SEC Filing - Northrop Grumman

PAGE 1 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 September 30, 1996 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 October 25, 1996 57,728,291 shares Northrop Grumman Corporation and Subsidiaries Part I. Financial Information Item 1. Financial Statements CONSOLIDATED CONDENSED STATEMENTS OF INCOME Three months ended Nine months ended September 30 September 30 $ in millions, except per share 1996 1995 1996 1995 Net Sales $2,043 $1,630 $5,789 $5,006 Cost of sales Operating costs 1,606 1,269 4,563 3,928 Administrative and general expenses 272 230 714 663 Operating margin 165 131 512 415 Other, net 17 5 40 7 Interest expense (69) (36) (197) (106) Income before income taxes 113 100 355 316 Federal and foreign income taxes 43 39 138 122 Net income $ 70 $ 61 $ 217 $ 194 Weighted average shares outstanding, in millions 57.7 49.4 52.8 49.3 Earnings per share $ 1.21 $ 1.25 $ 4.10 $ 3.93 Dividends per share $ .40 $ .40 $ 1.20 $ 1.20 I-1 Northrop Grumman Corporation and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION September 30 December 31 $ in millions 1996 1995 Assets Cash and cash equivalents $ 93 $ 18 Accounts receivable, net of progress payments of $2,750 in 1996 and $2,426 in 1995 1,344 1,197 Inventoried costs, net of progress payments of $591 in 1996 and $428 in 1995 1,114 771 Deferred income taxes 37 25 Prepaid expenses 94 61 Total current assets 2,682 2,072 Property, plant and equipment 3,324 2,900 Accumulated depreciation (1,785) (1,724) 1,539 1,176 Goodwill, net of accumulated amortization of $121 in 1996 and $63 in 1995 3,409 1,403 Other purchased intangibles, net of accumulated amortization of $92 in 1996 and $36 in 1995 1,011 356 Deferred income taxes 438 99 Prepaid pension cost, intangible pension and benefit trust fund 196 255 Investments in and advances to affiliates and sundry assets 238 94 5,292 2,207 $ 9,513 $ 5,455 I-2 Northrop Grumman Corporation and Subsidiaries September 30 December 31 $ in millions 1996 1995 Liabilities and Shareholders' Equity Notes payable to banks $ 245 $ 65 Current portion of long-term debt 188 144 Trade accounts payable 463 360 Accrued employees' compensation 366 203 Advances on contracts 185 98 Income taxes payable, including deferred income taxes of $554 in 1996 and $471 in 1995 609 528 Other current liabilities 482 317 Total current liabilities 2,538 1,715 Long-term debt 3,101 1,163 Accrued retiree benefits 1,676 1,048 Other long-term obligations 66 39 Deferred income taxes 21 31 Paid-in capital Preferred stock, 10,000,000 shares authorized and none issued Common stock, 200,000,000 shares authorized; issued and outstanding: 1996 --57,728,291; 1995 -- 49,462,615, 770 272 Retained earnings 1,353 1,199 Unfunded pension losses, net of taxes (12) (12) 2,111 1,459 $9,513 $5,455 I-3 Northrop Grumman Corporation and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Nine months ended September 30 $ in millions 1996 1995 Operating Activities Sources of Cash Cash received from customers Progress payments $ 1,652 $1,708 Other collections 4,109 3,195 Income tax refunds received 12 7 Interest received 8 Other cash receipts 5 10 Cash provided by operating activities 5,786 4,920 Uses of Cash Cash paid to suppliers and employees 5,021 4,460 Interest paid 156 102 Income taxes paid 62 48 Other cash payments 3 Cash used in operating activities 5,239 4,613 Net cash provided by operating activities 547 307 Investing Activities Payment for purchase of Westinghouse ESG, net of cash acquired (2,886) Additions to property, plant and equipment (122) (97) Proceeds from sale of property, plant and equipment 24 31 Proceeds from sale of affiliates 18 29 Funding of retiree benefit trust (25) Other investing activities 19 (20) Net cash used in investing activities (2,972) (57) Financing Activities Borrowings under lines of credit 2,613 150 Repayment of borrowings under lines of credit (616) (259) Proceeds from issuance of long-term debt 1,000 Principal payments of long-term debt (832) (70) Proceeds from issuance of stock 498 3 Dividends paid (63) (59) Other financing activities (100) Net cash provided by(used in) financing activities 2,500 (235) Increase in cash and cash equivalents 75 15 Cash and cash equivalents balance at beginning of period 18 17 Cash and cash equivalents balance at end of period $ 93 $ 32 I-4 Northrop Grumman Corporation and Subsidiaries Nine months ended September 30 $ in millions 1996 1995 Reconciliation of Net Income to Net Cash Provided by Operating Activities Net income $ 217 $ 194 Adjustments to reconcile net income to net cash provided Depreciation 157 165 Amortization of intangible assets 116 43 Write-off of intangible asset 14 Loss(gain) on disposals of property, plant and equipment 5 (6) Noncash retiree benefits (107) (43) Decrease(increase) in Accounts receivable 1 244 Inventoried costs (41) 200 Prepaid expenses (90) 135 Refundable income taxes 43 Increase(decrease) in Progress payments (30) (323) Accounts payable and accruals 224 (273) Provisions for contract losses (33) (132) Income taxes 115 63 Other transactions (1) (3) Net cash provided by operating activities $ 547 $ 307 Noncash Investing and Financing Activities Purchase of Westinghouse ESG Fair value of assets acquired $3,948 Cash paid 2,890 Liabilities assumed $1,058 I-5 Northrop Grumman Corporation and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Nine months ended September 30 $ in millions 1996 1995 Paid-in Capital At beginning of year $ 272 $ 265 Stock issuance 493 Employee stock awards and options exercised, net of forfeitures 5 4 $ 770 $ 269 Retained Earnings At beginning of year $1,199 $1,026 Net income 217 194 Cash dividends (63) (59) $1,353 $1,161 Unvested Employee Restricted Award Shares $ $ (1) Unfunded Pension Losses, Net of Taxes $ (12) $ I-6 Northrop Grumman Corporation and Subsidiaries SELECTED INDUSTRY SEGMENT INFORMATION Three months ended Nine months ended September 30 September 30 $ in millions, except per share 1996 1995 1996 1995 Net Sales Military and Commercial Aircraft $1,058 $1,187 $ 3,119 $ 3,595 Electronics 1,060 520 2,888 1,627 Intersegment sales (75) (77) (218) (216) $2,043 $1,630 $ 5,789 $ 5,006 Operating Profit Military and Commercial Aircraft $ 161 $ 132 $ 374 $ 359 Electronics 25 42 183 119 Total operating profit 186 174 557 478 Adjustments to reconcile operating profit to operating margin: Other income included above (8) (1) (9) (1) State and local income taxes (5) (13) (24) (27) General corporate expenses (31) (21) (90) (78) Mark to market restricted stock rights (11) (11) Retiree benefit cost included in contract costs 40 11 112 100 Retiree benefit cost (6) (19) (23) (57) Operating margin $ 165 $ 131 $ 512 $ 415 Contract Acquisitions Military and Commercial Aircraft $ 734 $ 893 $2,612 $ 1,528 Electronics 605 697 5,206 2,315 Intersegment acquisitions (70) (61) (232) (198) $1,269 $1,529 $ 7,586 $ 3,645 Funded Order Backlog Military and Commercial Aircraft $ 6,894 $ 7,596 Electronics 5,678 3,254 Intersegment backlog (54) (38) $12,518 $10,812 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 (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 1995 Annual Report. Acquisition On March 1, 1996 the company purchased substantially all of the defense and electronics systems business of Westinghouse Electric Corporation at a cost of $2.9 billion and financed the transaction with new borrowings. The purchase method of accounting was used to record the transaction with fair values being assigned to the assets acquired and liabilities assumed. The excess of the purchase price over the tangible net assets acquired was first assigned to identifiable intangible assets and the balance to goodwill with amortization on a straight-line basis over weighted average periods of 11 years and 40 years, respectively. The business acquired is being operated as a division of the company and has been designated the Electronic Sensors and Systems Division (ESSD). Financial data of ESSD have been consolidated with Northrop Grumman effective March 1, 1996. The following unaudited pro forma financial information combines Northrop Grumman's and ESSD's results of operations as if the acquisition had taken place on January 1, 1995, and is not necessarily indicative of future operating results for Northrop Grumman. Three months ended Nine months ended September 30 September 30 $ in millions, except per share 1996 1995 1996 1995 Sales $2,043 $2,178 $6,036 $6,591 Net Income 70 3 197 80 Earnings per share 1.21 .06 3.72 1.62 Inventoried Costs The company's inventoried costs consist primarily of work in process related to long-term contracts with customers. Goodwill and Other Purchased Intangibles Goodwill and other purchased intangible assets are amortized over periods of 40 years and a weighted average of 15 years, respectively. Goodwill and other purchased intangibles balances are included in the identifiable assets of the industry segment to which they have been assigned and amortization is charged against the respective industry segment operating profit. The recoverability of goodwill and other purchased intangibles is evaluated at least annually considering the projected future profitability and cash flow at the operations to which they relate. When it is determined that an impairment has occurred, an appropriate charge to operations is recorded. I-8 Northrop Grumman Corporation and Subsidiaries Long-Term Debt During the first quarter of 1996 the company sold to institutional investors $400 million of 7 percent notes due 2006, $300 million of 7 3/4 percent debentures due 2016 and $300 million of 7 7/8 percent debentures due 2026. The proceeds from this issuance were used to finance a portion of the purchase price of ESSD. The debt indenture contains restrictions relating to limitations on liens, sale and leaseback arrangements and funded debt of subsidiaries. To finance the balance of the purchase price of ESSD the company amended its Credit Agreement with a group of domestic and foreign banks to provide for three credit facilities: $1.8 billion available on a revolving credit basis through March 2002; a variable interest rate $500 million two-year term loan due March 1, 1998, which was repaid in July, 1996; and a variable interest rate $1.5 billion six-year term loan due in 24 quarterly installments of $62.5 million plus interest beginning June 1996. At September 30, 1996, a total of $1.7 billion was outstanding under these facilities. Effective November 1, 1996, the Credit Agreement was further amended to reduce the $1.5 billion term loan to $1.05 billion payable in 21 quarterly installments of $50 million plus interest beginning March 1, 1997. The company will pay a facility fee and, at least quarterly, interest on the outstanding debt under the Credit Agreement at rates which vary based in part on the company's credit rating and leverage ratio. In the event of a change in control, as defined, the banks are relieved of their commitments. Compensating balances are not required. The credit agreement contains restrictions relating to the payment of dividends, acquisition of the company's stock, aggregate indebtedness for borrowed money and interest coverage. Common Stock In June 1996 the company, in a public offering, issued