Northrop Grumman Corporation and Subsidiaries
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 August 8, 2000 69,932,751 shares
Northrop Grumman Corporation and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS
OF FINANCIAL POSITION
June 30, December 31,
Dollars in millions 2000 1999
- -------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 97 $ 142
Accounts receivable, net of progress payments of
$1,968 in 2000 and $1,714 in 1999 1,341 1,402
Inventoried costs, net of progress payments of
$556 in 2000 and $521 in 1999 627 1,190
Deferred income taxes 21 23
Prepaid expenses 36 36
Net current assets of discontinued operations 740
- -------------------------------------------------------------------------------
Total current assets 2,862 2,793
- -------------------------------------------------------------------------------
Property, plant and equipment 2,349 2,895
Accumulated depreciation (1,396) (1,655)
- -------------------------------------------------------------------------------
953 1,240
- -------------------------------------------------------------------------------
Goodwill, net of accumulated amortization of $472 in 2000
and $441 in 1999 3,322 3,469
Other purchased intangibles, net of accumulated amortization
of $421 in 2000 and $388 in 1999 678 761
Prepaid pension cost, intangible pension asset
and benefit trust fund 1,174 946
Assets available for sale 26 26
Investments in and advances to affiliates and sundry assets 49 50
- -------------------------------------------------------------------------------
5,249 5,252
- -------------------------------------------------------------------------------
$9,064 $9,285
===============================================================================
I-1
Northrop Grumman Corporation and Subsidiaries
June 30, December 31,
Dollars in millions 2000 1999
- ---------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Notes payable to banks $ 12 $ 25
Current portion of long-term debt 200 200
Trade accounts payable 449 490
Accrued employees' compensation 330 366
Advances on contracts 319 316
Income taxes payable including deferred income taxes
of $569 in 2000 and $550 in 1999 649 608
Other current liabilities 445 459
- ---------------------------------------------------------------------------
Total current liabilities 2,404 2,464
- ---------------------------------------------------------------------------
Long-term debt 1,750 2,000
Accrued retiree benefits 1,089 1,458
Other long-term liabilities 39 42
Deferred income taxes 219 64
Paid-in capital
Preferred stock, 10,000,000 shares
authorized; none issued
Common stock, 200,000,000 shares
authorized; issued and outstanding:
2000 - 69,908,605; 1999 - 69,719,164 1,039 1,028
Retained earnings 2,543 2,248
Accumulated other comprehensive loss (19) (19)
- ---------------------------------------------------------------------------
3,563 3,257
- ---------------------------------------------------------------------------
$ 9,064 $ 9,285
===========================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
I-2
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
Three months ended Six months ended
June 30, June 30,
Dollars in millions, except per share 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------
Net sales $1,856 $1,921 $3,658 $3,631
Cost of sales
Operating costs 1,319 1,471 2,621 2,768
Administrative and general expenses 220 196 433 406
- ------------------------------------------------------------------------------------------
Operating margin 317 254 604 457
Interest expense (46) (54) (92) (109)
Other, net 2 (4) 4
- ------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and cumulative
effect of accounting change 273 196 516 348
Federal and foreign income taxes 98 73 185 129
- ------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting change 175 123 331 219
Income(loss) from discontinued operations,
net of tax 18 (10) 35 (2)
Loss on disposal of discontinued operations,
net of income tax expense of $77 (15) (15)
- ------------------------------------------------------------------------------------------
Net income before cumulative effect
of accounting change 178 113 351 217
Cumulative effect of change in accounting for
start-up costs, net of income tax
benefit of $11 in 1999 (16)
- ------------------------------------------------------------------------------------------
Net income $ 178 $ 113 $ 351 $ 201
==========================================================================================
Weighted average shares outstanding,
in millions 69.9 68.6 69.8 68.7
==========================================================================================
Basic earnings per share
Continuing operations $ 2.50 $ 1.79 $ 4.74 $ 3.19
Discontinued operations .26 (.14) .50 (.03)
Disposal of discontinued operations (.21) (.21)
- ------------------------------------------------------------------------------------------
Before cumulative effect of accounting change 2.55 1.65 5.03 3.16
Accounting change (.24)
- ------------------------------------------------------------------------------------------
Basic earnings per share $ 2.55 $ 1.65 $ 5.03 $ 2.92
==========================================================================================
Diluted earnings per share
