ITEM 1. BUSINESS
Litton Industries, Inc. (hereafter together with its consolidated subsidiaries referred to as the "Company" or "Litton" unless the context otherwise indicates) designs, builds, and overhauls surface ships for government and commercial customers worldwide and is a provider of defense and commercial electronics technology, components, and materials for customers worldwide. In addition, the Company is a prime contractor to the U.S. government for information technology and provides specialized IT services to commercial customers and government customers in local/foreign jurisdictions. The Company was founded in California in 1953 and has evolved into a major international organization with approximately 40,300 employees at more than 26 divisions and nine countries. During the first month of fiscal year 2000, the Company completed the acquisition of Avondale Industries, Inc. ("Avondale"), which is engaged in the design, construction, conversion, repair and modernization of various types of ocean-going vessels for military and commercial customers.
The Company's businesses are reported in four business segments: Advanced Electronics, Information Systems, Ship Systems, and Electronic Components and Materials. Information about the Company's business segments appears on pages and of this Annual Report on Form 10-K. This information includes revenue, operating profit and total assets for each of the three years ended July 31, 2000. The segment information for fiscal years 1999 and 1998 has been restated to reflect the transfer of the Data System division from the Information Systems segment to the Advanced Electronics segment.
Advanced Electronics
The Advanced Electronics segment is a major supplier and integrator of electronic systems and related services to the U.S. and international military and commercial markets. The principal businesses comprising the Advanced Electronics segment are navigation, guidance and control systems, marine electronics and electronic warfare systems. The primary products include inertial navigation systems, IFF (identification friend or foe) systems, integrated marine bridge systems, steering and machinery control systems, ruggedized computers and displays, laser range finders and target designators, threat warning and electro-optical systems, microwave tubes and air traffic control systems. The Company also provides and integrates shipboard engineering, information and communications control systems and avionics systems.
Sales backlog for the Advanced Electronics segment was $1.4 billion and $1.4 billion at July 31, 2000 and 1999, respectively. Of the backlog at July 31, 2000, $133 million is expected to be realized as sales in years after fiscal year 2001 and $921 million is related to defense contract backlog.
Approximately 52% of the revenues for the Advanced Electronics segment in fiscal year 2000 were derived from sales to the U.S. Government.
Information Systems
The Information Systems segment designs, develops, integrates and supports computer-based information systems and provides information technology and services primarily for government customers. The core services and capabilities of the two primary subsidiaries, PRC Inc. ("PRC") and TASC, Inc. ("TASC"), comprising this segment include systems integration, software engineering, seat management, data warehousing, signals processing, information architectures, imagery and geospatial systems and enterprise resource planning. Markets served by PRC and TASC include criminal justice, weather, Department of Defense, aerospace, healthcare, public safety, transportation, aviation, telecommunications and the intelligence community.
Firm backlog for the Information Systems segment was $777.5 million and $883.9 million at July 31, 2000 and 1999, respectively. Of the backlog at July 31, 2000, $279 million is expected to be realized as sales in years after fiscal year 2001 and $376 million is related to defense contract backlog. In addition, PRC and
TASC had unfunded backlog with potential future contract values totaling approximately $2.1 billion at July 31, 2000 compared with $2.2 billion at July 31, 1999.
Approximately 93% of the revenues for the Information Systems segment in fiscal year 2000 were derived from sales to the U.S. Government.
Ship Systems
The Ship Systems segment builds non-nuclear ships for the U.S. Navy and designs, builds and overhauls surface ships for government and commercial customers worldwide. On August 2, 1999, the Company completed the acquisition of Avondale, which is engaged in the design, construction, conversion, repair and modernization of various types of ocean-going vessels for military and commercial markets. Avondale and Ingalls Shipbuilding, Inc. ("Ingalls") serve maritime customers from design concept formulation to postdelivery support functions. Current production under contracts with the U.S. Navy at Ingalls and Avondale include a seventh LHD class assault ship, six Aegis destroyers, two LPD 17 class amphibious assault ships and four Sealift support ships. The Company is building three Alaskan crude double-hulled oil tankers and two passenger cruise ships under contracts with commercial customers.
Sales backlog for the Ship Systems segment was $5.8 billion and $4.1 billion at July 31, 2000 and 1999, respectively. Of the backlog at July 31, 2000, approximately $3.5 billion is expected to be realized as sales in years after fiscal 2001 and $4.7 billion is related to defense contract backlog.
Approximately 84% of the revenues for the Ship Systems segment in fiscal year 2000 were derived from sales to the U.S. Government.
