ITEM 1. BUSINESS
Litton Industries, Inc. (hereafter together with its consolidated subsidiaries referred to as the "Company" or "Litton" unless the context otherwise indicates) is a high-technology aerospace, defense and commercial electronics company which provides advanced electronic, defense and information systems to U.S. and world markets and is a primary builder of large multimission surface combatant ships for the U.S. Navy. Litton is a leader in integrated marine electronics and information technology-based systems and products. In addition to being a primary builder of surface combatant ships, the Company provides overhaul, repair, modernization, design and engineering services. Litton is also an international supplier of connectors, multilayer circuit boards, solder materials, laser crystals and other electronic components used primarily in the telecommunications, industrial and computer markets. The Company was founded in California in 1953 and has evolved into a major international organization with approximately 31,500 employees at more than 26 divisions and seven countries.
The Company's businesses are reported in three business segments: Advanced Electronics, Marine Engineering and Production, and Electronic Components and Materials. Information about the Company's business segments appears on pages and of this Annual Report on Form 10-K. This information includes sales and service revenues, operating profit and identifiable assets for each of the three years ended July 31, 1997.
Advanced Electronics
The Advanced Electronics segment is a major supplier of electronic and information systems and related services to the U.S. and international military, commercial and non-defense federal markets. The businesses in this segment also provide navigation systems and marine electronics to a variety of commercial customers. The principal businesses comprising the Advanced Electronics segment are information systems, navigation, guidance and control systems, marine electronics and electronic warfare systems. This segment's business base has shifted to a higher mix of non-defense and commercial businesses with the acquisitions of PRC Inc. ("PRC") and Sperry Marine Inc. ("Sperry Marine") during fiscal year 1996. PRC is a diversified information technology company that designs, develops, integrates and processes computer-based information systems and reengineers business systems for the U.S. Government and other customers. A significant portion of PRC's revenues is generated from providing systems integration and computer-based solutions to the non-defense federal, state and local governments. Sperry Marine is a leading producer of marine electronic navigation and guidance systems for commercial and military customers. To enhance its capabilities in marine electronics, the Company acquired Racal Marine Group ("Decca") in fiscal year 1997. Decca, headquartered in the U.K., provides diverse marine electronic equipment, including radars, electronic chart systems, chart video plotting systems and bridge monitoring systems to commercial and military customers. During fiscal year 1997, the Company also acquired SAI Technology which manufactures customized and ruggedized mobile computing equipment and systems for military and commercial applications worldwide. The Company also participates in ongoing development and production programs as well as upgrade and retrofit business worldwide to serve both defense and non-defense markets.
Sales backlog for the Advanced Electronics segment was $2.130 billion and $2.228 billion at July 31, 1997 and 1996. In addition, PRC had unfunded backlog with potential future contract values totaling approximately $1.5 billion at July 31, 1997 and $1 billion at July 31, 1996. Of the backlog at July 31, 1997, $472 million is expected to be realized as sales in years after fiscal year 1998. Of the backlog at July 31, 1997, $1.509 billion is related to worldwide defense contract backlog.
Significant revenues of the Advanced Electronics segment in 1997 were derived from sales to the U.S. Government (approximately 64%).
Marine Engineering and Production
The Marine Engineering and Production segment is engaged in the building of large multimission surface combatant ships and is a provider of overhaul, repair, modernization, ship design and engineering services primarily for the U.S. Navy. Since 1975, the Company has delivered a total of 74 new destroyers, cruisers and amphibious assault ships to the U.S. Navy. Current construction work includes seven Aegis destroyers and two amphibious assault ships for the U.S. Navy. The Company is also exploring opportunities in commercial vessels, offshore drilling rigs and production platforms and has recently reached agreement, along with options, to build up to 31 water supply vessels for a company engaged in marine supply services.
Sales backlog for the Marine Engineering and Production segment was $3.231 billion and $3.288 billion at July 31, 1997 and 1996, respectively. Of the backlog at July 31, 1997, approximately $2.115 billion is expected to be realized as sales in years after fiscal 1998.
Approximately 98% of the revenues for the Marine Engineering and Production segment in 1997 were derived from sales to the U.S. Government.
Electronic Components and Materials
The Electronic Components and Materials segment manufactures and distributes interconnection subsystems, electronic connectors, printed circuit boards, backpanels, soldering materials, laser crystals, rotary components, fiber optic components and systems and microwave components and subsystems to primarily commercial markets worldwide.
Sales backlog for the Electronic Components and Materials segment was $164.6 million and $150.9 million at July 31, 1997 and 1996, respectively. Substantially all of the backlog at July 31, 1997 is expected to be realized in sales in the next fiscal year.
Methods of Distribution
The Company principally markets its products and services throughout the world through the home offices and branch offices of its various operations. In general, each of the Company's operations is responsible for selecting, implementing and maintaining an efficient and effective marketing program.
Raw Materials
The Company uses a wide variety of raw materials in the manufacture of its many products. The availability of any individual raw material is not critical to the Company's operations.
Patents
The Company owns a large number of patents, trademarks and copyrights relating to its manufactured products, which have been obtained over a period of years. The Company considers these patents, trademarks and copyrights, in the aggregate, to be valuable to its operations. However, the Company does not believe that the conduct of its businesses, as a whole, is materially dependent upon any single patent, trademark or copyright.
Competition
Competition exists with respect to all products manufactured and services rendered by the Company, particularly with respect to the defense related businesses. Competition ranges from companies which produce a single product or offer a single service to some of the world's largest corporations. The Company is continuing to enhance its competitive position by developing new applications for its technologies as well as pursuing commercial opportunities and developing strategic alliances. Additionally, recent acquisitions have provided the Company access to non-defense markets, including the systems integration market, that offer growth opportunities.
U.S. Government Contracts
Approximately 67% of the Company's total sales and service revenues for fiscal year 1997 were from U.S. Government contracts and subcontracts. Approximately 74% of these revenues related to fixed-price type contracts. As is common with U.S. Government contracts, the Company's U.S. defense contracts are unilaterally terminable at the option of the U.S. Government with compensation for work completed and costs incurred. Contracts with the U.S. Government are subject to certain laws and regulations, the noncompliance with which may result in various sanctions. In the current government contracting environment, contractors, sometimes without their knowledge, are subject to investigations by the U.S. Government initiated in various ways. Most investigations result in no action being taken or administrative resolution. Litton is aware of ongoing investigations and is cooperating in those investigations. Should any investigation result in the filing of formal charges against the Company by the U.S. Government, disclosure will be made if the amount involved or the relief sought is deemed by the Company to be material.
Research and Development
Worldwide expenditures on research and development activities amounted to $241.8 million, $217.0 million and $227.1 million, of which approximately 29%, 30% and 28% were Company-sponsored in the years ended July 31, 1997, 1996 and 1995, respectively. In fiscal 1997, the Advanced Electronics segment accounted for 96% of the total research and development expenditures.
Environmental Protection
During the fiscal year ended July 31, 1997, the amounts incurred in compliance with federal, state and local regulations pertaining to environmental standards did not have a material effect upon the capital expenditures or earnings of the Company. For additional information with respect to environmental matters, see Items 3, 7, and 8 of this Annual Report on Form 10-K.
Number of Employees
At July 31, 1997, the Company had approximately 31,500 full-time employees. Employment by business segment was as follows:
Financial Information by Geographic Area
See Operations by Geographic Area on pages and of this Annual Report on Form 10-K.
Forward-Looking Statements
Except for the historical information, this Annual Report on Form 10-K contains forward-looking statements, which involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors discussed herein.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal plants and offices have an aggregate floor area of approximately 8,235,000 square feet, of which 7,163,000 square feet (87.0%) are located in the United States, and 1,072,000 square feet (13.0%) are located outside of the United States, primarily in Canada and Western Europe. The Company's executive offices, in owned premises, are at 21240 Burbank Boulevard, Woodland Hills, California.
These properties are used by the various business segments as follows:
Approximately 6,436,000 square feet (78.2%) of the principal plant, office and commercial floor area is owned by the Company, and the balance is held under lease.
The Company's principal plants and offices in the United States are situated in 31 locations in 16 states as follows:
The above-mentioned facilities are in satisfactory condition and suitable for the particular purposes for which they were acquired or constructed and are adequate for present operations.
The foregoing information excludes Company held properties leased to others and also excludes plants or offices which, when added to all other Company plants and offices in the same city, have a total floor area of less than 50,000 square feet.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
(a) Litton is suing Honeywell, Inc. ("Honeywell") for patent infringement relating to the manufacture of ring laser gyro navigation systems which are used in commercial aircraft. After trial of that case in the U.S. District Court for the Central District of California, on August 31, 1993, the jury rendered a verdict in favor of Litton in the amount of $1.2 billion. On January 9, 1995, the District Court released a Memorandum of Decision finding Litton's patent invalid and rejecting the jury verdict. Litton appealed to the U.S. Court of Appeals for the Federal Circuit. On July 3, 1996, the Court of Appeals rendered a decision reversing the District Court's decision, finding the patent valid and infringed by Honeywell. The Court of Appeals reinstated the jury's verdict on liability including the findings of interference with contract and prospective business advantage and ordered a new trial on the amount of damages sustained by Litton in the District Court. On March 17, 1997, the U.S. Supreme Court vacated the Court of Appeals ruling and remanded the case to the Court of Appeals for further consideration in view of the Supreme Court's decision in Warner-Jenkins Co. v. Hilton Davis Chemical Co. On September 30, 1997, a hearing took place before the Court of Appeals. As of this date, no decision has been rendered by the Court of Appeals.