approximately 8 million shares of common stock at $63.25 per share. The net proceeds of $493 million were used to pay down outstanding debt under the company's Credit Agreement. Contingencies In accordance with company policy on environmental remediation, the estimated cost to complete remediation has been accrued where it is probable that the company will incur such costs in the future, including those for which it has been named a Potentially Responsible Party by the Environmental Protection Agency or similarly designated by other environmental agencies. To assess the potential impact on the company's financial statements, management estimates the total reasonably possible remediation costs that could be incurred by the company, taking into account currently available facts on each site as well as the current state of technology and prior experience in remediation of contaminated sites. These estimates are reviewed periodically and adjusted to reflect changes in facts and technical and legal circumstances. Management estimates that at September 30, 1996, the reasonable range of future costs for environmental remediation, including those acquired in the purchase of the defense and electronics systems business of Westinghouse Electric Corporation, is $45 million to $65 million, of which $53 million has been accrued. While management cannot predict whether new information gained as projects progress will materially affect the estimated liability accrued, management does not anticipate that future remediation expenditures will have a material adverse effect on the company's results of operations or financial position. I-9 Northrop Grumman Corporation and Subsidiaries Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND THE RESULTS OF ITS OPERATIONS. During the first quarter of 1996, Northrop Grumman acquired the defense and electronics systems business of Westinghouse Electric Corporation. The business acquired is being operated as a division of the company and has been designated the Electronic Sensors and Systems Division (ESSD). Northrop Grumman results for 1996 include ESSD operations from March 1, 1996, the date of acquisition. Results for 1995 do not include ESSD data. The reporting of industry segment data has been realigned based upon the company's current mix of products. Operating results for those programs formerly reported in the missiles and unmanned vehicles segment and aircraft services programs previously included in the data systems and other services segment (DSOS) are now included in the military and commercial aircraft segment (MCA). The balance of the programs previously included in DSOS and all of the operations of ESSD are included in the electronics industry segment. Data for comparable prior periods has been restated. Sales for the third quarter of 1996 were 25 percent higher than last year's third quarter. Sales rose 16 percent in the first nine months versus the comparable period of 1995. MCA industry segment sales decreased in the third quarter and first nine months of 1996 versus comparable periods of 1995 primarily as a result of decreased volume on the B-2 bomber and F/A-18 strike fighter programs. Lower volume on the company's other military programs also contributed to the decrease in sales for the first nine months of 1996 versus the comparable period of 1995. Electronics industry segment sales for the third quarter and first nine months of 1996 increased over the same periods a year ago as a result of including the post acquisition sales added by ESSD, which more than offset the revenue declines in the other programs in this segment. Sales by major program/business area and units delivered were as shown in the following table. The Airborne Radar, Marine, Space and Airspace Management program areas were acquired as part of ESSD. The balance of sales for ESSD are included in the "All Other" category. I-10 Northrop Grumman Corporation and Subsidiaries Three months Nine months September 30 September 30 $ in millions 1996 1995 1996 1995 B-2 $ 383 $ 478 $1,271 $1,452 Surveillance Aircraft (E-8 Joint STARS, E-2) 250 265 811 793 F/A-18 185 228 521 622 Boeing Jetliners 160 124 421 421 Airborne Radar 172 388 ECM 87 87 286 240 Marine 140 311 C-17 73 56 194 195 Space 97 214 Airspace Management 58 171 Data Systems 49 35 138 139 All Other 389 357 1,063 1,144 $2,043 $1,630 $5,789 $5,006 Three months Nine months Units 1996 1995 1996 1995 F/A-18 C/D 17 16 49 39 747 9 5 21 18 F/A-18 E/F 2 3 5 C-17 2 3 5 5 B-2 1 1 4 3 The amount of operating profit increased in the third quarter and first nine months of 1996 as compared to the same periods of 1995. Third quarter operating profit included the disposition of three claims stemming from work performed in the 1980's. The MCA segment benefited $31 million from the settlement of two claims involving productivity improvements on the F/A-18 and contractual issues related to support services on the TA-4J aircraft. The Electronics industry segment operating profit was reduced by $29 million as a result of the writedown of a claim related to avionics work performed by the former Grumman Corporation prior to its acquisition by Northrop. The third quarter 1996 MCA segment operating profit also benefited from cumulative margin rate adjustments made on several Boeing jetliner programs, which resulted in a net $7 million operating margin increase. These adjustments reflected continued improvement in operating performance of these programs. The MCA segment operating profit for the first nine months of 1996 increased versus 1995 as a result of the $31 million from claim settlements and higher operating margin