Electronic Components and Materials
The Electronic Components and Materials segment designs, manufactures and produces a broad range of high-tech materials and products integral to the telecommunications and computer markets including complex many-layered backplanes and assemblies, specialty brushless motors, slip rings, high density electronic and fiber optic connectors, cylindrical connectors, microelectronic attachment materials including solder spheres, precision wires and pastes, laser crystals, gallium arsenide substrates and microwave components for primarily commercial markets worldwide.
Sales backlog for the Electronic Components and Materials segment was $329.6 million and $222.7 million at July 31, 2000 and 1999, respectively. Substantially all of the backlog at July 31, 2000 is expected to be realized in sales in the next fiscal year and $45 million is related to defense contract backlog.
Approximately 11% of the revenues for the Electronic Components and Materials segment in fiscal year 2000 were derived from sales to the U.S. Government.
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 business units 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. The Company is continuing to enhance its competitive position by developing new applications for its technologies as well as pursuing commercial opportunities and developing strategic alliances.
U.S. Government Contracts
Approximately 68% of the Company's total sales and service revenues for fiscal year 2000 were from U.S. Government contracts and subcontracts. Approximately 60% of these revenues related to fixed-price type contracts. 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. 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 to the consolidated financial statements.
Research and Development
Worldwide expenditures on research and development activities amounted to $331.5 million, $315.6 million and $233.8 million, of which approximately 28%, 26% and 33% were Company-sponsored in the years ended July 31, 2000, 1999 and 1998, respectively. In fiscal 2000, the Advanced Electronics segment accounted for 63% of the total research and development expenditures.
Environmental Protection
During the fiscal year ended July 31, 2000, the amounts incurred to comply 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 7 and 8 of this Annual Report on Form 10-K.
Number of Employees
At July 31, 2000, the Company had approximately 40,300 full-time employees. Employment by business segment was as follows:
Financial Information by Geographic Area
See Operations by Geographic Area on pages and of this Annual Report on Form 10-K.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal plants and offices have an aggregate floor area of approximately 10,638,000 square feet, of which 9,558,000 square feet (89.8%) are located in the United States, and 1,080,000 square feet (10.2%) are located outside of the United States, primarily in Western Europe and Canada. The Company's executive offices, in owned premises, are at 21240 Burbank Boulevard, Woodland Hills, California.
These properties are used by the various business segments as follows:
Approximately 8,175,000 square feet (76.8%) 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 36 locations in 18 states as follows:
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.
ITEM 3. LEGAL PROCEEDINGS
(a) Litton brought suit against Honeywell, Inc. ("Honeywell") for patent infringement relating to the manufacture of ring laser gyro navigation systems used in commercial aircraft. In August 1993, the jury rendered a verdict in favor of Litton which the District Court rejected in January 1995. In July 1996, the Federal Circuit Court of Appeals reversed the District Court's decision and reinstated parts of the jury's verdict related to liability in favor of Litton and ordered a new trial on the amount of damages. In March 1997, the U.S. Supreme Court vacated the Court of Appeals' ruling and remanded the case to the Court of Appeals for further consideration. On April 7, 1998, the Court of Appeals reinstated its finding that the patent was valid and remanded the case back to the District Court for determination on both liability and damages. On September 23, 1999, the U.S. District Court granted Honeywell's motions rejecting the patent and state law claims. On February 28, 2000, the Company filed an appeal of the District Court's ruling in the Federal
Circuit Court of Appeals. Briefs have been filed by both sides. A hearing before the Appellate Court has been rescheduled for November 1, 2000.
Litton also brought suit against Honeywell for illegal monopolizing of the market for inertial reference systems for large commercial air transport, commuter and business aircraft. In February 1996, a jury rendered a verdict in favor of Litton. The District Court upheld the jury's verdict on liability, but declined to enter the jury's damage award on the basis that Litton's damage study did not disaggregate damages among legal and illegal conduct. A new trial limited to the amount of damages resulted in a jury verdict on December 9, 1998, of $250 million in favor of Litton. On January 27, 1999, U.S. District Court Judge Mariana R. Pfaelzer entered a final judgment against Honeywell of $250 million which, by law, is trebled to $750 million, plus post-judgment interest from the date of entry of judgment, costs and attorney fees. On May 20, 1999, the court heard Honeywell's post trial motions. On September 23, 1999, the court denied Honeywell's motions as they related to Litton Systems, Inc. but granted a motion regarding Litton Systems Canada, holding it did not have standing or jurisdiction to bring its claims in the United States. As a result of that ruling, the judgment against Honeywell was reduced to $660 million plus interest, together with attorney fees and costs of $35.6 million. Both Honeywell and Litton have appealed the judge's decision to the Ninth Circuit Court of Appeals. Briefs have been filed and the parties await a hearing before the Appellate Court.