Litton is also suing Honeywell on antitrust grounds in the same U.S. District Court. On February 29, 1996, a jury rendered a verdict in favor of Litton. On July 25, 1996, the District Court upheld the jury's verdict that Honeywell attempted to illegally monopolize and did monopolize the market for inertial reference systems for large commercial air transport, commuter and business aircraft. However, the District Court declined to enter the $234 million jury verdict on the basis that Litton's damage study as presented failed to disaggregate damages between illegal and legal acts. A new trial limited to the issue of the amount of damages
sustained by Litton attributable to Honeywell's unlawful conduct has been ordered by the District Court. The District Court has declined to set a trial date until after the Court of Appeals rules in the patent case.
(b) The Company and certain of its divisions or subsidiaries have been named as potentially responsible parties by the United States Environmental Protection Agency, various state environmental agencies, and other potentially responsible parties for costs associated with cleanup of a number of sites to which they may have contributed wastes. Also, the Company and certain of its divisions and subsidiaries have incurred costs, which have not had a material impact on the Company's consolidated financial statements in any one year, for cleaning up a number of sites, presently or formerly owned or leased by the Company (or by subsidiaries or divisions thereof). In addition, the Company and certain of its divisions or subsidiaries have been named as defendants in certain lawsuits for personal injuries and property damage allegedly resulting from environmental contamination.
At this time, the Company believes that its ultimate liability for additional expenditures associated with these matters will not materially adversely affect its consolidated financial position.
There are various other litigation proceedings in which the Company is involved. Although the results of litigation proceedings cannot be predicted with certainty, it is the opinion of the General Counsel that the ultimate resolution of these other proceedings will not have a material adverse effect on the Company's consolidated financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended July 31, 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information with respect to the market for and number of holders of the Company's Common stock and quarterly market information which is set forth on page and dividend information which is set forth on page of this Annual Report on Form 10-K. The number of holders of record of the Company's Common stock was computed by a count of record holders on September 30, 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SUMMARY OF FINANCIAL INFORMATION (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
See Notes on page 8.
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SUMMARY OF FINANCIAL INFORMATION --(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- ---------------
* In addition, PRC Inc. had unfunded backlog with potential contract values totaling approximately $1.5 billion and $1 billion for fiscal years 1997 and 1996, respectively.
NOTES:
(A) Financial information for fiscal years 1994 and 1993 included the results of Western Atlas Inc. ("WAI"), a former subsidiary of Litton. The shares of common stock of WAI were distributed to holders of Litton Common stock in the form of a dividend on March 17, 1994. The accounts of WAI have been segregated and reflected as discontinued operations. Results for fiscal year 1994 also included the settlement of a civil suit and extraordinary loss on early extinguishment of debt.
(B) During the five year period ended July 31, 1997, the Company declared no cash dividends on its Common stock. In 1994, the Company distributed all of the issued and outstanding shares of common stock of its previously wholly-owned subsidiary, Western Atlas Inc., in the form of a dividend to holders of Litton Common stock.
ITEM 7.
ITEM 7. FINANCIAL REVIEW AND ANALYSIS
The Company's primary lines of business are in high technology electronics and information systems and surface combatant ships for the U.S. and world markets. In response to reductions in defense spending, the Company has focused on an acquisition strategy to reduce its concentration in defense related markets. The acquisitions of PRC Inc. ("PRC") and Sperry Marine Inc. ("Sperry Marine") in fiscal year 1996 provided access to non-defense information systems and commercial marine electronics markets and were the primary reason for the improved results in fiscal year 1997. The defense industry is an important part of the Company's future, and, accordingly, the Company has made selective acquisitions in recent years which have strengthened its competitive position in the traditional defense electronics markets.
Segment information can be found on pages and.
Fiscal Year 1997 Compared To 1996
Total sales and operating profit for fiscal year 1997 were $4.18 billion and $369.6 million, respectively, representing increases of 16% and 15% over the prior year's results. Sales and operating profit for fiscal year 1996 were $3.61 billion and $320.1 million, respectively. Net earnings increased 7% to $162.0 million, after an increase in interest expense, for fiscal year 1997 compared with net earnings of $150.9 million for fiscal year 1996. Earnings per share improved 8% to $3.40 for fiscal year 1997 compared with $3.15 for fiscal year 1996.
Sales and operating profit for the Advanced Electronics segment amounted to $2.62 billion and $171.5 million, respectively, for fiscal year 1997. These results were significantly higher than fiscal year 1996 sales of $1.92 billion and operating profit of $131.8 million. These improvements were primarily attributable to the acquisitions of PRC in February 1996 and Sperry Marine in May 1996. The acquisition of PRC is a reflection of the Company's strategy to expand its information systems services, particularly in the non-defense federal and commercial markets. PRC generates a significant portion of its revenues from providing systems integration and computer-based solutions to the non-defense federal, state and local governmental markets. Sperry Marine, a leading supplier of marine electronic navigation and guidance systems, also contributed significantly to the improved results in the current fiscal year. Continuing with the strategy to also focus on marine electronics, the Company acquired Racal Marine Group ("Decca") in February 1997. Decca provides electronic chart systems, bridge monitoring systems and radar products. The combined technologies and capabilities of Sperry and Decca will enable the Company to provide system-wide solutions to the marine markets for both defense and commercial applications. The Company has also strengthened its position in the electronic display market with the acquisition of SAI Technology ("SAIT") in March 1997. SAIT provides customized and ruggedized mobile computing equipment and systems for commercial and military operations worldwide. Backlog for the Advanced Electronics segment at July 31, 1997 amounted to $2.13 billion compared with $2.23 billion at July 31, 1996. In addition, PRC has unfunded backlog with potential contract values totaling approximately $1.5 billion at July 31, 1997 compared with $1.0 billion at July 31, 1996.
The Marine Engineering and Production segment reported sales and operating profit of $1.11 billion and $135.0 million, respectively, for fiscal year 1997 compared with $1.29 billion and $142.5 million, respectively, for fiscal year 1996. The decrease reflected a lower level of construction activities as a result of contracts being completed, including two Aegis destroyers during each of fiscal years 1996 and 1997 and a fifth LHD class amphibious assault ship in fiscal year 1997. This decline was partially offset by other contracts moving into more advanced stages of production and the startup of production on a seventh LHD class amphibious assault ship. Operating margins improved as a result of increased earnings rates on programs maturing in the production process and continued cost reduction efforts. During fiscal year 1997, the U.S. Navy awarded the Company a contract to begin advance procurement of materials to be used in the construction of future Aegis destroyers. Although no contracts have been awarded, the Navy has asked the Company to submit proposals for the construction of eight more Aegis destroyers. Going forward, the Company intends to pursue commercial opportunities including vessels, offshore drilling rigs and production platforms particularly in the petroleum industry. Backlog for the Marine Engineering and Production segment at July 31, 1997 was $3.23 billion compared with $3.29 billion at July 31, 1996.
The Electronic Components and Materials segment contributed with improved sales and operating profit in fiscal year 1997. Sales and operating profit were $508.3 million and $69.7 million, respectively, for fiscal year 1997, compared with $449.6 million and $51.4 million, respectively, for fiscal year 1996. This segment benefited from the growth in the markets which it serves, particularly from the strong demand in the telecommunication-related markets for its commercial electronic products. Cost reduction efforts and process improvements have also contributed to the improved operating margins.
Fiscal Year 1996 Compared To 1995
Effective July 31, 1996, certain businesses previously reported with the Advanced Electronics segment have been grouped with the Electronic Components and Materials segment (formerly known as the Interconnect Products segment). Accordingly, the segment information for fiscal year 1995 as discussed below has been restated to reflect these changes.
Total sales and operating profit increased by 9% and 14% compared with the prior year's results. Net earnings improved 12%, although interest expense was higher in 1996 as a result of the debt incurred in connection with the PRC and Sperry Marine acquisitions.
Sales and operating profit for the Advanced Electronics segment increased by 22% and 17% when compared with the prior fiscal year. These improvements reflected the contributions from the acquisitions completed during fiscal years 1996 and 1995. These acquisitions included PRC, Sperry Marine, the Inertial Systems Business Unit of Hughes Electronics Corp.'s Delco Systems Operations and Teldix GmbH, a European defense electronics firm. Operating margin for fiscal year 1996 of 6.9% was slightly lower than the 7.2% for fiscal year 1995 as a result of PRC being a lower margin business in comparison with that historically experienced by the other businesses in this segment. At July 31, 1996, backlog for this segment was $2.23 billion compared with $1.69 billion at July 31, 1995. In addition, PRC had unfunded backlog with potential contract values totaling approximately $1 billion at July 31, 1996.
Sales for the Marine Engineering and Production segment were lower by 7%, while operating profit improved by 8% compared with the prior year's results. The decrease in sales was attributable to lower construction activity on long-term contracts nearing completion, partially offset by activity on new contracts and others moving into more advanced stages of production. Operating margins improved as a result of cost reduction efforts and increased earnings rates on long-term contracts as they matured in the production process and as uncertainties diminished. During fiscal year 1996, the Company delivered three Aegis destroyers to the U.S. Navy and received funding for the construction of a fifteenth Aegis destroyer with a contract value in excess of $300 million and options for two more destroyers. Also in fiscal year 1996, the Company received funding to construct a seventh LHD class amphibious assault ship with a contract value of nearly $800 million. Backlog for this segment at July 31, 1996 was $3.29 billion, not including the aforementioned options for two more Aegis destroyers, compared with $3.31 billion at July 31, 1995. Backlog at July 31, 1996 included seven Aegis destroyers, six of which were under production, and three LHD class amphibious assault ships, all of which were in production.
