SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported) March 1, 1996
-------------------------
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in charter)
Delaware 1-3229 95-1055798
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
1840 Century Park East, Los Angeles, California 90067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 553-6262
NONE
(Former name or former address, if changed since last report)
Page 1 of 28
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 1, 1996, pursuant to the Asset Purchase Agreement dated as of
January 3, 1996 (the "Purchase Agreement"), Northrop Grumman Corporation
("Registrant") acquired from Westinghouse Electric Corporation (collectively
"Seller") substantially all of the assets of Seller's Electronic Systems
Group (excluding the security systems, wireless communications and airship
businesses thereof and the business of Westinghouse Landmark GIS, Inc.) (the
"Division"). The purchase includes the Seller's voting stock or other
interests in several domestic and foreign subsidiaries and joint ventures. A
copy of the Purchase Agreement is filed herewith as Exhibit 2.1, and
certain ancillary agreements are filed as Exhibits 2.2 and 2.3, and
reference is made thereto for the complete terms and conditions thereof.
The purchase price of $3 billion cash (subject to adjustment following
an audit of the closing date balance sheet of the Division) was based upon
the estimated net assets to be acquired as well as the value of the ongoing
business, and took into account the liabilities reflected on the balance
sheet and assumed by Registrant.
Registrant obtained the cash portion of the purchase price from (i) an
offering made pursuant to Rule 144A promulgated under the Securities Act of
1933, as amended, of $1 billion in debt securities having maturity dates of
10, 20 and 30 years and (ii) a bank credit facility advanced under the Second
Amended and Restated Credit Agreement dated as of April 15, 1994, Amended
and Restated as of March 1, 1996 among Northrop Grumman Corporation, Bank of
America National Trust and Savings Association, as Documentation Agent,
Chemical Securities, Inc., as Syndication Agent, The Chase Manhattan Bank
(National Association), as Administrative Agent and the Banks Signatories
thereto (the "Credit Agreement"). A copy of the Credit Agreement is filed
herewith as Exhibit 2.4 and reference is made thereto for the complete terms
and conditions thereof.
Registrant intends to continue to use the assets purchassed from Seller
in the operation of the Division, which will be known as the Electronic
Sensors and Systems Division of Registrant, and is reviewing these business
areas and its strategic core competencies to determine whether any synergies
may be achieved by repositioning or divesting certain assets or business
areas. Based on information available to date, the Registrant does not
anticipate that expense levels for corporate services in the near term will
exceed historical levels charged to the Division as reflected in the
Financial Statements of the Division filed pursuant to Item 7.
No material relationship exists between Seller and Registrant or any of
its affiliates, directors or officers, or any associate of any such directors
or officers.
The Press Release of Registrant dated March 1, 1996, announcing the
completion of the acquisition described above is filed herewith as Exhibit
99.1 and is incorporated herein by reference.
Page 2 of 28
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of the Division
The following Financial Statements of the Division are included with
this amended Form 8-K:
Report of Independent Accountants
Combined Statement of Financial Position as of December 31, 1994 and
1995
Combined Statement of Earnings for the Years Ended December 31, 1993,
1994 and 1995
Combined Statement of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995
Combined Statement of Changes in Invested Equity for the Years Ended
December 31, 1993, 1994 and 1995
Notes to Combined Financial Statements
(b) Exhibits
The following Exhibit is included with this amended Form 8-K:
Exhibit Number Description of Exhibit
- -------------- -------------------------------------------
2.1 Asset Purchase Agreement dated as of January 3, 1996,
between Westinghouse Electric Corporation, a Pennsylvania
corporation, as Seller, and Northrop Grumman Corporation,
a Delaware corporation, as Buyer. (Schedules and Exhibits
have been omitted pursuant to Rule 601(b)(2) of Regulation
S-K. Such Schedules and Exhibits are listed and described
in the Purchase Agreement. Registrant hereby agrees to
furnish to the Securities and Exchange Commission, upon its
request, any or all such omitted Schedules and Exhibits.)*
2.2 Letter Agreement dated February 28, 1996 from Westinghouse
Electric Corporation to Northrop Grumman Corporation.*
2.3 Letter Agreement dated February 29, 1996 from Westinghouse
Electric Corporation to Northrop Grumman Corporation.
(Scheules have been omitted pursuant to Rule 601(b)(2) of
Regulation S-K. Such Schedules are listed and described in
the Letter Agreement. Registrant hereby agrees to furnish
to the Securities and Exchange Commission, upon its request,
any or all such omitted Schedules.)*
2.4 Second Amended and Restated Credit Agreement dated as of
April 15, 1994, Amended and Restated as of March 1, 1996
among Northrop Grumman Corporation, Bank of America National
Trust and Savings Association, as Documentation Agent,
Chemical Securities, Inc., as Syndication Agent, The Chase
Manhattan Bank (National Association), as Administrative
Agent and the Banks Signatories thereto. (Schedules and
Exhibits have been omitted pursuant to Rule 601(b)(2) of
Regulation S-K. Such Schedules and Exhibits are listed and
described in the Credit Agreement. Registrant hereby agrees
to furnish to the Securities and Exchange Commission, upon
its request, any or all such omitted Schedules and
Exhibits.)*
23.1 Consent of Independent Accountants
99.1 Press release of Registrant dated March 1, 1996*
* Previously filed on Registrant's Form 8-K dated March 18, 1996.
Page 3 of 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Westinghouse Electric Corporation
In our opinion, the accompanying combined statement of financial position
and the related combined statements of earnings, of cash flows and of changes in
invested equity present fairly, in all material respects, the financial position
of Electronic Systems (a unit of Westinghouse Electric Corporation) at December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 12, the Company changed its method of accounting for
certain postemployment benefits in 1993.
Electronic Systems is a unit of Westinghouse Electric Corporation and, as
disclosed in the financial statements, receives support services from, and has
transactions and relationships with, Westinghouse Electric Corporation and its
affiliates.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 31, 1996
4 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
COMBINED STATEMENT OF FINANCIAL POSITION
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
Current assets
Cash and cash equivalents........................................................... $ 3,996 $ 81
Trade accounts receivable, net (Note 5)............................................. 283,027 237,197
Inventories (Note 6)................................................................ 182,562 203,554
Costs and profits in excess of billings on long-term contracts (Note 6)............. 178,783 219,030
Deferred income taxes (Note 11)..................................................... 135,644 129,162
Prepaid expenses and other current assets........................................... 13,888 5,785
------------ ------------
Total current assets.............................................................. 797,900 794,809
------------ ------------
Property, plant and equipment, net (Note 7)........................................... 404,161 414,724
Goodwill and other intangible assets, net (Note 8).................................... 138,253 159,621
Deferred income taxes (Note 11)....................................................... 173,057 128,733
Other noncurrent assets (Note 9)...................................................... 11,662 25,135
------------ ------------
Total assets.......................................................................... $ 1,525,033 $ 1,523,022
------------ ------------
------------ ------------
LIABILITIES AND INVESTED EQUITY
Current liabilities
Accounts payable.................................................................... $ 105,110 $ 84,160
Accrued expenses (Note 10).......................................................... 314,131 252,639
Billings in excess of costs and profits on long-term contracts (Note 6)............. 128,307 75,912
------------ ------------
Total current liabilities......................................................... 547,548 412,711
------------ ------------
Pension liability (Note 12)........................................................... 369,395 279,298
Postretirement and postemployment benefits (Note 12).................................. 279,024 279,414
Other noncurrent liabilities.......................................................... 15,340 37,130
------------ ------------
663,759 595,842
------------ ------------
Commitments and contingencies (Notes 13 and 17)
Invested equity (Notes 12 and 13)..................................................... 313,726 514,469
------------ ------------
Total liabilities and invested equity................................................. $ 1,525,033 $ 1,523,022
------------ ------------
------------ ------------
The accompanying notes are an integral part of these combined financial
statements.
