of all
employees, were in a legally defined full-funding limitation status at
December 31, 1996. To protect the assets in the master trust from a
"change in control" the trust agreement and the Northrop Grumman Pension
Plan were appropriately amended during 1991.
The company and subsidiaries also sponsor defined-contribution plans
in which most employees are eligible to participate. Company contributions,
up to 4 percent of compensation, are based on a matching of employee
contributions.
In addition, the company and its subsidiaries provide certain health
care and life insurance benefits for retired employees. Employees achieve
eligibility to participate in these contributory plans upon retirement from
active service and if they meet specified age and years of service
requirements. Election to participate must be made at the date of
retirement. Qualifying dependents are also eligible for medical coverage.
Approximately 85 percent of the company's current retirees participate in
the medical plans. The cost and funded status for the medical and life
benefits are combined in the tables that follow because (1) life benefits
constitute an insignificant amount of the combined cost, and (2) for those
plans with assets, the assets in trust for each plan can be used to pay
benefits under either plan. Plan documents reserve the company's right to
amend or terminate the plans at any time. Premiums charged retirees for
medical coverage are based on years of service and are adjusted annually
for changes in the cost of the plans as determined by an independent
actuary. In addition to this medical inflation cost-sharing feature, the
plans also have provisions for deductibles, copayments, coinsurance
percentages, out-of-pocket limits, schedule of reasonable fees, managed
care providers, maintenance of benefits with other plans, Medicare
carve-out and a maximum lifetime benefit of from $250,000 to $1,000,000 per
covered individual. It is the policy of the company to fund the maximum
amount deductible for income taxes into the VEBA trust established for the
Northrop Retiree Health Care Plan for Retired Employees for payment of
benefits.
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
The cost to the company of these plans in each of the last five years
is shown in the following table.
$ in millions 1996 1995 1994 1993 1992
Defined benefit pension plans
Actual return on assets $(1,379) $(1,856) $ 25 $ (449) $ (298)
Deferral of actual return on assets 618 1,233 (541) 153 38
Expected return on assets (761) (623) (516) (296) (260)
Service cost 174 125 176 104 99
Interest cost 570 520 372 190 175
Amortization of unrecognized items
Transition asset, net (42) (42) (42) (42) (42)
Prior service costs 41 31 14 15 13
Net gain from previous years (21) (34) (40) (42) (68)
Net periodic pension income $ (39) $ (23) $ (36) $ (71) $ (83)
Defined contribution plans $ 73 $ 54 $ 59 $ 47 $ 48
Retiree health care and life insurance
benefit plans
Actual return on assets $ (60) $ (95) $ 22 $ (19) $ (10)
Deferral of actual return on assets 38 76 (42) (1) (10)
Expected return on assets (22) (19) (20) (20) (20)
Service cost 27 20 28 21 25
Interest cost 91 89 61 37 39
Amortization of unrecognized gain from
previous years (5) (3) (2) (6) (3)
Excess dependent cost 2
Net periodic postretirement benefit cost $ 91 $ 87 $ 69 $ 32 $ 41
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 preceding year,
whereas the funded status of the plans, shown later, uses only the first
two factors, as of the end of each year.
1996 1995 1994 1993 1992
Discount rate for obligations 7.50% 7.00% 8.25% 7.00% 8.00%
Rate of increase for compensation 4.50 5.00 5.25 5.50 5.50
Expected long-term rate of return
on plan assets 9.00 9.00 8.75 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 7
percent for 1996 and is assumed to decrease gradually to 6 percent for 2006
and remain at that level thereafter. An additional one-percentage-point of
increase each year in that rate would result in a $12 million annual
increase in the aggregate of the service and interest cost components of
net periodic postretirement benefit cost, and a $111 million increase in
the accumulated postretirement benefit obligation at December 31, 1996.
The following tables set forth the funded status and amounts
recognized in the Consolidated Statements of Financial Position at each
year-end for the company's defined-benefit pension and retiree health care
and life insurance benefit plans. The summary showing pension plans whose
accumulated benefits are in excess of assets at December 31, 1996, is
comprised of seven qualified plans along with twelve unfunded nonqualified
plans for benefits provided to directors, officers and employees either
beyond those provided by, or payable under, the company's main plans.