Continuing operations $ 2.50 $ 1.78 $ 4.73 $ 3.16
Discontinued operations .26 (.14) .50 (.03)
Disposal of discontinued operations (.21) (.21)
- ------------------------------------------------------------------------------------------
Before cumulative effect of accounting change 2.55 1.64 5.02 3.13
Accounting change (.24)
- ------------------------------------------------------------------------------------------
Diluted earnings per share $ 2.55 $ 1.64 $ 5.02 $ 2.89
==========================================================================================
Dividends per share $ .40 $ .40 $ .80 $ .80
==========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
I-3
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 30,
Dollars in millions 2000 1999
- ------------------------------------------------------------------
Paid-in Capital
At beginning of year $1,028 $ 989
Stock issued in purchase of business 30
Employee stock awards and options exercised 11 5
- ------------------------------------------------------------------
1,039 1,024
- ------------------------------------------------------------------
Retained Earnings
At beginning of year 2,248 1,892
Net income 351 201
Cash dividends (56) (55)
- ------------------------------------------------------------------
2,543 2,038
- ------------------------------------------------------------------
Accumulated Other Comprehensive Loss (19) (31)
- ------------------------------------------------------------------
Total shareholders' equity $3,563 $3,031
==================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
I-4
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
Six months ended June 30,
Dollars in millions 2000 1999
- -----------------------------------------------------------------------------
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 706 $ 947
Other collections 3,667 3,475
Income tax refunds received 8 23
Interest received 3 1
Other cash receipts 2 5
- -----------------------------------------------------------------------------
Cash provided by operating activities 4,386 4,451
- -----------------------------------------------------------------------------
Uses of Cash
Cash paid to suppliers and employees 3,861 3,900
Interest paid 88 106
Income taxes paid 36 59
Other cash disbursements 8
- -----------------------------------------------------------------------------
Cash used in operating activities 3,985 4,073
- -----------------------------------------------------------------------------
Net cash provided by operating activities 401 378
- -----------------------------------------------------------------------------
Investing Activities
Additions to property, plant and equipment (85) (72)
Payment for businesses purchased (42) (97)
Proceeds from sale of property, plant and equipment 6 16
Other investing activities (11)
- -----------------------------------------------------------------------------
Net cash used in investing activities (132) (153)
- -----------------------------------------------------------------------------
Financing Activities
Borrowings under lines of credit 23
Repayment of borrowings under lines of credit (163) (53)
Principal payments of long-term debt (100) (100)
Proceeds from issuance of stock 5 3
Dividends paid (56) (55)
- -----------------------------------------------------------------------------
Net cash used in financing activities (314) (182)
- -----------------------------------------------------------------------------
(Decrease)increase in cash and cash equivalents (45) 43
Cash and cash equivalents balance at beginning of period 142 44
- -----------------------------------------------------------------------------
Cash and cash equivalents balance at end of period $ 97 $ 87
=============================================================================
I-5
Northrop Grumman Corporation and Subsidiaries
Six months ended June 30,
Dollars in millions 2000 1999
- -------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 351 $ 201
Adjustments to reconcile net income to net cash provided
Depreciation 90 98
Amortization of intangible assets 104 95
Common stock issued to employees 6
Loss on disposal of discontinued operations 15
Loss(gain) on disposals of property, plant and equipment 3 1
Retiree benefits income (267) (114)
Decrease(increase) in
Accounts receivable (287) (82)
Inventoried costs (180) (57)
Prepaid expenses 12
Increase(decrease) in
Progress payments 437 206
Accounts payable and accruals (2) (27)
Provisions for contract losses (30) 11
Deferred income taxes 176 112
Income taxes payable 23 6
Retiree benefits (44) (91)
Other transactions 6 7
- --------------------------------------------------------------------------------
Net cash provided by operating activities $ 401 $ 378
================================================================================
Noncash Investing Activities:
Purchase of businesses
Assets acquired $ 49 $ 156
Cash paid (36) (97)
Stock issued (30)
- --------------------------------------------------------------------------------
Liabilities assumed $ 13 $ 29
================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
I-6
Northrop Grumman Corporation and Subsidiaries
SELECTED INDUSTRY SEGMENT INFORMATION