(b) In fiscal 1999 the Company was advised that the United States Attorney's Office in Los Angeles had decided to pursue action against the Company in connection with a lengthy investigation first initiated in 1991, unless the matter could be satisfactorily resolved. After extensive discussions with the U.S. Attorney's Office of the reasons why the Company believed it complied with applicable laws and administrative regulations with respect to payments to foreign consultants and potential terms of settlement, this matter was settled by the payment of $18.5 million during fiscal 1999. Although Litton believed it had meritorious defenses, this settlement, relating to past conduct, was determined to be in the Company's best interest.
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 financial statements.
ITEM 4.
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, 2000.
PART II
ITEM 5.
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 and dividend information which is set forth on page 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 29, 2000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SUMMARY OF FINANCIAL INFORMATION (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Notes:
(A) Results for fiscal year 1999 included the effects of non-recurring and special charges and a voluntary settlement totaling $116.8 million pre-tax ($77.4 million after-tax) or $1.67 per share. See Item 7, Financial Review and Analysis.
(B) During the five year period ended July 31, 2000, the Company declared no cash dividends on its Common stock.
ITEM 7.
ITEM 7. FINANCIAL REVIEW AND ANALYSIS
The Company designs, builds, and overhauls surface ships for government and commercial customers worldwide and is a provider of defense and commercial electronics technology, components, and materials for customers worldwide. In addition, the Company is a prime contractor to the U.S. government for information technology and provides specialized IT services to commercial and government customers in local/foreign jurisdictions. During the first month of fiscal year 2000, the Company completed the acquisition of Avondale Industries, Inc. ("Avondale"), which is engaged in the design, construction, conversion, repair and modernization of various types of ocean-going vessels for military and commercial markets. Avondale is reported within the Company's Ship Systems segment.
In the fourth quarter of fiscal year 2000, the Company transferred its Data Systems division ("DSD") from the Information Systems segment to the Advanced Electronics segment. Accordingly, the segment information for fiscal years 1999 and 1998 has been restated to reflect this change.
Segment information can be found on pages through.
Fiscal Year 2000 Compared To 1999
The Company reported revenues of $5.59 billion for fiscal year 2000 compared with $4.83 billion for fiscal year 1999. Segment operating profit was $562.1 million for fiscal year 2000, inclusive of a $19.2 million gain on sale of businesses and $4.7 million in special charges (see Note K), compared with $339.3 million for fiscal year 1999, inclusive of a gain on sale of business of $12.8 million and non-recurring and special charges totaling $116.8 million. Current year's earnings and diluted earnings per share before the cumulative effect of a change in accounting principle were $221.2 million and $4.80, respectively, compared with $120.6 million and $2.58, respectively, for fiscal year 1999. The non-recurring and special charges reduced fiscal 1999 diluted earnings per share by $1.67. The cumulative effect of a change in accounting principle (net of tax) of $2.8 million or $.06 per share resulted from the adoption of Statement of Position 97-3, which required a change in the accounting for assessments by the workers' compensation second-injury fund administered by the Department of Labor.
Advanced Electronics
The Advanced Electronics segment reported revenues and operating profit of $1.59 billion and $73.3 million ($72.2 million before special charges) for fiscal year 2000 compared with $1.72 billion and $90.9 million ($118.8 million before non-recurring and special charges), respectively, for fiscal year 1999. The decrease in revenues reflects a decline in sales of legacy airborne electronics products and systems and reduced revenue at DSD, partially offset by contributions from Denro Inc. ("Denro"), which was acquired in the third quarter of fiscal year 1999. Operating profit and margins for the current year were impacted by cost growth provisions on two integrated systems development programs for the modernization of ships and helicopters, the CG 47 Ships Automated Electronics and SH-2G(A) Helicopter Integrated Avionics programs, totaling $52.5 million. The higher costs resulted from the initial design of complex developmental software, increased customer requirements, testing and installation efforts and later than expected customer furnished data and equipment. These costs were partially offset by improved performance and reduced risks elsewhere in the group.
Backlog for the Advanced Electronics segment amounted to $1.39 billion at July 31, 2000, compared with $1.40 billion at July 31, 1999.
