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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 June 30, 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 July 22, 1997 58,063,569 shares
Northrop Grumman Corporation and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three months ended June 30,Six months ended June 30,
Dollars in millions,
except per share 1997 1996 1997 1996
Net sales $2,087 $2,143 $4,051 $3,746
Cost of sales
Operating costs 1,636 1,631 3,211 2,904
Administrative and general
expenses 230 304 437 495
Operating margin 221 208 403 347
Other, net 2 14 4 23
Interest expense (65) (82) (129) (128)
Income before income taxes 158 140 278 242
Federal and foreign income taxes 58 54 103 95
Net income $ 100 $ 86 $ 175 $ 147
Weighted average shares outstanding,
in millions 58.0 51.0 58.0 50.3
Earnings per share $ 1.72 $ 1.69 $ 3.02 $ 2.92
Dividends per share $.40 $.40 $.80 $.80
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
Dollars in millions 1997 1996
Assets
Cash and cash equivalents $ 47 $ 44
Accounts receivable, net of progress payments
of $3,116 in 1997 and $2,721 in 1996 1,542 1,356
Inventoried costs, net of progress payments
of $567 in 1997 and $533 in 1996 1,270 1,053
Deferred income taxes 79 77
Prepaid expenses 61 67
Total current assets 2,999 2,597
Property, plant and equipment 3,214 3,154
Accumulated depreciation (1,829) (1,752)
1,385 1,402
Goodwill, net of accumulated amortization of $190 in 1997
and $144 in 1996 3,434 3,436
Other purchased intangibles, net of accumulated
amortization of $162 in 1997 and $116 in 1996 942 988
Deferred income taxes 455 520
Prepaid pension cost, intangible pension asset
and benefit trust funds 339 229
Investments in and advances to
affiliates and sundry assets 146 250
5,316 5,423
$ 9,700 $ 9,422
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Northrop Grumman Corporation and Subsidiaries
June 30, December 31,
Dollars in millions 1997 1996
Liabilities and Shareholders' Equity
Notes payable to banks $ 24 $ 228
Current portion of long-term debt 200 200
Trade accounts payable 490 452
Accrued employees' compensation 381 315
Advances on contracts 250 230
Income taxes payable, including deferred
income taxes of $583 in 1997 and $629 in 1996 628 654
Other current liabilities 542 521
Total current liabilities 2,515 2,600
Long-term debt 3,085 2,950
Accrued retiree benefits 1,720 1,624
Other long-term liabilities 57 59
Deferred income taxes 61 61
Paid-in capital
Preferred stock, 10,000,000 shares
authorized; none issued
Common stock, 200,000,000 shares
authorized; issued and outstanding:
1997 -- 58,051,547; 1996 -- 57,928,466 789 784
Retained earnings 1,477 1,348
Unfunded pension losses, net of taxes (4) (4)
2,262 2,128
$9,700 $9,422
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
Six months ended June 30,
Dollars in millions 1997 1996
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $1,112 $1,117
Other collections 2,818 2,722
Income tax refunds received 1 5
Interest received 1 3
Other cash receipts 1 1
Cash provided by operating activities 3,933 3,848
Uses of Cash
Cash paid to suppliers and employees 3,653 3,250
Interest paid 119 91
Income taxes paid 26 46
Other cash disbursements 2
Cash used in operating activities 3,800 3,387
Net cash provided by operating activities 133 461
Investing Activities
Payment for purchase of Westinghouse ESG,
net of cash acquired (2,884)
Additions to property, plant and equipment (86) (85)
Proceeds from sale of property, plant and equipment 47 26
Proceeds from sale of affiliates/operations 19 29
Funding of retiree benefit trust (25)
Other investing activities 1 1
Net cash used in investing activities (19) (2,938)
Financing Activities
Borrowings under lines of credit 278 1,973
Repayment of borrowings under lines of credit (247) (613)
Proceeds from issuance of long-term debt 1,000
Principal payments of long-term debt (100) (140)
Proceeds from issuance of stock 4 498
Dividends paid (46) (39)
Other financing activities (101)
Net cash provided by(used in) financing activities (111) 2,578
Increase in cash and cash equivalents 3 101
Cash and cash equivalents balance at beginning of period 44 18
