-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VeG3VcXJ/31oTeNxWJrJisk+HC6xmozBoN6herz7ZEfbhT+TuodrkEfOpIbkHsM+ nBUjZm0N0hZzM9J8KJJIPg== 0000950148-96-002222.txt : 19961015 0000950148-96-002222.hdr.sgml : 19961015 ACCESSION NUMBER: 0000950148-96-002222 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961011 SROS: NASD SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LITTON INDUSTRIES INC CENTRAL INDEX KEY: 0000059880 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 951775499 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03998 FILM NUMBER: 96642651 BUSINESS ADDRESS: STREET 1: 21240 BURBANK BLVD CITY: WOODLAND HILLS STATE: CA ZIP: 91367-6675 BUSINESS PHONE: 8185985000 MAIL ADDRESS: STREET 1: 21240 BURBANK BLVD CITY: WOODLAND HILLS STATE: CA ZIP: 91367-6675 10-K 1 ANNUAL REPORT DATED 7/31/96 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996 ============================================================================== FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-3998 LITTON INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-1775499 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 21240 BURBANK BOULEVARD WOODLAND HILLS, CALIFORNIA 91367-6675 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 598-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - ---------------------------------------- ------------------------ Common Stock, par value $1 per share New York Stock Exchange Pacific Stock Exchange Series B $2 Cumulative Preferred Stock, New York Stock Exchange par value $5 per share Pacific Stock Exchange
------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 for 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 __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ On September 30, 1996, the aggregate market value of the Registrant's voting stock held by non-affiliates was $2.213 billion. On September 30, 1996, there were 46,571,369 shares of Common Stock outstanding, exclusive of treasury shares or shares held by subsidiaries of the Registrant. Part III incorporates information by reference from the definitive Proxy Statement in connection with the Registrant's Annual Meeting of Shareholders to be held on December 5, 1996. =============================================================================== 2 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE ---- PART I Item 1: Business................................................................... 1 Item 2: Properties................................................................. 3 Item 3: Legal Proceedings.......................................................... 4 Item 4: Submission of Matters to a Vote of Security Holders........................ 5 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters.................................................................. 6 Item 6: Selected Financial Data.................................................... 6 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 6 Item 8: Financial Statements and Supplementary Data................................ 6 Item 9: Disagreements on Accounting and Financial Disclosure....................... 6 PART III Item 10: Directors and Executive Officers of the Registrant......................... 12 Item 11: Executive Compensation..................................................... 13 Item 12: Security Ownership of Certain Beneficial Owners and Management............. 13 Item 13: Certain Relationships and Related Transactions............................. 13 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 14 Signatures.............................................................................. 17
3 PART I ITEM 1. BUSINESS Litton Industries, Inc. (hereafter together with its consolidated subsidiaries referred to as the "Company" or "Litton" unless the context otherwise indicates) is mainly a high-technology aerospace and defense company which provides advanced electronic, defense and information systems to U.S. and world markets and is a primary builder of large multimission surface combatant ships for the U.S. Navy. Litton is a major provider of ship overhaul, repair, modernization, design and engineering services and is a leader in integrated marine electronics and information technology-based systems and products. Litton is also an international supplier of connectors, multilayer circuit boards, laser crystals and other materials used primarily in the telecommunications, industrial and computer markets. The Company was founded in California in 1953 and has evolved into a major international organization with approximately 33,500 employees at more than 25 divisions. The Company's businesses are reported in three business segments: Advanced Electronics, Marine Engineering and Production, and Electronic Components and Materials (formerly known as the Interconnect Products segment). Effective July 31, 1996, certain businesses which were previously reported in the Advanced Electronics segment have been grouped with the Electronic Components and Materials segment. Accordingly, the segment information for fiscal years 1995 and 1994 presented herein has been restated to reflect these changes. Information about the Company's business segments appears on pages F-20 and F-21 of this Annual Report on Form 10-K. This information includes sales and service revenues, operating profit (loss) and identifiable assets for each of the three years ended July 31, 1996. Advanced Electronics The Advanced Electronics segment is a major supplier of electronic systems and related services to the U.S. and international military electronics markets and also provides navigation systems and electronic components to a variety of commercial customers. The principal businesses comprising the Advanced Electronics segment are navigation, guidance and control systems, information technology and electronic warfare systems. Several acquisitions were completed during fiscal year 1996 which enhanced the Company's existing business base including PRC Inc. ("PRC") in February 1996 and Sperry Marine Inc. ("Sperry Marine") in May 1996. PRC is a diversified information technology company that designs, develops, integrates and processes computer-based information systems and reengineers business systems for the U.S. Government (including non-defense federal markets) and other customers. Sperry Marine is a leading producer of marine electronic navigation and guidance systems to commercial and military customers. The Company also participates in ongoing development and production programs as well as upgrade and retrofit business worldwide to serve both defense and non-defense markets. Sales backlog for the Advanced Electronics segment was $2.228 billion at July 31, 1996 which did not include an unfunded portion related to PRC with potential future contract values totaling approximately $1 billion. Total backlog at July 31, 1995 was $1.689 billion. Of the backlog at July 31, 1996, $594 million is expected to be realized as sales in years after fiscal 1997 and $1.660 billion related to worldwide defense contract backlog. Significant revenues of the Advanced Electronics segment in 1996 were derived from sales to the U.S. Government (approximately 63%). Marine Engineering and Production The Marine Engineering and Production segment is engaged in the building of large multimission surface combatant ships and is a provider of overhaul, repair, modernization, ship design and engineering services primarily for the U.S. Navy. Since 1975, the Company has delivered a total of 72 new destroyers, cruisers and amphibious assault ships to the U.S. Navy. Current construction work includes six Aegis destroyers and three amphibious assault ships for the U.S. Navy. 1 4 Sales backlog for the Marine Engineering and Production segment was $3.288 billion and $3.310 billion at July 31, 1996 and 1995, respectively. Of the backlog at July 31, 1996, approximately $2.217 billion is expected to be realized as sales in years after fiscal 1997. Significant revenues of the Marine Engineering and Production segment in 1996 were derived from sales to the U.S. Government (approximately 99%). Electronic Components and Materials The Electronic Components and Materials segment manufactures and distributes interconnection subsystems, electronic connectors, printed circuit boards, backpanels, soldering materials, rotary components, fiber optic components and systems and microwave components and subsystems to diverse markets worldwide. Sales backlog for the Electronic Components and Materials segment was $150.9 million and $138.7 million at July 31, 1996 and 1995, respectively. Substantially all of the backlog at July 31, 1996 is expected to be realized in sales in the next fiscal year. Discontinued Operations On March 17, 1994, Litton distributed all of the issued and outstanding shares of common stock of its previously wholly-owned subsidiary, Western Atlas Inc. ("WAI"). WAI owned and conducted the oilfield services and industrial automation systems businesses. The accounts of WAI have been segregated and reflected as discontinued operations in the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. For further information, see Note B of Notes to Consolidated Financial Statements. Methods of Distribution The Company principally markets its products and services throughout the world through the home offices and branch offices of its various operations. In general, each of the Company's operations is responsible for selecting, implementing and maintaining an efficient and effective marketing program. Raw Materials The Company uses a wide variety of raw materials in the manufacture of its many products. The availability of any individual raw material is not critical to the Company's operations. Patents The Company owns a large number of patents, trademarks and copyrights relating to its manufactured products, which have been obtained over a period of years. The Company considers these patents, trademarks and copyrights, in the aggregate, to be valuable to its operations. However, the Company does not believe that the conduct of its businesses, as a whole, is materially dependent upon any single patent, trademark or copyright. Competition Competition exists with respect to all products manufactured and services rendered by the Company. Competition ranges from companies which produce a single product or offer a single service to some of the world's largest corporations. U.S. Government Contracts Approximately 71% of the Company's total sales and service revenues for fiscal year 1996 were from U.S. Government contracts and subcontracts. Approximately 81% of these revenues related to fixed-price type contracts. As is common with U.S. Government contracts, the Company's U.S. defense contracts are unilaterally terminable at the option of the U.S. Government with compensation for work completed and costs 2 5 incurred. Contracts with the U.S. Government are subject to certain laws and regulations, the noncompliance with which may result in various sanctions. In the current government contracting environment, contractors, sometimes without their knowledge, are subject to investigations by the U.S. Government initiated in various ways. Most investigations result in no action being taken or administrative resolution. Litton is aware of ongoing investigations and is cooperating in those investigations. Should any investigation result in the filing of formal charges against the Company by the U.S. Government, disclosure will be made if the amount involved or the relief sought is deemed by the Company to be material. Research and Development Worldwide expenditures on research and development activities amounted to $217.0 million, $227.1 million and $220.1 million, of which approximately 30%, 28% and 26% were Company-sponsored in the years ended July 31, 1996, 1995 and 1994, respectively. In fiscal 1996, the Advanced Electronics segment accounted for 97% of the total research and development expenditures. Environmental Protection During the fiscal year ended July 31, 1996, the amounts incurred in compliance with federal, state and local regulations pertaining to environmental standards did not have a material effect upon the capital expenditures or earnings of the Company. For additional information with respect to environmental matters, see Items 3, 7, and 8 of this Annual Report on Form 10-K. Number of Employees At July 31, 1996, the Company had approximately 33,500 full-time employees. Employment by business segment was as follows: Advanced Electronics....................................................... 18,100 Marine Engineering and Production.......................................... 11,900 Electronic Components and Materials and Other.............................. 3,500 ------ 33,500 ======
Financial Information by Geographic Area See the table and related notes thereto, Operations by Geographic Area, which appear on pages F-20 and F-21 of this Annual Report on Form 10-K. Forward-Looking Statements Except for the historical information, this Annual Report on Form 10-K contains forward-looking statements, which involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors discussed herein. ITEM 2. PROPERTIES The Company's principal plants and offices have an aggregate floor area of approximately 8,472,000 square feet, of which 7,444,000 square feet (87.9%) are located in the United States, and 1,028,000 square feet (12.1%) are located outside of the United States, primarily in Canada and Western Europe. The Company's executive offices, in owned premises, are at 21240 Burbank Boulevard, Woodland Hills, California. 3 6 These properties are used by the various business segments as follows:
SQUARE FEET ----------- Advanced Electronics..................................................... 5,467,000 Marine Engineering and Production........................................ 1,891,000 Electronic Components and Materials...................................... 1,008,000 Corporate and Other Businesses........................................... 106,000 --------- 8,472,000 =========
Approximately 6,677,000 square feet (78.8%) of the principal plant, office and commercial floor area is owned by the Company, and the balance is held under lease. The Company's principal plants and offices in the United States are situated in 30 locations in 16 states as follows:
STATE SQUARE FEET --------------------------------------------------------- ----------- California............................................... 2,165,000 Mississippi.............................................. 1,946,000 Virginia................................................. 1,096,000 Maryland................................................. 301,000 Texas.................................................... 275,000 Pennsylvania............................................. 236,000 Utah..................................................... 216,000 Iowa..................................................... 203,000 Other states............................................. 1,006,000 --------- 7,444,000 =========
The above-mentioned facilities are in satisfactory condition and suitable for the particular purposes for which they were acquired or constructed and are adequate for present operations. The foregoing information excludes Company held properties leased to others and also excludes plants or offices which, when added to all other Company plants and offices in the same city, have a total floor area of less than 50,000 square feet. ITEM 3. LEGAL PROCEEDINGS (a) Litton is suing Honeywell, Inc. ("Honeywell") for patent infringement relating to the manufacture of ring laser gyro navigation systems which are used in commercial aircraft. After trial of that case in the U.S. District Court for the Central District of California, on August 31, 1993, the jury rendered a verdict in favor of Litton in the amount of $1.2 billion. On January 9, 1995, the District Court released a Memorandum of Decision finding Litton's patent invalid and rejecting the jury verdict. Litton appealed to the U.S. Court of Appeals for the Federal Circuit. On July 3, 1996, the Court of Appeals rendered a decision reversing the District Court's decision, finding the patent valid and infringed by Honeywell. The Court of Appeals reinstated the jury's verdict on liability including the findings of interference with contract and prospective business advantage and ordered a new trial on the amount of damages sustained by Litton in the District Court. Litton is also suing Honeywell on antitrust grounds in the same U.S. District Court. On February 29, 1996, the jury rendered a verdict in favor of Litton. On July 25, 1996, the District Court upheld the jury's verdict that Honeywell attempted to illegally monopolize and did monopolize the market for inertial reference systems for large commercial air transport, commuter and business aircraft. However, the District Court declined to enter the $234 million jury verdict on the basis that Litton's damage study as presented failed to disaggregate damages between illegal and legal acts. A new trial in the District Court has been ordered and will be limited to the issue of the amount of damages sustained by Litton attributable to Honeywell's unlawful conduct. 4 7 (b) The Company and certain of its divisions or subsidiaries have been named as potentially responsible parties by the United States Environmental Protection Agency, various state environmental agencies, and other potentially responsible parties for costs associated with cleanup of a number of sites to which they may have contributed wastes. Also, the Company and certain of its divisions and subsidiaries have incurred costs, which have not had a material impact on the Company's consolidated financial statements in any one year, for cleaning up a number of sites, presently or formerly owned or leased by the Company (or by subsidiaries or divisions thereof). In addition, the Company and certain of its divisions or subsidiaries have been named as defendants in certain lawsuits for personal injuries and property damage allegedly resulting from environmental contamination. At this time, the Company believes that its ultimate liability for additional expenditures associated with these matters will not materially adversely affect its consolidated financial statements. There are various other litigation proceedings in which the Company is involved. Although the results of litigation proceedings cannot be predicted with certainty, it is the opinion of the General Counsel that the ultimate resolution of these other proceedings will not have a material adverse effect on the Company's consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended July 31, 1996. 5 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS See the information with respect to the market for and number of holders of the Company's Common stock and quarterly market information which is set forth on page F-22 and dividend information which is set forth on page F-13 of this Annual Report on Form 10-K. The number of holders of record of the Company's Common stock was computed by a count of record holders on September 30, 1996. ITEM 6. SELECTED FINANCIAL DATA See the information with respect to selected financial data on pages 7 and 8 of this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See the information under the caption "Financial Review and Analysis" on pages 9 through 11 of this Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ----- Management's Responsibility for Financial Reporting................................... F-1 Independent Auditors' Report.......................................................... F-2 Consolidated Statements of Operations................................................. F-3 Consolidated Balance Sheets........................................................... F-4 Consolidated Statements of Shareholders' Investment................................... F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7 Quarterly Financial Information (unaudited)........................................... F-22