The Electronic Components and Materials segment also contributed with improved results in fiscal year 1996 as a result of strong demand for its electronics-related products by its customers in the telecommunication and computer industries. On-going cost reduction efforts also helped to maintain the solid performances by the businesses in the segment.
Liquidity and Capital Resources
During fiscal year 1997, cash flow from operations enabled the Company to reduce debt by more than $100 million, to repurchase 875,000 shares of Common stock and to fund the acquisitions of Decca and SAIT. Inclusive of the fiscal year 1997 repurchases, approximately 2.9 million shares remained to be repurchased under the Company's stock buyback program at July 31, 1997. Net interest expense rose significantly in fiscal year 1997 as a result of the issuance in March 1996 of $400 million aggregate principal amount of debentures in connection with the acquisition of PRC (see Note C) and short-term borrowings made in 1996 under an
existing revolving credit agreement in connection with the acquisition of Sperry Marine and for other operating needs.
At July 31, 1997, the Company had unused credit commitments of $315 million under the aforementioned revolving credit agreement available for its general use. Additionally, the Company has filed Form S-3 Registration Statements with the Securities and Exchange Commission enabling it to offer debt and other securities with an aggregate offering price of up to $600 million.
Environmental Matters
As previously reported, the Company or certain of its divisions or subsidiaries has been named as a potentially responsible party in respect to various sites to which certain of its operations may have contributed wastes. Also, the Company and certain of its divisions and subsidiaries have incurred costs, which have not had a material impact on the Company's consolidated financial statements in any one year, for cleaning up a number of sites now or formerly owned or leased by the Company. At this time, the Company believes that its ultimate liability for additional expenditures associated with such owned or leased sites and other sites to which it may have contributed wastes will not have a material adverse effect on its consolidated financial position.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on directors of the Company will be included under the caption "Election of Directors" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 4, 1997, which is hereby incorporated by reference.
The executive officers of the Company are elected each year by the Board of Directors at its first meeting following the Annual Meeting of Shareholders to serve during the ensuing year and until their respective successors are elected and qualify. There are no family relationships between any of the executive officers of the Company. The following information indicates the position and age of the executive officers at October 8, 1997 and their business experience during the prior five years:
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation will be included under the caption "Compensation of Executive Officers" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 4, 1997, which is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of the Company's voting securities by each director and all officers and directors as a group, and by any person known to beneficially own more than 5% of any class of voting security of the Company will be included under the captions "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 4, 1997, which is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions including information with respect to management indebtedness will be included under the caption "Indebtedness of Management to the Company" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 4, 1997, which is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
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.
LITTON INDUSTRIES, INC.
/s/ CAROL A. WIESNER
------------------------------------ Carol A. Wiesner Vice President and Controller (Chief Accounting Officer)
October 10, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
LITTON INDUSTRIES, INC.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements of Litton Industries, Inc. and subsidiary companies, and related financial information included in this Annual Report, have been prepared by the Company, whose management is responsible for their integrity. These statements, which necessarily reflect estimates and judgments, have been prepared in conformity with generally accepted accounting principles.
The Company maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded. As part of this system, the Company has an internal audit staff to monitor the compliance with and the effectiveness of established procedures.
The consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose report appears on page.
The Audit and Compliance Committee of the Board of Directors, which consists solely of directors who are not employees of the Company, meets periodically with management, the independent auditors and the Company's internal auditors to review the scope of their activities and reports relating to internal controls and financial reporting matters. The independent and internal auditors have full and free access to the Audit and Compliance Committee and meet with the Committee both with and without the presence of Company management.
/s/ RUDOLPH E. LANG, JR. - -------------------------------------- Rudolph E. Lang, Jr. Senior Vice President and Chief Financial Officer
September 17, 1997
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders Litton Industries, Inc. Woodland Hills, California
We have audited the accompanying consolidated balance sheets of Litton Industries, Inc. and subsidiary companies as of July 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' investment, and cash flows for each of the three years in the period ended July 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 Litton Industries, Inc. and subsidiary companies as of July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California September 17, 1997
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accounts of Litton Industries, Inc. and its wholly-owned subsidiaries (the "Company" or "Litton") are included in the accompanying consolidated financial statements. All material intercompany accounts and transactions have been eliminated. Certain reclassifications of prior period information were made to conform to the current year presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenues utilized in the earnings recognition process, that affect the reported amounts in the financial statements and accompanying notes. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates.
CASH EQUIVALENTS The Company considers securities purchased within three months of their date of maturity to be cash equivalents.
EARNINGS PER SHARE Primary earnings per share computations are based on the weighted-average number of common shares outstanding and common share equivalents with dilutive effects. Computations were based on 47,400,279 (1997), 47,573,669 (1996) and 47,187,934 (1995) weighted-average shares and net earnings after provision for cash dividends on preferred stock. Fully diluted earnings per share were comparable to primary earnings per share in each of the three years in the period ended July 31, 1997. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which requires the presentation of "basic" and "diluted" earnings per share ("EPS") and is effective for periods ending after December 15, 1997. Basic EPS is calculated based on the weighted-average number of shares outstanding and diluted EPS includes the effects of dilutive potential common shares. See Quarterly Financial Information (Unaudited) herein for pro forma effects on fiscal year 1997 earnings per share results.
INVENTORIES AND LONG-TERM CONTRACTS Inventory costs under long-term contracts generally reflect actual or average costs and include general and administrative costs of the Marine Engineering and Production segment. For the Company's other business segments, general and administrative costs are expensed as incurred. Other inventories are stated at the lower of cost or market, generally using the average or actual cost method. Progress payments received are first offset against the related balance of unbilled receivables and inventories with any remainder included in "Contract liabilities and customer deposits".
Revenues and profits on long-term contracts, performed over extended periods of time, are recognized under the percentage-of-completion method of accounting, principally based on direct labor dollars incurred for the Marine Engineering and Production segment and generally on the costs incurred or units-of-delivery basis for the Company's other operations. Revenues and profits on long-term contracts are based on the Company's estimates to complete and are reviewed periodically, with adjustments recorded in the period in which the revisions are made. Any anticipated losses on contracts are charged to operations as soon as they are determinable.
RESEARCH AND DEVELOPMENT Company-sponsored research and development expenditures are charged to expense as incurred. Worldwide expenditures on research and development activities amounted to $241.8 million, $217.0 million and $227.1 million, of which 29%, 30% and 28% were Company-sponsored, in the years ended July 31, 1997, 1996 and 1995, respectively.
PROPERTY, PLANT AND EQUIPMENT Investment in property, plant and equipment is stated at cost. Allowances for depreciation and amortization, computed generally by the straight-line method for financial reporting purposes, are provided over the estimated useful lives of the related assets.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOREIGN CURRENCIES The currency effects of translating the financial statements of those non-U.S. subsidiaries and divisions of the Company which operate in local currency environments are included in the "Cumulative currency translation adjustment" component of Shareholders' Investment. Gains and losses resulting from foreign currency transactions are included in results of operations and were not material in each of the three years in the period ended July 31, 1997.
GOODWILL AND OTHER INTANGIBLES For financial statement purposes, goodwill and other intangibles are generally amortized using the straight-line method over their estimated useful lives, not exceeding 40 years. Goodwill at July 31, 1997 and 1996 was $722.0 million and $674.1 million, respectively. The current and future profitability of the operations to which the goodwill relates are evaluated at least annually. These factors, along with management's plans with respect to the operations and the projected undiscounted cash flows, are considered in assessing the recoverability of the goodwill.
ENVIRONMENTAL COSTS Provisions for environmental costs are recorded when the Company determines its responsibility for remedial efforts or environmental liability and such amounts are reasonably estimable. The Company's exposure may be mitigated by potential insurance reimbursements and recovery under the Company's U.S. Government contracts, to the extent recoverable. These recoveries are not recorded until collection is probable. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation Liabilities". SOP 96-1 provides guidance on the recognition, measurement and disclosure of environmental remediation liabilities and is effective for fiscal years beginning after December 15, 1996. The adoption of SOP 96-1 by the Company in fiscal year 1998 is not expected to have a material impact on the Company's results of operations or financial position.
OTHER NEW ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components. Comprehensive income includes "all changes in equity during a period except those resulting from investments by owners and distributions to owners". SFAS No. 130 is effective for the Company starting in its fiscal year 1999 and is expected to impact the Company's reporting of currency effects from translating the financial statements of non-U.S. subsidiaries and divisions currently included as a component of Shareholders' Investment.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes new requirements on the reporting of information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for the Company starting in its fiscal year 1999.
In January 1997, the Securities and Exchange Commission issued new disclosure requirements for accounting policies on and market risk inherent in derivative and other financial instruments. Except for certain foreign currency hedging contracts involving immaterial amounts, the Company does not have derivative or other financial instruments which are subject to market risk.