Cash and cash equivalents balance at end of period $ 47 $ 119
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Northrop Grumman Corporation and Subsidiaries
Six months ended June 30,
Dollars in millions 1997 1996
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 175 $ 147
Adjustments to reconcile net income to net cash provided
Depreciation 111 100
Amortization of intangible assets 92 70
Common stock issued to employees 2
Loss on disposals of property, plant and equipment 1 9
Retiree benefits cost(income) (24) 17
Decrease(increase) in
Accounts receivable (391) 106
Inventoried costs (217) (75)
Prepaid expenses 5 1
Increase(decrease) in
Progress payments 254 (25)
Accounts payable and accruals 117 134
Provisions for contract losses 13 (16)
Income taxes 80 70
Retiree benefits (90) (82)
Other transactions 5 5
Net cash provided by operating activities $ 133 $ 461
Noncash Investing and Financing Activities
Purchase of Westinghouse ESG
Fair value of assets acquired $ 3,894
Cash paid (2,889)
Liabilities assumed $ 1,005
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Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 30,
Dollars in millions 1997 1996
Paid-in Capital
At beginning of year $ 784 $ 272
Stock issuance 493
Employee stock awards and options exercised,
net of forfeitures 5 5
789 770
Retained Earnings
At beginning of year 1,348 1,199
Net income 175 147
Cash dividends (46) (39)
1,477 1,307
Unfunded Pension Losses, Net of Taxes (4) (12)
Total shareholders' equity $2,262 $2,065
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Northrop Grumman Corporation and Subsidiaries
SELECTED INDUSTRY SEGMENT INFORMATION
Three months ended June 30, Six months ended June 30,
Dollars in millions 1997 1996 1997 1996
Net Sales
Aircraft $1,115 $1,073 $ 2,141 $ 2,061
Electronics 1,065 1,136 2,088 1,828
Intersegment sales (93) (66) (178) (143)
$2,087 $2,143 $ 4,051 $ 3,746
Operating Profit
Aircraft $ 145 $ 138 $ 280 $ 239
Electronics 103 113 193 187
Total operating profit 248 251 473 426
Adjustments to reconcile operating
profit to operating margin:
Other income included above (3) (1) (3) (1)
State and local income taxes 9 (13) (3) (19)
General corporate expenses (33) (29) (64) (59)
Operating margin $ 221 $ 208 $ 403 $ 347
Contract Acquisitions
Aircraft $1,290 $1,139 $ 1,955 $ 1,878
Electronics 1,165 1,057 2,437 4,601
Intersegment acquisitions (94) (78) (189) (162)
$2,361 $2,118 $ 4,203 $ 6,317
Funded Order Backlog
Aircraft $ 6,928 $ 6,894
Electronics 5,682 5,678
Intersegment backlog (58) (54)
$12,552 $12,518
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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 June 30, Six months ended June 30,
1997 1996 1997 1996
Earnings per share 1.72 1.69 3.02 2.92
Diluted earnings per share 1.69 1.66 2.97 2.87
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 .6161 shares of Northrop
Grumman common stock for each share of Logicon common stock. The Logicon
shareholder vote to approve the merger is scheduled for July 29, 1997.
On July 3, 1997, the company announced that it had entered into a
definitive agreement with Lockheed Martin Corporation to combine the
companies. The merger is expected to be accounted for as a pooling of
interests. Under terms of the agreement, Northrop Grumman shareholders
will receive 1.1923 shares of Lockheed Martin common stock for each share
of Northrop Grumman stock. The transaction is expected to close by the end
of 1997.
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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 3 percent lower in the second quarter of 1997 than the second
quarter of 1996. Sales rose 8 percent in the first half of 1997 over
sales reported in the first six months of 1996. Comparative results for
1996 include only four months 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 second quarter and first half
of 1997 versus comparable periods of 1996 as a result of greater deliveries
of shipsets for Boeing jetliners and higher sales on the C-17 military
transport and Gulfstream V business jet. These increases were partially
offset by decreases in B-2 and F/A-18 sales.