on the C- 17 military transport aircraft and commercial aerostructures programs. These increases more than offset lower overall operating margin on the B-2 Bomber, due to lower sales volume, and a $25 million charge recorded in the first quarter of 1996 related to the company's work for Fokker Aircraft N.V., which declared bankruptcy last March. This I-11 Northrop Grumman Corporation and Subsidiaries year's first nine months also benefited from the delivery of four B-2 bombers versus three in the first three quarters of 1995. The MCA segment third quarter and first nine months of 1996 were also impacted by $7 million and $21 million respectively in expenditures for ongoing company-sponsored research and development on commercial aerostructures, as compared to $15 million and $23 million for the comparable periods of 1995. Electronics industry segment operating profit for the third quarter was reduced by $9 million as a result of a cumulative downward margin rate adjustment related to the inspection and replacement of incorrect rivets installed on E-8 Joint STARS aircraft. The reductions in operating profit for the third quarter and first nine months of 1996 as compared to the same periods in 1995 were partially offset by the inclusion of ESSD operations. Operating margin for the third quarter and first nine months of 1996 included an increase in retiree benefit income, which was partially offset by a charge in the third quarter of 1996 for a mark to market adjustment related to restricted employee stock rights. Other income for the third quarter and first nine months included gains of $6 million and $18 million, respectively, from the sales of a portion of an equity investment in a manufacturer of high technology equipment. Interest expense for the third quarter of 1996 was $33 million higher than the corresponding quarter of 1995. Interest expense for the first nine months of 1996 was $91 million higher than the first three quarters of 1995. These increases resulted from the higher average level of borrowings due to new borrowings required for the ESSD acquisition. 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 nine months $547 million of cash was generated from operations versus $307 million in the first nine months of 1995 and was more than sufficient to finance capital expenditures and dividends. The company's liquidity and financial flexibility is expected to continue to be provided by the cash flow generated from operating activities, which for the balance of this year is not expected to continue at the level achieved in the first nine months, supplemented by unused borrowing capacity under the company's credit agreement and other short term credit facilities. Forward-Looking Information Certain statements or 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 involve risk and uncertainties, including the availability of future cash flow. The company's operations are necessarily subject to various risks and uncertainties, actual outcomes are dependent upon 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, political 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-12 Northrop Grumman Corporation and Subsidiaries Part II OTHER INFORMATION Item 1. Legal Proceedings In the second quarter of 1996, a Federal jury returned a verdict for the company with respect to the remaining issues in the litigation entitled U.S. ex rel David Peterson and Jeff Kroll v. Northrop Corporation which is described in the company's Annual Report on Form 10-K for 1995, as supplemented in the company's Form 10-Q for the quarterly periods ended March 31, 1996 and June 30, 1996. The government's motion for a new trial filed on May 30, 1996, was denied on August 16, 1996. A notice of appeal was filed by the government on October 10, 1996. II-1 Northrop Grumman Corporation and Subsidiaries Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10 - Amendment No. 1 dated as of November 1, 1996, to Second Amended and Restated Credit Agreement dated as of April 15, 1994, Amended and Restated as of March 1, 1996. 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 September 30, 1996. II-2 Northrop Grumman Corporation and Subsidiaries 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: November 1, 1996 by/s/N. F. Gibbs Nelson F. Gibbs Corporate Vice President and Controller Date: November 1, 1996 by/s/James C. Johnson James C. Johnson Corporate Vice President and Secretary II-3 Northrop Grumman Corporation and Subsidiaries EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share) Three months ended Nine months ended September 30 September 30 Primary: 1996 1995 1996 1995 Average shares outstanding 57,715 49,399 52,755 49,339 Common stock equivalents 1,472 1,265 1,370 1,052 Totals 59,187 50,664 54,125 50,391 Net income $69,751 $61,606 $216,540 $194,136 Earnings per share(1) $ 1.18 $ 1.22 $ 4.00 $ 3.85 Fully diluted: Average shares outstanding 57,715 49,399 52,755 49,339 Common stock equivalents 1,640 1,322 1,640 1,322 Totals 59,355 50,721 54,395 50,661 Net income $69,751 $61,606 $216,540 $194,136 Earnings per share(1) $ 1.18 $ 1.21 $ 3.98 $ 3.83 (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%.

5 9-MOS DEC-31-1996 SEP-30-1996 93 0 1,438 94 1,114 2,682 3,324 1,785 9,513 2,538 3,101 0 0 770 1,341 9,513 5,789 5,789 5,277 5,277 (40) 0 197 355 138 217 0 0 0 217 4.10 4.10