NOTE B: ACQUISITIONS
During fiscal year 1997, the Company completed the acquisitions of Decca and SAIT. Decca, headquartered in the U.K., provides diverse marine electronic equipment, including radars, electronic chart systems, chart video plotting systems and bridge monitoring systems. SAIT manufactures customized and ruggedized mobile computing equipment and systems for military and commercial applications worldwide. These acquisitions have been accounted for under the purchase method of accounting and reflected herein based upon preliminary allocations of the purchase prices which are subject to revision based upon final settlement with the sellers and the receipt of certain pending information. Such revisions are not expected to have a material impact on the consolidated financial statements. These acquisitions, together with the
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
finalization of the allocation process with respect to previous acquisitions, resulted in an increase to goodwill of approximately $86.8 million during fiscal year 1997.
Acquisitions made during fiscal year 1996 included PRC and Sperry Marine. PRC is a diversified information technology company that designs, develops, integrates and supports computer-based information handling and processing systems and reengineers business processes for the U.S. Government, commercial customers and state and local governments. Sperry is a provider of advanced electronic navigation and guidance systems to commercial and military customers for marine uses. Other acquisitions made during each of the three fiscal years ended July 31, 1997 are considered integral to the Company's goals, but did not materially impact the consolidated financial statements.
NOTE C: CASH AND MARKETABLE SECURITIES, DEBT AND INTEREST
Cash and marketable securities consist of the following interest-earning investments:
Cash and cash equivalents (see Note A) at July 31, 1997 and 1996 consisted of $4.1 million and $77.1 million in time deposits, respectively.
The Company's marketable securities at July 31, 1997 and 1996 consisted of obligations issued by the U.S. Government with an estimated fair market value of $19.4 million and $19.3 million, respectively, based on quoted market prices compared with the carrying amount of $15.8 million for each period. These investments have been classified as held-to-maturity securities.
Notes payable and current portion of long-term obligations are composed of:
Long-term obligations consist of the following:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term obligations at July 31, 1997 mature as follows:
In connection with the acquisition of PRC in February 1996, the Company issued $300 million principal amount of 7.75% debentures due March 15, 2026 and $100 million principal amount of 6.98% debentures due March 15, 2036. Interest on these debentures is payable semiannually on March 15 and September 15, commencing on September 15, 1996. The debentures are redeemable in whole or in part, at the option of the Company at any time in the case of the 7.75% debentures and at any time after March 15, 2006 in the case of the 6.98% debentures. In either case the redemption price is equal to the greater of 100% of the principal amount of such debentures or the sum of the present values of the remaining scheduled payments of principal and interest thereon at U.S. Treasury Rates plus, in each case, accrued interest thereon to the date of redemption. The holders of the 6.98% debentures may elect to have such debentures redeemed on March 15, 2006 at 100% of the principal amount, together with accrued interest to March 15, 2006. The aggregate estimated fair value of these debentures at July 31, 1997 was $411.5 million, based on interest rates available for debt with similar terms.
At July 31, 1997, the Company had unused credit commitments of $315 million under a revolving credit agreement with various banks available for its general use.
Net interest expense is composed of the following:
Total cash interest payments made during fiscal year 1997 amounted to $45.2 million compared with $7.7 million for fiscal year 1996 and $5.3 million for fiscal year 1995. Capitalized interest costs in each of the three years in the period ended July 31, 1997 were not material.
In addition to the previously discussed marketable securities, the Company's other financial instruments include accounts receivable, accounts payable, payrolls and related expenses, notes payable and current portion of long-term obligations and other miscellaneous long-term assets and liabilities. The carrying amounts of the short-term assets and liabilities approximate their market values due to their short maturity. Differences between the recorded amounts and market value of the remainder of the financial instruments were not material. As discussed in Note I, the Company also has off-balance sheet guarantees and letter of credit agreements with notional values totaling $361 million at July 31, 1997, relating principally to the guarantee of future performance on foreign government contracts.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES
Following are the details of accounts receivable:
Of the $176.1 million in retentions and amounts not billed at July 31, 1997, $163.5 million is expected to be collected in fiscal year 1998 with the balance to be collected in subsequent years, as contract deliveries are made and warranty periods expire.
Summarized below are the components of inventory balances:
The amounts included in "Inventoried costs related to long-term contracts" representing general and administrative costs and production cost of delivered units in excess of anticipated average cost of all units expected to be produced are not significant.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E: PROPERTY, PLANT AND EQUIPMENT
Investment in property, plant and equipment consists of the following:
The net book value of assets utilized under capital leases was not material at July 31, 1997 and 1996.
The range of estimated useful lives for determining depreciation and amortization of the major classes of assets are:
As of July 31, 1997, minimum rental commitments under noncancellable operating leases were:
Minimum rental commitments under capital leases were not material at July 31, 1997.
Rental expense for operating leases, including amounts for short-term leases with nominal, if any, future rental commitments, was $48.9 million, $38.5 million and $28.4 million for the years ended July 31, 1997, 1996 and 1995, respectively. The minimum future rentals receivable under subleases and the contingent rental expenses were not significant.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F: SHAREHOLDERS' INVESTMENT
SHARE INFORMATION At July 31, 1997, there were authorized 120 million shares of Common stock, par value $1.00; 22 million shares of Preferred stock, par value $5.00 and 8 million shares of Preference stock, par value $2.50.
No cash dividends were paid on the Common stock in the three fiscal years ended July 31, 1997.
The Series B Preferred stock receives a $2.00 annual dividend, is not convertible into Common stock and is redeemable at the option of the Company at $80.00 plus accrued dividends and, in the event of liquidation, is entitled to receive $25.00 plus accrued dividends. There were 410,643 shares of Series B Preferred stock outstanding for each of the three fiscal years ended July 31, 1997.
STOCK OPTION INFORMATION The Company has a stock option plan which provides for the grant of incentive awards to officers and other key employees. Incentive awards may be granted in the form of stock options at fair market value of the Company's Common stock on the date of grant. Prior to August 1, 1996, options were and could have been granted at an option price of not less than 50% nor more than 100% of the fair market value of the Company's Common stock. Options subject to grant under the plan consist of 5,000,000 shares originally authorized plus 1.5% of the total issued and outstanding shares of Common stock as of the end of the preceding fiscal year, subject to certain limitations. Options so granted remain exercisable for a period of 10 years from date of grant. The Company also has a Director Stock Option Plan which provides for the grant of stock options to the Company's non-employee directors at the fair market value of the Company's Common stock on the date of grant. The number of options which are granted annually under the Director Stock Option plan is fixed by the plan and become fully exercisable on the first anniversary of their respective grant date.
The following is a summary of stock option activity for the three fiscal years ended July 31, 1997:
Exercisable options at July 31, 1997, 1996 and 1995 were 1,641,094, 1,317,070 and 1,215,126 at weighted-average exercise prices of $21.82, $18.40 and $14.86, respectively.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information with respect to options outstanding at July 31, 1997:
The Company recognizes compensation expense in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under the provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), compensation expense would have been measured using a fair value based method. On a pro forma basis, net earnings and primary earnings per share for fiscal year 1997 would have been $158.4 million and $3.32, respectively. For fiscal year 1996, pro forma net earnings and primary earnings per share would have been $150.2 million and $3.14, respectively. The pro forma results are based on estimated weighted-average fair values of options granted during fiscal years 1997 and 1996 of $17.41 and $17.01, respectively. The fair value of each grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in fiscal year 1997 and 1996, respectively: risk-free interest rates of 6.40% and 6.68%; expected volatility of 20% for both years; and expected lives of 6.2 years and 6.5 years.
SHAREHOLDER RIGHTS PLAN The Company has a Share Purchase Rights Plan which becomes exercisable under certain circumstances involving the acquisition by a person or group of 15% or more of the Company's Common stock. Each right will entitle the holder to purchase one one-thousandth of a share of Series A Participating Preferred Stock ("Preferred Share") at a price of $150 per one one-thousandth of a Preferred Share, subject to adjustment. Alternatively, each right will entitle its holder to purchase a number of shares of the Company's Common stock having a market value of two times the exercise price of the right. The Company may exchange the rights for one Common share per right or redeem them at $.01 per right at any time before they become exercisable. The rights expire in August 2004.
NOTE G: TAXES ON INCOME
Earnings before taxes on income and by geographic area are as follows:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of taxes on income consist of the following provisions (benefits):
The primary components of the Company's deferred income tax assets and liabilities are as follows:
The deferred tax assets and liabilities are classified on the Consolidated Balance Sheets as follows:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of income taxes at the U.S. statutory rate to the provision for income taxes:
Undistributed earnings of non-U.S. subsidiaries for which U.S. taxes have not been provided are included in consolidated retained earnings in the amounts of $132 million and $143 million at July 31, 1997 and 1996, respectively. If such earnings were distributed, U.S. income taxes would be partially reduced by available credits for taxes paid to the jurisdictions in which the income was earned.
The Company made cash tax payments, including amounts for prior years' taxes, of $105.6 million, $169.9 million and $65.3 million in fiscal years 1997, 1996 and 1995, respectively.
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS The majority of the Company's U.S. employees are covered by contributory defined benefit plans under which employees are eligible for benefits at age 65. Generally, benefits are determined under a formula based primarily on the participant's total plan contributions. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible.
The Company has a defined contribution voluntary savings plan for eligible U.S. employees. This 401(K) plan is designed to enhance the existing retirement programs for participating employees. The Company matches 50% of a certain portion of participants' contributions to the plan.