Three months ended Six months ended
June 30, June 30,
Dollars in millions 2000 1999 2000 1999
- -------------------------------------------------------------------------------
Net Sales
Integrated Systems $ 809 $ 939 $1,665 $1,730
Electronic Sensors & Systems 664 659 1,265 1,274
Logicon 425 365 803 718
Intersegment sales (42) (42) (75) (91)
- -------------------------------------------------------------------------------
$1,856 $1,921 $3,658 $3,631
===============================================================================
Operating Margin
Integrated Systems $ 113 $ 110 $ 213 $ 180
Electronic Sensors & Systems 48 54 82 99
Logicon 33 21 64 40
- -------------------------------------------------------------------------------
Total 194 185 359 319
Other items included in operating margin:
Corporate expenses (4) (8) (11) (16)
Deferred state tax provision (13) (4) (24) (9)
Pension income 140 81 280 163
- -------------------------------------------------------------------------------
Operating margin $ 317 $ 254 $ 604 $ 457
===============================================================================
Contract Acquisitions
Integrated Systems $ 531 $ 488 $ 993 $1,546
Electronic Sensors & Systems 1,644 954 2,239 1,529
Logicon 371 317 808 726
Intersegment acquisitions (68) (24) (103) (53)
- -------------------------------------------------------------------------------
$ 2,478 $1,735 $3,937 $3,748
===============================================================================
Funded Order Backlog
Integrated Systems $3,779 $4,715
Electronic Sensors & Systems 4,498 3,374
Logicon 614 574
Intersegment backlog (113) (131)
- -------------------------------------------------------------------------------
$8,778 $8,532
===============================================================================
I-7
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 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 1999 consolidated
financial statements as restated for discontinued operations and filed on
Form 8-K.
Discontinued Operations
Effective July 24, 2000, the company completed the sale of its
commercial aerostructures (Aerostructures) business to The Carlyle
Group, pursuant to an Asset Purchase Agreement dated as of June 9, 2000
between Northrop Grumman and Vought Aircraft Industries, Inc., an
entity owned by The Carlyle Group. Aerostructures is a major producer
of commercial and military aircraft subassemblies, the majority of
which are sold to The Boeing Company and, for military contracts,
ultimately to the U. S. Government. The purchase price was composed
of $667.7 million in cash and a promissory note for $175 million,
maturing in nine years, with interest payable in kind for four years
and interest payable in kind or cash thereafter. The proceeds were received
and recorded in the third quarter of 2000. An estimated loss on the sale
of $15 million was recorded in the second quarter of 2000.
The loss includes the estimated effect of the settlement and
curtailment of various pension and other post-retirement benefit
plans, as well as the write-off of goodwill. The amount of the loss
may be adjusted in the third quarter of 2000, pending the final
determination of these and other amounts.
The company's Consolidated Statements of Income and related
footnote disclosures have been restated to reflect Aerostructures as
discontinued operations for all periods presented. Operating results
of the discontinued Aerostructures business are as follows:
Three months ended Six months ended
June 30, June 30,
$ in millions 2000 1999 2000 1999
- ----------------------------------------------------------------------------------
Net Sales $ 291 $ 353 $ 569 $ 736
==================================================================================
Income before income taxes $ 28 $ (15) $ 55 $ (3)
Federal and foreign income taxes 10 (5) 20 (1)
- ----------------------------------------------------------------------------------
Income(loss) from discontinued operations $ 18 $ (10) $ 35 $ (2)
==================================================================================
I-8
Northrop Grumman Corporation and Subsidiaries
Aerostructures net assets as of June 30, 2000, are classified
as "Net current assets of discontinued operations". The balance sheet as of
December 31, 1999, and Cash Flows Statements for all periods
presented have not been restated. The net assets of Aerostructures
at June 30, 2000 were as follows:
($ in millions)
Accounts receivable $ 104
Inventoried costs 591
Other current assets 2
Property, plant and equipment, net 276
Goodwill 124
Other purchased intangibles 35
Prepaid pension costs 92
Other assets 1
Trade accounts payable (29)
Accrued employees' compensation (35)
Other current liabilities (46)
Accrued retiree benefits (374)
Other long-term liabilities (1)
- ---------------------------------------------------------------
Net current assets of discontinued operations $ 740
===============================================================
I-9
Northrop Grumman Corporation and Subsidiaries
Earnings per Share
Basic earnings per share are calculated using the weighted average
number of shares of common stock outstanding during each period,
after giving recognition to stock splits and stock dividends.