Amendment No. 1 EXECUTION COPY NORTHROP GRUMMAN CORPORATION _________________ AMENDMENT NO. 1 Dated as of November 1, 1996 to SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of April 15, 1994 Amended and Restated as of March 1, 1996 _________________ CHASE SECURITIES INC., as Arranger THE CHASE MANHATTAN BANK, as Administrative Agent BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Syndication Agent MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Documentation Agent AMENDMENT NO. 1 AMENDMENT NO. 1 dated as of November 1, 1996, between NORTHROP GRUMMAN CORPORATION, a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); each of the lenders that is a signatory hereto (individually, a "Bank" and, collectively, the "Banks"); THE CHASE MANHATTAN BANK, as Swingline Bank; and THE CHASE MANHATTAN BANK, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). The Company, the Banks, and certain other banks listed on Schedule II hereto (hereinafter the "Non-Continuing Banks") and the Administrative Agent are parties to a Second Amended and Restated Credit Agreement dated as of April 15, 1994 amended and restated as of March 1, 1996 (as heretofore modified and supplemented and in effect on the date hereof, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for loans to be made by said Banks to the Company in an aggregate principal amount not exceeding $3,800,000,000. The Company, the Banks and the Administrative Agent wish to amend the Credit Agreement in certain respects, and accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 1, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Subject to the satisfaction of the conditions precedent specified in Section 4 below, but effective as of the date hereof, the Credit Agreement shall be amended as follows: 2.01. References in the Credit Agreement to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 1.01 of the Credit Agreement is amended by amending and (to the extent not already included in said Section 1.01) adding the following definitions and inserting the same in the appropriate alphabetical locations: "'Amendment No. 1' shall mean the Amendment No. 1 dated as of November 1, 1996 to this Agreement among the Company, the Banks party thereto and the Administrative Agent. "'Amendment No. 1 Effective Date' shall mean the date on which Amendment No. 1 became effective. "'Applicable Facility Fee Rate' and 'Applicable Margin' shall mean, during any period when the Rating is in one of the Rating Groups specified below, the percentage set forth below opposite the reference to such fee or to the relevant Class and Type of Syndicated Loan: REVOLVING CREDIT LOANS Rating Rating Rating Rating Group Group Group Group Fee or Loan I II III IV Applicable Facility Fee .10% .125% .15% .25% Rate Applicable Margin for .20% .25% .30% .50% Eurodollar Loans Applicable Margin for 0% 0% 0% 0% Base Rate Loans TERM LOANS Rating Rating Rating Rating Group Group Group Group Fee or Loan I II III IV Applicable Margin for .30% .375% .45% .75% Eurodollar Loans Applicable Margin for 0% 0% 0% 0% Base Rate Loans Any change in the Applicable Facility Fee Rate or in the Applicable Margin by reason of a change in the Moody's Rating or the S&P Rating shall become effective on the date of announcement or publication by the respective Rating Agency of a change in such Rating or, in the absence of such announcement or publication, on the effective date of such changed Rating." "'Facility' shall mean the Revolving Credit Facility." "'Majority Banks' shall mean Banks holding more than 50% of the aggregate amount of (a) the Revolving Credit Commitments or, if the Revolving Credit Commitments shall have terminated, the sum of (i) the aggregate unpaid principal amount of the Revolving Loans plus (ii) the aggregate unpaid principal amount of the Competitive Bid Loans plus (b) the aggregate principal amount of the Series II Term Loans." "Mandatory Prepayment Period" shall mean any period during which one or more of the following conditions is satisfied: (a) the Leverage Ratio is greater than 50%; or (b) an Investment Grade Rating Period does not exist. "'Rating' shall mean a Moody's Rating or an S&P Rating." "'Rating Agency' shall mean Moody's or S&P." "'Rating Group' shall mean any of Rating Group I, Rating Group II, Rating Group III and Rating Group IV." "'Rating Group I' shall mean (a) no Event of Default has occurred and is continuing and (b) the Moody's Rating is at or above Baa1 (or a Substitute Rating is at the corresponding rating level or higher) or the S&P Rating is at or above BBB+ (or a Substitute Rating is at the corresponding rating level or higher); "Rating Group II" shall mean (a) no Event of Default has occurred and is continuing, (b) the Moody's Rating is at or above Baa2 (or a Substitute Rating is at the corresponding rating level or higher) or the S&P Rating is at or above BBB (or a Substi tute Rating is at the corresponding rating level or higher) and (c) Rating Group I is not in effect; "Rating Group III" shall mean (a) no Event of Default has occurred and is continuing, (b) the Moody's Rating is at or above Baa3 (or a Substitute Rating is at the corresponding rating level or higher) or the S&P Rating is at or above BBB- (or a Substitute Rating is at the corresponding rating level or higher) and (c) neither Rating Group I nor Rating Group II is in effect; and "Rating Group IV" shall mean none of Rating Group I, Rating Group II or Rating Group III is in effect; provided that, (A) if the Moody's Rating and the S&P Rating (or, in either case, a Substitute Rating) shall be at different Rating levels and one of such Ratings is no more than one Rating level lower than the other of such Ratings, then the applicable Rating Group shall be based upon the higher of such Ratings and (B) if the Moody's Rating and the S&P Rating (or, in either case, a Substitute Rating) shall be at different Rating levels and one