5 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
COMBINED STATEMENT OF EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
Revenue................................................................. $ 2,554,490 $ 2,184,785 $ 2,348,073
------------ ------------ ------------
Costs and expenses
Cost of sales......................................................... 1,997,466 1,684,615 1,782,640
Selling, general and administrative (Note 13)......................... 244,894 229,327 261,070
Research and development.............................................. 75,204 72,293 75,883
Restructuring charges, net (Note 4)................................... 51,200 8,600 90,500
Other expense, net (Note 14).......................................... 13,816 62,464 11,755
------------ ------------ ------------
2,382,580 2,057,299 2,221,848
------------ ------------ ------------
Earnings before income taxes and cumulative effect of accounting
change................................................................. 171,910 127,486 126,225
Provision for income taxes (Note 11).................................... 64,663 46,821 47,294
------------ ------------ ------------
Earnings before cumulative effect of accounting change.................. 107,247 80,665 78,931
Cumulative effect of accounting change (Note 12)........................ (13,377)
------------ ------------ ------------
Net earnings............................................................ $ 107,247 $ 80,665 $ 65,554
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these combined financial
statements.
6 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
COMBINED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Cash flow from operating activities:
Net earnings............................................................. $ 107,247 $ 80,665 $ 65,554
Noncash items included in earnings
Depreciation and amortization.......................................... 69,760 72,864 68,558
Pension settlement loss................................................ 60,984
Noncash restructuring charges.......................................... (3,200) 200 30,500
Loss on sale of property, plant and equipment.......................... 3,508 2,175 3,603
Other changes that provided (used) cash, net of effects of acquisition of
business
Trade accounts receivable.............................................. (45,830) 44,641 52,494
Inventories............................................................ 20,992 104,594 (38,590)
Costs and profits in excess of billings on long-term contracts......... 40,247 (28,879) (30,060)
Prepaid expenses and other current assets.............................. (8,103) 5,642 15,600
Deferred income taxes.................................................. (6,972) (43,166) (20,495)
Accounts payable....................................................... 20,950 781 (31,969)
Accrued expenses....................................................... 86,592 (106,432) 21,082
Billings in excess of costs and profits on long-term contracts......... 52,395 (106,800) 120,416
Pension liability...................................................... (12,049) 42,536 3,547
Postretirement and postemployment benefits............................. (390) (11,363) 18,794
Other noncurrent assets and liabilities................................ (4,025) 69,462 8,850
----------- ----------- -----------
Net cash provided by operating activities.................................. 321,122 187,904 287,884
----------- ----------- -----------
Cash flow from investing activities:
Business acquisition..................................................... (21,900) (72,700)
Purchases of property, plant and equipment............................... (54,823) (43,951) (18,869)
----------- ----------- -----------
Net cash used in investing activities...................................... (76,723) (116,651) (18,869)
----------- ----------- -----------
Cash flow from financing activities:
Net intercompany transactions............................................ (240,484) (71,486) (269,944)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... 3,915 (233) (929)
Cash and cash equivalents at beginning of year............................. 81 314 1,243
----------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 3,996 $ 81 $ 314
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these combined financial
statements.
7 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
COMBINED STATEMENT OF CHANGES IN INVESTED EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
----------- ---------- -----------
Balance at beginning of year............................................... $ 514,469 $ 457,234 $ 784,877
Net earnings............................................................... 107,247 80,665 65,554
Equity translation adjustments............................................. (1,761) (4,120) 2,632
Minimum pension liability adjustments...................................... (65,745) 52,176 (125,905)
Intercompany transactions, net............................................. (240,484) (71,486) (269,944)
----------- ---------- -----------
Balance at end of year..................................................... $ 313,726 $ 514,469 $ 457,234
----------- ---------- -----------
----------- ---------- -----------
The accompanying notes are an integral part of these combined financial
statements.
8 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1 -- NATURE OF OPERATIONS AND RELATIONSHIPS WITH WESTINGHOUSE
GENERAL
Electronic Systems (the Company), a unit of Westinghouse Electric
Corporation (Westinghouse), provides advanced electronic systems, products and
technologies primarily to U.S. and non-U.S. government agencies. The Company is
not a legal entity. The operations included in these financial statements are
substantially the Electronic Systems segment of Westinghouse as disclosed by
Westinghouse for external reporting purposes. However, for purposes of these
financial statements, operations disposed of or transferred to other business
units during the three year period ended December 31, 1995 and those operations
which will be retained by Westinghouse have been excluded for all years
presented because any remaining assets and liabilities related to these entities
are not included in the sale of the Company to Northrop Grumman Corporation (see
Note 18).
The Company operates in one business segment -- the research, development,
production and support of advanced electronic systems. The Company derives a
substantial portion of its revenue from long-term contracts for systems
development and production and related services principally in defense
electronics, air traffic control systems and space systems. Significant
customers include the U.S. Department of Defense (DOD), the Federal Aviation
Administration (FAA) and the National Aeronautics and Space Administration
(NASA). Sales to U.S. government agencies totalled $2,040,000, $1,789,000, and
$2,039,000 in 1995, 1994 and 1993, respectively.
As more fully described in Notes 2, 3, 4, 5, 6, and 17, the periodic
reporting of results for long-term government contracts is inherently dependent
on the extensive use of estimates. All such estimates have been made to the best
of management's ability based upon facts available at the time, but it is
possible that future developments may require revisions of those estimates.
RELATED PARTY TRANSACTIONS
The Company is an integrated component of Westinghouse's operations and
receives a number of administrative and support services from Westinghouse and
participates in a number of Westinghouse employee benefit plans and is included
in Westinghouse's insurance programs and income tax returns. Further information
about such relationships and transactions is included in Notes 2, 12, 13, 17 and
18.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements of the Company primarily comprise the
accounts of one Westinghouse operating unit which is not a separate legal entity
and certain subsidiaries of Westinghouse. All material intercompany accounts and
transactions have been eliminated in combination.
REVENUE RECOGNITION
The majority of the Company's revenue results from contract services
performed under a variety of contracts, including cost plus, fixed-price and
time-and-materials type contracts. Sales under government and commercial
fixed-price incentive contracts are recorded at the time deliveries are made or,
for long-term contracts with a duration in excess of two years, upon the
completion of specific tasks (pre-defined milestones). Sales under
cost-reimbursement contracts are recorded as work is performed and billed.