Electronics segment sales for the second quarter 1997 declined as
compared with the second quarter 1996 due to lower surveillance aircraft
and electronic countermeasures (ECM) sales. The electronics segment sales
increase for the first half of this year as compared with the first half
of last year is due to the inclusion of ESSD operations for the full first
half of 1997 versus four months in 1996.
Sales by major program/business area and units delivered were:
Three months Six months
$ in millions 1997 1996 1997 1996
B-2 $ 395 $ 456 $ 760 $ 888
Surveillance Aircraft
(E-8 Joint Stars, E-2) 278 304 523 561
F/A-18 123 185 252 336
Boeing Jetliners 221 158 425 261
Airborne Radar 151 161 296 216
ECM 90 115 193 199
Marine 140 129 272 171
C-17 75 50 142 121
Space 78 91 164 117
Airspace Management 63 81 129 113
Data Systems 79 47 127 89
All Other 394 366 768 674
$2,087 $2,143 $4,051 $3,746
Three months Six months
Units 1997 1996 1997 1996
747 11 7 22 12
F/A-18 C/D 8 19 18 32
F/A-18 E/F 1 3
C-17 2 1 4 3
B-2 1 3
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Northrop Grumman Corporation and Subsidiaries
Pension income, which is included in operating profit, was $34 million
for the second quarter and $67 million for the first six months of 1997 as
compared with $10 million and $27 million for the same periods of 1996.
Substantially all of the pension income is assigned to the aircraft segment.
Operating margin in the second quarter 1997 benefited $10 million from a
reduction in deferred state income taxes. The merger of Grumman Corporation
and several of its subsidiaries into Northrop Grumman Corporation caused the
deferred tax items associated with those merged companies to be shifted to
Northrop Grumman Corporation resulting in a reapportionment in various
states' deferred tax amounts.
The amount and rate of operating profit earned on sales increased in
the aircraft segment in the second quarter and first half of 1997 as compared
with the same periods of 1996. Aircraft segment operating profit benefited in
the second quarter 1997 versus the second quarter 1996 from a higher level of
Boeing jetliner sales, increased operating margin rates on various military
aircraft programs, and an increase in pension income. These improvements were
partially offset by lower F/A-18 sales and no B-2 aircraft deliveries in the
second quarter of 1997 versus one in the second quarter of 1996. For the first
six months of 1997, aircraft segment operating profit improved due to increased
pension income, higher levels of Boeing jetliner and B-2 spares and support
sales, and a $7 million reduction in expenditures for ongoing company-sponsored
research and development for commercial aerostructures. Offsetting these
improvements was a reduction in B-2 operating margin as a result of no aircraft
deliveries in the first six months of this year versus three deliveries in the
comparable period of 1996. Last year's first half results included a
$25 million charge related to the company's work for Fokker Aircraft N.V.,
which declared bankruptcy in March 1996.
The amount and rate of operating profit earned on sales decreased in the
electronics segment in the second quarter as compared with the same period
last year as a result of lower sales volume and a change in the business mix.
For the first half of 1997, electronics segment operating profit increased with
the inclusion of ESSD operations for the full first half of 1997 versus four
months in 1996. Electronics operating profit was reduced by a $13 million
pretax charge recorded in the first quarter of 1997 related to an increase in
the cost estimate to complete the company's work on the Directed Infrared
Countermeasures (DIRCM) program.
Other income for the second quarter of 1996 included a $12 million gain
from the sale of an equity investment in a manufacturer of high technology
equipment. Other income for the first half of 1996 also included a $4 million
gain from the early retirement of notes payable which were due in 1999.
Interest expense for the second quarter 1997 was $17 million lower than
the corresponding quarter in 1996, following the $660 million decrease in
average debt outstanding between the two years' second quarters. For the
first half of 1997, interest expense was level with the same period of
last year.
