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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 29549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to______________________
Commission File Number 1-3229
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE No. 95-1055798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Century Park East, Los Angeles, California 90067
(address of principal executive offices)
(310) 553-6262
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock outstanding as of April 25, 1997 58,024,695 shares
Northrop Grumman Corporation and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three months ended March 31,
Dollars in millions, except per share 1997 1996
Net Sales $1,964 $1,603
Cost of sales
Operating costs 1,576 1,299
Administrative and general expenses 206 165
Operating margin 182 139
Other, net 2 9
Interest expense (64) (46)
Income before income taxes 120 102
Federal and foreign income taxes 45 41
Net income $ 75 $ 61
Weighted average shares outstanding, in millions 58.0 49.6
Earnings per share $ 1.30 $ 1.23
Dividends per share $ .40 $ .40
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF FINANCIAL POSITION
March 31,December 31,
Dollars in millions 1997 1996
Assets
Cash and cash equivalents $ 43 $ 44
Accounts receivable, net of progress payments
of $3,049 in 1997 and $2,721 in 1996 1,448 1,356
Inventoried costs, net of progress payments
of $546 in 1997 and $533 in 1996 1,172 1,053
Deferred income taxes 76 77
Prepaid expenses 55 67
Total current assets 2,794 2,597
Property, plant and equipment 3,174 3,154
Accumulated depreciation (1,777) (1,752)
1,397 1,402
Goodwill, net of accumulated amortization of $167 in 1997
and $144 in 1996 3,456 3,436
Other purchased intangibles, net of accumulated amortization
of $139 in 1997 and $116 in 1996 965 988
Deferred income taxes 484 520
Prepaid pension cost, intangible pension asset
and benefit trust funds 286 229
Investments in and advances to
affiliates and sundry assets 196 250
5,387 5,423
$ 9,578 $ 9,422
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Northrop Grumman Corporation and Subsidiaries
March 31, December 31,
Dollars in millions 1997 1996
Liabilities and Shareholders' Equity
Notes payable to banks $ 271 $ 228
Current portion of long-term debt 200 200
Trade accounts payable 437 452
Accrued employees' compensation 330 315
Advances on contracts 236 230
Income taxes payable, including deferred
income taxes of $559 in 1997 and $629 in 1996 623 654
Other current liabilities 546 521
Total current liabilities 2,643 2,600
Long-term debt 2,907 2,950
Accrued retiree benefits 1,722 1,624
Other long-term liabilities 58 59
Deferred income taxes 64 61
Paid-in capital
Preferred stock, 10,000,000 shares
authorized; none issued
Common stock, 200,000,000 shares
authorized; issued and outstanding:
1997 -- 58,010,230; 1996 -- 57,928,466 788 784
Retained earnings 1,400 1,348
Unfunded pension losses, net of taxes (4) (4)
2,184 2,128
$ 9,578 $ 9,422
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
Three months ended March 31,
Dollars in millions 1997 1996
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 568 $ 455
Other collections 1,342 1,215
Income tax refunds received 5
Cash provided by operating activities 1,910 1,675
Uses of Cash
Cash paid to suppliers and employees 1,842 1,419
Interest paid 30 19
Income taxes paid 5 7
Cash used in operating activities 1,877 1,445
Net cash provided by operating activities 33 230
Investing Activities
Payment for purchase of Westinghouse
ESG, net of cash acquired (2,904)
Capital expenditures (35) (41)
Proceeds from sale of property, plant and equipment 1 5
Other investing activities 20 14
Net cash used in investing activities (14) (2,926)
Financing Activities
Borrowings under lines of credit 50 1,973
Proceeds from issuance of long-term debt 1,000
Principal payments of long-term debt (50) (140)
Proceeds from issuance of stock 3 4
Dividends paid (23) (19)
Other financing activities (61)
Net cash provided by(used in) financing activities (20) 2,757
Increase(decrease) in cash and cash equivalents (1) 61
Cash and cash equivalents balance at beginning of period 44 18
Cash and cash equivalents balance at end of period $ 43 $ 79
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Northrop Grumman Corporation and Subsidiaries
Three months ended March 31,
Dollars in millions 1997 1996
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 75 $ 61
Adjustments to reconcile net income to net cash provided
Depreciation 47 47
Amortization of intangible assets 46 24
Common stock issued to employees 1
Loss(gain) on disposals of property, plant and equipment (1)
Retiree benefits cost(income) (11) 3
Decrease(increase) in
Accounts receivable (223) 137
Inventoried costs (96) (74)
Prepaid expenses 12 4
Increase(decrease) in
Progress payments 166 (87)
Accounts payable and accruals (15) 94
Provisions for contract losses 25 (6)
Income taxes 52 46
Retiree benefits (47) (27)
Other transactions 2 8
Net cash provided by operating activities $ 33 $ 230