Estimated contract profits are recorded in proportion to recorded sales. Some
contracts contain incentive provisions which provide for increased or decreased
earnings based upon performance in relation to established targets. Such
adjustments are considered in estimating sales and profit rates and are recorded
when there is
9 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
sufficient information to assess anticipated contract performance. Revenues
relating to contracts or contract changes that have not been completely priced,
negotiated, documented, or funded are not recognized unless realization is
considered probable.
Major contracts for complex military systems are performed over extended
periods of time and are subject to changes in scope and delivery schedules.
Pricing negotiations on changes and settlement of claims often extend over
prolonged periods of time. Estimates of final contract revenues include future
revenue from expected recovery on claims. Such revenues are included when it is
probable that the claim will result in additional contract revenue, when the
amount can be reliably estimated and legal entitlement has been established.
Estimates are reviewed periodically, and changes in estimated contract
revenue and costs which result in changes to estimated contract profit are
recognized in the period in which they are determined. Provisions for
anticipated losses on contracts are recorded in full as they are identified.
A standard one year warranty against defective material and workmanship is
provided for products sold. Standard warranty costs, which have not been
significant, are reported as incurred. Warranty beyond the scope of defective
material and workmanship is quoted as a separate contract cost element, and
provision is made for the anticipated warranty costs as sales are recognized.
CASH AND CASH EQUIVALENTS
Westinghouse performs cash management on a centralized basis in North
America for the Company as well as for other Westinghouse businesses. Under such
service arrangements, accounts receivable are collected and cash is invested
centrally. Activity in the Company's cash balances supporting its North American
operations is recorded through the invested equity account with Westinghouse.
The Company maintains certain separate bank accounts primarily related to its
non-North American operations; the balances in such accounts are included in
cash and cash equivalents in the accompanying balance sheet. The Company
considers cash and cash equivalents to include cash on hand and on deposit and
highly liquid investments with original maturities at date of acquisition
generally of three months or less.
DEBT AND INTEREST COST
Westinghouse has not allocated any portion of its debt or related interest
cost to the Company, and no portion of Westinghouse's debt is specifically
related to the operations of the Company. Accordingly, the Company's financial
statements include no charges for interest or capitalized interest.
INVENTORIES
Inventories consist principally of unreimbursed costs under fixed-price
contracts and are stated at total costs incurred reduced by the estimated
average cost of deliveries. Inventoried costs include both direct contract costs
and allocable overhead costs (generally determined on an average cost basis).
All other inventories are stated at the lower of cost (generally determined on
an average cost basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets (buildings, 40-45 years; land improvements,
15-25 years; machinery and equipment, 8-12 years; furniture and fixtures, 5-10
years; and
10 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
information systems equipment, 3-5 years). Leasehold improvements are amortized
on a straight-line basis over the shorter of the lease term or the estimated
useful lives of the improvements. Capitalization of newly acquired assets is
limited to those with cost in excess of $1.5 (one thousand, five hundred
dollars).
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized using the straight-line
method over their estimated lives, but not exceeding 40 years for assets
acquired prior to January 1, 1994 and not in excess of 15 years for assets
acquired after December 31, 1993.
Subsequent to the acquisition of an intangible asset, management continually
evaluates whether later events or circumstances have occurred that indicate the
remaining estimated useful life of an intangible asset may warrant revision or
that the remaining balance of such an asset may not be recoverable. When factors
indicate that an intangible asset should be evaluated for possible impairment,
management uses an estimate of the undiscounted future cash flows of the asset
over its remaining useful life in measuring whether the intangible asset is
recoverable. If such an analysis indicates that impairment has in fact occurred,
the book value of the intangible asset is written down to its estimated
realizable value.
INCOME TAXES
Historically, the results of the Company's domestic operations have been
included in the consolidated U.S. federal income tax return of Westinghouse. The
results of the Company's foreign operations have been reported separately in
their respective taxing jurisdictions. The income tax expense and other
tax-related information in these statements is presented as if the Company had
not been eligible to be included in the consolidated tax returns of Westinghouse
or other affiliates (i.e., the Company on a stand-alone basis). The recognition
and measurement of income tax expense and deferred income taxes required certain
assumptions, allocations, and significant estimates which management believes
are reasonable to measure the tax consequences as if the Company was a
stand-alone taxpayer.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes."
SFAS 109 requires the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled.
For purposes of these financial statements, any current income tax
liabilities are considered to have been paid by Westinghouse and are recorded
through the invested equity account with Westinghouse.
Deferred federal income taxes have not been provided on the cumulative
undistributed earnings of foreign affiliates as these earnings are considered to
be permanently reinvested.
EMPLOYEE BENEFIT PLANS
Westinghouse has a number of employee benefit plans covering substantially
all employees. Historically, most of the Company's employees have participated
in the Westinghouse plans for pensions, postretirement benefits other than
pensions, and postemployment benefits. In addition, the Company has maintained
its own pension and postretirement benefit plans for certain of its employees
not included in the Westinghouse plans. Most pension plan benefits are based on
years of service and compensation levels at the
11 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
time of retirement, a formula based on career earnings or a final average
compensation amount. Pension benefits are paid from trusts funded by
contributions from employees and Westinghouse. The pension funding policy is
consistent with the funding requirements of U.S. federal and other governmental
laws and regulations. Plan assets consist primarily of listed stocks, fixed
income securities and real estate investments. Postretirement benefit
arrangements consist of various retiree medical, dental and life insurance
arrangements sponsored by Westinghouse.
For purposes of these financial statements, the costs and related balance
sheet accounts and disclosures for pensions, postretirement benefits other than
pensions, and postemployment benefits have been presented as if the portion of
the plans relating to the Company's employees had been segregated from the
Westinghouse plans as separate plans. The accumulated benefit obligation (ABO)
and projected benefit obligation (PBO) for pensions and accumulated
postretirement benefit obligation (APBO) were calculated based on demographic
data for the active, inactive, and retired employees of the Company. Plan assets
and unrecognized net transition obligation, prior service cost and gain or loss
were allocated based on the proportion of the Company's PBO or APBO to the total
Westinghouse PBO or APBO for pensions and postretirement benefits other than
pensions, respectively. The actuarially determined net periodic costs and
related balance sheet accounts have been reflected in these financial
statements. Contributions have been recorded through the invested equity
account. Management believes that the assumptions, allocations, and significant
estimates used are reasonable.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are incurred under both independent
Company-initiated programs and under contracts for specific programs with
others, primarily the U.S. government. Research and development costs incurred
under contract are charged to inventory as contracts in progress. Independent
research and development costs which are not incurred in performance of specific
contract requirements are reimbursable as indirect period cost through
government-mandated cost accounting procedures. Unallowable research and
development costs are charged against income as incurred.
FOREIGN CURRENCY
Non-U.S. operations utilize the local currency as the functional currency.