Information Systems
The Information Systems segment reported revenues of $1.36 billion and operating profit of $97.1 million ($83.8 million before gain on sale of businesses and special charges) for fiscal year 2000 compared with revenues of $1.45 billion and operating loss of $18.2 million (profit of $34.3 million before special charges and gain on sale of business) for fiscal year 1999. The decrease in revenues reflected the sale of three non-core businesses during fiscal year 2000 as well as the completion of two large systems integration programs in the
fourth quarter of fiscal year 1999 and lower activity in the civil systems and services sector at the PRC Inc. subsidiary ("PRC") in 2000. Operating profit for fiscal year 1999 included an accrual of $23.7 million for estimated losses to complete contracts related to a business being exited (see below for further discussion). In fiscal year 2000, this business was sold, resulting in the reversal of $12.9 million of such estimated losses no longer necessary.
Firm backlog for the Information Systems segment at July 31, 2000 was $777.5 million compared with $883.9 million at July 31, 1999. In addition, this segment had unfunded backlog with potential contract values totaling $2.1 billion at July 31, 2000 compared with $2.2 billion at July 31, 1999.
Ship Systems
The Ships Systems segment, which included the effects of the Avondale acquisition in August 1999, reported revenues and operating profit of $1.98 billion and $279.1 million, respectively, for fiscal year 2000 compared with $1.09 billion and $160.5 million, respectively, for fiscal year 1999.
During fiscal year 2000, the Company strengthened its position as a world-class shipbuilder with the acquisition of Avondale. Major contracts currently under construction at Avondale include the LPD 17 Class amphibious assault ships and Sealift support ships for the U.S. Navy and Alaskan crude double-hulled tankers for a commercial customer. These three programs accounted for approximately 88% of Avondale's revenues for fiscal year 2000. Under the LPD program, Avondale serves as the prime contractor and is constructing the first two ships while a third is being built by a team member under a cost-reimbursable contract. During fiscal year 2000, the U.S. Navy exercised an option for a fourth LPD to be built by Avondale under a cost-reimbursable contract. Under the Sealift program, Avondale is under contract to build seven transport vessels for the U.S. Navy of which three have been delivered. Avondale is also building three Alaskan crude double-hulled tankers for a commercial customer with options for two more tankers. In the fourth quarter of fiscal 2000, the Company recorded charges of $40 million due to cost growth on the double-hulled tanker lead ship program and reduced margins on the Sealift program. The Company revised its cost estimates to complete these ships following an extensive assessment of the physical progress and the impact of modifications and requirements remaining to complete these ships.
The Company's Ingalls Shipbuilding, Inc. subsidiary ("Ingalls") reported increased revenues reflecting a higher level of construction activities on long-term contracts, including construction under a contract to build two passenger cruise ships for a commercial customer, along with six Aegis destroyers and a seventh LHD class assault ship for the U.S. Navy. In July 2000, Ingalls received a contract from the U.S. Navy to develop the contract design and the detailed engineering design for an eighth LHD class amphibious assault ship, which is expected to eventually lead to a ship construction contract. To date, Congress has appropriated approximately $880 million in design and material procurement funding for LHD 8. These developments resulted in a favorable adjustment to the cost estimates for existing long-term contracts which, along with improved earnings rates on maturing programs, resulted in higher fourth quarter operating margins and more than offset the charges recorded at Avondale.
Backlog for the Ship Systems segment increased to $5.8 billion at July 31, 2000 from the $4.1 billion at July 31, 1999. The primary reason for the increase was due to the acquisition of Avondale and, as previously discussed, the exercise of options by the U.S. Navy to build two additional LPD amphibious assault ships, as well as two additional Aegis destroyers.
Electronic Components and Materials
The Electronic Components and Materials segment reported revenues and operating profit of $701.4 million and $112.5 million for the current fiscal year compared with $619.1 million and $109.2 million for the prior fiscal year. Continued demand from the wireless telecommunications and microelectronic device markets, particularly for backplanes, rack assembly and brushless motors, contributed to the improved results for this segment. To address demand from telecommunications customers, the Company is continuing capital investments focusing on new product development, capacity expansion and creation of dedicated capacity for specific customers. During fiscal year 2000, the Company acquired TEC Electrical Components Group, Ltd.
("TEC"), a United Kingdom based manufacturer and supplier of electrical connectors to the military, aerospace and commercial industries. Acquisitions in fiscal year 1999 included Tarutin Company, Ltd. ("Tarutin"), a Japanese manufacturer of paste solder and soldering products for the consumer electronics and automobile industries, and Retconn Incorporated ("Retconn"), which designs and manufactures coaxial connectors, contacts, and cable harnesses for the wireless communications and computer markets.