Diluted earnings per share reflect the dilutive effect of stock
options and other stock awards granted to employees under stock-based
compensation plans.
Basic and diluted earnings per share are calculated as follows:
Three months ended Six months ended
June 30, June 30,
(in millions, except per share) 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income from continuing operations $ 175 $ 123 $ 331 $ 219
Weighted-average common shares outstanding 70.0 68.6 69.8 68.7
Basic earnings per share from continuing operations $ 2.50 $ 1.79 $ 4.74 $ 3.19
Diluted earnings per share
Income from continuing operations $ 175 $ 123 $ 331 $ 219
Weighted-average common shares outstanding 70.0 68.6 69.8 68.7
Dilutive effect of stock options and awards .1 .5 .2 .7
- ----------------------------------------------------------------------------------------------
Weighted-average diluted shares outstanding 70.1 69.1 70.0 69.4
==============================================================================================
Diluted earnings per share from continuing operations $ 2.50 $ 1.78 $ 4.73 $ 3.16
I-10
Northrop Grumman Corporation and Subsidiaries
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS
Effective July 24, 2000, the company completed the sale of its
commercial aerostructures (Aerostructures) business to The Carlyle
Group. Aerostructures is a major producer of commercial and military
aircraft subassemblies, the majority of which are sold to The Boeing
Company and, for military contracts, ultimately to the U.S.
Government. The company's Consolidated Condensed Statements of
Operations and Selected Industry Segment Information have been
restated to reflect Aerostructures as discontinued operations for all
periods presented.
Sales were 3 percent lower in the second quarter and essentially
unchanged in the first half of 2000 versus the same periods,
respectively, of 1999. Both the second quarter and six-month periods
reflect lower sales in the Integrated Systems (ISS) segment, flat
sales in the Electronic Sensors and Systems (ESS) segment, and
increased sales in the Information Technology (Logicon) segment.
ISS sales were 14 percent lower in the second quarter and 4
percent lower in the first half of 2000 versus the same periods,
respectively, of 1999, primarily due to decreased Air Combat Systems
(ACS) sales. Increased sales of the F/A-18E/F, as this program
transitions from the development phase in early 1999 to the current
production phases, were more than offset by lower B-2 and F/A-18C/D
sales.
ESS sales for the second quarter and first six months of 2000
were virtually unchanged from the same periods last year. Increased
sales in the Aerospace Electronic Systems business area in the second
quarter and first six months reflect higher land combat systems
sales. The decrease in Command, Control, Communications,
Intelligence and Naval Systems (C3I&N) business area sales is
primarily attributable to lower air defense and air traffic control
radar systems sales for international customers. Increased
automation and information systems sales are the main cause for the
improvement in the "Other" business area.
Logicon sales were 16 percent higher in the second quarter and
12 percent higher in the first half of 2000 versus the same periods a
year ago, largely attributable to growth in the Government
Information Technology business area.