Assets and liabilities are translated into U.S. dollars at the exchange rate
applicable at the time of translation, while revenue and costs are translated at
the average rates of exchange prevailing during the year. Translation
adjustments are accumulated in invested equity. Foreign exchange gains and
losses incurred on foreign currency transactions are included in income. The
Company has entered into forward exchange contracts to hedge the effect of
foreign currency fluctuations on certain transactions and commitments
related to purchases and sales denominated in foreign currencies. The Company's
foreign exchange policy includes matching purchases and sales in national
currencies when possible and hedging unmatched transactions in excess of $250.
Gains and losses on commitment hedges are deferred and included in the basis of
the transaction underlying the commitment. Gains and losses on transaction
hedges are recognized in income and offset the foreign exchange gains and losses
on the related transactions. The aggregate foreign currency transaction gain
(loss) for the years ended December 31, 1995, 1994 and 1993 was $(22), $(34) and
$480, respectively.
CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of billed accounts receivable and unbilled
accounts receivable (principally unreimbursed costs and fees under contracts).
Receivables result primarily from contracts with U.S. and non-U.S. governments
and from subcontracts with prime contractors to the U.S. government. Contracts
with the U.S. government do not
12 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
require collateral or other security. The Company conducts ongoing credit
evaluations of non-government customers and generally does not require
collateral or other security from these customers. The Company generally has
negotiated terms and conditions which provide for non-U.S. government customers
to make advance payments in amounts sufficient to limit the Company's credit
risk. Historically, the Company has not incurred any significant credit related
losses under its long-term contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and cash equivalents and trade
accounts receivable approximates fair value.
NOTE 3 -- ACQUISITION
Effective June 1, 1994, the Company acquired certain assets of the Norden
Systems Division (Norden) of United Technologies Corporation for $94,600, of
which $72,700 was paid at closing and the remaining $21,900 in January 1995, and
assumed certain liabilities. Norden designs and manufactures advanced electronic
systems for combat vehicles, aircraft, ships, submarines and air traffic
control. The transaction was accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to assets
acquired and liabilities assumed based on the estimated fair value of such
assets and liabilities at the date of acquisition. The purchase price resulted
in an excess of costs over net assets acquired of approximately $56,100. Such
excess is being amortized on a straight-line basis over 13 years. Norden's
results of operations have been included in the consolidated results of
operations since the date of acquisition.
The following unaudited pro forma information presents the results of
operations of the Company and Norden for the years ended December 31, 1994 and
1993, with pro forma adjustments as if the Norden acquisition had occurred as of
the beginning of the periods presented. The pro forma presentation does not
purport to be indicative of what would have occurred had the acquisition been
made as of those dates or of results which may occur in the future.
1994 1993
------------ ------------
Revenue........................................................... $ 2,258,081 $ 2,570,693
Earnings before cumulative effect of accounting change............ 69,364 77,687
Net earnings...................................................... 69,364 64,310
A $25 million liability was established in conjunction with the Norden
acquisition for the consolidation of administrative and manufacturing facilities
at the Norwalk and Melville locations into Baltimore, of which $1.7 million has
been expended to date; the consolidation is to be completed by May 1997. A
memorandum of understanding for the treatment of the costs of the consolidation
actions has been reached with the Corporate Administrative Contracting Officer.
Such costs are subject to recovery through inclusion in allowable costs for
government rate purposes over future periods. However, because the extent of
recovery is not estimable, no asset has been recorded for any amounts that might
ultimately be recovered from inclusion of these costs in future contracting
rates.
NOTE 4 -- SPECIAL RESTRUCTURING ACTIONS
Management is committed to ongoing restructuring actions that will enhance
the Company's competitive position in the defense industry. As a result, net
restructuring charges principally related to workforce reductions, asset
writedowns, and consolidation of facilities of $51,200, $8,600 and $90,500 were
recorded by
13 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 4 -- SPECIAL RESTRUCTURING ACTIONS (CONTINUED)
the Company and charged against income in 1995, 1994 and 1993, respectively. A
portion of the restructuring charges are expected to be allowed as indirect
costs under the Company's government contracts in future periods. The amount
estimated to be subject to recovery through inclusion for government rate
purposes for years after 1995 is approximately $94 million. Because the extent
of recovery is not estimable, no asset has been recorded for any amounts that
might ultimately be recovered from the inclusion of these costs in future
contracting rates.
The 1993 and 1994 actions included the separation of approximately 1,000
employees, exiting of certain product lines and closure of certain facilities.
In 1995, management announced a series of additional restructuring actions that
included the separation of approximately 1,300 employees and the closure of
additional facilities. The costs related to these actions are primarily
employee separation costs, and are included in the 1995 provision. The 1995
projects are expected to have pre-tax savings of approximately $9,000 in
1995, and $60,000 in 1996 and beyond. A substantial portion of these
savings will be priced into the Group's government contracts. The majority of
the cash expenditures related to the 1995 projects will be completed by
year-end 1996. A minimal amount will be expended beyond 1996. The 1994
adjustments primarily reflect revised cost estimates related to prior
provisions. The 1995 adjustments reflect the elimination of an asset
provision established previously, which was subsequently determined to be
recoverable under a certified claim which was submitted to the U.S. Navy in
October 1995, as well as revised cost estimates related to prior provisions.
The following table is a reconciliation of the
restructuring charges under each of the initiatives to the remaining amounts
accrued at December 31, 1995:
EMPLOYEE FACILITY CLOSURE &
SEPARATION ASSET RATIONALIZATION
COSTS WRITEDOWNS COSTS OTHER TOTAL
--------------- ----------- ------------------- ---------- ----------
1993 provision....................... $ 37,600 $ 30,500 $ 15,700 $ 6,700 $ 90,500
Expenditures/disposals............... (1,400) (800) (2,200)
--------------- ----------- ------- ---------- ----------
Balance at December 31, 1993......... 36,200 30,500 14,900 6,700 88,300
1994 provision....................... 6,000 6,000
Expenditures/disposals............... (34,600) (22,100) (5,600) (5,900) (68,200)
Adjustments.......................... 5,300 200 (2,200) (700) 2,600
--------------- ----------- ------- ---------- ----------
Balance at December 31, 1994......... 12,900 8,600 7,100 100 28,700
1995 provision....................... 61,000 5,700 1,700 400 68,800
Expenditures/disposals............... (17,700) (300) (1,000) (19,000)
Adjustments.......................... (4,000) (8,900) (4,600) (100) (17,600)
--------------- ----------- ------- ---------- ----------
Balance at December 31, 1995......... $ 52,200 $ 5,100 $ 3,200 $ 400 $ 60,900
--------------- ----------- ------- ---------- ----------
--------------- ----------- ------- ---------- ----------
Actions related to the above restructuring programs are expected to be
substantially completed by December 1996.