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Northrop Grumman Corporation and Subsidiaries
The company's effective federal income tax rate was 37.1 percent for
the first six months of 1997 versus 39.3 percent for the comparable period of
1996. The decrease in the rate was caused primarily by an increase in foreign
sales tax credits.
In June 1996 the company issued approximately 8 million shares of common
stock in a public offering. The $493 million in net proceeds from the issuance
were used to pay down long-term debt. During the first half of 1997,
$133 million of cash was generated from operations versus $461 million in the
first half of 1996. The decrease is primarily due to the increase in working
capital for the Boeing jetliners, Gulfstream V business jet and JSTARS programs
in support of increased production levels. Cash generated from operating
activities is expected to increase in the last half of this year and 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.
In May 1997 the company 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 .6161 shares of Northrop Grumman common stock for each share of Logicon
common stock. The Logicon shareholder vote is scheduled for July 29, 1997.
In July 1997 the company entered into a definitive agreement with
Lockheed Martin Corporation to combine the two companies. The merger is
expected to be accounted for as a pooling of interests. Under terms of the
agreement, Northrop Grumman shareholders will receive 1.1923 shares of
Lockheed Martin common stock for each share of Northrop Grumman stock.
The transaction, which is subject to shareholder approvals and U.S.
government regulatory reviews, is expected to close by the end of 1997.
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
There have been no material changes in the litigation reported in the
company's Form 10-K for the year ended December 31, 1996 except as
reported in Item 1 of the company's Form 10-Q for the quarter ended
March 31, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting --
The annual meeting of stockholders of Northrop Grumman Corporation
was held on May 21, 1997.
(b) Election of Directors --
The following Class III Director nominees were elected at the annual
meeting:
John T. Chain, Jr.
Jack Edwards
Kent Kresa
The Directors whose terms of office continue are:
Jack R. Borsting
Phillip Frost
Robert A. Lutz
Aulana L. Peters
John E. Robson
Richard M. Rosenberg
John Brooks Slaughter
Richard J. Stegemeier
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Northrop Grumman Corporation and Subsidiaries
(c) The matters voted upon at the meeting and the results of each vote
are as follows:
Votes Votes Shares
For Directors: For Against Abstaining
John T. Chain, Jr. 50,085,286 806,577 -
Jack Edwards 50,070,212 821,651 -
Kent Kresa 50,058,400 833,463 -
Votes Votes Shares Broker
For Against Abstaining Non-Votes
Approval of the amendments
to the Company's 1993 Long-
Term Incentive Stock Plan 35,275,484 12,943,331 501,971 2,171,077
Ratification of the appointment
of Deloitte & Touche as the
Company's independent auditors 50,449,705 231,499 210,659 -
Shareholder Proposal 2,236,428 43,160,881 3,323,476 2,171,078
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Northrop Grumman Corporation and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Agreement and Plan of Merger dated as of May 4, 1997
among Northrop Grumman Corporation, Logicon, Inc. and NG Acquisition
(incorporated by reference to Registration Statement on Form S-4 filed
June 9, 1997).
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 June 30, 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: July 28, 1997 by/s/N. F. Gibbs
Nelson F. Gibbs
Corporate Vice President and Controller
Date: July 28, 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 June 30, Six months ended June 30,
1997 1996 1997 1996
Primary:
Average shares outstanding 58,037 50,978 58,003 50,275
Common stock equivalents 979 1,300 945 1,319
Totals 59,016 52,278 58,948 51,594
Net income $99,785 $86,044 $175,112 $146,789
Earnings per share(1) $ 1.69 $ 1.65 $ 2.97 $ 2.85
Fully diluted:
Average shares outstanding 58,037 50,978 58,003 50,275
Common stock equivalents 1,064 1,419 1,064 1,420
Totals 59,101 52,397 59,067 51,695
Net income $99,785 $86,044 $175,112 $146,789
Earnings per share(1) $ 1.69 $ 1.64 $ 2.96 $ 2.84
(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%.