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 6 9 ITEM 6. SELECTED FINANCIAL DATA LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES SUMMARY OF FINANCIAL INFORMATION (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JULY 31 -------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Operating Results Sales and Service Revenues............... $3,611.5 $3,319.7 $3,446.1 $3,474.2 $3,710.8 Segment Operating Profit................. 320.1 280.5 181.4 264.1 289.9 Earnings (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle Continuing Operations................. $ 150.9 $ 135.0 $ 51.3 $ 87.3 $ 87.3 Discontinued Operations............... -- -- (173.1) 95.0 87.1 Extraordinary Loss....................... -- -- (30.7) -- -- Cumulative Effect of a Change in Accounting Principle Continuing Operations................. -- -- -- (106.7) -- Discontinued Operations............... -- -- -- (10.4) -- -------- -------- -------- -------- -------- Net Earnings (Loss)...................... $ 150.9 $ 135.0 $ (152.5) $ 65.2 $ 174.4 ======== ======== ======== ======== ======== Sales to the U.S. Government as a Percent of Total Sales........................ 71% 73% 73% 73% 70% Financial Position at Year End Total Assets............................. $3,431.4 $2,559.6 $2,254.3 $2,749.1 $2,953.1 Shareholders' Investment................. 917.3 758.1 610.4 578.4 322.3 Long-term Obligations.................... 514.5 103.6 105.6 106.5 131.2 Convertible Subordinated Notes and Other Subordinated Debentures................. -- -- -- 435.8 735.6 Working Capital.......................... 68.8 130.1 36.9 435.3 365.0 Current Ratio............................ 1.04 1.10 1.03 1.36 1.25 Common Share Data Earnings (Loss) per Share Primary Earnings (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle Continuing Operations............... $ 3.15 $ 2.84 $ 1.10 $ 2.10 $ 2.10 Discontinued Operations............. -- -- (3.79) 2.31 2.12 Extraordinary Loss.................... -- -- (0.67) -- -- Cumulative Effect of a Change in Accounting Principle Continuing Operations............... -- -- -- (2.60) -- Discontinued Operations............. -- -- -- (0.25) -- -------- -------- -------- -------- -------- Total Primary.................... $ 3.15 $ 2.84 $ (3.36) $ 1.56 $ 4.22 ======== ======== ======== ======== ========
See Notes on page 8. 7 10 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES SUMMARY OF FINANCIAL INFORMATION -- (CONTINUED) (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JULY 31 --------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Fully Diluted Earnings (Loss) before Extraordinary Item and Cumulative Effect of a Change in Accounting Principle Continuing Operations.............. $ 3.15 $ 2.84 $ 1.10 $ 2.10 $ 2.10 Discontinued Operations............ -- -- (3.79) 2.31 1.84 Extraordinary Loss...................... -- -- (0.67) -- -- Cumulative Effect of a Change in Accounting Principle Continuing Operations.............. -- -- -- (2.60) -- Discontinued Operations............ -- -- -- (0.25) -- -------- -------- -------- -------- -------- Total Fully Diluted............. $ 3.15 $ 2.84 $ (3.36) $ 1.56 $ 3.94 ======== ======== ======== ======== ======== Book Value per Share...................... 19.48 16.19 13.07 12.48 7.71 Common Shares Outstanding at Year End (in millions)............................... 46.6 46.2 45.9 45.5 40.5 Shares Used to Compute Primary Earnings (Loss) per Share (in millions).......... 47.6 47.2 45.7 41.2 41.2 Shares Used to Compute Fully Diluted Earnings (Loss) per Share (in millions)............................... 47.6 47.3 45.7 41.2 47.3 Other Selected Financial Information Capital Expenditures.................... $ 91.0 $ 98.3 $ 80.6 $ 73.6 $ 81.5 Depreciation and Amortization Expense... 113.8 95.4 98.4 107.4 113.0 Research and Development Expenditures... 217.0 227.1 220.1 254.6 201.9 Backlog at Year End..................... 5,666.9* 5,137.8 5,466.6 6,700.4 6,570.0 Number of Employees at Year End......... 33,500 29,100 29,000 32,300 34,700
- --------------- * In addition, PRC Inc., acquired in February 1996, has unfunded backlog with potential contract values totaling approximately $1 billion. Notes: (A) Results for fiscal year 1994 included the settlement of a civil suit (see Note J on page F-19) and extraordinary loss on early extinguishment of debt (see Note J on page F-19). (B) Amounts related to fiscal year 1992 have been restated to reflect the WAI businesses as discontinued operations in connection with the Distribution discussed in Note B on pages F-8 and F-9. (C) During the five year period ended July 31, 1996, the Company declared no cash dividends on its Common stock. 8 11 ITEM 7. FINANCIAL REVIEW AND ANALYSIS During fiscal year 1996 the Company completed several acquisitions, including PRC in February 1996 and Sperry Marine in May 1996. With estimated combined annual revenues of $1 billion, these acquisitions, accounted for under the purchase method of accounting, have contributed to the fiscal year 1996 results and expanded the Company's business base. PRC is a diversified information technology company that designs, develops, integrates and supports computer-based information handling and processing systems and reengineers business processes for the U.S. Government and other customers. Sperry Marine is a leading producer of marine electronic navigation and guidance systems to military and commercial customers. The other acquisitions included the Inertial Systems Business Unit of Hughes Electronics Corp.'s Delco Systems Operations and Teldix GmbH, a European defense electronics firm. The Company is continuing to evaluate strategic acquisitions, like the ones completed during fiscal year 1996, which will provide growth opportunities. Effective July 31, 1996, certain businesses previously reported with the Advanced Electronics segment have been grouped with the Electronic Components and Materials segment (formerly known as the Interconnect Products segment). Accordingly, the segment information for fiscal years 1995 and 1994 as discussed below has been restated to reflect these changes. Segment information can be found on pages F-20 and F-21. Fiscal Year Ended July 31, 1996 compared to 1995 Total sales and segment operating profit increased by 9% and 14% compared with the prior year's results. Net earnings improved 12%, although interest expense was higher in the current fiscal year as a result of the debt incurred in connection with the previously mentioned acquisitions. Sales and operating profit for the Advanced Electronics segment increased by 22% and 17% when compared with the prior fiscal year. These improvements reflect the contributions from the acquisitions completed in the current and prior fiscal year. The acquisitions of PRC and Sperry Marine have expanded the Company's business base, reducing exposure to any further defense budget reductions, and also improved its competitive position to pursue new opportunities in both military and commercial sectors. Additionally, PRC has provided the Company access to non-defense federal markets with products such as computer-aided dispatch systems for police, fire and emergency medical services and its weather forecasting systems. Although PRC is expected to contribute significantly in sales, the profit margin for this type of business is lower in comparison with that historically experienced by the other businesses in this segment. For the current fiscal year, segment operating margin was 6.9%, slightly below the 7.2% for fiscal year 1995. At July 31, 1996, backlog for this segment was $2.23 billion which did not include an unfunded portion for PRC with potential contract values totaling approximately $1 billion. Backlog at July 31, 1995 was $1.69 billion. Sales for the Marine Engineering and Production segment were lower by 7%, while operating profit improved by 8% compared with the prior year's results. The decrease in sales was attributable to lower construction activity on long-term contracts nearing completion, partially offset by activity on new contracts and others moving into more advanced stages of production. Operating margins improved as a result of cost reduction efforts and increased earnings rates on long-term contracts as they mature in the production process and as uncertainties are resolved. During fiscal year 1996, the Company delivered three Aegis destroyers to the U.S. Navy and received funding for the construction of a fifteenth Aegis destroyer with a contract value in excess of $300 million and options for two more destroyers. Also in fiscal year 1996, the Company received funding to construct a seventh LHD class amphibious assault ship with a contract value of nearly $800 million. Backlog for this segment at July 31, 1996 was $3.29 billion, not including the aforementioned options for two more Aegis destroyers, compared with $3.31 billion at July 31, 1995. Backlog at July 31, 1996 included seven Aegis destroyers, six of which were under production, and three LHD class amphibious assault ships, all of which were in production. Subsequent to fiscal year-end, one Aegis destroyer was completed and delivered to the U.S. Navy. The Electronic Components and Materials segment also contributed with improved results in the current fiscal year as a result of strong demand for its electronics-related products by its customers in the telecommunication and computer industries. The on-going cost reduction efforts and focus on opportunities for new products will help maintain the solid performances by the businesses in the segment. 9 12 Fiscal Year Ended July 31, 1995 as compared to 1994 Earnings from continuing operations were significantly higher in 1995 primarily because the 1994 results were impacted by a charge to operations for the settlement of a civil suit (see Note J). Additionally, interest expense was significantly lower in 1995 as a result of the early extinguishment of subordinated debt in July 1994, and there was a reduction in corporate expenses as the 1994 results included costs related to Western Atlas Inc. ("WAI") (see Note B). Sales for the Advanced Electronics segment were substantially comparable with the prior year. The impact of reduced defense spending was offset by contributions from the acquisitions completed in fiscal year 1995 and the effects of non-recurring revenues recognized upon completion of a long-term contract. Operating margin improved slightly to 7.2% for fiscal year 1995 compared with 6.9% for fiscal year 1994, exclusive of the settlement of a civil suit. This improvement reflected increased operating efficiency as a result of continued efforts to adjust the cost structure of these businesses. Backlog increased slightly to $1.69 billion at July 31, 1995 compared with $1.64 billion at July 31, 1994, primarily due to acquisitions made during 1995. The Marine Engineering and Production segment maintained a comparable profit margin on slightly lower sales in comparison with the prior year. The decline in sales reflects the transition from the completion and winding down of certain long-term contracts to the startup of new contracts. Contracts completed and delivered during fiscal year 1995 included four Aegis guided missile destroyers and one multipurpose amphibious assault ship to the U.S. Navy, and two SA'AR 5 class corvettes to the Israeli government. During fiscal year 1995, the Company received funding for the construction of two additional destroyers with an aggregate estimated contract value in excess of $700 million. Backlog at July 31, 1995 amounted to $3.31 billion compared with $3.69 billion at July 31, 1994. Backlog at July 31, 1995 included eight Aegis guided missile destroyers, of which six were under construction, and two multipurpose amphibious assault ships, both of which were in production. The Electronic Components and Materials segment maintained a substantially comparable level of sales, while operating profit was significantly higher in 1995. Operating profit for 1994 was affected by a charge recorded to adjust the carrying value of a division which was subsequently sold. Interest expense was significantly lower in 1995 compared with 1994 as a result of the early extinguishment of subordinated debt in July 1994. The use of cash for the extinguishment also resulted in lower interest income in 1995. Discontinued Operations On March 17, 1994, Litton distributed all of the issued and outstanding shares of common stock of its previously wholly-owned subsidiary, WAI, which was reflected as discontinued operations (see Note B) for fiscal year 1994. The balance sheet effect of the distribution was a reduction to Litton's Shareholders' Investment in the aggregate amount of $909.2 million representing the book value of net assets distributed. Results for fiscal year 1994 included special charges totaling $179 million, net of tax, recorded to reflect the write-down of net assets relating to the disposal of one division and to provide for obsolescence of older technology equipment, vessels and inventory and the consolidation of facilities. Liquidity and Capital Resources In connection with the acquisition of PRC, the Company issued $300 million principal amount of 7.75% debentures due March 15, 2026 and $100 million principal amount of 6.98% debentures due March 15, 2036 (see Note C). The Company also borrowed, on a short-term basis, $200 million under an existing revolving credit agreement to finance the acquisition of Sperry Marine and other operating needs, including a payment to settle prior years' taxes. The Company expects to repay the short-term borrowings with existing funds and cash flow from operations which also provided the funds for the cash portion of these and two other 10 13 acquisitions completed in fiscal year 1996. These borrowings were the primary reason for the increase in interest expense in fiscal year 1996 compared with 1995. At July 31, 1996, the unused credit commitments under the revolving credit agreement amounted to $200 million, which is available primarily for replacement of existing debt. Environmental Matters As previously reported, the Company or certain of its divisions or subsidiaries has been named as a potentially responsible party in respect to various sites to which certain of its operations may have contributed wastes. Also, the Company and certain of its divisions and subsidiaries have incurred costs, which have not had a material impact on the Company's consolidated financial statements in any one year, for cleaning up a number of sites now or formerly owned or leased by the Company. At this time, the Company believes that its ultimate liability for additional expenditures associated with such owned or leased sites and other sites to which it may have contributed wastes will not have a material adverse effect on its consolidated financial statements. New Accounting Standards In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires that certain long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company is not aware of any significant impact of adopting SFAS No. 121 and will implement this Standard in fiscal year 1997. Also in 1995, the FASB issued Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation". This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans using a fair value based method. However, SFAS No. 123 allows an entity to continue to measure compensation cost using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB No.25") , "Accounting for Stock Issued to Employees". The Company anticipates continuing to measure compensation cost in accordance with the provisions of APB No. 25 and will make the pro forma disclosures required by SFAS No. 123 in its financial statements for fiscal year 1997. 11 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information on directors of the Company will be included under the caption "Election of Directors" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 5, 1996, which is hereby incorporated by reference. The executive officers of the Company are elected each year by the Board of Directors at its first meeting following the Annual Meeting of Shareholders to serve during the ensuing year and until their respective successors are elected and qualify. There are no family relationships between any of the executive officers of the Company. The following information indicates the position and age of the executive officers at October 9, 1996 and their business experience during the prior five years:
POSITIONS AND OFFICES PRESENTLY NAME AGE HELD AND BUSINESS EXPERIENCE - -------------------------------------- --- ----------------------------------------------- Michael R. Brown...................... 55 President, Chief Operating Officer and a director since December, 1995; prior thereto Executive Vice President, Chief Operating Officer and a director since September, 1995; Senior Vice President since June, 1992 and Group Executive of the Electronic Warfare Systems Group since 1988; Group Executive of the Information Systems Group (formerly the Command, Control and Communications Systems Group) since May, 1995; Vice President since 1989. Larry A. Frame........................ 60 Senior Vice President and Group Executive of the Navigation, Guidance and Control Systems Group since March, 1994; prior thereto Division President of the Guidance and Control Systems Division since April, 1988; Vice President since 1990. Harry Halamandaris.................... 58 Senior Vice President since June, 1996; Group Executive of the Electronic Warfare Systems Group since September, 1995; Vice President for Strategic Planning since August, 1995; prior thereto Vice President and Group Executive of Kaiser Aerospace & Electronics, Inc. since August 1994; Director of Corporate Technology, Teledyne, Inc. since 1989 and President of Teledyne Systems Company since 1980. Rudolph E. Lang, Jr. ................. 60 Senior Vice President, Chief Financial Officer and a director since March, 1994; prior thereto Senior Vice President and Controller since December, 1988. John M. Leonis........................ 62 Chairman of the Board, Chief Executive Officer and a director since December, 1995; prior thereto President, Chief Executive Officer and a director since March, 1994; prior thereto Senior Vice President since July, 1990 and Group Executive of the Company's Navigation, Guidance and Control Systems Group since 1988; Vice President since 1988.