NOTE 5 -- TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consist of the following:
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Commercial............................................................ $ 65,861 $ 50,371
Government contracts
Billed.............................................................. 165,858 132,593
Unbilled............................................................ 53,488 57,041
---------- ----------
285,207 240,005
Less: Allowance for doubtful and potentially unrecoverable amounts.... (2,180) (2,808)
---------- ----------
$ 283,027 $ 237,197
---------- ----------
---------- ----------
Unbilled receivables consist of amounts of revenue recognized on contracts
for which billings have not been presented to the customers. Such amounts are
usually billed and collected within one year.
14 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 5 -- TRADE ACCOUNTS RECEIVABLE (CONTINUED)
The Company generally has several open contract disputes with its customers,
particularly the U.S. government, at any point in time. These disputes arise in
the normal course of long-term contracting and most of the disputes are
formalized in Requests for Equitable Adjustments (RFEAs) that relate primarily
to work beyond the scope of the contracts. Customers occasionally terminate
contracts before completion, resulting in Termination for Convenience Claims
(TCs). Unbilled accounts receivable at December 31, 1995 and 1994 included
$29,800 and $37,300, respectively, in RFEAs and $13,300 and $13,200,
respectively, in TCs. Management believes that the amounts are collectible
during 1996.
Substantially all billed accounts receivable are expected to be collected
within one year.
NOTE 6 -- INVENTORIES AND COSTS INCURRED UNDER LONG-TERM CONTRACTS
Inventories consists of the following:
DECEMBER 31,
-------------------------
1995 1994
----------- ------------
Raw materials...................................................... $ 10,689 $ 17,908
Work-in-process.................................................... 264,617 321,436
Finished goods..................................................... 1,748 1,866
----------- ------------
277,054 341,210
Profit on long-term contracts-in-progress.......................... 277,826 387,668
Progress payments to subcontractors................................ 52,837 58,377
Recoverable engineering and development costs...................... 197,556 290,302
----------- ------------
805,273 1,077,557
Inventoried costs and profits related to contracts with progress
billing terms..................................................... (622,711) (874,003)
----------- ------------
Inventories........................................................ $ 182,562 $ 203,554
----------- ------------
----------- ------------
Costs of $81,087 and $90,212 are included in inventory at December 31, 1995
and 1994, respectively, for projects or products which were not under contract
at those dates. Management of the Company believes that all inventories will be
recovered in the normal course of business, and that costs incurred in advance
of contractual coverage at December 31, 1995 will receive firm contractual
coverage in 1996.
Costs and profits on long-term contracts with progress billing terms are
presented in the accompanying financial statements according to the funded
status of individual contracts as shown below:
DECEMBER 31,
------------------------
1995 1994
----------- -----------
Costs and profits included in inventories........................... $ 554,518 $ 795,342
Progress billing on contracts....................................... (375,735) (576,312)
----------- -----------
Uncompleted contract costs and profits over related billings........ $ 178,783 $ 219,030
----------- -----------
----------- -----------
Progress billings on contracts...................................... $ 196,500 $ 154,573
Costs and profits included in inventories........................... (68,193) (78,661)
----------- -----------
Uncompleted contracts billings over related costs and profits....... $ 128,307 $ 75,912
----------- -----------
----------- -----------
The government has a security interest in the inventories identified with
progress billable contracts.
15 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 7 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
Land and land improvements........................................ $ 16,815 $ 13,732
Buildings and building improvements............................... 115,811 117,044
Machinery, equipment, furniture and fixtures...................... 899,049 902,085
Leasehold improvements............................................ 29,390 31,453
------------ ------------
1,061,065 1,064,314
Less: Accumulated depreciation and amortization................... (706,237) (684,258)
------------ ------------
354,828 380,056
Construction-in-progress.......................................... 49,333 34,668
------------ ------------
$ 404,161 $ 414,724
------------ ------------
------------ ------------
Depreciation and amortization expense was $60,117, $64,932 and $64,104 in
1995, 1994 and 1993, respectively.
NOTE 8 -- GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets comprise:
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Patents and licenses.................................................. $ 21,855 $ 20,710
Excess of cost over fair value of acquired businesses................. 131,650 137,087
Intangible pension asset.............................................. 19,288 26,721
---------- ----------
172,793 184,518
Less: Accumulated amortization........................................ (34,540) (24,897)
---------- ----------
$ 138,253 $ 159,621
---------- ----------
---------- ----------
Amortization expense was $9,643, $7,932 and $4,454 in 1995, 1994 and 1993,
respectively.
NOTE 9 -- OTHER NONCURRENT ASSETS
Other noncurrent assets comprise:
DECEMBER 31,
--------------------
1995 1994
--------- ---------
Long-term receivables................................................... $ 9,811 $ 12,036
Equity investments...................................................... 606 8,413
Other................................................................... 1,245 4,686
--------- ---------
$ 11,662 $ 25,135
--------- ---------
--------- ---------
16 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 10 -- ACCRUED EXPENSES
Accrued expenses comprise:
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Price and fee reserves................................................ $ 73,243 $ 48,527
Restructuring reserve (Note 4)........................................ 60,900 28,700
Vacation liability.................................................... 44,027 46,043
Accrued payroll and employee benefits................................. 43,350 42,647
Reserve for contract loss............................................. 14,966 5,034
Current portion of Norden consolidation liability (Note 3)............ 13,500 11,400
Accrued product warranty.............................................. 12,283 16,236
Other................................................................. 51,862 54,052
---------- ----------
$ 314,131 $ 252,639
---------- ----------
---------- ----------
NOTE 11 -- INCOME TAXES
The provision (benefit) for income taxes by taxing jurisdiction consists of
the following:
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- ---------- ----------
Current
U.S. federal............................................. $ 57,517 $ 74,862 $ 51,143
State and foreign........................................ 14,614 17,674 11,763
--------- ---------- ----------
72,131 92,536 62,906
--------- ---------- ----------
Deferred
U.S. federal............................................. (6,163) (37,487) (12,599)
State and foreign........................................ (1,305) (8,228) (3,013)
--------- ---------- ----------
(7,468) (45,715) (15,612)
--------- ---------- ----------
Total provision for income taxes........................... $ 64,663 $ 46,821 $ 47,294
--------- ---------- ----------
--------- ---------- ----------
A reconciliation from the statutory U.S. federal income tax rate to the
Company's effective income tax rate follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Statutory U.S. federal income tax rate............................ 35.0% 35.0% 35.0%
Increase (decrease) in the tax rate resulting from:
State taxes, net of U.S. federal tax benefit.................... 4.4 4.3 4.5
Other........................................................... (1.8) (2.6) (2.0)
--- --- ---
Effective income tax rate......................................... 37.6% 36.7% 37.5%
--- --- ---
--- --- ---
17 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 11 -- INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities included in the
combined statement of financial position are as follows:
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Assets
Provisions for expenses and losses.................................. $ 97,126 $ 77,222
Employee related accruals........................................... 264,358 226,573
Inventories......................................................... 14,238 16,423
Long-term contracts in process...................................... 10,583 21,896
---------- ----------
386,305 342,114
---------- ----------
Liabilities
Depreciation and amortization....................................... (71,774) (78,587)
Other............................................................... (5,830) (5,632)
---------- ----------
(77,604) (84,219)
---------- ----------
Net deferred tax asset................................................ $ 308,701 $ 257,895
---------- ----------
Deferred taxes are displayed as follows:
Net current deferred tax assets..................................... $ 135,644 $ 129,162
Net noncurrent deferred tax assets.................................. 173,057 128,733
---------- ----------
$ 308,701 $ 257,895
---------- ----------
---------- ----------
NOTE 12 -- EMPLOYEE BENEFIT PLANS
PENSIONS
Net periodic pension cost was as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
----------- ---------- ----------
Service cost............................................. $ 17,172 $ 25,646 $ 18,749
Interest cost on projected benefit obligations........... 87,909 91,591 95,815
Actual return on plan assets............................. (133,863) 1,389 (88,605)
Net amortization and deferrals........................... 81,244 (53,425) 12,011
----------- ---------- ----------
Net periodic pension cost................................ $ 52,462 $ 65,201 $ 37,970
----------- ---------- ----------
----------- ---------- ----------
Net periodic pension cost decreased $12,739 in 1995 compared to 1994, due
primarily to reduced amortization cost as a result of a pension settlement
charge of $60,984 recognized in 1994.