of such Ratings is two or more Rating levels lower than the other of such Ratings, then the applicable Rating Group shall be based upon a Rating that is one level lower than the higher of such Ratings." "'Revolving Credit Banks' shall mean (a) on the Amendment No. 1 Effective Date, the Banks having Revolving Credit Commitments as set forth in Schedule I hereto and (b) thereafter, the Banks from time to time holding Revolving Loans and/or Revolving Credit Commitments after giving effect to any assignments thereof permitted by Section 11.06 hereof." "'Series II Principal Payment Date' shall mean each Quarterly Date in each year, commencing with the second such Quarterly Date following the Amendment No. 1 Effective Date through and including the Series II Term Loan Final Maturity Date." "'Series II Term Loan Banks' shall mean (a) on the Amendment No. 1 Effective Date, the Banks having Series II Term Loans as set forth in Schedule I hereto and (b) thereafter, the Banks from time to time holding Series II Term Loans after giving effect to any assignments thereof permitted by Section 11.06 hereof." "'Term Loan Banks' shall mean the Series II Term Loan Banks." "'Term Loans' shall mean the Series II Term Loans." 2.03. Clause (i) of the fourth sentence of the definition of "Interest Period" is amended to read in its entirety as follows: "(i) no Interest Period for any Revolving Loan may end after the Revolving Commitment Termination Date;". 2.04. The definitions of "Equity Issuance", "Excess Cash Flow", "Principal Office", "Rating Level 1", "Rating Level 2", "Series I Term Loans", "Series I Term Loan Banks", "Series I Term Loan Commitment", "Series I Term Loan Facility", "Series I Term Loan Final Maturity Date", "Series II Term Loan Commitment", "Series II Term Loan Facility" and "Term Loan Commitments" in Section 1.01 of the Credit Agreement are deleted in their entirety. 2.05. The second sentence of Section 1.03 is amended to delete the following: "a Series I Term Loan,". 2.06. Section 2.01 is amended to read in its entirety as follows: "2.01 Syndicated Loans. Subject to and upon the terms and conditions herein set forth, each Bank severally agrees (i) to make Revolving Loans (together with the Series II Term Loans, the "Syndicated Loans" and each a "Syndicated Loan") to the Company in Dollars up to such Bank's Commitment under the Revolving Credit Facility and (ii) to effect a prepayment and reallocation of, and thereafter to maintain, its Series II Term Loans, all as set forth below: (a) [Intentionally omitted]. (b) Series II Term Loans. Subject to the terms and conditions of this Agreement and Amendment No. 1, Series II Term Loans shall be prepaid and reallocated pursuant to Section 4.03(a) of Amendment No. 1 and thereafter may, at the option of the Company, be maintained as, and/or Converted into, Base Rate Loans or Eurodollar Loans. (c) Revolving Loans. Syndicated Loans under the Revolving Credit Facility shall be available at any time and from time to time from and after the Amendment Effective Date to and including the Revolving Commitment Termination Date. Subject to the terms and conditions of this Agreement, during such period, Revolving Loans may be borrowed, repaid and reborrowed and may, at the option of the Company, be borrowed and maintained as, and/or Converted into, Base Rate Loans or Eurodollar Loans. Notwithstanding the foregoing, no Revolving Loan shall be made if the sum of (i) such Revolving Loan (together with all other Revolving Loans and Competitive Bid Loans to be made on the same day as such Revolving Loan) plus (ii) the aggregate principal amount of all outstanding Competitive Bid Loans plus (iii) the aggregate principal amount of all outstanding Revolving Loans plus (iv) the aggregate principal amount of all outstanding Swingline Loans exceeds the aggregate amount of the Revolving Credit Commitments at such time." 2.07. The second sentence of Section 2.02(a) of the Credit Agreement is amended to read in its entirety as follows: "Not later than 1:00 p.m. New York time on the date specified for each Syndicated Loan borrowing hereunder, each Bank shall make available the amount of the Syndicated Loan to be made by it on such date to the Administrative Agent, at an account in New York designated by the Administrative Agent, in immediately available funds, for account of the Company." 2.08. Subsection (f) of Section 2.03 of the Credit Agreement is amended to read in its entirety as follows: "(f) Any Bank whose offer to make any Competitive Bid Loan has been accepted shall, not later than 1:00 p.m. New York time on the date specified for the making of such Loan, make the amount of such Loan available to the Administrative Agent at an account in New York designated by the Administrative Agent in immediately available funds. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company on such date by depositing the same, in immediately available funds, in an account designated by the Company." 