The Company's non-U.S. subsidiaries also have retirement plans for long-term employees. These plans are not considered to be significant individually or in the aggregate to the Company's consolidated financial position. The pension liabilities and their related costs are computed in accordance with the laws of the individual nations and appropriate actuarial practices.
Additionally, PRC has various defined contribution pension plans covering substantially all of its employees, some of which provide for discretionary contributions.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the components of net periodic pension income (cost) for the U.S. defined benefit plans and costs for defined contribution plans and non-U.S. pension plans for fiscal years 1997, 1996 and 1995 are as follows:
A reconciliation of the funded status of the U.S. defined benefit plans is as follows:
The accumulated benefit obligations at July 31, 1997 and 1996 were $927.1 million and $851.1 million, inclusive of vested benefit obligations of $899.9 million and $824.0 million, respectively.
The primary actuarial assumptions used include:
The excess of plan assets over the projected benefit obligation at August 1, 1986 (when the Company adopted SFAS No. 87) and subsequent unrecognized gains and losses are fully amortized over the average remaining service period of active employees expected to receive benefits under the plans, generally 15 years. Pension assets included in "Other Assets and Long-term Investments" were $279.6 million and $239.7 million at July 31, 1997 and 1996, respectively. Plan assets are invested primarily in listed common stock and fixed income securities.
In fiscal years 1997, 1996 and 1995, the Company incurred $6.0 million, $5.0 million and $7.0 million, respectively, in costs for special separation and supplemental early retirement benefits for certain employees in connection with workforce reductions at certain operations.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER POSTRETIREMENT BENEFITS In addition to pension benefits, certain of the Company's U.S. employees are covered by postretirement health care and life insurance benefit plans. These benefit plans are unfunded.
The components of net periodic postretirement benefit costs for fiscal years 1997, 1996 and 1995 recognized under the provisions of SFAS No. 106 are as follows:
The following is a summary of the status of the postretirement benefit plans:
Actuarial assumptions used to measure the accumulated benefit obligation include a discount rate of 8 1/4% at July 31, 1997 and 1996. The assumed health care cost trend rate for fiscal year 1998 is 9 1/2%, decreasing over 20 years to 6% where it is expected to remain thereafter. The assumed health care cost trend rates for fiscal years 1997 and 1996 were 10.3% and 10.5%, respectively, decreasing over 21 and 22 years, respectively, to 6%. The effect of a one-percentage point increase in the assumed health care cost trend rate on the service cost and interest cost components of the net periodic postretirement benefit cost is not material. A one-percentage-point change in the assumed health care cost trend rate would impact the accumulated benefit obligation by approximately $12.7 million.
NOTE I: DEFENSE CONTRACTS, LITIGATION AND CONTINGENCIES
Approximately 67%, 71% and 73% of total sales and service revenues of the Company for the years ended July 31, 1997, 1996 and 1995 were from U.S. Government contracts and subcontracts. Approximately 74% of these revenues for 1997 related to fixed-price type contracts. As is common with U.S. Government contracts, the Company's U.S. defense contracts are unilaterally terminable at the option of the U.S. Government with compensation for work completed and costs incurred. Contracts with the U.S. Government are subject to certain laws and regulations, the noncompliance with which may result in various sanctions. In the current government contracting environment, contractors, sometimes without their knowledge, are subject to investigations by the U.S. Government initiated in various ways. Most investigations result in no action being taken or administrative resolution. Litton is aware of ongoing investigations and is cooperating in those investigations. Should any investigation result in the filing of formal charges against the Company by the U.S. Government, disclosure will be made if the amount involved or the relief sought is deemed by the Company to be material.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Litton is suing Honeywell, Inc. ("Honeywell") for patent infringement relating to the manufacture of ring laser gyro navigation systems which are used in commercial aircraft. After trial of that case in the U.S. District Court for the Central District of California, on August 31, 1993, the jury rendered a verdict in favor of Litton in the amount of $1.2 billion. On January 9, 1995, the District Court released a Memorandum of Decision finding Litton's patent invalid and rejecting the jury verdict. Litton appealed to the U.S. Court of Appeals for the Federal Circuit. On July 3, 1996, the Court of Appeals rendered a decision reversing the District Court's decision, finding the patent valid and infringed by Honeywell. The Court of Appeals reinstated the jury's verdict on liability including the findings of interference with contract and prospective business advantage and ordered a new trial on the amount of damages sustained by Litton in the District Court. On March 17, 1997, the U.S. Supreme Court vacated the Court of Appeals ruling and remanded the case to the Court of Appeals for further consideration in view of the Supreme Court's decision in Warner-Jenkins Co. v. Hilton Davis Chemical Co. On September 30, 1997, a hearing took place before the Court of Appeals. As of this date, no decision has been rendered by the Court of Appeals.
Litton is also suing Honeywell on antitrust grounds in the same U.S. District Court. On February 29, 1996, a jury rendered a verdict in favor of Litton. On July 25, 1996, the District Court upheld the jury's verdict that Honeywell attempted to illegally monopolize and did monopolize the market for inertial reference systems for large commercial air transport, commuter and business aircraft. However, the District Court declined to enter the $234 million jury verdict on the basis that Litton's damage study as presented failed to disaggregate damages between illegal and legal acts. A new trial limited to the issue of the amount of damages sustained by Litton attributable to Honeywell's unlawful conduct has been ordered by the District Court. The District Court has declined to set a trial date until after the Court of Appeals rules in the patent case to Honeywell's unlawful conduct.
There are various other litigation proceedings in which the Company is involved. Although the results of litigation proceedings cannot be predicted with certainty, it is the opinion of the General Counsel that the ultimate resolution of these other proceedings will not have a material adverse effect on the Company's consolidated financial position.
The Company has issued or is a party to various guarantees and letter of credit agreements totaling $361 million at July 31, 1997, relating principally to the guarantee of future performance on foreign government contracts.
NOTE J: BUSINESS SEGMENT REPORTING
The Company's primary operations are reported in the following three segments: Advanced Electronics, Marine Engineering and Production, and Electronic Components and Materials (formerly known as the Interconnect Products segment). In connection with organizational changes brought about from acquisitions, effective July 31, 1996, certain businesses which were previously reported in the Advanced Electronics segment have been grouped with the Electronic Components and Materials' businesses. Management believes that these changes result in more meaningful segment reporting and are more reflective of the operational characteristics of these businesses. Accordingly, the segment information for fiscal year 1995 presented herein has been restated to reflect these changes.
The Advanced Electronics segment designs, develops and manufactures inertial navigation, guidance and control and marine electronic systems. This segment also designs, develops, integrates and supports computer-based information systems and re-engineers business processes, as well as provides command, control and communications and electronic warfare systems. Results in fiscal years 1997 and 1996 include the effects of acquisitions completed during those fiscal years (see Note B).
The Marine Engineering and Production segment is engaged in the building of large multimission surface combatant ships and is a provider of overhaul, repair, modernization, ship design and engineering services.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The U.S. Government is a significant customer of both the Advanced Electronics and Marine Engineering and Production segments (see Note I).
The Electronic Components and Materials segment is an international supplier of laser crystals, connectors, multilayer circuit boards, solder materials and other electronic components used primarily in the telecommunication, industrial and computer markets.
Export sales were $489.1 million, $406.8 million and $324.6 million in fiscal years 1997, 1996 and 1995, respectively. Intersegment sales and sales between geographic areas are not material. All internal sales and transfers are based on negotiated prices.
Costs for Corporate, Interest and Other include unallocated expenses and net interest expense and assets consist primarily of cash, marketable securities and deferred tax assets.
OPERATIONS BY BUSINESS SEGMENT (MILLIONS OF DOLLARS)
OPERATIONS BY GEOGRAPHIC AREA (MILLIONS OF DOLLARS)
LITTON INDUSTRIES, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (MILLION OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
- ---------------
The total of quarterly amounts for earnings per share will not necessarily equal the annual amount, since the computions are based on the average number of common shares and dilutive common share equivalents outstanding during each period.
Litton Common stock is traded principally on the NewYork Stock Exchange and the Pacific Exchange, Inc. under the symbol "LIT".
As of September 30, 1997, there were approximately 24,500 holders of record of the Common stock.
* Primary earnings per share was the same as fully diluted earnings per share in each of the quarterly periods for fiscal years 1997 and 1996 and for the fiscal year 1996. For the fiscal year 1997, fully diluted earnings per share was $3.39.
** Pro forma basic earnings per share under SFAS No. 128 (see Note A) would have been:
Pro forma diluted earnings per share for fiscal year 1997 would have been the same as primary earnings per share.
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS
E-1
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS -- (CONTINUED)
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E-2
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS -- (CONTINUED)
E-3
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS -- (CONTINUED)
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E-4
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS -- (CONTINUED)
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E-5
EXHIBIT 11
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EARNINGS (LOSS) PER SHARE AND FULLY DILUTED EARNINGS (LOSS) PER SHARE (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(A) The weighted-average effect of stock options was anti-dilutive for fiscal year 1994 and, therefore, not considered.
E-6
EXHIBIT 11 (CONTINUED) LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EARNINGS (LOSS) PER SHARE AND FULLY DILUTED EARNINGS (LOSS) PER SHARE (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(A) The fully diluted earnings per share calculation for fiscal year 1993 did not include the assumed conversion of zero coupon convertible subordinated notes issued September 26, 1990, because the effect on shares used in the calculation and the related increase to income for the interest expense adjustment, net of tax, would be anti-dilutive. Substantially all of these notes were converted into Common stock and the remainder redeemed for cash in fiscal year 1993.