I-11
Northrop Grumman Corporation and Subsidiaries
Sales by business area and units delivered were:
Three months ended Six months ended
June 30, June 30,
$ in millions 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------
Integrated Systems
Air Combat Systems (ACS) $ 450 $ 544 $ 952 $ 995
Airborne Early Warning and Electronic Warfare (AEW/EW) 196 218 379 410
Airborne Ground Surveillance and Battle Management (AGS/BM) 170 188 346 349
Intrasegment Eliminations (7) (11) (12) (24)
- ---------------------------------------------------------------------------------------------------------
809 939 1,665 1,730
- ---------------------------------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 291 257 548 511
Command, Control, Communications,
Intelligence and Naval Systems (C3I&N) 184 218 361 432
Defensive Electronic Systems 107 124 203 235
Other 82 60 153 96
- ---------------------------------------------------------------------------------------------------------
664 659 1,265 1,274
- ---------------------------------------------------------------------------------------------------------
Logicon
Government Information Technology 301 248 554 489
Technology Services 92 85 184 168
Commercial Information Technology 32 32 65 61
- ---------------------------------------------------------------------------------------------------------
425 365 803 718
- ---------------------------------------------------------------------------------------------------------
Intersegment eliminations (42) (42) (75) (91)
- ---------------------------------------------------------------------------------------------------------
Total sales $1,856 $1,921 $3,658 $3,631
=========================================================================================================
Units
- ---------------------------------------------------------------------------------------------------------
B-2 2 1 3 2
F/A-18 C/D 0 7 0 16
F/A-18 E/F 7 3 14 3
- ---------------------------------------------------------------------------------------------------------
I-12
Northrop Grumman Corporation and Subsidiaries
ISS operating margin in the second quarter of 2000 was $113
million, up from the $110 million reported in the second quarter of
1999. ISS results reflect delivery of the last two B-2's under the
production contract compared with one in the second quarter of 1999,
improved Joint STARS operating margin, and an $8 million upward
cumulative margin rate adjustment on the F/A-18E/F program. Last
year's second quarter results included upward cumulative margin rate
adjustments of $36 million on the B-2 contract and $11 million on the
F/A-18E/F. For the first six months of 2000, ISS operating margin
was $213 million as compared with $180 million reported for the same
period of 1999. ISS first half results reflect delivery of three B-
2's compared with two in the first half of 1999, improved Joint STARS
operating margin, and upward cumulative margin rate adjustments on
the F/A-18E/F program totaling $16 million.
ESS reported operating margin of $48 million for the second
quarter of 2000 and $82 million for the first half of the year, as
compared with $54 million and $99 million, respectively, for the same
periods a year ago. Improved margin in the Defensive Electronic
Systems business area was more than offset by a reduction in pension-
related margin. Most of this pension-related operating margin was
eliminated with the merger of three of the company's pension plans
into one, beginning in the third quarter of 1999.
Logicon's operating margin in the second quarter and first half
periods of 2000 was $33 million and $64 million, respectively,
significantly higher than the $21 million and $40 million reported in
the same periods a year ago. The increases are attributable in part
to increased sales volume and improved performance. Logicon also
benefited from replacing several defined-contribution employee
benefit plans with a defined-benefit type pension plan in the first
quarter of 2000. While the total cash contributions remain the same,
the cost is now included in net pension income, in accordance with
company policy. As a result, the company's pension income is lower
than it otherwise would have been and Logicon's reported operating
margin is higher by $5 million for the second quarter and $10 million
for the first half of the year, with an additional $5 million of cash
contributions expected to be made in each of the remaining quarters
of this year.
Operating margin includes pension income of $140 million for the
second quarter and $280 million for the first six months of 2000 as
compared with $81 million and $163 million for the same periods of
1999. Pension income for the second half of 2000 will be adjusted to
give effect to final actuarial calculations incorporating the
Aerostructures disposition.
Interest expense was $46 million for the second quarter and $92
million for the first half of 2000, down from the $54 million and
$109 million, respectively, reported in the same periods last year.
The decreases resulted principally from a lower average level of
borrowings in the first half of 2000 compared with the first half of
1999.
The company's effective federal income tax rate was 36 percent
for the first six months of 2000 compared with 37 percent for the
same period in 1999.
I-13
Northrop Grumman Corporation and Subsidiaries
Aerostructures income from discontinued operations was $18 million
for the second quarter and $35 million for the first six months of 2000
as compared with losses of $10 million and $2 million for the same periods
of 1999. Included in these amounts are related pretax pension income of
$10 million for the second quarter and $20 million for the first six
months of 2000 as compared with $3 million and $4 million for the
same periods of 1999.
The estimated loss on the sale of the Aerostructures business
of $15 million, net of tax, is recorded in the second quarter of
2000. The loss includes the estimated effect of the settlement and
curtailment of various pension and other post-retirement benefit
plans, as well as the write-off of goodwill. The amount of the loss
may be adjusted in the third quarter of 2000, pending the final
determination of these and other amounts. The proceeds from the
sale, $667.7 million in cash and a promissory note for $175 million,
was received and recorded in the third quarter of 2000. The proceeds will be
used for repayment of debt and general corporate purposes, including potential
strategic acquisitions..