The company revised its estimate of the discount rate for obligations
and rate of increase for compensation assumptions in calculating the funded
status of the plans at December 31, 1996. The changes resulted in a
$483 million decrease in the projected benefit obligation for pension plans
and a $59 million decrease in the accumulated postretirement benefit
obligation.
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
$ in millions 1996 1995 1994 1993 1992
Pension plans whose assets exceed
accumulated benefits
Actuarial present value of benefit obligations
Vested benefits $ 6,255 $ 6,572 $ 2,487 $ 2,059 $ 1,690
Nonvested benefits 328 320 228 175 153
Accumulated benefit obligations 6,583 6,892 2,715 2,234 1,843
Effect of assumed salary rate increases 391 469 409 453 421
Projected benefit obligations 6,974 7,361 3,124 2,687 2,264
Less market value of plan assets 9,184 8,319 4,210 3,970 3,642
Excess of assets over projected benefit
obligations (2,210) (958) (1,086) (1,283) (1,378)
Unrecognized items
Net transition asset 247 289 332 374 415
Prior service costs (248) (286) (307) (114) (133)
Net gain 2,067 921 897 764 916
Accrued retiree benefits pension
asset included in Consolidated Statements
of Financial Position $ (144) $ (34) $ (164) $ (259) $ (180)
Pension plans whose accumulated benefits exceed assets
Actuarial present value of benefit obligations
Vested benefits $ 839 $ 311 $ 2,865 $ 57 $ 33
Nonvested benefits 51 8 252 3
Accumulated benefit obligations 890 319 3,117 60 33
Effect of assumed salary rate increases 145 15 16 19 3
Projected benefit obligations 1,035 334 3,133 79 36
Less market value of plan assets 436 177 2,872 16
Excess of projected benefit obligations
over assets 599 157 261 63 36
Unrecognized items
Net transition obligation (3) (3) (4) (5) (4)
Prior service costs (16) (5) (8) (14) 5
Net gain(loss) (10) (31) 1 (7) (3)
Additional minimum liability 22 29 6 12 7
Accrued retiree benefits liability
included in Consolidated Statements
of Financial Position $ 592 $ 147 $ 256 $ 49 $ 41
NORTHROP GRUMMAN CORPORATION
Pension plan assets at December 31, 1996, were comprised of 49 percent
domestic equity type investments in listed companies (including 4 percent
in Northrop Grumman common stock), 17 percent equity investments listed on
international exchanges, 27 percent in fixed income type investments,
principally U.S. Government securities, 3 percent in venture capital and
real estate investments, and 4 percent in cash. The investment in Northrop
Grumman represents 4,798,523 shares, or eight 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 1996 1995 1994 1993 1992
Retiree health care and life insurance benefit plans
Accumulated postretirement benefit obligation (APBO)
Retirees $ 841 $ 960 $ 575 $ 274 $ 243
Fully eligible active employees 81 88 172 86 82
Active employees not yet eligible 383 288 258 192 194
1,305 1,336 1,005 552 519
Less market value of plan assets 468 433 353 373 369
Excess of APBO over assets 837 903 652 179 150
Unrecognized items
Prior service cost (2) (1)
Net gain(loss) 191 (15) 156 74 72
Accrued retiree benefits liability included in
Consolidated Statements of Financial Position $1,026 $ 887 $ 808 $ 253 $ 222
Retiree health care and life insurance plan assets at December 31,
1996, 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.
NORTHROP GRUMMAN CORPORATION
In accordance with company policy on environmental remediation, the
estimated cost to complete remediation has been accrued where it is
probable that the company will incur such costs in the future, including
those for which it has been named a Potentially Responsible Party by the
Environmental Protection Agency or similarly designated by other
environmental agencies. To assess the potential impact on the company's
financial statements, management estimates the total reasonably possible
remediation costs that could be incurred by the company, taking into
account currently available facts on each site as well as the current state
of technology and prior experience in remediating contaminated sites.
These estimates are reviewed periodically and adjusted to reflect changes
in facts and technical and legal circumstances. Management estimates that
at December 31, 1996, the reasonable range of future costs for
environmental remediation, including those sites acquired in the purchase
of ESG, is $63 million to $107 million, of which $64 million has been
accrued. Although management cannot predict whether new information gained
as projects progress will materially affect the estimated liability
accrued, management does not anticipate that future remediation
expenditures will have a material adverse effect on the company's results
of operations or financial position.