The Company's restructuring activities contributed to a high level of lump
sum cash distributions from the pension fund during 1994. The magnitude of these
cash distributions required that the Company apply the provisions of SFAS No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and recognize a settlement loss of
$60,984 during the
18 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 12 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
fourth quarter of 1994. This charge was recorded as an other expense item in the
1994 statement of earnings (see Note 14). This noncash charge to income
represents the pro-rata portion of unrecognized losses associated with the
pension obligation that was settled.
The actuarial present value of benefit obligations and funded status were as
follows:
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
Actuarial present value of benefit obligation
Vested........................................................ $ (1,130,535) $ (1,008,994)
Nonvested..................................................... (33,604) (29,501)
------------- -------------
Accumulated benefit obligation.................................. $ (1,164,139) $ (1,038,495)
------------- -------------
------------- -------------
Projected benefit obligation.................................... $ (1,270,998) $ (1,133,188)
Plan assets at fair value....................................... 794,744 759,197
------------- -------------
Projected benefit obligation in excess of plan assets........... (476,254) (373,991)
Unrecognized prior service cost (benefit)....................... (27,973) (28,422)
Unrecognized losses, net........................................ 506,062 384,317
Unrecognized net transition obligation.......................... 47,261 55,143
------------- -------------
Prepaid pension cost............................................ 49,096 37,047
Adjustment to recognize minimum liability....................... (418,491) (316,345)
------------- -------------
Accrued pension liability....................................... $ (369,395) $ (279,298)
------------- -------------
------------- -------------
For financial reporting purposes, a pension plan is considered unfunded when
the fair value of plan assets is less than the accumulated benefit obligation.
When that is the case, a minimum pension liability must be recognized for the
sum of the unfunded amount less any accrued pension cost. In recognizing such a
liability, an intangible asset is usually recorded. However, the amount of the
intangible asset may not be greater than the sum of the prior service cost not
yet recognized and any unrecognized transition obligation. When the liability to
be recognized is greater than the intangible asset limit, the excess is charged
to invested equity, net of any tax effects which could be recognized in the
future.
At December 31, 1995, a minimum pension liability of $418,491 was recognized
for the sum of the unfunded amount of $369,395 plus the prepaid pension cost of
$49,096. An intangible asset of $19,288 and a charge to invested equity of
$399,203, which was reduced to $239,522 due to tax deferrals of $159,681, offset
the pension liability. As a result of this remeasurement, year-end 1995 invested
equity was decreased by $65,745 from December 31, 1994.
At December 31, 1994, a minimum pension liability of $316,345 was recognized
for the sum of the unfunded amount of $279,298 plus the prepaid pension cost of
$37,047. An intangible asset of $26,721 and a charge to invested equity of
$289,624, which was reduced to $173,777 due to tax deferrals of $115,847, offset
the pension liability. As a result of this remeasurement, year-end 1994 invested
equity was increased by $52,176 from December 31, 1993.
19 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 12 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company sponsors various nonqualified supplemental pension plans which
provide additional benefits to certain employees and are paid from the Company's
assets. The unfunded accumulated benefit obligation under these plans at
December 31, 1995 was $37,500 and is included in the accrued pension liability
above.
Assumptions used in developing the projected benefit obligations as of
December 31 were as follows:
1995 1994 1993
--------- --------- ---------
Discount rate.................................................... 6.75% 8.50% 7.25%
Rate of increase in compensation................................. 4.00% 4.00% 4.00%
Rate of return on plan assets.................................... 9.75% 9.75% 9.75%
In addition to the above described defined benefit pension plans, employees
of the Company meeting certain eligibility requirements may elect to participate
in employee savings plans sponsored by Westinghouse and the Company which
qualify as deferred salary arrangements under Section 401(k) of the Internal
Revenue Code. Under these plans, participating employees may defer a portion of
their pretax earnings, subject to statutory limitations. The Company matches a
portion of employees' contributions. Expense recorded by the Company related to
these plans was $16,338, $15,869, and $15,939 in 1995, 1994 and 1993,
respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Net periodic postretirement cost was as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Service cost................................................. $ 2,768 $ 4,360 $ 3,286
Interest cost on accumulated postretirement benefit
obligation.................................................. 23,253 21,287 21,809
Amortization of unrecognized net loss........................ 1,053
Actual return on plan assets................................. (218)
--------- --------- ---------
Net periodic postretirement benefit cost..................... $ 25,803 $ 26,700 $ 25,095
--------- --------- ---------
--------- --------- ---------
The actuarial present value of benefit obligations and funded status were as
follows:
DECEMBER 31,
------------------------
1995 1994
----------- -----------
Accumulated postretirement benefit obligation:
Retirees.......................................................... $ (220,801) $ (183,779)
Fully eligible active participants................................ (11,517) (9,801)
Other active participants......................................... (96,962) (81,174)
----------- -----------
Accumulated benefit obligation.................................... (329,280) (274,754)
Plan assets at fair value......................................... 3,000 2,748
----------- -----------
Accumulated benefit obligation in excess of plan assets............. (326,280) (272,006)
Unrecognized net loss............................................. 62,250 8,244
----------- -----------
Accrued postretirement benefits................................... $ (264,030) $ (263,762)
----------- -----------
----------- -----------
20 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 12 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The accumulated postretirement benefit obligation was calculated using the
terms of Westinghouse's medical, dental and life insurance plans, including the
effects of established maximums on covered costs.
The effect of a 1% annual increase in the assumed healthcare cost trend
rates would increase the accumulated postretirement benefit obligation by
approximately $19,169 and would increase net periodic postretirement benefit
cost by approximately $1,620.