2.09. Subsection (b) of Section 2.04 is amended to read in its entirety as follows: "(b) Termination of Commitments. The Revolving Credit Commitments and the Swingline Commitment shall terminate on the Revolving Commitment Termination Date." 2.10. Subsection (a) of Section 2.08 is amended to read in its entirety as follows: (a) The Syndicated Loans made by each Bank shall be evidenced (i) if Series II Term Loans, by a single promissory note of the Company in substantially the form of Exhibit A-2 hereto, dated the Restatement Date, payable to such Bank in a principal amount equal to its Series II Term Loan and otherwise duly completed (each a "Series II Term Note", collectively the "Series II Term Notes" or the "Term Notes") and (ii) if Revolving Loans, by a single promissory note of the Company substantially in the form of Exhibit A-3 hereto, dated the Restatement Date, payable to such Bank in a principal amount equal to its Revolving Credit Commitment and otherwise duly completed (each a "Revolving Note" and collectively the "Revolving Notes"). The date, amount, Type and interest rate of each Series II Term Loan and each Revolving Loan made by each Bank, and all payments made on account of the principal thereof, shall be recorded by such Bank on its books and, prior to any transfer of the Note evidencing the same, endorsed by such Bank on the schedule attached to such Note or any continuation thereof; provided that the failure by such Bank to make such recordation or endorsement shall not relieve the Company of any of its obligations hereunder or under such Note. 2.11. Section 2.09 is amended to delete the word "first" and the following phrase: "and second to the aggregate outstanding principal amount of the Series I Term Loans". 2.12. Subsections (a), (b) and (e) of Section 2.10 of the Credit Agreement are each amended to read in their entirety as follows: "[Intentionally omitted]." 2.13. Subsection (c) of Section 2.10 of the Credit Agreement is amended to read in its entirety as follows: "(c) Sale of Assets. Without limiting the obligation of the Company to obtain the consent of the Majority Banks pursuant to Section 8.09 hereof to any Disposition not otherwise permitted under Section 8.09 hereof, in the event that the Net Available Proceeds of any individual Disposition made after the Amendment Effective Date while a Mandatory Prepayment Period is in effect (or if, after giving effect to any such Disposition, a Mandatory Prepayment Period would exist) (herein, the "Current Disposition") exceeds $5,000,000 and, together with the Net Available Proceeds that individually exceed $5,000,000 of each prior Disposition as to which a prepayment has not yet been made under this Section 2.10(c), shall in the aggregate exceed $50,000,000 then, (i) at the time the Company gives notice to the Administrative Agent pursuant to Section 4.07 of the prepayment to be made pursuant to this Section 2.10(c), the Company will deliver to the Administrative Agent a statement, certified by a senior financial officer of the Company, in form and detail satisfactory to the Administrative Agent, of the aggregate amount of the Net Available Proceeds of such Current Disposition and prior Dispositions and (ii) the Company shall prepay the Term Loans in an aggregate amount equal to 100% of the Net Available Proceeds received for such Current Disposition and such prior Dispositions (except that Net Available Proceeds consisting of Permitted Buyer Indebtedness need not be applied to such prepayment until the earlier of any payment or Disposition of such Permitted Buyer Indebtedness and then only to the extent of such payment or the Net Available Proceeds of such Disposition), such prepayment to be effected as provided in paragraph (f) of this Section 2.10. 2.14. Subsections (i) and (ii) of Section 2.10(f) shall be amended to read in their entirety as follows: "(i) Prepayments of Term Loans described in paragraph (d) of this Section 2.10 shall be applied to the then remaining installments of the Series II Term Loans ratably. (ii) Prepayments of Term Loans described in paragraph (c) of this Section 2.10 shall be applied (A) to the extent that any such prepayment, together with all such prepayments theretofore made in any fiscal year after the Amendment No. 1 Amendment Effective Date, does not exceed $100,000,000, to the then remaining installments of the Series II Term Loans in direct order of their maturities and (B) thereafter to the then remaining installments of the Series II Term Loans ratably." 2.15. The second sentence of Section 2.11(b) of the Credit Agreement is amended to read in its entirety as follows: "Not later than 3:00 p.m. New York time, on the date specified in each Swingline Borrowing Notice hereunder, the Swingline Bank shall, subject to the terms of this Agreement, make the amount of the Swingline Loan to be made by it on such date available to the Administrative Agent at an account in New York designated by the Administrative Agent in immediately available funds, for account of the Company." 2.16. Subsection (c) of Section 3.01 of the Credit Agreement is amended to read in its entirety as follows: "[Intentionally omitted]". 2.17. Subsection (d) of Section 3.01 of the Credit Agreement is amended to read in its entirety as follows: "(d) The Company hereby promises to pay to the Administrative Agent for account of the Banks the aggregate principal amount of the Series II Term Loans outstanding on the Amendment No. 1 Effective Date in 21 equal consecutive quarterly installments payable on the Series II Principal Payment Dates." 2.18. The first sentence of Section 4.01 of the Credit Agreement is amended to read in its entirety as follows: "Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Company under this Agreement and the Notes shall be made in Dollars, in immediately available funds, to the Administrative Agent at an account in New York designated by the Administrative Agent, not later than 1:00 p.m. New York time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day)." 