12 15
POSITIONS AND OFFICES PRESENTLY NAME AGE HELD AND BUSINESS EXPERIENCE - -------------------------------------- --- ----------------------------------------------- Donald A. Lepore...................... 60 Senior Vice President since September, 1996; prior thereto Vice President since 1986; Group Executive of the Electronic Components and Materials Group (formerly the Interconnect Products Group) since 1986. Timothy G. Paulson.................... 49 Vice President and Treasurer since June, 1994; prior thereto Vice President of Finance and Administration of the Company's Amecom Division since 1991; Division Controller since 1986. John E. Preston....................... 55 Senior Vice President and General Counsel since March, 1994; prior thereto Vice President and Associate General Counsel since April, 1990. Gerald J. St. Pe'..................... 56 Senior Vice President of the Company since 1986 and President of Ingalls Shipbuilding, Inc., a subsidiary of the Company, since 1987. Carol A. Wiesner...................... 57 Vice President and Controller since June, 1994; prior thereto Vice President and Treasurer since June, 1988; Chief Accounting Officer of the Company.
ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation will be included under the caption "Compensation of Executive Officers" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 5, 1996, which is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information on beneficial ownership of the Company's voting securities by each director and all officers and directors as a group, and by any person known to beneficially own more than 5% of any class of voting security of the Company will be included under the captions "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 5, 1996, which is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information on certain relationships and related transactions including information with respect to management indebtedness will be included under the caption "Indebtedness of Management to the Company" of the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 5, 1996, which is hereby incorporated by reference. 13 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE ---- (a)(1) Financial Statements See Item 8 of Part II hereof. (a)(2) Financial Statement Schedules The schedules specified under Regulation S-X are either not applicable or immaterial to the Company's consolidated financial statements for each of the three years in the period ended July 31, 1996. (a)(3) Executive Compensation Plans and Arrangements............................... 15 (b) Reports on Form 8-K (1) In a report filed on Form 8-K dated May 8, 1996, the Company reported the amended terms with respect to the acquisition of Sperry Marine Inc. (2) In a report filed on Form 8-K dated July 26, 1996, the Company reported that the U.S. Court of Appeals reinstated the verdict rendered by a U.S. District Court jury in Litton's favor related to a patent infringement suit against Honeywell, Inc. ("Honeywell"). The case will return to the U.S. District Court for a new trial to establish the amount of financial damages sustained by Litton. In addition, the Company reported that the U.S. District Court upheld a jury's verdict in Litton's favor for a separate suit against Honeywell on antitrust grounds. A new trial has been ordered and will be limited to the issue of the amount of damages sustained by Litton. See Item 3 of Part I and Note I of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further information. (c) Index to Exhibits........................................................... E-1
14 17 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
REPORT WITH EXHIBIT WHICH EXHIBIT DESCRIPTION NO. WAS FILED - ------------------------------------------------------------------ -------- -------------- Directors' annual retainer and attendance fees.................... 10.1(a) 1995 Form 10-K Director retirement age and postretirement payments to directors. ..................................................... 10.2(b) 1991 Form 10-K Litton Supplemental Retirement Plan. ............................. 10.3 1983 Form 10-K -- Amendment to the Litton Supplemental Retirement Plan. ....... 10.1 April, 1993 Form 10-Q Form of the agreement under the Litton Industries, Inc. Executive Survivor Benefit Plan. ......................................... 10.4(a) 1984 Form 10-K -- Amendment to the Executive Survivor Benefit Plan, adopted June 13, 1986. ............................................ 10.4(a) 1986 Form 10-K Incentive loans. ................................................. 10.8(a) 1991 Form 10-K -- Amendment to Incentive loan program. ........................ 10.5(b) 1996 Form 10-K Supplemental Medical Insurance Plan. ............................. 10.10 1990 Form 10-K Orion L. Hoch Supplemental Retirement Agreement and Supplemental Medical Insurance Plan. ........................................ 10.13(b) 1983 Form 10-K -- First Amendment. ............................................ 10.13(c) 1984 Form 10-K -- Second Amendment. ........................................... 10.4 April, 1994 Form 10-Q -- Approval for participation in the Supplemental Medical Insurance Plan. ............................................ 10.2 April, 1994 Form 10-Q Lifetime participation of Fred W. O'Green and Mildred G. O'Green in the Supplemental Medical Insurance Plan. .................... 10.13(e) 1988 Form 10-K Litton Industries Inc. 1984 Long-Term Stock Incentive Plan, as amended. ....................................................... 10.14(a) 1992 Form 10-K -- Amendment dated March 12, 1992 for the two-for-one Common stock split. ....................................... 10.14(b) 1992 Form 10-K -- Amendment dated August 2, 1993. ............................. 10.14(c) 1993 Form 10-K -- Adjustment for the distribution of Western Atlas Inc. ....... 10.14(d) 1993 Form 10-K Litton Industries, Inc. Performance Award Plan. .................. 10.15 1984 Form 10-K -- Amendment dated December 2, 1992. ........................... 10.2 April, 1993 Form 10-Q -- Amendment dated August 3, 1995. ............................. 10.11(c) 1995 Form 10-K Litton Industries, Inc. Restoration Plan. ........................ 10.16 1989 Form 10-K Litton Industries, Inc. Director Stock Option Plan. .............. 10.18(a) 1989 Form 10-K -- Amendment dated March 12, 1992 for the two-for-one Common stock split. ....................................... 10.18(b) 1992 Form 10-K -- Adjustment for the distribution of Western Atlas Inc. ....... 10.18(c) 1993 Form 10-K -- Board of Directors Resolution with respect to options issued to directors of the Company who became directors of Western Atlas Inc. ................................................. 10.13(d) 1995 Form 10-K Consulting agreement between a subsidiary of the Company and Thomas B. Hayward, a director. ................................. 10.5 Apri1, 1994 Form 10-Q The Company's "Group Bonus Plan". ................................ 10.16 1996 Form 10-K Litton Industries, Inc. Supplemental Executive Retirement Plan. .......................................................... 10.22 1995 Form 10-K Incentive compensation plan of Ingalls Shipbuilding, Inc., a subsidiary of the Company. ..................................... 10.17 1996 Form 10-K
15 18 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS -- (CONTINUED)
REPORT WITH EXHIBIT WHICH EXHIBIT DESCRIPTION NO. WAS FILED - ------------------------------------------------------------------ -------- -------------- Litton Industries, Inc. Deferred Compensation Plan for Directors. ..................................................... 10.26 April, 1993 Form 10-Q Form of Change of Control Employment Agreement.................... 10.27 1993 Form 10-K
16 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. LITTON INDUSTRIES, INC. /s/ Carol A. Wiesner ------------------------------------ Carol A. Wiesner Vice President and Controller (Chief Accounting Officer) October 11, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ Alton J. Brann /s/ Michael R. Brown - -------------------------------------------- -------------------------------------------- Alton J. Brann, October 11, 1996 Michael R. Brown, October 11, 1996 Director Director, President and Chief Operating Officer /s/ J. T. Casey /s/ Carol B. Hallett - -------------------------------------------- -------------------------------------------- Joseph T. Casey, October 11, 1996 Carol B. Hallett, October 11, 1996 Director Director /s/ Thomas B. Hayward /s/ Orion L. Hoch - -------------------------------------------- -------------------------------------------- Thomas B. Hayward, October 11, 1996 Orion L. Hoch, October 11, 1996 Director Director /s/ David E. Jeremiah /s/ Rudolph E. Lang, Jr. - -------------------------------------------- -------------------------------------------- David E. Jeremiah, October 11, 1996 Rudolph E. Lang, Jr., October 11, 1996 Director Director, Senior Vice President and Chief Financial Officer /s/ Robert H. Lentz /s/ John M. Leonis - -------------------------------------------- -------------------------------------------- Robert H. Lentz, October 11, 1996 John M. Leonis, October 11, 1996 Director Director, Chairman of the Board and Chief Executive Officer /s/ William P. Sommers /s/ C. B. Thornton, Jr. - -------------------------------------------- -------------------------------------------- William P. Sommers, October 11, 1996 C. B. Thornton, Jr., October 11, 1996 Director Director /s/ Carol A. Wiesner - -------------------------------------------- Carol A. Wiesner, October 11, 1996 Vice President and Controller (Chief Accounting Officer)
17 20 LITTON INDUSTRIES, INC. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements of Litton Industries, Inc. and subsidiary companies, and related financial information included in this Annual Report, have been prepared by the Company, whose management is responsible for their integrity. These statements, which necessarily reflect estimates and judgments, have been prepared in conformity with generally accepted accounting principles. The Company maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded. As part of this system, the Company has an internal audit staff to monitor the compliance with and the effectiveness of established procedures. The consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose report appears on page F-2. The Audit and Compliance Committee of the Board of Directors, which consists solely of directors who are not employees of the Company, meets periodically with management, the independent auditors and the Company's internal auditors to review the scope of their activities and reports relating to internal controls and financial reporting matters. The independent and internal auditors have full and free access to the Audit and Compliance Committee and meet with the Committee both with and without the presence of Company management. /s/ RUDOLPH E. LANG, JR. - ---------------------------- Rudolph E. Lang, Jr. Senior Vice President and Chief Financial Officer September 19, 1996 F-1 21 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Litton Industries, Inc. Woodland Hills, California We have audited the accompanying consolidated balance sheets of Litton Industries, Inc. and subsidiary companies as of July 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended July 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Litton Industries, Inc. and subsidiary companies as of July 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California September 19, 1996 F-2 22 LITTON INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JULY 31 ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Sales and Service Revenues............................. $3,611,538 $3,319,725 $3,446,053 ---------- ---------- ---------- Costs and Expenses Cost of sales........................................ 2,805,640 2,646,342 2,777,462 Selling, general and administrative.................. 424,724 348,014 360,875 Depreciation and amortization........................ 113,833 95,356 98,444 Interest -- net...................................... 13,728 3,053 32,624 Unusual item -- litigation settlement................ -- -- 86,000 ---------- ---------- ---------- Total........................................ 3,357,925 3,092,765 3,355,405 ---------- ---------- ---------- Earnings from Continuing Operations before Taxes on Income and Extraordinary Item........................ 253,613 226,960 90,648 Taxes on Income........................................ (102,713) (91,945) (39,342) ---------- ---------- ---------- Earnings from Continuing Operations before Extraordinary Item................................... 150,900 135,015 51,306 Discontinued Operations................................ -- -- (173,079) ---------- ---------- ---------- Earnings (Loss) before Extraordinary Item.............. 150,900 135,015 (121,773) Extraordinary Loss..................................... -- -- (30,732) ---------- ---------- ---------- Net Earnings (Loss).......................... $ 150,900 $ 135,015 $ (152,505) ========== ========== ========== Primary Earnings (Loss) per Share Earnings before Extraordinary Item Continuing Operations............................. $ 3.15 $ 2.84 $ 1.10 Discontinued Operations........................... -- -- (3.79) Extraordinary Loss................................... -- -- (0.67) ---------- ---------- ---------- Total Primary................................ $ 3.15 $ 2.84 $ (3.36) ========== ========== ==========
See accompanying notes to consolidated financial statements. F-3 23 LITTON INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
JULY 31 ------------------------- 1996 1995 ---------- ---------- ASSETS Current Assets Cash and marketable securities.................................... $ 92,855 $ 110,696 Accounts receivable less allowance for doubtful accounts of $38,335 (1996) and $13,189 (1995).............................. 685,216 420,937 Inventories less progress billings................................ 571,056 552,195 Deferred tax assets............................................... 365,657 362,819 Prepaid expenses.................................................. 31,989 18,609 ---------- ---------- Total Current Assets................................................ 1,746,773 1,465,256 ---------- ---------- Property, Plant and Equipment, Net.................................. 680,313 621,839 ---------- ---------- Goodwill and Other Intangibles, Net of Amortization of $79,173 (1996) and $56,762 (1995)......................................... 691,834 218,283 ---------- ---------- Other Assets and Long-term Investments (Includes $2,163 (1996) and $2,126 (1995) Due from Related Parties)........................... 312,508 254,244 ---------- ---------- Total Assets.............................................. $3,431,428 $2,559,622 ========== ========== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities Accounts payable.................................................. $ 808,767 $ 702,897 Payrolls and related expenses..................................... 295,527 238,999 Taxes on income................................................... 68,872 117,947 Notes payable and current portion of long-term obligations........ 249,727 25,106 Other current liabilities......................................... 255,105 250,174 ---------- ---------- Total Current Liabilities........................................... 1,677,998 1,335,123 ---------- ---------- Long-term Obligations............................................... 514,542 103,631 ---------- ---------- Postretirement Benefit Obligations Other than Pensions.............. 205,029 204,883 ---------- ---------- Deferred Tax and Other Long-term Liabilities........................ 116,600 157,842 ---------- ---------- Shareholders' Investment Capital stock Voting preferred stock -- Series B (liquidating preference $8,213)....................................................... 2,053 2,053 Common stock (shares outstanding: 46,565,269 (1996) and 46,181,980 (1995))..................... 46,565 46,182 Additional paid-in capital........................................ 296,899 284,399 Retained earnings................................................. 601,050 451,862 Cumulative currency translation adjustment........................ (29,308) (26,353) ---------- ---------- Total Shareholders' Investment...................................... 917,259 758,143 ---------- ---------- Total Liabilities and Shareholders' Investment............ $3,431,428 $2,559,622 ========== ==========
See accompanying notes to consolidated financial statements. F-4 24 LITTON INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (THOUSANDS OF DOLLARS)