Noncash Investing and Financing Activities
Purchase of Westinghouse ESG
Fair value of assets acquired $ 3,969
Cash paid (2,909)
Liabilities assumed $ 1,060
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended March 31,
Dollars in millions 1997 1996
Paid-in Capital
At beginning of year $ 784 $ 272
Employee stock awards and options exercised,
net of forfeitures 4 4
788 276
Retained Earnings
At beginning of year 1,348 1,199
Net income 75 61
Cash dividends (23) (19)
1,400 1,241
Unfunded Pension Losses, Net of Taxes (4) (12)
Total shareholders' equity $ 2,184 $ 1,505
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Northrop Grumman Corporation and Subsidiaries
SELECTED INDUSTRY SEGMENT INFORMATION
Three months ended March 31,
Dollars in millions 1997 1996
Net Sales
Aircraft $ 1,026 $ 988
Electronics 1,023 692
Intersegment sales (85) (77)
$ 1,964 $ 1,603
Operating Profit
Aircraft $ 135 $ 101
Electronics 90 74
Total operating profit 225 175
Adjustments to reconcile operating profit
to operating margin:
State and local income taxes (12) (6)
General corporate expenses (31) (30)
Operating margin $ 182 $ 139
Contract Acquisitions
Aircraft $ 665 $ 739
Electronics 1,272 3,544
Intersegment acquisitions (95) (84)
$ 1,842 $ 4,199
Funded Order Backlog
Aircraft $ 6,753 $ 6,828
Electronics 5,582 5,757
Intersegment backlog (57) (42)
$12,278 $12,543
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Northrop Grumman Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared by management in accordance with the instructions to
Form 10-Q of the Securities and Exchange Commission. They do not
include all information and notes necessary for a complete presentation
of financial position, results of operations, changes in shareholders'
equity, and cash flows in conformity with generally accepted accounting
principles. They do, however, in the opinion of management, include all
adjustments (all of which were normal recurring accruals) necessary for
a fair statement of the results for the periods presented. The
financial statements should be read in conjunction with the Notes and
Independent Auditors' Report contained in the company's 1996 Annual
Report.
Inventoried Costs
The company's inventoried costs consist primarily of work in process
related to long-term contracts with customers.
Earnings Per Share
In February, 1997, Financial Accounting Standards Board Statement 128 -
Earnings per Share was issued. This new standard becomes effective for
financial statements for periods ending after December 15, 1997. Under
the new standard, earnings per share would have been reported as
follows:
Three months ended March 31,
1997 1996
Earnings per share $1.30 $1.23
Diluted earnings per share $1.28 $1.21
Subsequent Events
On May 5, 1997, the company announced that it had entered into a definitive
agreement with Logicon, Inc. (Logicon), a leading defense information
technology company, to merge Logicon with a wholly owned subsidiary of
Northrop Grumman. The merger will be accounted for as a pooling of interests.
Stockholders of Logicon will receive, for each share of Logicon common stock,
a fraction of a Northrop Grumman share determined by dividing $52 by the
average closing price for Northrop Grumman common stock during a 30-trading
day period prior to mailing the merger proxy statement to the Logicon
stockholders. In no event will the exchange ratio be more than 0.6919:1
or less than 0.5661:1.
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Northrop Grumman Corporation and Subsidiaries
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND THE RESULTS OF ITS OPERATIONS
Sales were 23 percent higher in the first quarter of 1997 versus the first
quarter of 1996. Comparative results for 1996 include only one month of
operations of the defense electronics and systems business of Westinghouse,
which was acquired March 1, 1996 and is now operated as the Electronics
Sensors and Systems Division (ESSD).
Aircraft segment sales increased in the first quarter of 1997 as
compared to last year's first quarter as a result of increased deliveries
of Boeing jetliner shipsets and Gulfstream V business jets. These increases
were partially offset by decreases on the B-2, F/A-18 and C-17 programs.
Electronics segment sales increased due to the inclusion of ESSD
operations for the full quarter of 1997.
Sales by major program/business area and units delivered in the
first quarter were:
Dollars in millions 1997 1996
B-2 $ 365 $ 432
Surveillance Aircraft 245 257
F/A-18 129 151
Boeing Jetliners 204 103
Airborne Radar 145 55
ECM 103 84
Marine 132 42
C-17 67 71
Space 86 26
Airspace Management 66 32
Data Systems 48 42
All Other 374 308
$1,964 $1,603
Units 1997 1996
747 11 5
F/A-18 C/D 10 13
F/A-18 E/F 2
C-17 2 2
B-2 2
Gulfstream V 5
Pension income, which is included in operating profit, increased by
$15 million to $33 million in the first quarter of 1997 as compared with
the first quarter of 1996. Substantially all of the pension income is
attributable to the aircraft segment.