2.19. Subsection (b) of Section 4.02 is amended to read in its entirety as follows: "(b) the making, Conversion and Continuation of Revolving Loans, and the Conversion and Continuation of Series II Term Loans, of a particular Type (other than Conversions provided for by Section 5.04 hereof) shall be made pro rata among the relevant Banks according to the amounts of their respective Revolving Credit Commitments (in the case of making of Loans) or their respective Revolving Credit and Series II Term Loans (in the case of Conversions and Continuations of Loans); 2.20. Subsection (c) of Section 8.01 of the Credit Agreement is amended to read in its entirety as follows: "(c) with each of the financial statements required to be delivered under Section 8.01(a) or 8.01(b) hereof, a certificate of an authorized financial or accounting officer of the Company, in form and substance satisfactory to the Administrative Agent setting forth (i) the Net Available Proceeds of each Disposition in excess of $5,000,000 that has occurred in the fiscal period to which such financial statements relate and (ii) the aggregate amount of Net Available Proceeds for each other Disposition in excess of $5,000,000 that has occurred in prior fiscal periods and for which no prepayment has been made pursuant to Section 2.10(c) hereof;". 2.21. Clause (i) of Section 8.09(d) of the Credit Agreement is amended to read in its entirety as follows: "[Intentionally omitted];". 2.22. Section 8.19 of the Credit Agreement is amended to read in its entirety as follows: "[Intentionally omitted]." 2.23. The first sentence of Section 10.09 of the Credit Agreement is amended to read in its entirety as follows: "The Documentation Agent, the Syndication Agent and the Arranger identified on the cover page of this Agreement, or on the cover page of any amendment hereto, shall have no duties or responsibilities hereunder other than, in the case of the Documentation Agent and the Syndication Agent, as Banks hereunder." 2.24. Schedule I of the Credit Agreement is amended to read in its entirety as Schedule I hereto. 2.25. Exhibit A-1 is amended to read in its entirety as follows: "[Intentionally omitted]." Section 3. Representations and Warranties. The Company represents and warrants to the Banks that (i) the representations and warranties set forth in Section 7 of the Credit Agreement are true and complete on the date hereof as if made on and as of the date hereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date) and as if each reference in said Section 7 to "this Agreement" included reference to this Amendment No. 1, (ii) after giving effect to the amendments in Section 2 of this Amendment No. 1, no Default shall have occurred and be continuing, (iii) the making and performance by the Company of this Amendment No. 1, and the Revolving Notes and Series II Term Notes delivered pursuant to Section 4.04 hereof, have been duly authorized by all necessary corporate action and (iv) this Amendment No. 1, and the Credit Agreement as amended by Amendment No. 1, constitute, and each of such Notes (when executed and delivered for value) will constitute, legal, valid and binding obligations of the Company, enforceable in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Section 4. Conditions Precedent. As provided in Section 2 above, the amendments to the Credit Agreement set forth in said Section 2 shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: 4.01. Execution by All Parties. This Amendment No. 1 shall have been executed and delivered by each of the parties hereto. 4.02. Payment of Interest and Fees. Each Bank and Non- Continuing Bank shall have been paid in full all interest and fees accrued under the Credit Agreement to the Amendment No. 1 Effective Date (as defined in the Credit Agreement as hereby amended). 4.03. Reallocation. The Series II Term Loans shall have been prepaid under Section 2.09 of the Credit Agreement on November 1, 1996, but prior to the effectiveness of the amendments to the Credit Agreement set forth in Section 2 above, in an aggregate principal amount of $257,500,000; and immediately thereafter the Banks and the Non-Continuing Banks shall be deemed to have made and taken such assignments, as the case may be, of the remaining Series II Term Loans such that, after giving effect thereto, each Bank shall hold a Series II Term Loan in an aggregate principal amount set forth in opposite the name of such Bank in Schedule I hereto. In order to fund such assignments and thereby effect the reallocations of the Series II Term Loans, each Bank listed in Part A of Schedule III will pay on the Amendment No. 1 Effective Date to the Administrative Agent the amount set forth opposite such Bank's name in Part A of Schedule III, out of which aggregate amounts the Administrative Agent will pay on the Amendment No. 1 Effective Date to each Bank and Non- Continuing Bank listed in Part B of Schedule III the amount set forth opposite its name in Part B of Schedule III. 4.04. Notes. The Administrative Agent shall have received Revolving Notes and Series II Term Notes, duly completed and executed by the Company in exchange for the Revolving Notes and Series II Term Notes of the Company previously delivered pursuant to the Credit Agreement. 4.05. Documents. The Administrative Agent shall have received such other documents as the Administrative Agent or any Bank or special New York counsel to Chase may reasonably request. Section 5. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first above written. NORTHROP GRUMMAN CORPORATION By: Albert F. Myers Title: Corporate Vice President & Treasurer THE BANKS THE CHASE MANHATTAN BANK By: Richard C. Smith Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: Lori Kannegieter Title: Managing Director MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: Diana H. Imhof Title: Vice President