Pension Income
Overall operating results for fiscal year 2000 included $85.8 million in pre-tax periodic non-cash pension income under the Company's defined benefits plans compared with $62.0 million for fiscal year 1999. Inclusive of the costs of the Company's other pension and retirement savings plans, the net impact to pre-tax operating profit was $21.1 million income for fiscal year 2000 and $6.8 million for fiscal year 1999.
Fiscal Year 2001 Outlook
The Company's current operating plans call for moderate sales growth in fiscal year 2001 while operating profit is expected to be substantially comparable to fiscal year 2000. Operating profit will be impacted by changes in the product mix in the Ship Systems segment resulting from a larger amount of lower margin lead ship design and construction on the tankers and cruise ships and lower amount of profits from a reduced number of mature programs completing in 2001. Pre-tax pension income is expected to increase to between $100 million and $105 million in fiscal 2001. The Company expects modest increases in defense procurement spending as well as growth in government spending on information technology services and increased demand for shipbuilding. Demand for telecommunications electronic components and materials continues to be strong. The Company continues to review all strategic options available, such as consolidations and dispositions, including options for the businesses with the Advanced Electronics segment.
Fiscal Year 1999 Compared To 1998
The Company reported revenues and segment operating profit of $4.83 billion and $339.3 million for fiscal year 1999 compared with $4.40 billion and $410.0 million, respectively, for fiscal year 1998. Net earnings and diluted earnings per share were $120.6 million and $2.58, respectively, compared with $181.4 million and $3.82, respectively, for the prior fiscal year. Results for fiscal year 1999 included the effects of non-recurring and special charges totaling $116.8 million pre-tax ($77.4 million after-tax) or $1.67 per share.
Advanced Electronics
The Advanced Electronics segment reported revenues and operating profit of $1.72 billion and $90.9 million ($118.8 million before non-recurring and special charges) for fiscal year 1999 compared with $1.82 billion and $134.7 million, respectively, for fiscal year 1998. The decline in revenues reflected the leveling off in the demand for this segment's inertial navigation systems and products. During the third quarter of fiscal year 1999, the Company completed the acquisition of Denro, a manufacturer of voice and data electronic switching equipment and data recorders used in air traffic control with annual revenues of approximately $35 million.
Backlog for the Advanced Electronics segment at July 31, 1999 was $1.40 billion compared with $1.55 billion at July 31, 1998.
Information Systems
The Information Systems segment reported revenues and operating loss of $1.45 billion and $18.2 million (profit of $34.3 million before special charges and gain on sale of business) for fiscal year 1999 compared with revenues of $1.0 billion and operating profit of $46.4 million for fiscal year 1998. The acquisition of TASC, Inc. ("TASC") in April 1998 and higher volume on the systems integration programs and technology outsourcing contracts with the U.S. Government at PRC resulted in higher revenues for fiscal year 1999. Operating profit and margins at PRC and TASC increased primarily due to improved performance on selected systems integration and systems engineering programs and the significant growth in revenues in these two businesses.
Firm backlog at July 31, 1999 for this segment increased to $883.9 million from $786.5 million at July 31, 1998. In addition, TASC and PRC had unfunded backlog with potential contract values of up to $2.2 billion at July 31, 1999 compared with $1.8 billion at July 31, 1998.
Ship Systems
The Ship Systems segment reported revenues and operating profit of $1.09 billion and $160.5 million for fiscal year 1999 compared with $1.03 billion and $134.4 million for fiscal year 1998. The increase in revenues reflected a higher level of construction activities on long-term contracts, including three Aegis destroyers and a LHD class amphibious assault ship, partially offset by the completion and delivery of an Aegis destroyer in the second quarter of the current fiscal year and an Aegis destroyer and a LHD class amphibious assault ship during the second half of fiscal year 1998. Operating margins benefited from increased earnings rates on programs maturing in the production process. Backlog for this segment increased to $4.09 billion at July 31, 1999 compared with $3.47 billion at July 31, 1998. Contributing to the increase in backlog for fiscal year 1999 was a contract signed with American Classic Voyages Co. to build two passenger cruise ships, with an option for a third, and the exercise of an option by the U.S. Navy to build two additional destroyers.