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Northrop Grumman Corporation and Subsidiaries
The amount and rate of operating margin increased in the aircraft
segment in the first quarter of 1997 as compared with the first quarter
of 1996. B-2 operating margin benefited from an increased rate of margin
recorded on increased sales of spares and other support phases of the
program. B-2 operating margin was lower overall due to a lack of
deliveries in this year's first quarter as compared to two deliveries in
the comparable period of 1996. Aircraft segment operating margin also
benefited from a $3 million reduction in expenditures from ongoing
company-sponsored research and development on commercial aerostructures
as compared with the first quarter of 1996. The results for the first
quarter 1996 included a $25 million charge related to work the company
performed for Fokker N.V., which declared bankruptcy in March 1996.
The amount of electronics segment operating profit increased while
the rate on sales declined in the first quarter of 1997 as compared with
last year's first quarter. ESSD contributed to the increased amounts of
margin; however, the increase in the amortization of goodwill and other
purchased intangibles and a change in the business mix reduced the
operating margin rate as compared to last year's first quarter. The
electronics segment operating margin in the first quarter of 1997 was
reduced by a $13 million pretax charge related to an increase in the cost
estimate to complete the work on the Directed Infrared Countermeasures
(DIRCM) program.
Other income for the first quarter of 1996 included a $4 million
gain from the early retirement of notes payable which were due in 1999.
Interest expense in this year's first quarter was $18 million higher
than the corresponding period of 1996 following the $1 billion increase
in average debt outstanding between the two years' first quarters. The
increase in debt resulted from the new borrowings used to finance the
acquisition of ESSD.
The company's effective tax rate was 37.5 percent for the first
quarter of 1997 versus 40.2 percent for the comparable period in 1996.
The decrease in the rate was caused primarily by an increase in foreign
sales tax credits.
During the quarter, $33 million of net cash was generated from
operations versus $230 million in last year's first quarter. The
decrease is primarily due to the increase in working capital for the
Boeing jetliners, E-2C and JSTARS programs to support increased
production levels. Cash generated from operating activities is expected
to increase in the last half of this year and is expected to be more than
sufficient to finance capital expenditures and dividends. The company's
liquidity and financial flexibility will continue to be provided by cash
flow generated by operating activities, supplemented by the unused
borrowing capacity available under the company's credit agreement and
other short-term credit facilities.
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Northrop Grumman Corporation and Subsidiaries
Forward-Looking Information
Certain statements and assumptions in Management's Discussion and Analysis
contain or are based on "forward-looking" information (as defined in the
Private Securities Litigation and Reform Act of 1995) that involves risk and
uncertainties, including statements and assumptions with respect to future
revenues, program performance and cash flows, the outcome of contingencies
including litigation and environmental remediation, and anticipated costs of
capital investments and planned dispositions. The company's operations are
necessarily subject to various risks and uncertainties; actual outcomes are
dependent upon many factors, including, without limitation, the company's
successful performance of internal plans; government customers' budgetary
restraints; customer changes in short-range and long-range plans;
domestic and international competition in both the defense and commercial
areas; product performance; continued development and acceptance of new
products; performance issues with key suppliers and subcontractors; government
import and export policies; termination of government contracts; the outcome
of political and legal processes; legal, financial, and governmental risks
related to international transactions and global needs for military and
commercial aircraft and electronic systems and support as well as other
economic, political and technological risks and uncertainties.
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Northrop Grumman Corporation and Subsidiaries
Part II OTHER INFORMATION
Item 1. Legal Proceedings
False Claims Act Litigation
The government has withdrawn its notice of appeal of the unanimous
verdict for the company in U.S. ex rel, David Peterson and Jeff Kroll v.
Northrop Corporation and the Ninth Circuit Court of Appeals dismissed the
action. The case is now closed.
Walsh, et al. v. Northrop Grumman Corporation
This matter, which was described in the Annual Report on Form 10-K,
should proceed to trial in late 1997 or early 1998.
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Northrop Grumman Corporation and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended March 31, 1997.
SIGNATURES
Pursuant to the requirements 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.
Northrop Grumman Corporation (Registrant)
Date: May 6, 1997 by/s/N. F. Gibbs
Nelson F. Gibbs
Corporate Vice President and Controller
Date: : May 6, 1997 by/s/James C. Johnson
James C. Johnson
Corporate Vice President and Secretary
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Northrop Grumman Corporation and Subsidiaries
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share)
Three months ended March 31,
1997 1996
Primary:
Average shares outstanding 57,969 49,573
Common stock equivalents 912 1,337
Totals 58,881 50,910
Net income $ 75,327 $ 60,745
Earnings per share(1) $ 1.28 $ 1.19
Fully diluted:
Average shares outstanding 57,969 49,573
Common stock equivalents 911 1,349
Totals 58,880 50,922
Net income $ 75,327 $ 60,745
Earnings per share(1) $ 1.28 $ 1.19
(1) This calculation was made in compliance with Item 601 of Regulation S-K.
Earnings per share presented elsewhere in this report exclude from their
calculation shares issuable under employee stock options and rights, since
their dilutive effect is less than 3%.