CAPITAL STOCK -------------------- PREFERRED CUMULATIVE TOTAL SERIES B COMMON ADDITIONAL CURRENCY SHAREHOLDERS' PAR PAR PAID-IN RETAINED TRANSLATION INVESTMENT VALUE $5 VALUE $1 CAPITAL EARNINGS ADJUSTMENT ------------- --------- -------- ---------- --------- ---------- BALANCE AT JULY 31, 1993.............. $ 1,663,718 $ 2,053 $ 45,520 $ 706,191 $ 934,605 $(24,651) Net loss............................ (152,505) -- -- -- (152,505) -- Cash dividends on Preferred -- Series B ($2.00 per share)........................... (821) -- -- -- (821) -- Purchase of Common stock............ (2,399) -- (31) (479) (1,889) -- Exercise of stock options........... 15,513 -- 425 15,088 -- -- Currency translation adjustment..... 2,201 -- -- -- -- 2,201 Distribution of Western Atlas Inc. ............................ (915,293) -- -- (447,520) (461,709) (6,064) ---------- ------ ------- --------- --------- -------- BALANCE AT JULY 31, 1994.............. 610,414 2,053 45,914 273,280 317,681 (28,514) Net earnings........................ 135,015 -- -- -- 135,015 -- Cash dividends on Preferred -- Series B ($2.00 per share)........................... (821) -- -- -- (821) -- Exercise of stock options........... 5,246 -- 268 4,991 (13) -- Currency translation adjustment..... 2,161 -- -- -- -- 2,161 Adjustments to Distribution of Western Atlas Inc. .............. 6,128 -- -- 6,128 -- -- ---------- ------ ------- --------- --------- -------- BALANCE AT JULY 31, 1995.............. 758,143 2,053 46,182 284,399 451,862 (26,353) Net earnings........................ 150,900 -- -- -- 150,900 -- Cash dividends on Preferred -- Series B ($2.00 per share)........................... (821) -- -- -- (821) -- Purchase of Common stock............ (1,056) -- (25) (157) (874) -- Exercise of stock options........... 13,048 -- 408 12,657 (17) -- Currency translation adjustment..... (2,955) -- -- -- -- (2,955) ---------- ------ ------- --------- --------- -------- BALANCE AT JULY 31, 1996.............. $ 917,259 $ 2,053 $ 46,565 $ 296,899 $ 601,050 $(29,308) ========== ====== ======= ========= ========= ========
See accompanying notes to consolidated financial statements. F-5 25 LITTON INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
YEAR ENDED JULY 31 ------------------------------------- 1996 1995 1994 --------- --------- --------- Cash and cash equivalents at beginning of period........ $ 60,229 $ 44,526 $ 237,440 --------- --------- --------- Cash Was Provided by (Used for) Continuing Operations Operating Activities Net earnings.......................................... 150,900 135,015 20,574 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization...................... 113,833 95,356 98,444 Extraordinary loss on early extinguishment of debt............................................. -- -- 30,732 Deferred income tax (benefit) charge............... (16,300) 22,034 (121,644) Changes in working capital accounts Accounts receivable.............................. 4,263 (3,520) 152,523 Inventory........................................ (21,155) (46,570) 16,714 Prepaid expenses................................. (3,661) (2,242) (1,445) Accounts payable................................. (87,915) 64,113 12,632 Payroll and related expenses..................... 14,652 9,301 (30,734) Taxes on income.................................. (50,754) (5,645) (17,712) Other current liabilities........................ (2,487) 18,224 30,542 Other operating activities......................... (31,498) (12,859) 1,860 --------- --------- --------- Cash provided by operating activities................... 69,878 273,207 192,486 --------- --------- --------- Investing Activities Purchase of businesses, net of cash acquired.......... (647,674) (127,575) (21,919) Purchase of capital assets............................ (91,019) (98,281) (80,599) Decrease in other current marketable securities....... 34,717 22,611 43,512 Proceeds from sale of businesses...................... 28,700 14,609 -- Other investing activities............................ (7,483) 10,941 49,666 --------- --------- --------- Cash used for investing activities...................... (682,759) (177,695) (9,340) --------- --------- --------- Financing Activities Net proceeds from issuance of debentures due 2026 and 2036............................................... 395,176 -- -- Change in short-term obligations, net................. 224,462 (73,257) 33,614 Repayment of long-term obligations and early extinguishment of debt............................. (8,507) (10,226) (493,405) Other financing activities............................ 18,626 3,674 11,294 --------- --------- --------- Cash provided by (used for) financing activities........ 629,757 (79,809) (448,497) --------- --------- --------- Net cash provided by (used for) continuing operations... 16,876 15,703 (265,351) --------- --------- --------- Net cash provided by discontinued operations............ -- -- 72,437 --------- --------- --------- Resulting in Increase (Decrease) in Cash and Cash Equivalents........................................... 16,876 15,703 (192,914) --------- --------- --------- Cash and cash equivalents at end of period.............. $ 77,105 $ 60,229 $ 44,526 ========= ========= ========= Reconciliation to Consolidated Balance Sheets at July 31, 1996 and July 31, 1995: Cash and cash equivalents.......................... $ 77,105 $ 60,229 Marketable securities: U.S. Government obligations...................... 15,750 30,683 Other time deposits and certificates of deposit.. -- 19,784 --------- --------- Total cash and marketable securities............. $ 92,855 $ 110,696 ========= =========
See accompanying notes to consolidated financial statements. F-6 26 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accounts of Litton Industries, Inc. and all its wholly-owned subsidiaries (the "Company" or "Litton") are included in the accompanying consolidated financial statements. All material intercompany accounts and transactions have been eliminated. Certain reclassifications of prior period information were made to conform to the current year presentation. The financial information for fiscal year 1994 included the results of Western Atlas Inc. ("WAI"), a former subsidiary of Litton. The shares of common stock of WAI were distributed to holders of Litton Common stock in the form of a dividend on March 17, 1994. The accounts of WAI have been segregated and reflected as discontinued operations (see Note B). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenues utilized in the earnings recognition process, that affect the reported amounts in the financial statements and accompanying notes. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates. CASH EQUIVALENTS The Company considers securities purchased within three months of their date of maturity to be cash equivalents. EARNINGS PER SHARE Primary earnings per share computations are based on the weighted average number of common shares outstanding and common share equivalents with dilutive effects, if applicable. Computations were based on 47,573,669 (1996), 47,187,934 (1995) and 45,720,585 (1994) weighted average shares and net earnings after provision for cash dividends on preferred stock. Fully diluted earnings per share were the same as primary earnings per share in each of the three years in the period ended July 31, 1996. INVENTORIES AND LONG-TERM CONTRACTS Inventory costs under long-term contracts generally reflect actual costs incurred and include general and administrative costs of the Marine Engineering and Production segment. Otherwise, general and administrative costs are expensed as incurred. Other inventories are stated at the lower of cost or market, generally using the average or actual cost method. Progress payments received are first offset against the related balance of unbilled receivables and inventories. Any remaining portion is included in other current liabilities. Revenues and profits on long-term contracts, performed over extended periods of time, are recognized under the percentage-of-completion method of accounting, principally based on direct labor dollars incurred for the Marine Engineering and Production segment and generally on the costs incurred or units-of-delivery basis for the Company's other operations. Revenues and profits on long-term contracts are based on the Company's estimates to complete and are reviewed periodically, with adjustments recorded in the period in which the revisions are made. Any anticipated losses on contracts are charged to operations as soon as they are determinable. RESEARCH AND DEVELOPMENT Company-sponsored research and development expenditures are charged to expense as incurred. Worldwide expenditures on research and development activities amounted to $217.0 million, $227.1 million and $220.1 million, of which 30%, 28% and 26% were Company-sponsored, in the years ended July 31, 1996, 1995 and 1994, respectively. PROPERTY, PLANT AND EQUIPMENT Investment in property, plant and equipment is stated at cost. Allowances for depreciation and amortization, computed generally by the straight-line method for financial reporting purposes, are provided over the estimated useful lives of the related assets. FOREIGN CURRENCIES The currency effects of translating the financial statements of those non-U.S. subsidiaries and divisions of the Company which operate in local currency environments are included in the "Cumulative currency translation adjustment" component of Shareholders' Investment. Gains and losses F-7 27 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) resulting from foreign currency transactions are included in results of operations and were not material in each of the three years in the period ended July 31, 1996. GOODWILL AND OTHER INTANGIBLES For financial statement purposes, goodwill and other intangibles are generally amortized using the straight-line method over their estimated useful lives, not exceeding 40 years. Goodwill at July 31, 1996 and 1995 was $674.1 million and $212.2 million, respectively. The current and future profitability of the operations to which the goodwill relates are evaluated at least annually. These factors, along with management's plans with respect to the operations and the projected undiscounted cash flows, are considered in assessing the recoverability of the goodwill. ENVIRONMENTAL COSTS Provisions for environmental costs are recorded when the Company determines its responsibility for remedial efforts or environmental liability and such amounts are reasonably estimable. The Company's exposure may be mitigated by potential insurance reimbursements and, to the extent such costs are recoverable, under the Company's U.S. Government contracts. These recoveries are not recorded until collection is probable. NOTE B: ACQUISITIONS AND DIVESTITURES ACQUISITIONS On February 16, 1996, the Company acquired all of the issued and outstanding stock of PRC Inc. ("PRC") from The Black & Decker Corporation for a preliminary purchase price of $425 million in cash. PRC, with revenues of more than $700 million in its fiscal year ended December 31, 1995, is a diversified information technology company that designs, develops, integrates and supports computer-based information handling and processing systems and reengineers business processes for the U.S. Government, commercial customers and state and local governments. On May 15, 1996, the Company acquired Steerage Corp. ("Steerage") which conducts operations through its wholly-owned subsidiary Sperry Marine Inc. ("Sperry Marine") for a preliminary cash purchase price of $158.7 million inclusive of $52.4 million used for repayment of existing Steerage debt. With revenues of approximately $145 million in its fiscal year ended December 31, 1995, Sperry Marine is a provider of advanced electronic navigation and guidance systems to commercial and military customers for marine uses. The following table sets forth unaudited pro forma information for the fiscal years ended July 31, 1996 and 1995 as if the combinations had occurred on August 1, 1994. The amounts reflect the purchase method of accounting and goodwill amortization periods of 30 years for PRC and 25 years for Sperry Marine. The pro forma amounts are not necessarily indicative of what the results of operations would have been if the combinations had occurred on August 1, 1994, nor are they necessarily indicative of future results of operations.
TWELVE MONTHS ENDED JULY 31 ------------------------- 1996 1995 ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Sales and Service Revenues.................................. $4,162,210 $4,168,535 Net Earnings................................................ $ 152,456 $ 135,112 Primary Earnings per Share.................................. $ 3.19 $ 2.85
In addition to these transactions, there were other acquisitions (including Teledyne Inc.'s Electronics Systems operations and the Electro-Optical Systems operations of Imo Industries Inc.) made during the three years ended July 31, 1996 which, although considered integral to the Company's goals, did not materially impact the consolidated financial statements. F-8 28 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DISTRIBUTION OF WAI On March 17, 1994, Litton distributed all of the issued and outstanding shares of common stock of its previously wholly-owned subsidiary, WAI. The WAI operations, reflected herein as discontinued operations, comprised substantially all of the Company's former oilfield services and industrial automation systems businesses. The distribution ("Distribution") was made in the form of a dividend to holders of record of Litton Common stock at the close of business on March 14, 1994. Litton shareholders of record received one share of WAI common stock for each share of Litton Common stock owned. The consolidated financial statements reflected an accounting date for the Distribution of February 28, 1994. Litton's Shareholders' Investment has been reduced by an aggregate amount of $909.2 million representing the book value of net assets distributed. WAI incurred a net loss of $173 million for the seven months ended February 28, 1994 including special charges totaling $179 million, net of tax, recorded to reflect the write-down of net assets relating to the disposal of one division and to provide for obsolescence of older technology equipment, vessels and inventory and the consolidation of facilities. Corporate interest costs of $7 million have been attributed to WAI and, therefore, reclassified to discontinued operations for the seven months ended February 28, 1994. Total income tax benefits allocated to WAI for the same period were $55 million. NOTE C: CASH AND MARKETABLE SECURITIES, DEBT AND INTEREST Cash and marketable securities consist of the following interest-earning investments:
JULY 31 -------------------- 1996 1995 ------- -------- (THOUSANDS OF DOLLARS) Time deposits and certificates of deposit....................... $77,105 $ 80,013 U.S. Government obligations..................................... 15,750 30,683 ------- -------- $92,855 $110,696 ======= ========
Cash and cash equivalents (see Note A) at July 31, 1996 and 1995 consisted of $77.1 million and $60.2 million in time deposits, respectively. The Company's marketable securities at July 31, 1996 consisted of obligations issued by the U.S. Government with an estimated fair market value of $19.3 million based on quoted market prices compared with the carrying amount of $15.8 million. At July 31, 1995, the estimated fair market value of marketable securities, which also consisted of U.S. Government obligations, was $35.0 million compared with the carrying amount of $30.7 million. These investments have been classified as held-to-maturity securities. Notes payable and current portion of long-term obligations are composed of:
JULY 31 -------------------- 1996 1995 -------- ------- (THOUSANDS OF DOLLARS) Notes payable to banks, with weighted average interest at 5.7% (1996) and 7.7% (1995)........................................ $237,827 $13,635 Current portion of long-term obligations........................ 11,900 11,471 -------- ------- $249,727 $25,106 ======== =======
F-9 29 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-term obligations consist of the following:
JULY 31 --------------------- 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Capital lease commitments (Note E)............................. $ 8,516 $ 16,671 -------- -------- Other long-term obligations 7.75% debentures due 2026.................................... 300,000 -- 6.98% debentures due 2036.................................... 100,000 -- Pension accruals (other than U.S. and Canadian plans)........ 72,426 57,421 Industrial Development Revenue Bonds, with interest based generally on 70% of the current prime rate, due to 2008... 21,115 21,215 Other........................................................ 12,485 8,324 -------- -------- 506,026 86,960 -------- -------- $514,542 $103,631 ======== ========
Other long-term obligations at July 31, 1996 mature as follows:
(THOUSANDS OF DOLLARS) Year ended July 31, 1998............................................................ $ 5,882 1999............................................................ 4,528 2000............................................................ 4,661 2001............................................................ 8,132 Years subsequent to July 31, 2001................................. 482,823 -------- $506,026 ========
In connection with the acquisition of PRC, the Company issued $300 million principal amount of 7.75% debentures due March 15, 2026 and $100 million principal amount of 6.98% debentures due March 15, 2036. Interest on these debentures is payable semiannually on March 15 and September 15, commencing on September 15, 1996. The debentures are redeemable in whole or in part, at the option of the Company at any time in the case of the 7.75% debentures and at any time after March 15, 2006 in the case of the 6.98% debentures. In either case the redemption price is equal to the greater of 100% of the principal amount of such debentures or the sum of the present values of the remaining scheduled payments of principal and interest thereon at U.S. Treasury Rates plus, in each case, accrued interest thereon to the date of redemption. The holders of the 6.98% debentures may elect to have such debentures redeemed on March 15, 2006 at 100% of the principal amount, together with accrued interest to March 15, 2006. The aggregate estimated fair value of these debentures at July 31, 1996 was $387.2 million, based on interest rates available for debt with similar terms. The Company also incurred short-term borrowings in connection with the acquisition of Sperry Marine and other operating uses. These short-term borrowings were made under an existing revolving credit agreement with various banks and are expected to be repaid with existing funds and cash flows from operations. At July 31, 1996, the unused credit commitments under this revolving credit agreement amounted to $200 million, which is available primarily for replacement of existing debt. F-10 30 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net interest expense is composed of the following:
YEAR ENDED JULY 31 --------------------------------- 1996 1995 1994 -------- ------- -------- (THOUSANDS OF DOLLARS) Interest expense.................................... $ 26,312 $12,918 $ 58,738 Interest income..................................... (12,584) (9,865) (26,114) -------- ------- -------- Net interest expense................................ $ 13,728 $ 3,053 $ 32,624 ======== ======= ========
Total cash interest payments made during fiscal year 1996 amounted to $7.7 million compared with $5.3 million for fiscal year 1995 and $100.6 million for fiscal year 1994. Payments for fiscal year 1994 included $37 million of prepaid interest in connection with an early extinguishment of debt (see Note J). Capitalized interest costs in each of the three years in the period ended July 31, 1996 were not material. In addition to the previously discussed marketable securities, the Company's other financial instruments include accounts receivable, accounts payable, payrolls and related expenses, notes payable and current portion of long-term obligations and other miscellaneous long-term assets and liabilities. The carrying amounts of the short-term assets and liabilities approximate their market values due to their short maturity. Differences between the recorded amounts and market value of the remainder of the financial instruments were not material. As discussed in Note I, the Company also has off-balance sheet guarantees and letter of credit agreements with notional values totaling $313 million at July 31, 1996, relating principally to the guarantee of future performance on foreign government contracts. NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES Following are the details of accounts receivable:
JULY 31 ------------------------ 1996 1995 --------- ---------- (THOUSANDS OF DOLLARS) Receivables related to long-term contracts Amounts billed U.S. Government........................................ $ 223,389 $ 162,995 Other.................................................. 78,168 43,028 -------- -------- 301,557 206,023 -------- -------- Unbilled recoverable costs and accrued profit on progress completed and retentions U.S. Government........................................ 129,349 17,362 Other.................................................. 44,058 27,304 -------- -------- 173,407 44,666 -------- -------- Other receivables, principally from commercial customers.... 210,252 170,248 -------- -------- $ 685,216 $ 420,937 ======== ========
Of the $173.4 million in retentions and amounts not billed at July 31, 1996, $149.0 million is expected to be collected in fiscal year 1997 with the balance to be collected in subsequent years, as contract deliveries are made and warranty periods expire. F-11 31 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized below are the components of inventory balances:
JULY 31 ------------------------ 1996 1995 --------- ---------- (THOUSANDS OF DOLLARS) Raw materials and work in process........................... $ 306,615 $ 230,642 Finished goods.............................................. 59,801 44,565 Inventoried costs related to long-term contracts............ 573,399 752,188 -------- -------- Gross inventories........................................... 939,815 1,027,395 Less progress billings, principally related to long-term contracts................................................. (368,759) (475,200) -------- -------- Net inventories................................... $ 571,056 $ 552,195 ======== ========
The amounts included in "Inventoried costs related to long-term contracts" representing general and administrative costs and production cost of delivered units in excess of anticipated average cost of all units expected to be produced are not significant. NOTE E: PROPERTY, PLANT AND EQUIPMENT Investment in property, plant and equipment consists of the following:
JULY 31 ------------------------- 1996 1995 ---------- ---------- (THOUSANDS OF DOLLARS) Property, plant and equipment, at cost Land...................................................... $ 54,740 $ 45,097 Buildings................................................. 644,560 623,712 Machinery and equipment................................... 903,860 877,455 ---------- ---------- 1,603,160 1,546,264 Less accumulated depreciation............................. (922,847) (924,425) ---------- ---------- Net investment in property, plant and equipment... $ 680,313 $ 621,839 ========== ==========
The net book value of assets utilized under capital leases was not material at July 31, 1996 and 1995. The range of estimated useful lives for determining depreciation and amortization of the major classes of assets are: Buildings...................................................... 10-45 years Land improvements and building improvements.................... 2-20 years Machinery and equipment........................................ 2-20 years
F-12 32 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of July 31, 1996, minimum rental commitments under capital and noncancellable operating leases were:
CAPITAL OPERATING LEASES LEASES ------- -------- (THOUSANDS OF DOLLARS) Year ended July 31 1997.......................................................... $ 8,738 $ 37,635 1998.......................................................... 8,702 28,992 1999.......................................................... 36 23,969 2000.......................................................... -- 18,837 2001.......................................................... -- 14,464 Years subsequent to July 31, 2001............................... -- 34,314 ------- -------- Total minimum lease payments.................................... 17,476 $158,211 ======== Less amounts representing interest.............................. (862) ------- Net minimum lease payments...................................... 16,614 Less current portion of capital lease commitments............... (8,098) ------- Long-term portion of capital lease commitments.................. $ 8,516 =======
Rental expense for operating leases, including amounts for short-term leases with nominal, if any, future rental commitments, was $38.5 million, $28.4 million and $32.4 million for the years ended July 31, 1996, 1995 and 1994, respectively. The minimum future rentals receivable under subleases and the contingent rental expenses were not significant. NOTE F: SHAREHOLDERS' INVESTMENT SHARE INFORMATION At July 31, 1996, there were authorized 120 million shares of Common stock, par value $1.00; 22 million shares of preferred stock, par value $5.00 and 8 million shares of Preference stock, par value $2.50. No cash dividends were paid on the Common stock in the three fiscal years ended July 31, 1996. The Series B preferred stock receives a $2.00 annual dividend, is not convertible into Common stock and is redeemable at the option of the Company at $80.00 plus accrued dividends and, in the event of liquidation, is entitled to receive $25.00 plus accrued dividends. There were 410,643 shares of Series B preferred stock outstanding for each of the three fiscal years ended July 31, 1996. STOCK OPTION INFORMATION The Company has stock option plans which provide for the grant of incentive awards to officers and other key employees. Incentive awards may be granted in the form of stock options at not less than 50% nor more than 100% of the fair market value (subject to shareholders' approval, only at 100% of fair market value subsequent to July 31, 1996) of the Company's Common stock on the date of grant. The Company also has a Director Stock Option Plan which provides for the grant of stock options to the Company's non-employee directors at the fair market value of the Common stock on the date of grant. The number of options which are granted annually is fixed by the plan and become fully exercisable on the first anniversary of their respective grant. F-13 33 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of stock options' activities for the three fiscal years ended July 31, 1996:
NUMBER OF RANGES OF SHARES UNDER PRICES PER OPTION SHARE ------------ ----------------- Outstanding at July 31, 1993.................................. 2,622,129 $14.35 to $57.38 Grants: Period prior to the Distribution (Note B)........... 49,000 $33.14 to $66.69 Period subsequent to the Distribution................ 421,000 $15.19 to $37.19 Exercises: Period prior to the Distribution................. (341,638) $14.35 to $47.94 Period subsequent to the Distribution............. (99,070) $ 7.41 to $20.18 Cancellations............................................... (6,000) --------- Outstanding at July 31, 1994.................................. 2,645,421 $ 7.40 to $37.19 Grants...................................................... 606,500 $17.09 to $34.19 Exercises................................................... (274,667) $ 7.40 to $20.83 Cancellations............................................... (29,700) --------- Outstanding at July 31, 1995.................................. 2,947,554 $ 7.40 to $37.19 Grants...................................................... 858,000 $18.94 to $50.75 Exercises................................................... (429,800) $ 7.36 to $34.19 Cancellations............................................... (81,800) --------- Outstanding at July 31, 1996.................................. 3,293,954 $ 7.40 to $44.06 =========
Exercisable options at July 31, 1996, 1995 and 1994 were 1,317,070, 1,215,126 and 1,083,111, respectively. At July 31, 1996, there were 946,185 shares available for grants of future awards under these plans. In connection with the Distribution of the shares of Western Atlas common stock (see Note B) in fiscal year 1994, each option granted pursuant to the plans was adjusted to account for the Distribution. Each Litton optionee with options outstanding on the Distribution date received an equivalent number of Western Atlas options. The option price was allocated in accordance with a formula. SHAREHOLDER RIGHTS PLAN The Company has a Share Purchase Rights Plan which becomes exercisable under certain circumstances involving the acquisition by a person or group of 15% or more of the Company's Common stock. Each right will entitle the holder to purchase one one-thousandth of a share of Series A Participating Preferred Stock ("Preferred Share") at a price of $150 per one one-thousandth of a Preferred Share, subject to adjustment. Alternatively, each right will entitle its holder to purchase a number of shares of the Company's Common stock having a market value of two times the exercise price of the right. The Company may exchange the rights for one Common share per right or redeem them at $.01 per right at any time before they become exercisable. The rights expire in August 2004. NOTE G: TAXES ON INCOME Earnings from continuing operations before taxes on income and extraordinary item by geographic area are as follows:
YEAR ENDED JULY 31 ---------------------------------- 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) United States...................................... $261,735 $218,827 $102,453 Other nations...................................... (8,122) 8,133 (11,805) -------- -------- -------- $253,613 $226,960 $ 90,648 ======== ======== ========
F-14 34 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of taxes on income consist of the following provisions (benefits):
YEAR ENDED JULY 31 --------------------------------- 1996 1995 1994 -------- ------- -------- (THOUSANDS OF DOLLARS) United States Current........................................... $ 63,110 $86,781 $ 67,637 Deferred.......................................... 30,178 (6,486) (33,203) -------- ------- -------- 93,288 80,295 34,434 -------- ------- -------- Other nations Current........................................... (1,773) (4,112) (2,919) Deferred.......................................... (338) 6,457 518 -------- ------- -------- (2,111) 2,345 (2,401) -------- ------- -------- State and local, primarily current.................. 11,536 9,305 7,309 -------- ------- -------- $102,713 $91,945 $ 39,342 ======== ======= ========
The primary components of the Company's deferred income tax assets and liabilities are as follows:
JULY 31 --------------------- 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Deferred Tax Assets: Inventory and receivables.................................... $175,469 $166,992 Employee benefits............................................ 138,241 139,694 Accrued liabilities.......................................... 101,621 91,374 Other items.................................................. 37,601 48,417 -------- -------- 452,932 446,477 -------- -------- Deferred Tax Liabilities: Employee benefits............................................ 82,287 70,066 Depreciation................................................. 61,965 65,428 -------- -------- 144,252 135,494 -------- -------- Net deferred tax assets........................................ $308,680 $310,983 ======== ========
The deferred tax assets and liabilities are classified on the Consolidated Balance Sheets as follows:
JULY 31 --------------------- 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Net current deferred tax assets................................ $365,657 $362,819 Net long-term deferred tax liabilities......................... 56,977 51,836 -------- -------- $308,680 $310,983 ======== ========
F-15 35 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a reconciliation of income taxes at the U.S. statutory rate to the provision for income taxes:
YEAR ENDED JULY 31 -------------------------------- 1996 1995 1994 -------- ------- ------- (THOUSANDS OF DOLLARS) Tax at U.S. statutory rate........................... $ 88,765 $79,436 $31,727 State taxes net of federal benefit................... 7,629 6,048 4,751 Earnings taxed at other than U.S. statutory rate..... 2,325 3,604 946 Other items.......................................... 3,994 2,857 1,918 -------- ------- ------- $102,713 $91,945 $39,342 ======== ======= ======= Effective tax rate................................... 40.5% 40.5% 43.4% ======== ======= =======
Undistributed earnings of non-U.S. subsidiaries for which U.S. taxes have not been provided are included in consolidated retained earnings in the amounts of $139 million and $152 million at July 31, 1996 and 1995, respectively. If such earnings were distributed, U.S. income taxes would be partially reduced by available credits for taxes paid to the jurisdictions in which the income was earned. The Company made tax payments (including amounts to settle prior years' taxes) of $169.9 million, $65.3 million and $195.0 million in fiscal years 1996, 1995 and 1994, respectively. NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS PENSION BENEFITS The majority of the Company's U.S. employees are covered by contributory defined benefit plans under which employees are eligible for benefits at age 65. Generally, benefits are determined under a formula based primarily on the participant's total plan contributions. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible. The Company has a defined contribution voluntary savings plan for eligible U.S. employees. This 401(K) plan is designed to enhance the existing retirement programs for participating employees. The Company matches 50% of a certain portion of participants' contributions to the plan. The Company's non-U.S. subsidiaries also have retirement plans for long-term employees. These plans are not considered to be significant individually or in the aggregate to the Company's consolidated financial position. The pension liabilities and their related costs are computed in accordance with the laws of the individual nations and appropriate actuarial practices. Additionally, PRC has various defined contribution pension plans covering substantially all of its employees, some of which provide for discretionary contributions. The other companies acquired during fiscal year 1996 sponsor various defined benefit and retirement plans which the Company has assumed in connection with their acquisition. F-16 36 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the components of net periodic pension income (cost) for the U.S. defined benefit plans, defined contribution plans and non-U.S. pension plans for fiscal years 1996, 1995 and 1994 are as follows:
YEAR ENDED JULY 31 ---------------------------------- 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) Defined benefit plans Service cost-benefits earned during the period... $(25,235) $(26,880) $(24,543) Interest cost on projected benefit obligation.... (66,679) (64,566) (60,271) Actual return on plan assets..................... 159,459 120,009 114,769 Net amortization and deferral.................... (38,646) (2,757) (1,607) ------- ------- ------- Net periodic pension income...................... 28,899 25,806 28,348 Defined contribution plans......................... (14,951) (9,497) (10,246) Non-U.S. pension plans............................. (4,647) (4,025) (3,445) ------- ------- ------- Net pension income................................. $ 9,301 $ 12,284 $ 14,657 ======= ======= =======
A reconciliation of the funded status of the U.S. defined benefit plans is as follows:
YEAR ENDED JULY 31 ------------------------- 1996 1995 ---------- ---------- (THOUSANDS OF DOLLARS) Fair value of plan assets................................... $1,532,789 $1,237,771 Projected benefit obligation................................ (934,747) (855,423) Unrecognized net transition asset........................... (46,870) (59,611) Unrecognized net gain....................................... (376,941) (147,638) Unrecognized prior service costs............................ 25,382 (9,679) -------- -------- Prepaid pension cost........................................ $ 199,613 $ 165,420 ======== ========
The accumulated benefit obligations at July 31, 1996 and 1995 were $851.1 million and $778.5 million, inclusive of vested benefit obligations of $824.0 million and $759.0 million, respectively. The primary actuarial assumptions used include:
YEAR ENDED JULY 31 ------------------- 1996 1995 ---- ---- Expected long-term rate of return................................ 9% 9 1/4% Weighted-average discount rate................................... 8 1/4% 8 1/4% Rate of increase on future compensation levels................... 5% 5%
The excess of plan assets over the projected benefit obligation at August 1, 1986 (when the Company adopted SFAS No. 87) and subsequent unrecognized gains and losses are fully amortized over the average remaining service period of active employees expected to receive benefits under the plans, generally 15 years. Pension assets included in Other Assets and Long-term Investments were $239.7 million and $204.0 million at July 31, 1996 and 1995, respectively. Plan assets are invested primarily in listed common stock and fixed income securities. In fiscal years 1996, 1995 and 1994, the Company incurred $5.0 million, $7.0 million and $18.7 million, respectively, in costs for special separation and supplemental early retirement benefits for certain employees in connection with workforce reductions at certain operations. F-17 37 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER POSTRETIREMENT BENEFITS In addition to pension benefits, certain of the Company's U.S. employees are covered by postretirement health care and life insurance benefit plans. These benefit plans are unfunded. The components of net periodic postretirement benefit costs for fiscal years 1996, 1995 and 1994 recognized under the provisions of SFAS No. 106 are as follows:
YEAR ENDED JULY 31 ------------------------------- 1996 1995 1994 ------- ------- ------- (THOUSANDS OF DOLLARS) Service cost -- benefits earned during the period..... $ 1,569 $ 2,221 $ 2,073 Interest cost on projected benefit obligation......... 11,939 14,712 14,049 Net amortization and deferral of actuarial amounts.... (1,212) -- -- ------- ------- ------- Net postretirement benefit cost............. $12,296 $16,933 $16,122 ======= ======= =======
The following is a summary of the status of the plans:
YEAR ENDED JULY 31 --------------------- 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Accumulated benefit obligation: Retirees..................................................... $117,629 $126,338 Fully eligible plan participants............................. 23,192 23,616 Other active plan participants............................... 18,626 14,533 -------- -------- Total accumulated benefit obligation........................... 159,447 164,487 Unrecognized actuarial amounts................................. 45,582 40,396 -------- -------- Accrued benefit obligation........................... $205,029 $204,883 ======== ========
Actuarial assumptions used to measure the accumulated benefit obligation include a discount rate of 8 1/4% at July 31, 1996 and 1995. The assumed health care cost trend rate for fiscal year 1997 is 10.3%, decreasing over 21 years to 6% where it is expected to remain thereafter. The assumed health care cost trend rates for fiscal years 1996 and 1995 were 10.5% and 14.4%, respectively. The effect of a one-percentage-point increase in the assumed health care cost trend rate on the service cost and interest cost components of the net periodic postretirement benefit cost is not material. A one-percentage-point change in the assumed health care cost trend rate would impact the accumulated benefit obligation by approximately $11.3 million. NOTE I: DEFENSE CONTRACTS, LITIGATION AND CONTINGENCIES Approximately 71%, 73% and 73% of total sales and service revenues of the Company for the years ended July 31, 1996, 1995 and 1994 were from U.S. Government contracts and subcontracts. Approximately 81% of these revenues for 1996 related to fixed-price type contracts. As is common with U.S. Government contracts, the Company's U.S. defense contracts are unilaterally terminable at the option of the U.S. Government with compensation for work completed and costs incurred. Contracts with the U.S. Government are subject to certain laws and regulations, the noncompliance with which may result in various sanctions. In the current government contracting environment, contractors, sometimes without their knowledge, are subject to investigations by the U.S. Government initiated in various ways. Most investigations result in no action being taken or administrative resolution. Litton is aware of ongoing investigations and is cooperating in those investigations. Should any investigation result in the filing of formal charges against the Company by the U.S. Government, disclosure will be made if the amount involved or the relief sought is deemed by the Company to be material. F-18 38 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Litton is suing Honeywell, Inc. ("Honeywell") for patent infringement relating to the manufacture of ring laser gyro navigation systems which are used in commercial aircraft. After trial of that case in the U.S. District Court for the Central District of California, on August 31, 1993, the jury rendered a verdict in favor of Litton in the amount of $1.2 billion. On January 9, 1995, the District Court released a Memorandum of Decision finding Litton's patent invalid and rejecting the jury verdict. Litton appealed to the U.S. Court of Appeals for the Federal Circuit. On July 3, 1996, the Court of Appeals rendered a decision reversing the District Court's decision, finding the patent valid and infringed by Honeywell. The Court of Appeals reinstated the jury's verdict on liability including the findings of interference with contract and prospective business advantage and ordered a new trial on the amount of damages sustained by Litton in the District Court. Litton is also suing Honeywell on antitrust grounds in the same U.S. District Court. On February 29, 1996, the jury rendered a verdict in favor of Litton. On July 25, 1996, the District Court upheld the jury's verdict that Honeywell attempted to illegally monopolize and did monopolize the market for inertial reference systems for large commercial air transport, commuter and business aircraft. However, the District Court declined to enter the $234 million jury verdict on the basis that Litton's damage study as presented failed to disaggregate damages between illegal and legal acts. A new trial in the District Court has been ordered and will be limited to the issue of the amount of damages sustained by Litton attributable to Honeywell's unlawful conduct. There are various other litigation proceedings in which the Company is involved. Although the results of litigation proceedings cannot be predicted with certainty, it is the opinion of the General Counsel that the ultimate resolution of these other proceedings will not have a material adverse effect on the Company's consolidated financial statements. The Company has issued or is a party to various guarantees and letter of credit agreements totaling $313 million at July 31, 1996, relating principally to the guarantee of future performance on foreign government contracts. NOTE J: EXTRAORDINARY ITEM AND UNUSUAL ITEM On July 11, 1994, the Company effected an in-substance defeasance of its 12 5/8% Subordinated Debentures by placing direct U.S. Government obligations in an irrevocable trust to provide for the redemption, according to their terms, on July 1, 1995 at 104.2% of their principal amount, plus accrued interest. Due to this in-substance defeasance, results for fiscal year 1994 included an extraordinary loss on early extinguishment of debt of $49.2 million pre-tax, or $30.7 million after tax. The effect on primary earnings per share for the year was a decrease of $.67. On July 14, 1994, the Company settled a civil suit brought under the so-called qui tam provisions of the False Claims Act and recorded a charge of $86.0 million to the operating results of the Advanced Electronics segment. On an after-tax basis, the impact of this settlement was a $53.8 million loss, or a decrease of $1.18 to primary earnings per share for the year. F-19 39 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE K: BUSINESS SEGMENT REPORTING The Company's primary operations are reported in the following three segments: Advanced Electronics, Marine Engineering and Production, and Electronic Components and Materials (formerly known as the Interconnect Products segment). In connection with organizational changes brought about from the acquisitions made during the year, effective July 31, 1996, certain businesses which were previously reported in the Advanced Electronics segment have been grouped with the Electronic Components and Materials' businesses. Management believes that these changes result in more meaningful segment reporting and are more reflective of the operational characteristics of these businesses. Accordingly, the segment information for fiscal years 1995 and 1994 presented herein has been restated to reflect these changes. The Advanced Electronics segment designs, develops and manufactures inertial navigation, guidance and control, command, control and communications and electronic warfare systems. In addition, this segment designs, develops, integrates and supports computer-based information systems and reengineers business processes. Results in fiscal year 1996 include the effects of the February 1996 acquisition of PRC, the May 1996 acquisition of Sperry Marine and other acquisitions which are integral to the businesses in the segment (see Note B). The Marine Engineering and Production segment is engaged in the building of large multimission surface combatant ships and is a provider of overhaul, repair, modernization, ship design and engineering services. The U.S. Government is a significant customer of both the Advanced Electronics and Marine Engineering and Production segments (see Note I). The Electronic Components and Materials segment manufactures and distributes interconnection subsystems, electronic connectors, printed circuit boards, backpanels, soldering materials, rotary components, fiber optic components and systems and microwave components and subsystems to diverse markets worldwide. Operating profit for fiscal year 1994 included a charge recorded to adjust the carrying value of a division which was subsequently sold. Export sales were $406.8 million, $324.6 million and $336.2 million in fiscal years 1996, 1995 and 1994, respectively. Intersegment sales and sales between geographic areas are not material. All internal sales and transfers are based on negotiated prices. Costs for Corporate and Other Amounts include net interest expense and assets consists primarily of cash, marketable securities and deferred tax assets. The Company's service revenues are primarily associated with the Information Systems group within the Advanced Electronics segment. Revenues for this group for the fiscal years ended July 31, 1996, 1995 and 1994 were $611.6 million, $406.0 million and $453.7 million, respectively. F-20 40 LITTON INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OPERATIONS BY BUSINESS SEGMENT
MARINE ELECTRONIC YEAR ENGINEERING COMPONENTS CORPORATE ENDED ADVANCED AND AND AND OTHER JULY 31 ELECTRONICS* PRODUCTION MATERIALS AMOUNTS TOTAL ------- ----------- ----------- ----------- --------- ------ (MILLIONS OF DOLLARS) Sales and service revenues..... 1996 $ 1,923 $ 1,295 $ 450 $ (56) $3,612 1995 1,573 1,396 405 (54) 3,320 1994 1,604 1,484 412 (54) 3,446 Operating profit (loss)........ 1996 132 143 51 (72) 254 1995 113 132 37 (55) 227 1994 110** 141 20 (94) 177 Capital expenditures........... 1996 50 19 20 2 91 1995 46 26 15 11 98 1994 41 22 14 4 81 Depreciation and amortization expense...................... 1996 78 19 15 2 114 1995 60 18 15 2 95 1994 63 19 15 1 98 Identifiable assets at year end.......................... 1996 2,159 361 338 573 3,431 1995 1,275 392 308 585 2,560 1994 1,048 330 305 571 2,254
OPERATIONS BY GEOGRAPHIC AREA
YEAR CORPORATE ENDED UNITED OTHER AND OTHER JULY 31 STATES* NATIONS* SUBTOTAL AMOUNTS TOTAL ------- ------- -------- -------- --------- ------ (MILLIONS OF DOLLARS) Sales and service revenues............. 1996 $ 3,263 $349 $3,612 $ -- $3,612 1995 3,039 281 3,320 -- 3,320 1994 3,160 286 3,446 -- 3,446 Operating profit (loss)................ 1996 321 (1) 320 (66) 254 1995 267 13 280 (53) 227 1994 271** (4) 267 (90) 177 Identifiable assets at year end........ 1996 2,450 408 2,858 573 3,431 1995 1,742 233 1,975 585 2,560 1994 1,470 213 1,683 571 2,254
- --------------- * The increases in fiscal year 1996 include the effects of the acquisitions completed during the fiscal year. ** Excludes the effects of the settlement of a civil suit (see Note J). F-21 41 LITTON INDUSTRIES, INC. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
SALES EARNINGS AND BEFORE PRIMARY COMMON STOCK SERVICE TAXES NET EARNINGS HIGH AND LOW REVENUES ON INCOME EARNINGS PER SHARE* MARKET PRICES -------- --------- -------- ---------- ------------- Fiscal Year 1996 First Quarter........... $ 836 $ 62 $ 37 $ .77 High 44 1/4 Low 36 3/4 Second Quarter........ 740 55 33 .68 High 49 3/4 Low 39 3/8 Third Quarter......... 1,004 65 39 .81 High 51 1/2 Low 41 Fourth Quarter........ 1,032 72 42 .89 High 48 3/4 Low 40 1/2 -------- --------- -------- ---------- Fiscal Year 1996...... $3,612 $ 254 $151 $ 3.15 ======= ======= ====== ======== Fiscal Year 1995 First Quarter........... $ 789 $ 54 $ 32 $ .68 High 40 Low 35 5/8 Second Quarter........ 694 48 28 .60 High 38 7/8 Low 33 1/8 Third Quarter......... 862 60 36 .75 High 38 Low 32 1/2 Fourth Quarter........ 975 65 39 .81 High 38 7/8 Low 34 1/2 -------- --------- -------- ---------- Fiscal Year 1995...... $3,320 $ 227 $135 $ 2.84 ======= ======= ====== ========
- --------------- Litton Common stock is traded principally on the New York Stock Exchange and the Pacific Stock Exchange under the symbol "LIT". As of September 30, 1996, there were approximately 25,600 holders of record of the Common stock. * Primary earnings per share also reflected fully diluted earnings per share in each of the four quarters of fiscal years 1995 and 1996. F-22 42 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES INDEX TO EXHIBITS
EXHIBIT NO. AND APPLICABLE SECTION OF ITEM 601 OF REGULATION S-K - ------------------ 3.1(a) Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's 1984 Annual Report on Form 10-K, and incorporated herein by reference. 3.1(b) Amendment to the Company's Restated Certificate of Incorporation, filed as Exhibit 3.1(a) to the Company's October 31, 1986 Quarterly Report on Form 10-Q, and incorporated herein by reference. 3.2(a) By-laws of the Company as amended through the date of this filing, and incorporated herein by reference.* 4.1 Indenture dated as of June 10, 1985 between the Company and The Bank of New York, Trustee, under which the 12 5/8% Subordinated Debentures Due 2005 were issued, filed as Exhibit 4.1 to the Company's April 30, 1985 Quarterly Report on Form 10-Q, and incorporated herein by reference. 4.2 Form of definitive 12 5/8% Subordinated Debenture Due 2005, filed as Exhibit 4.4 to the Company's 1985 Annual Report on Form 10-K, and incorporated herein by reference. 4.3 Indenture dated as of December 15, 1991 between the Company and The Bank of New York, Trustee, under which the 7.75% and 6.98% debentures due 2026 and 2036 were issued and specimens of such debentures, filed as Exhibit 4.1 of the Company's April 30, 1996 Quarterly Report on Form 10-Q, and incorporated herein by reference. 4.4 $400,000,000 Amended and Restated Credit Agreement dated December 22, 1994, along with amendment dated March 17, 1995, among Litton Industries, Inc., a group of banks and Morgan Guaranty Trust Company of New York, as Agent, and Wells Fargo Bank, N.A., as Co-Agent, filed as Exhibit 4.3 to the Company's 1995 Annual Report on Form 10-K, and incorporated herein by reference. 4.4(a) Amendment No. 2 dated November 30, 1995 to the $400,000,000 Amended and Restated Credit Agreement, filed as Exhibit 4 to the Company's Form 8-K/A dated March 4, 1996, and incorporated herein by reference. 4.4(b) Amendment No. 3 dated April 25, 1996 to the $400,000,000 Amended and Restated Credit Agreement, filed as Exhibit 4.2 to the Company's April 30, 1996 Quarterly Report on Form 10-Q, and incorporated herein by reference. 4.5 Other instruments defining the rights of holders of other long-term debt of the Registrant are not filed as exhibits because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its consolidated subsidiaries. The Registrant hereby undertakes to furnish a copy of any such instrument to the Commission upon request. 4.6 Rights Agreement, together with exhibits thereto, dated August 17, 1994 between Litton Industries, Inc. and The Bank of New York, as Rights Agent, filed as Exhibit 99.2 to Form 8-K dated August 17, 1994, and incorporated herein by reference. 10.1(a) Board of Directors Resolutions, adopted December 7, 1995, with respect to nonemployee directors' annual retainer and attendance fees filed as Exhibit 10 to the Company's April 30, 1996 Quarterly Report on Form 10-Q, and incorporated herein by reference.