Minimum rental commitments under long-term noncancellable operating
leases total $239 million which is payable as follows: 1997 - $64 million,
1998 - $45 million, 1999 - $37 million, 2000 - $27 million, and 2001 -
$19 million, and 2002 and thereafter - $47 million.
NORTHROP GRUMMAN CORPORATION
STOCK RIGHTS
The company has a Common Stock Purchase Rights plan with one right issued
in tandem with each share of common stock. The rights will become
exercisable on the tenth business day after a person or group has acquired
15 percent or more of the general voting power of the company, or announces
an intention to make a tender offer for 30 percent or more of such voting
power, without the prior consent of the Board of Directors. If the rights
become exercisable, a holder will be entitled to purchase one share of
common stock from the company at an initial exercise price of $105.
If a person acquires more than 15 percent of the then outstanding
voting power of the company or if the company is combined with an acquiror,
each right will entitle its holder to receive, upon exercise, shares of the
company's or the acquiror's (depending upon which is the surviving company)
common stock having a value equal to two times the exercise price of the
right.
The company will be entitled to redeem the rights at $.02 per right at
any time prior to the earlier of the date that a person has acquired or
obtained the right to acquire 15 percent of the general voting power of the
company or the expiration of the rights in October 1998. The rights are not
exercisable until after the date on which the company's prerogative to
redeem the rights has expired. The rights do not have voting or dividend
privilege and cannot be traded independently from the company's common
stock until such time as they become exercisable.
STOCK COMPENSATION PLANS
At December 31, 1996, the company had two stock-based compensation plans --
the 1993 Long-Term Incentive Stock Plan (LTISP) and the 1995 Stock Option
Plan for Non-Employee Directors (SOPND).
The LTISP permits grants to key employees of three general types of stock
incentive awards: stock options, stock appreciation rights (SARs) and
stock awards. With shareholder approval of this plan and
subsequent amendment, a total of 4.1 million additional shares were made
available for future grants. Up to 1.8 million of these shares may be in
the form of stock awards. At December 31, 1996, 227,062 shares remained
available for future grants under the LTISP.
NORTHROP GRUMMAN CORPORATION
Under the LTISP each grant of a stock option is made at the closing
market price on the date of grant. Options generally vest in 25 percent
increments, two, three, four and five years from the grant date and expire
ten years after the grant date. No SARs have been granted under the LTISP.
Stock awards, in the form of restricted performance stock rights, are
granted to key employees without payment to the company. Recipients of the
rights earn shares of stock based on a total-shareholder-return measure of
performance over a five-year period with interim distributions three and
four years after grant. If at the end of the five-year period the
performance objectives have not been met, up to 70 percent of the original
grant will be forfeited. Termination of employment can result in
forfeiture of some or all of the benefits extended under the plan.
The shareholder approval of the SOPND in 1995 made available 300,000
shares for grants of stock options to nonemployee directors. Each grant of
a stock option is made at the closing market price on the date of the
grant, is immediately exercisable and expires ten years after the grant
date. At December 31, 1996, 289,500 shares were available for future
grants under the SOPND.
The company applies Accounting Principles Board Opinion 25 -
Accounting for Stock Issued to Employees and related Interpretations in
accounting for awards made under the plans. When stock options are
exercised, the amount of the cash proceeds to the company is recorded as an
increase to paid-in capital. No compensation expense is recognized in
connection with stock options. Compensation expense for restricted
performance stock rights is estimated and accrued over the vesting period.
The fixed 30 percent minimum distribution portion is recorded at grant
value and the variable portion is recorded at market value. Compensation
expense recognized for stock awards was $25 million in 1996, $4 million in
1995, $4 million in 1994, $5 million in 1993, and $4 million in 1992.