Assumptions used in developing the projected benefit obligation at December
31 were as follows:
1995 1994 1993
--------- --------- ---------
Discount rate................................................. 6.75% 8.50% 7.25%
Compensation increase rate.................................... 4.00% 4.00% 4.00%
Healthcare cost trend rates................................... 10.50% 11.00% 12.00%
Long-term rate of return on plan assets....................... 7.00% 7.00% 9.75%
POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment benefits to former or inactive
employees and their dependents during the time period following employment but
before retirement. These amounts include salary continuation and other
miscellaneous postemployment benefits such as weekly accident and sickness pay,
life insurance and death gratuities. Electronic Systems' liability for
postemployment benefits was $14,994 and $15,652 at December 31, 1995 and 1994,
respectively. In December 1993, Electronic Systems adopted, retroactive to
January 1, 1993, SFAS No. 112, "Employers Accounting for Postemployment
Benefits". Electronic Systems' charge for adoption of SFAS 112 at January 1,
1993 was $13,377, net of $8,918 of deferred taxes, and was immediately
recognized as a cumulative effect of a change in accounting for postemployment
benefits.
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company purchases products from and sells products to other Westinghouse
operations on a limited basis. The Company also purchases certain services from
Westinghouse, including liability, property and workers' compensation insurance.
These transactions are discussed in further detail below. All transactions with
Westinghouse are assumed to be immediately settled and, accordingly, are
recorded through the invested equity account.
CORPORATE SERVICES
The Company uses, and is charged directly for, certain services that
Westinghouse provides to its business units. These services generally include
information systems support, certain accounting functions, such as transaction
processing, legal services, environmental affairs, human resources and
telecommunications. The Company also purchases other Westinghouse
internally-provided services as needed, including printing, productivity and
quality consulting and other services.
Westinghouse centrally develops, negotiates and administers Electronic
Systems' insurance programs. The insurance includes broad all-risk coverage for
real and personal property, third-party liability coverage, employer's
liability, automobile liability, general product liability, and other standard
liability coverage. Westinghouse also maintains a program of self-insurance for
workers' compensation in the U.S. The cost of this program is charged to the
Company based on claims history.
All of the cost of services described above are included in the combined
statement of earnings. Such charges are based on costs which directly relate to
the Company on a basis that management believes is
21 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 13 -- RELATED PARTY TRANSACTIONS (CONTINUED)
reasonable. However, management believes that it is possible that the costs of
these transactions may differ from those that would result from transactions
among unrelated parties. It is not practical to estimate costs of these
transactions had the Company operated as a separate stand-alone entity since
alternative procurement opportunities were not explored. Charges included in the
statement of earnings related to the services above are $51,323, $56,468 and
$69,857 for 1995, 1994 and 1993, respectively.
OTHER CORPORATE EXPENSES
Westinghouse allocates a certain portion of its corporate expenses to its
business units. These allocated costs include Westinghouse executive management
and corporate overhead; corporate legal, environmental, audit, treasury and tax
services, and other corporate support and executive costs.
These corporate expenses are allocated primarily based on payroll dollars.
Such allocations are not necessarily indicative of actual results and it is not
practical for management to estimate the level of expenses that might have been
incurred had the Company operated as a separate stand-alone entity.
Amounts so allocated included in the statement of earnings are $47,457,
$45,949 and $46,078 for 1995, 1994 and 1993, respectively, approximately
one-half of which is allowable for the Company's government contract pricing
purposes in accordance with government-mandated cost accounting procedures.
GUARANTEES
The Company provides guarantees to customers in the form of standby letters
of credit for Company bids, advance payments and performance of contractual
obligations. Such guarantees are supported by Westinghouse's lines of credit. At
December 31, 1995 there are 53 guarantees in the amount of approximately $202
million outstanding. The cost for the lines of credit which support the
guarantees is charged to the Company and is inventoried if specifically related
to an ongoing contract or otherwise expensed as incurred.
NOTE 14 -- OTHER EXPENSE, NET
Other (income) expense consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Loss on disposition of fixed assets.......................... $ 3,508 $ 2,175 $ 3,603
Share of net losses of investees............................. 5,423 405 3,917
Pension settlement loss (Note 12)............................ 60,984
Other........................................................ 4,885 (1,100) 4,235
--------- --------- ---------
$ 13,816 $ 62,464 $ 11,755
--------- --------- ---------
--------- --------- ---------
NOTE 15 -- FORWARD EXCHANGE CONTRACTS
At December 31, 1995, the Company had outstanding forward exchange contracts
to buy the U.S. dollar equivalent of $6,592 of foreign currencies and sell the
U.S. dollar equivalent of $15,447 of foreign currencies. These contracts mature
in various periods through March 1998 and were entered into to hedge foreign
currency commitments. The aggregate fair value of these forward exchange
contracts at December 31, 1995 was $6,414 and $14,176 bought and sold,
respectively. Management believes that the market end credit risk associated
with these contracts is not significant.
22 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 16 -- GEOGRAPHIC INFORMATION
A summary of geographic information relating to foreign and domestic
operations is presented below:
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
Sales
U.S............................................... $ 2,510,433 $ 2,135,503 $ 2,299,698
Non-U.S........................................... 44,057 49,282 48,375
------------ ------------ ------------
$ 2,554,490 $ 2,184,785 $ 2,348,073
------------ ------------ ------------
------------ ------------ ------------
Earnings before income taxes and cumulative effect
of accounting change
U.S............................................... $ 167,732 $ 126,050 $ 123,646
Non-U.S........................................... 4,178 1,436 2,579
------------ ------------ ------------
$ 171,910 $ 127,486 $ 126,225
------------ ------------ ------------
------------ ------------ ------------
Assets
U.S............................................... $ 1,492,617 $ 1,484,836 $ 1,569,868
Non-U.S........................................... 32,416 38,186 42,934
------------ ------------ ------------
$ 1,525,033 $ 1,523,022 $ 1,612,802
------------ ------------ ------------
------------ ------------ ------------
Export sales included in U.S. sales above were $546,529, $466,970 and
$354,923 for 1995, 1994 and 1993, respectively.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
The Company leases certain office space and facilities and equipment under
noncancelable operating leases which expire in various years through 2010. These
leases generally provide for renewal options ranging from one to five years. In
addition, certain of such leases require the Company to share proportionately in
building operating costs and real estate taxes and contain escalation clauses
for periodic increases. Rental expense incurred under such leases was
approximately $32,067, $25,753 and $39,217 in 1995, 1994 and 1993, respectively.
These amounts include payments to West Quest Limited Partnership, of which the
Company is a 25% owner, of $5,400, $5,268 and $5,140 in 1995, 1994 and 1993,
respectively. Future minimum lease commitments at December 31, 1995, are as
follows:
1996.............................................................. $ 23,258
1997.............................................................. 16,593
1998.............................................................. 14,443
1999.............................................................. 13,658
2000.............................................................. 13,164
2001 and thereafter............................................... 40,196
---------
$ 121,312
---------
---------
These minimum lease commitments include amounts due to West Quest Limited
Partnership of $5,335 -- 1996, $5,673 -- 1997, $5,815 -- 1998, $5,960 -- 1999,
$6,109 -- 2000, and $9,164 -- thereafter.