- --------------- * Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-1 43 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES INDEX TO EXHIBITS -- (CONTINUED)
EXHIBIT NO. AND APPLICABLE SECTION OF ITEM 601 OF REGULATION S-K - ------------------ 10.1(b) Board of Directors Resolutions with respect to director retirement age and with respect to postretirement payments to directors, including those payments made in the event of a change in control of the Company, adopted on October 16, 1991, filed as Exhibit 10.2(b) to the Company's 1991 Annual Report on Form 10-K, and incorporated herein by reference. 10.2(a) Litton Supplemental Retirement Plan, filed as Exhibit 10.3 to the Company's 1983 Annual Report on Form 10-K, and incorporated herein by reference. 10.2(b) Board of Directors Resolution, adopted December 2, 1992, amending the Litton Supplemental Retirement Plan, filed as Exhibit 10.1 to the Company's April 30, 1993 Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.2(c) Agreement of Trust between the Company and First Interstate Bank of California, dated December 20, 1988, regarding payments of pension benefits under the Litton Supplemental Retirement Plan to certain former and present employees or their beneficiaries, filed as Exhibit 10.17 to the Company's 1989 Annual Report on Form 10-K, and incorporated herein by reference. 10.2(d) Amendments, through the date of the filing, to the Agreement of Trust dated December 20, 1988, and incorporated herein by reference. 10.2(e) Instruments dated April 16, 1990, and April 25, 1990, removing First Interstate Bank of California as Trustee under Agreement of Trust dated December 20, 1988, and appointing Wells Fargo Bank, N.A., as Successor Trustee, filed as Exhibit 10.17(c) to the Company's 1990 Annual Report on Form 10-K, and incorporated herein by reference. 10.2(f) Letter of Credit dated November 17, 1989, issued by Wells Fargo Bank, N.A. pursuant to Agreement of Trust dated December 20, 1988, filed as Exhibit 10.17(d) to the Company's 1990 Annual Report on Form 10-K, and incorporated herein by reference. 10.3(a) Specimen of the form of the agreement presently outstanding under the Litton Industries, Inc. Executive Survivor Benefit Plan, applicable to officers and certain key employees, filed as Exhibit 10.4 to the Company's 1984 Annual Report on Form 10-K, and incorporated herein by reference. 10.3(b) Board of Directors Resolutions amending the Executive Survivor Benefit Plan, adopted June 12, 1986, filed as Exhibit 10.4(a) to the Company's 1986 Annual Report on Form 10-K, and incorporated herein by reference. 10.5(a) Board of Directors Resolution with respect to incentive loans, adopted September 26, 1991, filed as Exhibit 10.8(a) to the Company's 1991 Annual Report on Form 10-K and incorporated herein by reference. 10.5(b) Board of Directors Resolution, adopted September 19, 1996, amending the Company's incentive loan program.* 10.5(c) Specimen of the form of promissory note applicable to loans presently outstanding under the Company's incentive loan program, filed as Exhibit 10.8(b) to the Company's 1991 Annual Report on Form 10-K, and incorporated herein by reference.
- --------------- * Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-2 44 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES INDEX TO EXHIBITS -- (CONTINUED)
EXHIBIT NO. AND APPLICABLE SECTION OF ITEM 601 OF REGULATION S-K - ------------------ 10.7(a) Supplemental Medical Insurance Plan for Key Executive Employees incorporating all amendments thereto through the date of this filing, filed as Exhibit 10.10 to the Company's 1990 Annual Report on Form 10-K, and incorporated herein by reference. 10.7(b) Resolution adopted by the Compensation and Selection Committee, dated January 26, 1994, approving the participation by Orion L. Hoch and Catherine Nan Hoch in the Supplemental Medical Insurance Plan, filed as Exhibit 10.2 to the Company's April 30, 1994 Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.9(a) Supplemental Retirement Agreement between the Company and Orion L. Hoch, filed as Exhibit 10.13(b) to the Company's 1983 Annual Report on Form 10-K, and incorporated herein by reference. 10.9(b) Amendments, through the date of the filing, to the Supplemental Retirement Agreement between the Company and Orion L. Hoch, and incorporated herein by reference. 10.9(c) Extract of the minutes of a meeting of the Compensation and Selection Committee of the Board of Directors, held on March 31, 1988, with respect to the lifetime participation of Fred W. O'Green and Mildred G. O'Green in the Supplemental Medical Insurance Plan, filed as Exhibit 10.13(e) to the Company's 1988 Annual Report on Form 10-K, and incorporated herein by reference. 10.10(a) Litton Industries, Inc. 1984 Long-Term Stock Incentive Plan, as amended, filed as Exhibit 10.14(a) to the Company's 1992 Annual Report on Form 10-K, and incorporated herein by reference. 10.10(b) Compensation and Selection Committee Resolutions, adopted March 12, 1992, amending the Litton Industries, Inc. 1984 Long-Term Stock Incentive Plan for the effects of the two-for-one Common stock split which was effective May 8, 1992, filed as Exhibit 10.14(b) to the Company's 1992 Annual Report on Form 10-K, and incorporated herein by reference. 10.10(c) Board of Directors Resolutions, adopted August 12, 1993, amending the Litton Industries, Inc. 1984 Long-Term Stock Incentive Plan for employment and option price in connection with the distribution of Western Atlas Inc., filed as Exhibit 10.14(c) to the Company's 1993 Annual Report on Form 10-K, and incorporated herein by reference. 10.10(d) Compensation and Selection Committee Resolution, adopted September 29, 1993, adjusting the options outstanding under the Litton Industries, Inc. 1984 Long-Term Stock Incentive Plan for the distribution of Western Atlas Inc. Common stock, filed as Exhibit 10.14(d) to the Company's 1993 Annual Report on Form 10-K, and incorporated herein by reference. 10.11(a) Litton Industries, Inc. Performance Award Plan, filed as Exhibit 10.15 to the Company's 1984 Annual Report on Form 10-K, and incorporated herein by reference. 10.11(b) Board of Directors Resolution, adopted December 2, 1992, amending the Litton Industries, Inc. Performance Award Plan, filed as Exhibit 10.2 to the Company's April 30, 1993 Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.11(c) Board of Directors Resolution, adopted August 3, 1995, amending the Litton Industries, Inc. Performance Award Plan, filed as Exhibit 10.11(c) to the Company's 1995 Annual Report on Form 10-K, and incorporated herein by reference. 10.12 Litton Industries, Inc. Restoration Plan filed as Exhibit 10.16 to the Company's 1989 Annual Report on Form 10-K, and incorporated herein by reference.
E-3 45 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES INDEX TO EXHIBITS -- (CONTINUED)
EXHIBIT NO. AND APPLICABLE SECTION OF ITEM 601 OF REGULATION S-K - ------------------ 10.13(a) Litton Industries, Inc. Director Stock Option Plan, filed as Exhibit 10.18(a) to the Company's 1989 Annual Report on Form 10-K, and incorporated herein by reference. 10.13(b) Board of Directors Resolution, adopted March 12, 1992, amending the Litton Industries, Inc. Director Stock Option Plan for the two-for-one Common stock split which was effective May 8, 1992, filed as Exhibit 10.18(b) to the Company's 1992 Annual Report on Form 10-K, and incorporated herein by reference. 10.13(c) Board of Directors Resolution, adopted September 30, 1993, adjusting the options outstanding under the Litton Industries, Inc. Director Stock Option Plan for the distribution of Western Atlas Inc. Common stock, filed as Exhibit 10.18(c) to the Company's 1993 Annual Report on Form 10-K, and incorporated herein by reference. 10.13(d) Board of Directors Resolution, adopted October 27, 1994, with respect to options issued to directors of the Company who became directors of Western Atlas Inc., filed as Exhibit 10.13(d) to the Company's 1995 Annual Report on Form 10-K, and incorporated herein by reference. 10.14 Consulting agreement between a subsidiary of the Company and Thomas B. Hayward, a director of the Company, dated December 17, 1993, filed as Exhibit 10.5 to the Company's April 30, 1994 Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.16 Copy of the Company's "Group Bonus Plan", which provides for incentive compensation rewards for certain Group Executives and other key group personnel.* 10.17 Copy of the "Incentive Compensation Plan" of Ingalls Shipbuilding, Inc., a subsidiary of the Company, to provide incentive compensation rewards to selected employees.* 10.18 Litton Industries, Inc. Deferred Compensation Plan for Directors together with Board of Directors Resolution adopted December 2, 1992, filed as Exhibit 10.3 to the Company's April 30, 1993 Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.19 Form of Change of Control Employment Agreement between the Company and certain executive officers, filed as Exhibit 10.27 to the Company's 1993 Annual Report on Form 10-K, and incorporated herein by reference. 10.20 Distribution and Indemnity Agreement between Litton Industries, Inc. and Western Atlas Inc. dated March 17, 1994, filed as Exhibit 99.1 to Form 8-K dated March 17, 1994, and incorporated herein by reference. 10.21 Tax Sharing Agreement between Litton Industries, Inc. and Western Atlas Inc. dated March 17, 1994, filed as Exhibit 99.1 to Form 8-K dated March 17, 1994, and incorporated herein by reference. 10.22 Litton Industries, Inc. Supplemental Executive Retirement Plan, effective August 1, 1995, to provide supplemental retirement benefits to certain key executive employees, filed as Exhibit 10.22 to the Company's 1995 Annual Report on Form 10-K, and incorporated herein by reference. 11 Statement of Computation of Earnings per Share included herein on pages E-6 and E-7. 21 Subsidiaries of the Registrant included herein on page E-8. 23 Independent Auditors' Consent included herein on page E-9.
- --------------- * Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-4 46 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES INDEX TO EXHIBITS -- (CONTINUED)
EXHIBIT NO. AND APPLICABLE SECTION OF ITEM 601 OF REGULATION S-K - ------------------ 27 Financial Data Schedule included herein. 99 Undertaking re: Indemnification for liabilities under Securities Act, filed as Exhibit 19 to the Company's 1990 Annual Report on Form 10-K, and incorporated herein by reference. 99.1 Stock Purchase Agreement dated as of December 13, 1995 By and Among The Black & Decker Corporation, PRC Investments, Inc., PRC Inc. and Litton Industries, Inc. filed as Exhibit 99.2 to the Company's Form 8-K dated February 22, 1996 and incorporated herein by reference.