Due to the sale of Aerostructures, ISS, formerly the Integrated
Systems and Aerostructures sector, will move its headquarters to a
new location in the Dallas metropolitan area. The current estimate
for nonrecurring ISS relocation and realignment costs is
approximately $20 million, most of which will occur in the second
half of 2000.
The Securities and Exchange Commission recently issued Staff
Accounting Bulletin (SAB) No. 101 Revenue Recognition in
Financial Statements. Since substantially all of the
company's revenue is recognized in compliance with Statement
of Position (SOP) No. 81-1 Accounting for Performancce of
Construction-Type and Certain Production-Type Contracts and
SOP No. 97-2 Software Revenue Recognition, implementation of
SAB No. 101 has no material effect on the company's results
of operations or financial position
Effective January 1, 1999, the company adopted the new
accounting standard, SOP 98-5 - Reporting on the Costs of Start-Up
Activities, which requires that certain costs that previously had
been deferred be expensed and reported as a cumulative effect of a
change in accounting principle. In 1999, the company reported a $16
million after-tax charge, or $.24 per share, to write off the
previously deferred start-up costs. All such costs incurred after
January 1, 1999, are expensed as incurred.
During the first half of 2000, $401 million of cash was
generated by operations versus the $378 million generated in the same
period last year. The improvement reflects lower pension plan
contributions as a result of the July 1999 pension plan merger. For
the remainder of 2000, cash generated from operating activities,
supplemented by borrowings under the credit agreement, are expected
to be more than sufficient to service debt, finance capital
expenditures, and continue paying dividends to the shareholders. 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.
Forward-Looking Information
Certain statements and assumptions in Management's Discussion and
Analysis and elsewhere in this quarterly report on Form 10-Q contain
or are based on "forward-looking" information (that the company
believes to be within the definition 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, planned dispositions and the
dispositon of Aerostructures. The company's operations are
necessarily subject to various risks and uncertainties; actual
outcomes are dependent upon 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.
I-14
Northrop Grumman Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The company has fixed-rate long-term debt obligations, most of which
are not callable until maturity. The company also has financial
instruments that are subject to interest rate risk, principally
variable-rate short-term debt outstanding under the Credit Agreement.
The company may enter into interest rate swap agreements to offset
the variable-rate characteristics of these loans. At June 30, 2000,
no interest rate swap agreements were in effect.
Only a small portion of the company's transactions are
contracted in foreign currencies. The company does not consider the
market risk exposure relating to foreign currency exchange to be
material.
I-15
Northrop Grumman Corporation and Subsidiaries
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Northrop Grumman Corporation
Los Angeles, California
We have reviewed the accompanying consolidated condensed statements
of financial position of Northrop Grumman Corporation and
Subsidiaries as of June 30, 2000, and the related consolidated
condensed statements of operations for the three- and six-month
periods ending June 30, 2000 and 1999, and the related consolidated
condensed statements of changes in shareholders' equity and cash
flows for the six-month periods ending June 30, 2000 and 1999. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review
of interim financial information consists principally of applying
analytical procedures to financial data and of making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we
do not express such and opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated condensed
financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing
standards generally accepted in the United States of America, the
consolidated balance sheet of Northrop Grumman Corporation and
Subsidiaries as of December 31, 1999, and the related consolidated
statements of income, comprehensive income, changes in shareholders'
equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 26, 2000, except for
discontinued operations footnote, as to which the date is July 24,
2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December
31, 1999 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Los Angeles, California
July 24, 2000
I-16
Northrop Grumman Corporation and Subsidiaries
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Fanni and related cases
Five shareholder class action lawsuits, making similar
allegations, were filed between July and September, 1998 in the
United States District Court for the Central District of California
against the company, its directors, and certain of its officers.
Three of these lawsuits, respectively encaptioned Fanni v. Northrop
Grumman Corp., et al., Schnee v. Northrop Grumman Corp., et al., and
Florida State Board of Admin. v. Northrop Grumman Corp., et al.
allege that defendants issued misleading proxy materials in
connection with the proposed acquisition of the company by Lockheed
Martin Corporation, in violation of the federal securities laws.