NORTHROP GRUMMAN CORPORATION
Stock option activity for the last five years is summarized below:
Weighted-
Average
Shares Exercise Shares
Under Option Prices Exercisable
Outstanding at January 1, 1992 2,823,870 $25 1,841,070
Granted 635,700 26
Cancelled (43,380) 20
Exercised (281,660) 21
Outstanding at December 31, 1992 3,134,530 25 1,798,550
Granted 515,300 36
Cancelled (96,640) 25
Exercised (1,405,330) 29
Outstanding at December 31, 1993 2,147,860 25 738,300
Granted 708,700 43
Cancelled (61,215) 28
Exercised (265,430) 25
Outstanding at December 31, 1994 2,529,915 30 817,660
Granted 762,500 56
Cancelled (130,885) 31
Exercised (170,810) 23
Outstanding at December 31, 1995 2,990,720 37 1,064,925
Granted 987,800 78
Cancelled (87,921) 49
Exercised (240,334) 28
Outstanding at December 31, 1996 3,650,265 49 1,236,689
Had compensation expense been determined based on the fair value at
the grant dates for stock option awards granted in 1996 and 1995,
consistent with the method of Financial Accounting Standards Board
Statement 123 - Accounting for Stock Based Compensation, net income and
earnings per share in 1996 would have been lower by $2 million and three
cents, respectively. For 1995 net income would have been unchanged and
earnings per share would have been lower by one cent. These amounts were
determined using weighted-average per share fair values of options granted
in 1996 and 1995 of $25 and $19, respectively. The fair value of each
option grant was estimated on the date of grant using the Black-Scholes
option-pricing model based on an expected life of six years and for 1996
and 1995, respectively, the following additional assumptions: dividend
yield - 2.1% and 2.8%; expected volatility - 28% and 31%; and risk-free
interest rate - 6.2% and 5.8%.
NORTHROP GRUMMAN CORPORATION
At December 31, 1996, the following stock options were outstanding:
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/96 Contractual Life Prices at 12/31/96 Prices
$16 to 25 632,070 3.1 years $18 632,070 $18
$26 to 40 686,001 6.3 years 32 415,846 30
$41 to 55 673,837 7.8 years 43 181,266 43
$56 to 70 796,557 8.8 years 58 7,507 57
$71 to 81 861,800 10.0 years 81
3,650,265 1,236,689
Restricted performance stock rights were granted with weighted-average
grant-date fair values per share as follows: 1996 - 802,800 at $81; 1995 -
22,660 at $53; 1994 - 141,540 at $43; 1993 - 473,000 at $36; and 1992 -
none granted.
NORTHROP GRUMMAN CORPORATION
UNAUDITED SELECTED QUARTERLY DATA
Quarterly financial results, previously reported are set forth in the
following tables together with dividend and common stock price data.
1996 Quarters, $ in millions, except per share 4 3 2 1
Net sales $2,282 $2,043 $2,143 $1,603
Operating margin 146 165 208 139
Net income 17 70 86 61
Earnings per share .30 1.21 1.69 1.23
Dividend per share .40 .40 .40 .40
Stock price:
High 84 1/4 80 1/4 69 1/4 67 3/8
Low 76 3/8 63 3/4 57 3/4 58 3/8
The fourth quarter of 1996 includes a $90 million pretax charge
related to the closure of four plants. The charge included $30 million for
costs related to the reduction of personnel and other closure activities
and $60 million for the write-down of facilities. The sale of shares owned
by the company in ETEC Systems, Inc. generated pretax gains of $10
million, $6 million and $12 million in the fourth, third and second
quarters, respectively. The first quarter includes a $25 million charge
related to nacelles work the company performed for Fokker Aircraft N.V.,
which declared bankruptcy in March 1996.
The sum of quarterly earnings per share for 1996 does not equal
earnings per share for the year because the average number of common shares
outstanding for the second half of 1996 was disproportionately higher than
the full year average due to the issuance in June of approximately
8 million shares of common stock in a public stock offering.
NORTHROP GRUMMAN CORPORATION
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. 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.
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, 1997, was 10,106.
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 1992 through 1996, 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 1992
through 1996, 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.
Deloitte & Touche LLP
Los Angeles, California
February 5, 1997
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 1997 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 1997 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 1997 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 1997 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
NORTHROP GRUMMAN CORPORATION
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, 1996.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
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 and restated as of
January 27, 1997.