E-5 47 EXHIBIT 11 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES EARNINGS (LOSS) PER SHARE AND FULLY DILUTED EARNINGS (LOSS) PER SHARE (A) (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992 ---------- ----------- ----------- ----------- ----------- PRIMARY EARNINGS (LOSS) PER SHARE Earnings available for common shares and common stock equivalent shares deemed to have a dilutive effect: Earnings from continuing operations..... $ 150,900 $ 135,015 $ 51,306 $ 87,341 $ 87,299 Provision for cash dividends on preferred stock (Series B)............. (821) (821) (821) (821) (821) ----------- ----------- ----------- ----------- ----------- Net earnings from continuing operations... 150,079 134,194 50,485 86,520 86,478 Discontinued operations................... -- -- (173,079) 94,962 87,138 Extraordinary loss........................ -- -- (30,732) -- -- Cumulative effect of a change in accounting principle: Continuing operations................... -- -- -- (106,727) -- Discontinued operations................. -- -- -- (10,390) -- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) available for common shares and common stock equivalent shares deemed to have a dilutive effect................................... $ 150,079 $ 134,194 $ (153,326) $ 64,365 $ 173,616 =========== =========== =========== =========== =========== Primary earnings (loss) per share before extraordinary item and cumulative effect of a change in accounting principle: Continuing operations................... $ 3.15 $ 2.84 $ 1.10 $ 2.10 $ 2.10 Discontinued operations................. -- -- (3.79) 2.31 2.12 Extraordinary loss........................ -- -- (0.67) -- -- Cumulative effect of a change in accounting principle: Continuing operations................... -- -- -- (2.60) -- Discontinued operations................. -- -- -- (0.25) -- ----------- ----------- ----------- ----------- ----------- Total primary................... $ 3.15 $ 2.84 $ (3.36) $ 1.56 $ 4.22 =========== =========== =========== =========== =========== SHARES USED IN COMPUTATION Weighted average common shares outstanding (net of treasury shares)................. 46,345,444 46,029,979 45,720,585 40,161,652 40,189,888 Common stock equivalents.................. 1,228,225 1,157,955 (B) 998,827 985,676 ---------- ----------- ----------- ----------- ----------- Total common shares and common stock equivalent shares deemed to have a dilutive effect.......................... 47,573,669 47,187,934 45,720,585 41,160,479 41,175,564 ========== ========== ========== ========== ==========
- --------------- NOTES: (A) Amounts related to fiscal year 1992 have been restated to reflect the WAI businesses as discontinued operations in connection with the Distribution discussed in Note B of Notes to Consolidated Financial Statements on pages F-8 and F-9 of this Annual Report on Form 10-K. (B) The weighted average effect of stock options was anti-dilutive for fiscal year 1994 and, therefore, not considered. E-6 48 EXHIBIT 11 (CONTINUED) LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES EARNINGS (LOSS) PER SHARE AND FULLY DILUTED EARNINGS (LOSS) PER SHARE (A) (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992 ---------- ----------- ----------- ----------- ----------- FULLY DILUTED EARNINGS (LOSS) PER SHARE Earnings available for common shares and common stock equivalent shares deemed to have a dilutive effect: Earnings from continuing operations..... $ 150,900 $ 135,015 $ 51,306 $ 87,341 $ 87,299 Provision for cash dividends on preferred stock (Series B)............. (821) (821) (821) (821) (821) ---------- ----------- ----------- ----------- ----------- Net earnings from continuing operations... 150,079 134,194 50,485 86,520 86,478 Discontinued operations................... -- -- (173,079) 94,962 87,138 Extraordinary loss........................ -- -- (30,732) -- -- Cumulative effect of a change in accounting principle: Continuing operations................... -- -- -- (106,727) -- Discontinued operations................. -- -- -- (10,390) -- ---------- ----------- ----------- ----------- ----------- Net earnings (loss) available for common shares and common stock equivalent shares deemed to have a dilutive effect................................... 150,079 134,194 (153,326) 64,365 173,616 Add: Interest expense on zero coupon convertible subordinated notes (net of tax).............................. -- -- -- (B) 13,083 ---------- ----------- ----------- ----------- ----------- Total............................ $ 150,079 $ 134,194 $ (153,326) $ 64,365 $ 186,699 ============ ============= ============= ============= ============= Fully diluted earnings (loss) per share before extraordinary item and cumulative effect of a change in accounting principle: Continuing operations................... $ 3.15 $ 2.84 $ 1.10 $ 2.10 $ 2.10 Discontinued operations................. -- -- (3.79) 2.31 1.84 Extraordinary loss........................ -- -- (0.67) -- -- Cumulative effect of a change in accounting principle: Continuing operations................... -- -- -- (2.60) -- Discontinued operations................. -- -- -- (0.25) -- ---------- ----------- ----------- ----------- ----------- Total fully diluted.............. $ 3.15 $ 2.84 $ (3.36) $ 1.56 $ 3.94 ============ ============= ============= ============= ============= SHARES USED IN COMPUTATION Total common shares and common stock equivalent shares deemed to have a dilutive effect....................... 47,573,669 47,187,934 45,720,585 41,160,479 41,175,564 Additional potentially dilutive securities (equivalent in common stock): Stock options......................... 23,858 73,964 -- -- 24,676 Zero coupon convertible subordinated notes.............................. -- -- -- (B) 6,126,000 ---------- ----------- ----------- ----------- ----------- Total............................ 47,597,527 47,261,898 45,720,585 41,160,479 47,326,240 ============ ============= ============= ============= ============= SUMMARY OF CASH DIVIDENDS DECLARED PER SHARE Preferred Series B........................ $ 2.00 $ 2.00 $ 2.00 $ 2.00 $ 2.00
- --------------- NOTES: (A) Amounts related to fiscal year 1992 have been restated to reflect the WAI businesses as discontinued operations in connection with the Distribution discussed in Note B of Notes to Consolidated Financial Statements on pages F-8 and F-9 of this Annual Report on Form 10-K. (B) The fully diluted earnings per share calculation for fiscal year 1993 did not include the assumed conversion of zero coupon convertible subordinated notes issued September 26, 1990, because the effect on shares used in the calculation and the related increase to income for the interest expense adjustment, net of tax, would be anti-dilutive. Substantially all of these notes were converted into Common stock and the remainder redeemed for cash in fiscal year 1993. E-7 49 EXHIBIT 21 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF PERCENTAGE OF NAME OF SUBSIDIARY INCORPORATION OWNERSHIP - ---------------------------------------------------------------------------- --------------- ------------- Ingalls Shipbuilding, Inc. ................................................. Delaware 100 Litton Systems, Inc. ....................................................... Delaware 100 PRC Inc. ................................................................... Delaware 100 Sperry Marine Inc. ......................................................... Delaware 100
The Registrant has additional operating subsidiaries, which considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. All above listed subsidiaries have been consolidated in the Registrant's financial statements. E-8 50 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in (i) Registration Statement No. 2-93044 on Form S-8, (ii) Registration Statement No. 33-27467 on Form S-8, (iii) Registration Statement No. 33-27468 on Form S-8, (iv) Registration Statement No. 33-44684 on Form S-3 and (v) Registration Statement No. 33-55944 on Form S-8 of our report dated September 19, 1996, appearing in this Annual Report on Form 10-K of Litton Industries, Inc. and subsidiary companies for the year ended July 31, 1996. DELOITTE & TOUCHE LLP Los Angeles, California October 11, 1996 E-9 EX-3.2.(A) 2 BY-LAWS OF THE COMPANY AS AMENDED 1 [LITTON LOGO] EXHIBIT 3.2(a) CERTIFICATION OF RESOLUTIONS OF THE BOARD OF DIRECTORS OF LITTON INDUSTRIES, INC. I, the undersigned JEANETTE M. THOMAS, Vice President and Secretary of LITTON INDUSTRIES, INC., a corporation organized and existing under the laws of the State of Delaware, DO HEREBY CERTIFY that the following is a true and correct extract of certain resolutions duly adopted by the Board of Directors of said corporation on September 19, 1996, in accordance with the laws of Delaware and the By-laws of this corporation, and that these resolutions are in full force and effect as of the date hereof: RESOLVED, that in accordance with Section 1 of Article III of the By-laws of this corporation, the number of directors is hereby fixed at eleven (11). IN WITNESS WHEREOF, I have here unto subscribed my name and affixed the seal of said corporation at Woodland Hills, California, this 1st day of October, 1996. /s/ Jeanette M. Thomas --------------------------- [SEAL] Jeanette M. Thomas Vice President and Secretary EX-10.5.(B) 3 BOARD OF DIRECTORS RESOLUTION 1 [LITTON LOGO] EXHIBIT 10.5(b) CERTIFICATION OF RESOLUTIONS OF THE BOARD OF DIRECTORS OF LITTON INDUSTRIES, INC. I, the undersigned JEANETTE M. THOMAS, Vice President and Secretary of LITTON INDUSTRIES, INC., a corporation organized and existing under the laws of the State of Delaware, DO HEREBY CERTIFY that the following is a true and correct extract of certain resolutions duly adopted by the Board of Directors of said corporation on September 19, 1996, in accordance with the laws of Delaware and the By-laws of this corporation, and that these resolutions are in full force and effect as of the date hereof: WHEREAS, loans outstanding under the Corporation's incentive loan program are scheduled to mature on December 31, 1996, and the Corporation desires to extend the program for an additional five-year period; NOW, THEREFORE, BE IT RESOLVED, that the Corporation's incentive loan program for officers and other key executives of the Corporation or its subsidiaries located in the United States be and hereby is extended upon the terms and conditions hereinafter set forth; RESOLVED, that all loans hereinafter made under the incentive loan program shall be evidenced by demand notes which provide that, if no demand is made, such notes shall be payable on the earlier of (i) termination of the borrower's employment or (ii) December 31, 2001; RESOLVED, that loans presently outstanding under the incentive loan program shall be extended in accordance with the terms and conditions set forth herein; RESOLVED, that the total amount of loans outstanding at any one time under the incentive loan program shall not exceed $6 million in the aggregate and shall not be extended to more than 50 key executives at any time; RESOLVED, that loans to any one borrower under the incentive loan program of the Corporation shall not cumulatively exceed the annual base salary of the borrower in effect on the date of the latest loan extended to the borrower, shall bear interest at the rate of 4 percent per annum payable quarterly, and shall be without security; 2 RESOLVED, that the Chief Executive Officer of this corporation shall have the authority to make loans, within the limitations and upon the terms and conditions prescribed by the Compensation and Selection Committee by these resolutions, in such amounts and to such key executives as the Chief Executive Officer may in his sole discretion determine; provided, however, that all loans proposed to be made under the incentive loan program to any officer of the Corporation of the level of Senior Vice President or higher shall require the approval of the Compensation and Selection Committee; RESOLVED, that the incentive loan program shall be administered by the Compensation and Selection Committee, which shall have the authority to make rules and regulations necessary to administer such program; and RESOLVED FURTHER, that all resolutions pertaining to the incentive loan program heretofore adopted by this Committee are hereby revoked and superseded by these resolutions. IN WITNESS WHEREOF, I have here unto subscribed my name and affixed the seal of said corporation at Woodland Hills, California, this 1st day of October, 1996. /s/ Jeanette M. Thomas --------------------------- [SEAL] Jeanette M. Thomas Vice President and Secretary 2 EX-10.16 4 COPY OF THE COMPANY'S "GRP BONUS PLAN" 1 [LITTON LOGO] EXHIBIT 10.16 GROUP BONUS PLAN I. PURPOSE The purpose of this Group Bonus Plan is to reward Group Executives and other key Group personnel for achieving Group financial performance consistent with Litton corporate goals. The participants are expected to conduct their business in an ethical manner, consistent with the Litton Standards of Conduct and to make decisions that ensure the long-term viability of the Group as well as the success of the current plan period. For this reason, the Litton Chief Executive Officer and the Litton President and Chief Operating Officer will eliminate or reduce bonus payments under this Group Bonus Plan if they believe that a participant has sacrificed long-term objectives to make short-term profits. II. PARTICIPANTS Group Executives and other key Group personnel. Group Executives are eligible to receive 50% of their bonus opportunity in accordance with the terms of this Group Bonus Plan and 50% in accordance with the terms of the Litton Industries, Inc. Performance Award Plan. III. BONUS PLAN Each Group Executive will be informed of the maximum percent of base salary (target bonus) that can be earned as a bonus. The base salary is the salary on the first day of the fiscal year that this Group Bonus Plan covers. The base salary can be adjusted for salary increases that are retroactive to the beginning of the fiscal year. The maximum percent of base salary will vary as a function of Group size, number of divisions and other factors. Each Group Executive, Group Controller and Group Vice President-Marketing will be given their individual target bonuses by the Litton President and Chief Operating Officer. The earned bonus percent of this target is a function of Group Return on Capital Utilized, as provided for in Paragraph V. IV. PARTICIPATION LEVEL Individual bonuses will be determined at the discretion of the Litton Chief Executive Officer and the Litton President and Chief Operating Officer. 2 V. FINANCIAL PERFORMANCE A minimum Group Return on Capital Utilized of 15% (ROCU) must be made before any bonuses can be earned. After which, bonuses will be earned pro rata, linearly as follows:
EARNED BONUS PERCENT MINIMUM OF ROCU TARGET BONUS ------- ---------------------------------- ALL OTHER GROUP EXECUTIVES PARTICIPANTS ---------------- ------------ 15% 25% 50% 28% 50% 100%
VI. BONUS PAYMENTS Each year earned bonus will be paid to participants in the December following the close of the fiscal year of performance. Participants must be employed by Litton on the payment date to be eligible for any bonus payment. A. Approved Leaves--A participant who leaves Litton: (1) to enter any of the Armed Services of the United States; (2) on an approved leave of absence; (3) on sick leave of absence in excess of thirty (30) days; or (4) upon termination due to retirement or disability, either during the fiscal year or after the close of the fiscal year, but prior to the bonus payment date, shall share in the Group Bonus Plan. In any such case, such employee will participate through the date of the month in which he or she is transferred or terminates employment. B. Deceased Participant--In the event of the death of a participant prior to the payment date, Litton will pay the pro rata portion of the bonus to date of death to the beneficiary as stipulated on the participant's group insurance card, and payment will be made on the regular payment date. 2 3 VII. AGREEMENT It is understood that this Group Bonus Plan does not constitute a contract between Litton and the participating personnel and may be changed, modified, amended, or terminated at any time by the Compensation and Selection Committee of the Board of Directors of Litton. It is also understood that a participant's performance during the plan period will have a bearing on the actual bonus paid regardless of the potential target bonus percentage. 3 EX-10.17 5 INCENTIVE COMPENSATION PLAN 1 [LITTON Logo] EXHIBIT 10.17 INGALLS INCENTIVE COMPENSATION PLAN I. PURPOSE The purpose of this Ingalls Incentive Compensation Plan (the "Plan") is to reward selected employees of Ingalls Shipbuilding, Inc. ("Ingalls") for achieving Ingalls financial performance consistent with the Litton corporate goals of Litton Industries, Inc. ("Litton"). The participants are expected to conduct their business in an ethical manner, consistent with the Litton Standards of Conduct and to make decisions that ensure the long-term viability of Ingalls as well as the success of the current plan period. The Litton Chief Executive Officer and the Litton President and Chief Operating Officer will eliminate or reduce bonus payments under this Plan if they believe that a participant has sacrificed long-term objectives to make short-term profits. II. PARTICIPANTS Ingalls' President and other key Ingalls personnel recommended by Ingalls' President and approved by Litton's Chief Executive Officer. III. BONUS PLAN A bonus pool expressed as a percentage of the total salary of Plan participants will be approved by Litton's Chief Executive Officer at the beginning of each fiscal year. The bonus may vary among participants as a function of the individual's performance of objectives established by Ingalls' President. IV. FINANCIAL PERFORMANCE Performance objectives shall be established using business operating profit as the major measurement while recognizing that other measurements such as sales ROCU and ROGA as related to Plan objectives must also be considered. V. INDIVIDUAL BONUS AWARDS The bonus for Ingalls' President will be recommended by the Chief Executive Officer and approved by the Compensation and Selection Committee of the Board of Directors of Litton. Individual bonuses for the other Plan participants will be recommended by Ingalls' President and approved by Litton's Chief Executive Officer. 2 VI. BONUS PAYMENTS Each year earned bonus will be paid to Plan participants in the December following the close of the fiscal year of performance. Participants must be employed by Ingalls or Litton on the payment date to be eligible for any bonus payment. A. Approved Leaves -- A participant in this Plan who leaves Ingalls to: (1) enter any of the Armed Services of the United States; (2) who is transferred to another subsidiary or division of Litton; (3) who is on an approved leave of absence; (4) who is on sick leave of absence in excess of thirty (30) days; or (5) who has terminated due to retirement or disability either during the fiscal year or after the close of the fiscal year, but prior to the payment date, shall share in the Bonus Plan. In such cases, such employee will participate through the date of the month in which he or she is transferred or terminates employment. B. Deceased -- In the event of the death of a participant prior to the payment date, Ingalls will pay the pro rata portion of the bonus to date of death to the beneficiary as stipulated on the participant's group insurance card, and such payment will be made on the regular payment date. VII. AGREEMENT It is understood that this Plan does not constitute a contract between Ingalls or Litton and the participating personnel and may be changed, modified, amended, or terminated at any time by the Compensation and Selection Committee of the Board of Directors of Litton. 2 EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet at July 31, 1996 and the Consolidated Statement of Operations for the twelve months ended July 31, 1996 and is qualified in its entirety by reference to such financial statements. 12-MOS JUL-31-1996 JUL-31-1996 77,105 15,750 723,551 38,335 571,056 1,746,773 1,603,160 922,847 3,431,428 1,677,998 514,542 0 2,053 46,565 868,641 3,431,428 3,611,538 3,611,538 2,805,640 2,805,640 113,833 0 13,728 253,613 102,713 150,900 0 0 0 150,900 3.15 3.15
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