23 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
All of the costs that are directly or indirectly allocable to the Company's
U.S. government contracts or subcontracts are subject to audit by the Defense
Contract Audit Agency (DCAA) or other government agencies. Payments made to the
Company under cost-reimbursable contracts, which represent approximately 30% of
total revenue during 1995, are subject to adjustment (including refunds to the
government) in the event that claimed overhead costs are determined to be
unallowable for reimbursement. In addition, the DCAA has made various
allegations under the Truth in Negotiation Act (TINA). Certain of these matters
are currently under review by the DCAA or other government agencies. As of
December 31, 1995, DCAA had completed rate audits through 1988 and has open
allegations dating back to 1985. While the outcome of these matters is
uncertain, the Company believes that its existing accruals for any such matters
are adequate and that future audits and final adjustments will not have a
significant impact on the Company's financial position.
In the normal course of its operations, the Company becomes involved in
certain legal proceedings, including contract claims and disputes, employment
related disputes or litigation, environmental matters, and investigations of
compliance with government laws and regulations. In the opinion of management,
based upon information presently available, after consideration of existing
accruals, none of these matters is likely to have a significant effect upon the
financial position, operating results or liquidity of the Company. The more
significant of these matters are discussed below:
- Herman/EEOC
In January 1993, Herman and 96 (later 106) other former Electronic Systems
employees filed suit for unlawful termination associated with a reduction
in force (RIF) of approximately 1,200 employees. In April 1993, the EEOC
filed suit in connection with the same RIF. These cases have been
consolidated for the purpose of discovery. Both suits are based on alleged
age discrimination and together involve 385 plaintiffs, 126 of whom have
been dismissed with prejudice from the action. The Federal Court in
Baltimore has adopted a multi-phase trial structure plan pursuant to which
in the initial phase only a few of the remaining 259 plaintiffs claims
would be tried and resolved. The first phase trial is presently expected
to commence in 1996.
- Abu Dhabi
In April 1994, suit was brought in Abu Dhabi Civil Court for $21 million
in compensation allegedly due to the plaintiff under an oral agreement to
provide information and consulting services to Electronic Systems in
support of its efforts to win a contract. The trial court issued a
judgment in November 1995, awarding $3 million to the plaintiff. Both of
the parties have appealed this decision, and a QUASI-DE NOVO trial will
now be held on this matter at the next higher court.
Over and above any judgment the Court may render in this case, Electronic
Systems could be subject to a penalty of up to $70 million under the
contract if the Court determines that the plaintiff was an agent for
Electronic Systems.
- Iran-Iranian Air Force Claim
In 1982, Electronic Systems filed claims against the Islamic Republic of
Iran Air Force (IRIAF) with the Iran -- U.S. Claims Tribunal. The Company
is claiming compensation in respect of the failure of IRIAF to pay sums
due under several contracts, and IRIAF has submitted counterclaims
challenging the Company's performance of the contracts. The trial in this
case was completed in March 1992, and the parties are awaiting the
decision of the Tribunal.
24 of 28
ELECTRONIC SYSTEMS
(A UNIT OF WESTINGHOUSE ELECTRIC CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
- Iran-Iranian Defense Ministry Claim
In October 1991, the Ministry of Defense of the Islamic Republic of Iran
brought an arbitration before the International Court of Arbitration of
the International Chamber of Commerce against the Company alleging breach
of nine radar equipment contracts that had been executed and performed
prior to the 1979 Iranian Revolution. Only one of those contracts
contained an arbitration clause, and as a preliminary matter, the Company
sought to dismiss the arbitration proceeding with regard to the other
eight contracts. The Company also sought to dismiss all of the claims as
untimely because the arbitration was filed well after the expiration of
the applicable statutes of limitations.
A hearing was held in July 1995 with respect to Electronic Systems' motion
to dismiss this case and the parties are awaiting a decision of the
arbitrators.
NOTE 18 -- SUBSEQUENT EVENT
On January 3, 1996, Westinghouse and Northrop Grumman Corporation (Northrop
Grumman) entered into an Asset Purchase Agreement whereby substantially all of
the operations and assets of the Company will be sold to Northrop Grumman, and
Northrop Grumman will assume substantially all of the liabilities of the
Company. The consummation of the sale is scheduled to take place on March 1,
1996, pending regulatory approval.
25 of 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this amendment to current report to be signed on its
behalf by the undersigned hereunto duly authorized.
NORTHROP GRUMMAN CORPORATION
Date: May 31, 1996 By: /s/ James C. Johnson
--------------- ----------------------------
James C. Johnson
Corporate Vice President and
Secretary
Page 26 of 28
EXHIBIT INDEX
Exhibit Number Description of Exhibit Page
- -------------- ------------------------------------------- -------
2.1 Asset Purchase Agreement dated as of January 3, 1996,
between Westinghouse Electric Corporation, a Pennsylvania
corporation, as Seller, and Northrop Grumman Corporation,
a Delaware corporation, as Buyer. (Schedules and Exhibits
have been omitted pursuant to Rule 601(b)(2) of Regulation
S-K. Such Schedules and Exhibits are listed and described
in the Purchase Agreement. Registrant hereby agrees to
furnish to the Securities and Exchange Commission, upon its
request, any or all such omitted Schedules and Exhibits.)*
2.2 Letter Agreement dated February 28, 1996 from Westinghouse
Electric Corporation to Northrop Grumman Corporation.*
2.3 Letter Agreement dated February 29, 1996 from Westinghouse
Electric Corporation to Northrop Grumman Corporation.
(Scheules have been omitted pursuant to Rule 601(b)(2) of
Regulation S-K. Such Schedules are listed and described in
the Letter Agreement. Registrant hereby agrees to furnish
to the Securities and Exchange Commission, upon its request,
any or all such omitted Schedules.)*
2.4 Second Amended and Restated Credit Agreement dated as of
April 15, 1994, Amended and Restated as of March 1, 1996
among Northrop Grumman Corporation, Bank of America National
Trust and Savings Association, as Documentation Agent,
Chemical Securities, Inc., as Syndication Agent, The Chase
Manhattan Bank (National Association), as Administrative
Agent and the Banks Signatories thereto. (Schedules and
Exhibits have been omitted pursuant to Rule 601(b)(2) of
Regulation S-K. Such Schedules and Exhibits are listed and
described in the Credit Agreement. Registrant hereby agrees
to furnish to the Securities and Exchange Commission, upon
its request, any or all such omitted Schedules and
Exhibits.)*
23.1 Consent of Independent Accountants
99.1 Press release of Registrant dated March 1, 1996*
* Previously filed on Registrant's Form 8-K dated March 18, 1996.
Page 27 of 28
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 2 to Registration Statement on Form
S-3 of Northrop Grumman Corporation of our report regarding Electronic
Systems (a unit of Westinghouse Electric Corporation) dated January 31, 1996
appearing in the Current Report on Form 8-K/A for Northrop Grumman
Corporation dated May 31, 1996.
PRICE WATERHOUSE, LLP
Baltimore, Maryland
May 31, 1996
EXHIBIT 23.1
28 of 28