These actions were later consolidated and seek unspecified damages on
behalf of a class of shareholders related to the accelerated vesting
of stock incentive plans upon the shareholder vote to approve the
merger. Plaintiffs filed an appeal from the Court's April, 2000,
order that dismissed these actions with prejudice. The other
lawsuits, respectively encaptioned Burroughs v. Northrop Grumman
Corp., et al., and Miller, et al. v. Northrop Grumman Corp., et al.,
were also consolidated and allege that defendants disseminated
misleading information in connection with the proposed acquisition,
in violation of the federal securities laws, thereby artificially
inflating the market price of the company's common stock. These
actions seek unspecified damages for a class of shareholders who
purchased Northrop Grumman stock between July 3, 1997 and March 9,
1998. On April 11, 2000, the Court entered an order dismissing these
actions without prejudice. Plaintiffs filed an amended complaint on
June 30, 2000. The company and the individual defendants deny the
allegations made in these actions and intend to defend the actions
vigorously.
General
The company, as a government contractor, is from time to time
subject to U.S. Government investigations relating to its operations.
Government contractors that are found to have violated the False
Claims Act, or are indicted or convicted for violations of other
Federal laws, or are considered not to be responsible contractors may
be suspended or debarred from government contracting for some period
of time. Such convictions could also result in fines. Given the
company's dependence on government contracting, suspension or
debarment could have a material adverse effect on the company.
The company is involved in certain other legal proceedings
arising in the ordinary course of business, none of which the
company's management believes will have a material adverse effect on
the company's financial condition.
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Northrop Grumman Corporation and Subsidiaries
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 May 17, 2000.
(b) Election of Directors -
The following Class III Director nominees were elected at
the annual meeting:
John T. Chain, Jr.
Vic Fazio
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
(c) The matters voted upon at the meeting and the results of each
vote are as follows:
Votes Votes
Directors: For Withheld
------------- -------------
John T. Chain, Jr. 56,204,062 1,747,427
Vic Fazio 56,122,692 1,828,797
Kent Kresa 56,148,408 1,803,081
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Northrop Grumman Corporation and Subsidiaries
Votes Votes Votes Broker
For Against Abstaining Non-Votes
---------- ------- ---------- ---------
Ratification of the 57,080,712 542,228 328,549 0
appointment of
Deloitte & Touche
LLP as the Company's
independent auditors
Shareholder Proposal 3,412,543 47,314,901 2,886,917 4,337,128
regarding foreign
offset commitments
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Northrop Grumman Corporation and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15 Letter from independent accountants regarding unaudited
interim financial information.
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, 2000. A
report on Form 8-K was filed August 8, 2000 restating the
financial statements previously presented in the December 31,
1999 report on Form 10-K and March 31, 2000 report on Form 10-Q
to give effect to the sale of Aerostructures.
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: August 11, 2000 by/s/ R. B. Waugh, Jr.
------------------ -----------------------------
R. B. Waugh, Jr.
Corporate Vice President and
Chief Financial Officer
Date: August 11, 2000 by/s/J. H. Mullan
------------------ -----------------------------
John H. Mullan
Corporate Vice President and Secretary
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Northrop Grumman Corporation and Subsidiaries
EXHIBIT (15)
Letter from Independent Accountants Regarding
Unaudited Interim Financial Information
August 11, 2000
Northrop Grumman Corporation
Los Angeles, California
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of the
unaudited interim financial information of Northrop Grumman
Corporation and subsidiaries for the periods ended June 30, 2000 and
1999, as indicated in our report dated July 24, 2000; because we did
not perform an audit, we expressed no opinion on the information.
We are aware that our report referred to above, which is
included in your Quarrterly Report on Form 10-Q for the quarter ended
June 30, 2000, is incorporated by reference in Registration Statement
Nos. 33-59815, 33-59853 and 333-68003 on Form S-8, Registration
Statement Nos. 333-78251 and 333-85633 on Form S-3 and Registration
Statement No. 333-40862 on Form S-4.
We also are aware that the aforementioned report, pursuant to
Rule 436 (c) under the Securities Act of 1933, is not considered a
part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant within
the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Los Angeles, California
II-5