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)
4(c) Form of Officer's Certificate (without exhibits) establishing the
terms of Northrop Grumman Corporation's 7% Notes Due 2006, 7 3/4%
Debentures Due 2016 and 7 7/8% Debentures Due 2026 (incorporated by
reference to Form S-4 Registration Statement, filed April 19, 1996)
4(d) Form of Northrop Grumman Corporation's 7% Notes Due 2006
(incorporated by reference to Form S-4 Registration Statement, filed
April 19, 1996)
4(e) Form of Northrop Grumman Corporation's 7 3/4% Debentures Due 2016
(incorporated by reference to Form S-4 Registration Statement, filed
April 19, 1996)
4(f) Form of Northrop Grumman Corporation's 7 7/8% Debentures Due 2026
(incorporated by reference to Form S-4 Registration Statement, filed
April 19, 1996)
10(a) Second Amended and Restated Credit Agreement dated as of April 15,
1994, Amended and Restated as of March 1, 1996 among Northrop
Grumman Corporation, Bank of American National Trust and Savings
Association, as Documentation Agent, Chemical Securities, Inc., as
Syndication Agent, The Chase Manhattan Bank (National Association),
as Administrative Agent, and the Banks Signatories thereto
(incorporated by reference to Form 8-K, filed March 18, 1996), and
amended as of November 1, 1996
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 (incorporated by
reference to Form 10-K filed February 22, 1996)
*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)
NORTHROP GRUMMAN CORPORATION
*10(e) Northrop Supplemental Plan 2 (incorporated by reference to Form
10-K filed February 22, 1996), and amended as of June 19, 1996.
*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 (incorporated by reference to
Form 10-K filed February 22, 1996)
*10(j) Executive Accidental Death, Dismemberment and Plegia Insurance
Policy (incorporated by reference to Form 10-K filed
February 22, 1996)
*10(k) Executive Long-Term Disability Insurance Policy (incorporated by
reference to Form 10-K filed February 22, 1996)
*10(l) Key Executive Medical Plan Benefit Matrix (incorporated by
reference to Form 10-K filed February 22, 1996)
*10(m) Executive Dental Insurance Policy Group Numbers 5134 and 5135
(incorporated by reference to Form 10-K filed February 22, 1996)
*10(n) Group Excess Liability Policy (incorporated by reference to
Form 10-K filed February 22, 1996)
*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), as amended (incorporated by
reference to Northrop Grumman Corporation Proxy Statement filed
April 1, 1996) and amended on December 18, 1996
NORTHROP GRUMMAN CORPORATION
*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) Form of Northrop Grumman Corporation Special Agreement
*10(s) Executive Deferred Compensation Plan (effective December 29, 1994)
(incorporated by reference to Form 10-K filed February 22, 1996)
10(t) Memorandum of Agreement dated December 16, 1996 (W. C. Solberg
Retirement Arrangements) and Release Agreement between Northrop
Grumman Corporation and W. C. Solberg
11 Statement Re Computation of Per Share Earnings
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
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
25th day of February 1997.
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 25th day of
February 1997, 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
Phillip Frost* 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(2) (Deduct)(1) of Period
Description:
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 $(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
Year ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $67,954 $19,364 $(31,873) $55,445
____________
(1) Uncollectible amounts written off, net of recoveries
(2) Additions include allowances for bad debts from acquired companies - $15,625 in 1994 and $4,751
in 1996
NORTHROP GRUMMAN CORPORATION
[Enlarge/Download Table]
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share)
1996 1995 1994 1993 1992
Primary:
Average shares outstanding 54,012 49,364 49,139 48,085 47,179
Net effect of the assumed exercise of
stock options - based on the
treasury stock method 1,260 1,111 758 792 251
Totals 55,272 50,475 49,897 48,877 47,430
Net Income $234,126 $252,159 $35,264 $95,755 $120,922
Earnings per share(1) $ 4.24 $ 5.00 $ .71 $ 1.96 $ 2.55
Fully diluted:
Average shares outstanding 54,012 49,364 49,139 48,085 47,179
Net effect of the assumed exercise
of stock options - based on the
treasury stock method 1,474 1,356 837 872 805
Totals 55,486 50,720 49,976 48,957 47,984
Net Income $234,126 $252,159 $35,264 $95,755 $120,922
Earnings per share(1) $ 4.22 $ 4.97 $ .71 $ 1.96 $ 2.52
(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, 33-55146, 33-59815,
33-59853, 333-03959, 333-02653 and 333-02453 of Northrop Grumman Corporation
on Form S-8 of our report appearing in this Annual Report on Form
10-K of Northrop Grumman Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 25, 1997
Dates Referenced Herein and Documents Incorporated by Reference
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