E-7
EXHIBIT 21
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SUBSIDIARIES OF THE REGISTRANT
The Registrant has additional operating subsidiaries, which considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary.
All above listed subsidiaries have been consolidated in the Registrant's financial statements.
E-8
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in (i) Registration Statement No. 2-93044 on Form S-8, (ii) Registration Statement No. 33-27467 on Form S-8, (iii) Registration Statement No. 33-27468 on Form S-8, (iv) Registration Statement No. 33-44684 on Form S-3, (v) Registration Statement No. 33-55944 on Form S-8, (vi) Registration Statement No. 333-13193 on Form S-3, (vii) Registration Statement No. 333-23447 on Form S-8, and (viii) Registration Statement No. 333-28295 on Form S-3 of our report dated September 17, 1997, appearing in this Annual Report on Form 10-K of Litton Industries, Inc. and subsidiary companies for the year ended July 31, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California October 10, 1997
E-9
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on directors of the Company will be included under the caption "Election of Directors" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 4, 1997, which is hereby incorporated by reference.
The executive officers of the Company are elected each year by the Board of Directors at its first meeting following the Annual Meeting of Shareholders to serve during the ensuing year and until their respective successors are elected and qualify. There are no family relationships between any of the executive officers of the Company. The following information indicates the position and age of the executive officers at October 8, 1997 and their business experience during the prior five years:
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation will be included under the caption "Compensation of Executive Officers" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 4, 1997, which is hereby incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of the Company's voting securities by each director and all officers and directors as a group, and by any person known to beneficially own more than 5% of any class of voting security of the Company will be included under the captions "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 4, 1997, which is hereby incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions including information with respect to management indebtedness will be included under the caption "Indebtedness of Management to the Company" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 4, 1997, which is hereby incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
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.
LITTON INDUSTRIES, INC.
/s/ CAROL A. WIESNER
------------------------------------ Carol A. Wiesner Vice President and Controller (Chief Accounting Officer)
October 10, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
LITTON INDUSTRIES, INC.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements of Litton Industries, Inc. and subsidiary companies, and related financial information included in this Annual Report, have been prepared by the Company, whose management is responsible for their integrity. These statements, which necessarily reflect estimates and judgments, have been prepared in conformity with generally accepted accounting principles.
The Company maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded. As part of this system, the Company has an internal audit staff to monitor the compliance with and the effectiveness of established procedures.
The consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose report appears on page.
The Audit and Compliance Committee of the Board of Directors, which consists solely of directors who are not employees of the Company, meets periodically with management, the independent auditors and the Company's internal auditors to review the scope of their activities and reports relating to internal controls and financial reporting matters. The independent and internal auditors have full and free access to the Audit and Compliance Committee and meet with the Committee both with and without the presence of Company management.
/s/ RUDOLPH E. LANG, JR. - -------------------------------------- Rudolph E. Lang, Jr. Senior Vice President and Chief Financial Officer
September 17, 1997
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders Litton Industries, Inc. Woodland Hills, California
We have audited the accompanying consolidated balance sheets of Litton Industries, Inc. and subsidiary companies as of July 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' investment, and cash flows for each of the three years in the period ended July 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 Litton Industries, Inc. and subsidiary companies as of July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California September 17, 1997
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accounts of Litton Industries, Inc. and its wholly-owned subsidiaries (the "Company" or "Litton") are included in the accompanying consolidated financial statements. All material intercompany accounts and transactions have been eliminated. Certain reclassifications of prior period information were made to conform to the current year presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenues utilized in the earnings recognition process, that affect the reported amounts in the financial statements and accompanying notes. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates.
CASH EQUIVALENTS The Company considers securities purchased within three months of their date of maturity to be cash equivalents.
EARNINGS PER SHARE Primary earnings per share computations are based on the weighted-average number of common shares outstanding and common share equivalents with dilutive effects. Computations were based on 47,400,279 (1997), 47,573,669 (1996) and 47,187,934 (1995) weighted-average shares and net earnings after provision for cash dividends on preferred stock. Fully diluted earnings per share were comparable to primary earnings per share in each of the three years in the period ended July 31, 1997. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which requires the presentation of "basic" and "diluted" earnings per share ("EPS") and is effective for periods ending after December 15, 1997. Basic EPS is calculated based on the weighted-average number of shares outstanding and diluted EPS includes the effects of dilutive potential common shares. See Quarterly Financial Information (Unaudited) herein for pro forma effects on fiscal year 1997 earnings per share results.
INVENTORIES AND LONG-TERM CONTRACTS Inventory costs under long-term contracts generally reflect actual or average costs and include general and administrative costs of the Marine Engineering and Production segment. For the Company's other business segments, general and administrative costs are expensed as incurred. Other inventories are stated at the lower of cost or market, generally using the average or actual cost method. Progress payments received are first offset against the related balance of unbilled receivables and inventories with any remainder included in "Contract liabilities and customer deposits".
Revenues and profits on long-term contracts, performed over extended periods of time, are recognized under the percentage-of-completion method of accounting, principally based on direct labor dollars incurred for the Marine Engineering and Production segment and generally on the costs incurred or units-of-delivery basis for the Company's other operations. Revenues and profits on long-term contracts are based on the Company's estimates to complete and are reviewed periodically, with adjustments recorded in the period in which the revisions are made. Any anticipated losses on contracts are charged to operations as soon as they are determinable.
RESEARCH AND DEVELOPMENT Company-sponsored research and development expenditures are charged to expense as incurred. Worldwide expenditures on research and development activities amounted to $241.8 million, $217.0 million and $227.1 million, of which 29%, 30% and 28% were Company-sponsored, in the years ended July 31, 1997, 1996 and 1995, respectively.
PROPERTY, PLANT AND EQUIPMENT Investment in property, plant and equipment is stated at cost. Allowances for depreciation and amortization, computed generally by the straight-line method for financial reporting purposes, are provided over the estimated useful lives of the related assets.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOREIGN CURRENCIES The currency effects of translating the financial statements of those non-U.S. subsidiaries and divisions of the Company which operate in local currency environments are included in the "Cumulative currency translation adjustment" component of Shareholders' Investment. Gains and losses resulting from foreign currency transactions are included in results of operations and were not material in each of the three years in the period ended July 31, 1997.
GOODWILL AND OTHER INTANGIBLES For financial statement purposes, goodwill and other intangibles are generally amortized using the straight-line method over their estimated useful lives, not exceeding 40 years. Goodwill at July 31, 1997 and 1996 was $722.0 million and $674.1 million, respectively. The current and future profitability of the operations to which the goodwill relates are evaluated at least annually. These factors, along with management's plans with respect to the operations and the projected undiscounted cash flows, are considered in assessing the recoverability of the goodwill.
ENVIRONMENTAL COSTS Provisions for environmental costs are recorded when the Company determines its responsibility for remedial efforts or environmental liability and such amounts are reasonably estimable. The Company's exposure may be mitigated by potential insurance reimbursements and recovery under the Company's U.S. Government contracts, to the extent recoverable. These recoveries are not recorded until collection is probable. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation Liabilities". SOP 96-1 provides guidance on the recognition, measurement and disclosure of environmental remediation liabilities and is effective for fiscal years beginning after December 15, 1996. The adoption of SOP 96-1 by the Company in fiscal year 1998 is not expected to have a material impact on the Company's results of operations or financial position.
OTHER NEW ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components. Comprehensive income includes "all changes in equity during a period except those resulting from investments by owners and distributions to owners". SFAS No. 130 is effective for the Company starting in its fiscal year 1999 and is expected to impact the Company's reporting of currency effects from translating the financial statements of non-U.S. subsidiaries and divisions currently included as a component of Shareholders' Investment.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes new requirements on the reporting of information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for the Company starting in its fiscal year 1999.
In January 1997, the Securities and Exchange Commission issued new disclosure requirements for accounting policies on and market risk inherent in derivative and other financial instruments. Except for certain foreign currency hedging contracts involving immaterial amounts, the Company does not have derivative or other financial instruments which are subject to market risk.
NOTE B: ACQUISITIONS
During fiscal year 1997, the Company completed the acquisitions of Decca and SAIT. Decca, headquartered in the U.K., provides diverse marine electronic equipment, including radars, electronic chart systems, chart video plotting systems and bridge monitoring systems. SAIT manufactures customized and ruggedized mobile computing equipment and systems for military and commercial applications worldwide. These acquisitions have been accounted for under the purchase method of accounting and reflected herein based upon preliminary allocations of the purchase prices which are subject to revision based upon final settlement with the sellers and the receipt of certain pending information. Such revisions are not expected to have a material impact on the consolidated financial statements. These acquisitions, together with the
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
finalization of the allocation process with respect to previous acquisitions, resulted in an increase to goodwill of approximately $86.8 million during fiscal year 1997.
Acquisitions made during fiscal year 1996 included PRC and Sperry Marine. PRC is a diversified information technology company that designs, develops, integrates and supports computer-based information handling and processing systems and reengineers business processes for the U.S. Government, commercial customers and state and local governments. Sperry is a provider of advanced electronic navigation and guidance systems to commercial and military customers for marine uses. Other acquisitions made during each of the three fiscal years ended July 31, 1997 are considered integral to the Company's goals, but did not materially impact the consolidated financial statements.
