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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders No information is required in response to this Item.
PART II
Item 5.
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.
Item 6. Selected Financial Data
The information required by this Item is contained in Part II, Item 7
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 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 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 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 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
NORTHROP GRUMMAN CORPORATION
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
NORTHROP GRUMMAN CORPORATION
Item 8.
Item 8. Financial Statements and Supplementary Data
NORTHROP GRUMMAN CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
NORTHROP GRUMMAN CORPORATION
The accompanying notes are an integral part of these consolidated financial statements
NORTHROP GRUMMAN CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
NORTHROP GRUMMAN CORPORATION
NORTHROP GRUMMAN CORPORATION
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.
NORTHROP GRUMMAN CORPORATION
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:
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:
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:
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
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
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
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.
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.
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.
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.
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.
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.
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.
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
NORTHROP GRUMMAN CORPORATION
(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