NOTE C: CASH AND MARKETABLE SECURITIES, DEBT AND INTEREST
Cash and marketable securities consist of the following interest-earning investments:
Cash and cash equivalents (see Note A) at July 31, 1997 and 1996 consisted of $4.1 million and $77.1 million in time deposits, respectively.
The Company's marketable securities at July 31, 1997 and 1996 consisted of obligations issued by the U.S. Government with an estimated fair market value of $19.4 million and $19.3 million, respectively, based on quoted market prices compared with the carrying amount of $15.8 million for each period. These investments have been classified as held-to-maturity securities.
Notes payable and current portion of long-term obligations are composed of:
Long-term obligations consist of the following:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term obligations at July 31, 1997 mature as follows:
In connection with the acquisition of PRC in February 1996, the Company issued $300 million principal amount of 7.75% debentures due March 15, 2026 and $100 million principal amount of 6.98% debentures due March 15, 2036. Interest on these debentures is payable semiannually on March 15 and September 15, commencing on September 15, 1996. The debentures are redeemable in whole or in part, at the option of the Company at any time in the case of the 7.75% debentures and at any time after March 15, 2006 in the case of the 6.98% debentures. In either case the redemption price is equal to the greater of 100% of the principal amount of such debentures or the sum of the present values of the remaining scheduled payments of principal and interest thereon at U.S. Treasury Rates plus, in each case, accrued interest thereon to the date of redemption. The holders of the 6.98% debentures may elect to have such debentures redeemed on March 15, 2006 at 100% of the principal amount, together with accrued interest to March 15, 2006. The aggregate estimated fair value of these debentures at July 31, 1997 was $411.5 million, based on interest rates available for debt with similar terms.
At July 31, 1997, the Company had unused credit commitments of $315 million under a revolving credit agreement with various banks available for its general use.
Net interest expense is composed of the following:
Total cash interest payments made during fiscal year 1997 amounted to $45.2 million compared with $7.7 million for fiscal year 1996 and $5.3 million for fiscal year 1995. Capitalized interest costs in each of the three years in the period ended July 31, 1997 were not material.
In addition to the previously discussed marketable securities, the Company's other financial instruments include accounts receivable, accounts payable, payrolls and related expenses, notes payable and current portion of long-term obligations and other miscellaneous long-term assets and liabilities. The carrying amounts of the short-term assets and liabilities approximate their market values due to their short maturity. Differences between the recorded amounts and market value of the remainder of the financial instruments were not material. As discussed in Note I, the Company also has off-balance sheet guarantees and letter of credit agreements with notional values totaling $361 million at July 31, 1997, relating principally to the guarantee of future performance on foreign government contracts.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES
Following are the details of accounts receivable:
Of the $176.1 million in retentions and amounts not billed at July 31, 1997, $163.5 million is expected to be collected in fiscal year 1998 with the balance to be collected in subsequent years, as contract deliveries are made and warranty periods expire.
Summarized below are the components of inventory balances:
The amounts included in "Inventoried costs related to long-term contracts" representing general and administrative costs and production cost of delivered units in excess of anticipated average cost of all units expected to be produced are not significant.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E: PROPERTY, PLANT AND EQUIPMENT
Investment in property, plant and equipment consists of the following:
The net book value of assets utilized under capital leases was not material at July 31, 1997 and 1996.
The range of estimated useful lives for determining depreciation and amortization of the major classes of assets are:
As of July 31, 1997, minimum rental commitments under noncancellable operating leases were:
Minimum rental commitments under capital leases were not material at July 31, 1997.
Rental expense for operating leases, including amounts for short-term leases with nominal, if any, future rental commitments, was $48.9 million, $38.5 million and $28.4 million for the years ended July 31, 1997, 1996 and 1995, respectively. The minimum future rentals receivable under subleases and the contingent rental expenses were not significant.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F: SHAREHOLDERS' INVESTMENT
SHARE INFORMATION At July 31, 1997, there were authorized 120 million shares of Common stock, par value $1.00; 22 million shares of Preferred stock, par value $5.00 and 8 million shares of Preference stock, par value $2.50.
No cash dividends were paid on the Common stock in the three fiscal years ended July 31, 1997.
The Series B Preferred stock receives a $2.00 annual dividend, is not convertible into Common stock and is redeemable at the option of the Company at $80.00 plus accrued dividends and, in the event of liquidation, is entitled to receive $25.00 plus accrued dividends. There were 410,643 shares of Series B Preferred stock outstanding for each of the three fiscal years ended July 31, 1997.
STOCK OPTION INFORMATION The Company has a stock option plan which provides for the grant of incentive awards to officers and other key employees. Incentive awards may be granted in the form of stock options at fair market value of the Company's Common stock on the date of grant. Prior to August 1, 1996, options were and could have been granted at an option price of not less than 50% nor more than 100% of the fair market value of the Company's Common stock. Options subject to grant under the plan consist of 5,000,000 shares originally authorized plus 1.5% of the total issued and outstanding shares of Common stock as of the end of the preceding fiscal year, subject to certain limitations. Options so granted remain exercisable for a period of 10 years from date of grant. The Company also has a Director Stock Option Plan which provides for the grant of stock options to the Company's non-employee directors at the fair market value of the Company's Common stock on the date of grant. The number of options which are granted annually under the Director Stock Option plan is fixed by the plan and become fully exercisable on the first anniversary of their respective grant date.
The following is a summary of stock option activity for the three fiscal years ended July 31, 1997:
Exercisable options at July 31, 1997, 1996 and 1995 were 1,641,094, 1,317,070 and 1,215,126 at weighted-average exercise prices of $21.82, $18.40 and $14.86, respectively.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information with respect to options outstanding at July 31, 1997:
The Company recognizes compensation expense in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under the provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), compensation expense would have been measured using a fair value based method. On a pro forma basis, net earnings and primary earnings per share for fiscal year 1997 would have been $158.4 million and $3.32, respectively. For fiscal year 1996, pro forma net earnings and primary earnings per share would have been $150.2 million and $3.14, respectively. The pro forma results are based on estimated weighted-average fair values of options granted during fiscal years 1997 and 1996 of $17.41 and $17.01, respectively. The fair value of each grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in fiscal year 1997 and 1996, respectively: risk-free interest rates of 6.40% and 6.68%; expected volatility of 20% for both years; and expected lives of 6.2 years and 6.5 years.
SHAREHOLDER RIGHTS PLAN The Company has a Share Purchase Rights Plan which becomes exercisable under certain circumstances involving the acquisition by a person or group of 15% or more of the Company's Common stock. Each right will entitle the holder to purchase one one-thousandth of a share of Series A Participating Preferred Stock ("Preferred Share") at a price of $150 per one one-thousandth of a Preferred Share, subject to adjustment. Alternatively, each right will entitle its holder to purchase a number of shares of the Company's Common stock having a market value of two times the exercise price of the right. The Company may exchange the rights for one Common share per right or redeem them at $.01 per right at any time before they become exercisable. The rights expire in August 2004.
NOTE G: TAXES ON INCOME
Earnings before taxes on income and by geographic area are as follows:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of taxes on income consist of the following provisions (benefits):
The primary components of the Company's deferred income tax assets and liabilities are as follows:
The deferred tax assets and liabilities are classified on the Consolidated Balance Sheets as follows:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of income taxes at the U.S. statutory rate to the provision for income taxes:
Undistributed earnings of non-U.S. subsidiaries for which U.S. taxes have not been provided are included in consolidated retained earnings in the amounts of $132 million and $143 million at July 31, 1997 and 1996, respectively. If such earnings were distributed, U.S. income taxes would be partially reduced by available credits for taxes paid to the jurisdictions in which the income was earned.
The Company made cash tax payments, including amounts for prior years' taxes, of $105.6 million, $169.9 million and $65.3 million in fiscal years 1997, 1996 and 1995, respectively.
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS The majority of the Company's U.S. employees are covered by contributory defined benefit plans under which employees are eligible for benefits at age 65. Generally, benefits are determined under a formula based primarily on the participant's total plan contributions. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible.
The Company has a defined contribution voluntary savings plan for eligible U.S. employees. This 401(K) plan is designed to enhance the existing retirement programs for participating employees. The Company matches 50% of a certain portion of participants' contributions to the plan.
The Company's non-U.S. subsidiaries also have retirement plans for long-term employees. These plans are not considered to be significant individually or in the aggregate to the Company's consolidated financial position. The pension liabilities and their related costs are computed in accordance with the laws of the individual nations and appropriate actuarial practices.
Additionally, PRC has various defined contribution pension plans covering substantially all of its employees, some of which provide for discretionary contributions.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the components of net periodic pension income (cost) for the U.S. defined benefit plans and costs for defined contribution plans and non-U.S. pension plans for fiscal years 1997, 1996 and 1995 are as follows:
A reconciliation of the funded status of the U.S. defined benefit plans is as follows:
The accumulated benefit obligations at July 31, 1997 and 1996 were $927.1 million and $851.1 million, inclusive of vested benefit obligations of $899.9 million and $824.0 million, respectively.
The primary actuarial assumptions used include:
The excess of plan assets over the projected benefit obligation at August 1, 1986 (when the Company adopted SFAS No. 87) and subsequent unrecognized gains and losses are fully amortized over the average remaining service period of active employees expected to receive benefits under the plans, generally 15 years. Pension assets included in "Other Assets and Long-term Investments" were $279.6 million and $239.7 million at July 31, 1997 and 1996, respectively. Plan assets are invested primarily in listed common stock and fixed income securities.
In fiscal years 1997, 1996 and 1995, the Company incurred $6.0 million, $5.0 million and $7.0 million, respectively, in costs for special separation and supplemental early retirement benefits for certain employees in connection with workforce reductions at certain operations.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER POSTRETIREMENT BENEFITS In addition to pension benefits, certain of the Company's U.S. employees are covered by postretirement health care and life insurance benefit plans. These benefit plans are unfunded.
The components of net periodic postretirement benefit costs for fiscal years 1997, 1996 and 1995 recognized under the provisions of SFAS No. 106 are as follows:
The following is a summary of the status of the postretirement benefit plans:
Actuarial assumptions used to measure the accumulated benefit obligation include a discount rate of 8 1/4% at July 31, 1997 and 1996. The assumed health care cost trend rate for fiscal year 1998 is 9 1/2%, decreasing over 20 years to 6% where it is expected to remain thereafter. The assumed health care cost trend rates for fiscal years 1997 and 1996 were 10.3% and 10.5%, respectively, decreasing over 21 and 22 years, respectively, to 6%. The effect of a one-percentage point increase in the assumed health care cost trend rate on the service cost and interest cost components of the net periodic postretirement benefit cost is not material. A one-percentage-point change in the assumed health care cost trend rate would impact the accumulated benefit obligation by approximately $12.7 million.
NOTE I: DEFENSE CONTRACTS, LITIGATION AND CONTINGENCIES
Approximately 67%, 71% and 73% of total sales and service revenues of the Company for the years ended July 31, 1997, 1996 and 1995 were from U.S. Government contracts and subcontracts. Approximately 74% of these revenues for 1997 related to fixed-price type contracts. As is common with U.S. Government contracts, the Company's U.S. defense contracts are unilaterally terminable at the option of the U.S. Government with compensation for work completed and costs incurred. Contracts with the U.S. Government are subject to certain laws and regulations, the noncompliance with which may result in various sanctions. In the current government contracting environment, contractors, sometimes without their knowledge, are subject to investigations by the U.S. Government initiated in various ways. Most investigations result in no action being taken or administrative resolution. Litton is aware of ongoing investigations and is cooperating in those investigations. Should any investigation result in the filing of formal charges against the Company by the U.S. Government, disclosure will be made if the amount involved or the relief sought is deemed by the Company to be material.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Litton is suing Honeywell, Inc. ("Honeywell") for patent infringement relating to the manufacture of ring laser gyro navigation systems which are used in commercial aircraft. After trial of that case in the U.S. District Court for the Central District of California, on August 31, 1993, the jury rendered a verdict in favor of Litton in the amount of $1.2 billion. On January 9, 1995, the District Court released a Memorandum of Decision finding Litton's patent invalid and rejecting the jury verdict. Litton appealed to the U.S. Court of Appeals for the Federal Circuit. On July 3, 1996, the Court of Appeals rendered a decision reversing the District Court's decision, finding the patent valid and infringed by Honeywell. The Court of Appeals reinstated the jury's verdict on liability including the findings of interference with contract and prospective business advantage and ordered a new trial on the amount of damages sustained by Litton in the District Court. On March 17, 1997, the U.S. Supreme Court vacated the Court of Appeals ruling and remanded the case to the Court of Appeals for further consideration in view of the Supreme Court's decision in Warner-Jenkins Co. v. Hilton Davis Chemical Co. On September 30, 1997, a hearing took place before the Court of Appeals. As of this date, no decision has been rendered by the Court of Appeals.
Litton is also suing Honeywell on antitrust grounds in the same U.S. District Court. On February 29, 1996, a jury rendered a verdict in favor of Litton. On July 25, 1996, the District Court upheld the jury's verdict that Honeywell attempted to illegally monopolize and did monopolize the market for inertial reference systems for large commercial air transport, commuter and business aircraft. However, the District Court declined to enter the $234 million jury verdict on the basis that Litton's damage study as presented failed to disaggregate damages between illegal and legal acts. A new trial limited to the issue of the amount of damages sustained by Litton attributable to Honeywell's unlawful conduct has been ordered by the District Court. The District Court has declined to set a trial date until after the Court of Appeals rules in the patent case to Honeywell's unlawful conduct.
There are various other litigation proceedings in which the Company is involved. Although the results of litigation proceedings cannot be predicted with certainty, it is the opinion of the General Counsel that the ultimate resolution of these other proceedings will not have a material adverse effect on the Company's consolidated financial position.
The Company has issued or is a party to various guarantees and letter of credit agreements totaling $361 million at July 31, 1997, relating principally to the guarantee of future performance on foreign government contracts.
NOTE J: BUSINESS SEGMENT REPORTING
The Company's primary operations are reported in the following three segments: Advanced Electronics, Marine Engineering and Production, and Electronic Components and Materials (formerly known as the Interconnect Products segment). In connection with organizational changes brought about from acquisitions, effective July 31, 1996, certain businesses which were previously reported in the Advanced Electronics segment have been grouped with the Electronic Components and Materials' businesses. Management believes that these changes result in more meaningful segment reporting and are more reflective of the operational characteristics of these businesses. Accordingly, the segment information for fiscal year 1995 presented herein has been restated to reflect these changes.
The Advanced Electronics segment designs, develops and manufactures inertial navigation, guidance and control and marine electronic systems. This segment also designs, develops, integrates and supports computer-based information systems and re-engineers business processes, as well as provides command, control and communications and electronic warfare systems. Results in fiscal years 1997 and 1996 include the effects of acquisitions completed during those fiscal years (see Note B).
The Marine Engineering and Production segment is engaged in the building of large multimission surface combatant ships and is a provider of overhaul, repair, modernization, ship design and engineering services.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The U.S. Government is a significant customer of both the Advanced Electronics and Marine Engineering and Production segments (see Note I).
The Electronic Components and Materials segment is an international supplier of laser crystals, connectors, multilayer circuit boards, solder materials and other electronic components used primarily in the telecommunication, industrial and computer markets.
Export sales were $489.1 million, $406.8 million and $324.6 million in fiscal years 1997, 1996 and 1995, respectively. Intersegment sales and sales between geographic areas are not material. All internal sales and transfers are based on negotiated prices.
Costs for Corporate, Interest and Other include unallocated expenses and net interest expense and assets consist primarily of cash, marketable securities and deferred tax assets.
OPERATIONS BY BUSINESS SEGMENT (MILLIONS OF DOLLARS)
OPERATIONS BY GEOGRAPHIC AREA (MILLIONS OF DOLLARS)
LITTON INDUSTRIES, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (MILLION OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
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The total of quarterly amounts for earnings per share will not necessarily equal the annual amount, since the computions are based on the average number of common shares and dilutive common share equivalents outstanding during each period.
Litton Common stock is traded principally on the NewYork Stock Exchange and the Pacific Exchange, Inc. under the symbol "LIT".
As of September 30, 1997, there were approximately 24,500 holders of record of the Common stock.
* Primary earnings per share was the same as fully diluted earnings per share in each of the quarterly periods for fiscal years 1997 and 1996 and for the fiscal year 1996. For the fiscal year 1997, fully diluted earnings per share was $3.39.
** Pro forma basic earnings per share under SFAS No. 128 (see Note A) would have been:
Pro forma diluted earnings per share for fiscal year 1997 would have been the same as primary earnings per share.
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS
E-1
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS -- (CONTINUED)
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E-2
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS -- (CONTINUED)
E-3
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS -- (CONTINUED)
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E-4
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS -- (CONTINUED)
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EXHIBIT 11
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EARNINGS (LOSS) PER SHARE AND FULLY DILUTED EARNINGS (LOSS) PER SHARE (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(A) The weighted-average effect of stock options was anti-dilutive for fiscal year 1994 and, therefore, not considered.
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EXHIBIT 11 (CONTINUED) LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EARNINGS (LOSS) PER SHARE AND FULLY DILUTED EARNINGS (LOSS) PER SHARE (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(A) The fully diluted earnings per share calculation for fiscal year 1993 did not include the assumed conversion of zero coupon convertible subordinated notes issued September 26, 1990, because the effect on shares used in the calculation and the related increase to income for the interest expense adjustment, net of tax, would be anti-dilutive. Substantially all of these notes were converted into Common stock and the remainder redeemed for cash in fiscal year 1993.
E-7
EXHIBIT 21
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SUBSIDIARIES OF THE REGISTRANT
The Registrant has additional operating subsidiaries, which considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary.
All above listed subsidiaries have been consolidated in the Registrant's financial statements.
E-8
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in (i) Registration Statement No. 2-93044 on Form S-8, (ii) Registration Statement No. 33-27467 on Form S-8, (iii) Registration Statement No. 33-27468 on Form S-8, (iv) Registration Statement No. 33-44684 on Form S-3, (v) Registration Statement No. 33-55944 on Form S-8, (vi) Registration Statement No. 333-13193 on Form S-3, (vii) Registration Statement No. 333-23447 on Form S-8, and (viii) Registration Statement No. 333-28295 on Form S-3 of our report dated September 17, 1997, appearing in this Annual Report on Form 10-K of Litton Industries, Inc. and subsidiary companies for the year ended July 31, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California October 10, 1997
E-9