Electronic Components and Materials
The Electronic Components and Materials segment reported revenues and operating profit of $619.1 million and $109.2 million for fiscal year 1999 compared with $595.8 million and $98.6 million for the prior year. Operating margins of 17.6% in fiscal year 1999 remained strong for the segment compared to 16.6% in fiscal year 1998. The margin increase was primarily due to cost reductions and increased capacity utilization at various electronic component manufacturing sites. During the third quarter of fiscal year 1999, the Company completed the acquisitions of Tarutin and Retconn.
Non-Recurring and Special Charges
Within the Advanced Electronics segment, operating profit for fiscal year 1999 was impacted by a fourth quarter payment of $18.5 million for a voluntary settlement with the United States Attorney's office to settle allegations related to the use of foreign sales consultants. Fiscal year 1999 margins were also impacted by the Company recording special charges in July 1999 totaling $9.4 million in connection with a plan to consolidate manufacturing facilities at its Data Systems ("DSD") and Applied Technology ("ATD", now part of Litton Advanced Systems, Inc.) divisions to improve operating efficiencies and eliminate excess capacity. In connection with the facilities consolidation at DSD, the Company recorded special charges of $5.3 million in 1999, which included $3.9 million for severance and termination benefits for 270 employees (primarily engineering and administrative personnel) and $1.4 million for vacating facilities and other costs. During fiscal year 2000, the Company expended approximately $3.4 million in cash, primarily in connection with the termination of 270 employees. At ATD, the Company recorded $4.1 million in special charges in 1999, including $2.3 million for severance and related benefits for the termination of approximately 170 employees (primarily manufacturing) and $1.8 million for the write-off of software with no future use and to vacate a facility. In fiscal year 2000, 141 employees were terminated, resulting in cash termination benefits of approximately $1.0 million. At July 31, 2000, the facilities consolidation process at DSD as announced in July 1999 has been completed and the effort at ATD is expected to be finished in the first quarter of fiscal year 2001.
Within the Information Systems segment, operating profit for fiscal year 1999 was impacted by the Company's decision to exit the mainframe outsourcing and professional services business at its Litton Enterprise Solutions, Inc. ("LES") subsidiary which resulted in the Company recording special charges in the fourth quarter of 1999 totaling $65.2 million and $23.7 million in estimated operating losses to complete existing contracts. LES, with fiscal year 1999 sales of $60 million, experienced increased competition from larger and more established competitors, which led to the plan to exit these businesses. The special charges included $41.3 million in software and hardware lease termination costs, $4.0 million for employee severance and termination benefits for approximately 360 employees, $15.0 million for the write off of the residual carrying value of goodwill related to the businesses being exited, $1.9 million for the write-off of software and
building improvements and $3.0 million for other exit costs. In the second quarter of fiscal 2000, the Company sold LES for proceeds of $17.3 million. This sale was not part of the Company's July 1999 decision to exit the mainframe outsourcing and professional services business. This transaction resulted in a pre-tax gain of $7.6 million and a special charge of $5.8 million, primarily for obligations for noncancelable software and hardware leases no longer usable by operations, partly offset by the reversal of termination benefits relating to employees who have continued employment with the buyer. As a result of the sale, fiscal 2000 Information Systems operating profits benefited by $12.9 million due to a change in the estimated losses to complete existing contracts. Cash expenditures totaled $9.3 million during fiscal year 2000 resulting from termination benefits for 103 employees, lease payments and costs incurred to migrate customers to alternate vendors and systems.
Also during fiscal year 2000, the Company completed the sale of its weather information and agricultural imaging businesses for proceeds of $127.6 million and a pre-tax gain of $11.6 million. Operating profit for fiscal year 1999 included a $12.8 million gain on sale of the Company's archive software products business which gain was offset by investment and development costs incurred for new products and programs.
Liquidity and Capital Resources
The primary sources of cash flow in fiscal year 2000 included cash generated from operations, proceeds from sale of businesses (see Note B) and borrowings. Cash flow from operations, which encompasses working capital requirements, were substantially comparable to the prior year's level, while proceeds from sale of businesses, totaling $147 million, were significantly higher. Cash from these activities provided the funds to finance significantly higher capital expenditures primarily for infrastructure improvements within the Ship Systems segment and to reduce short-term debt by approximately $68 million from fiscal year-end 1999. The Company also repurchased 420,539 shares of Common stock during fiscal year 2000, leaving 1.0 million shares available for repurchase under the Company's buyback program at July 31, 2000. Debt to total capital ratio was 48% at the end of fiscal year 2000 compared with 44% at fiscal year-end 1999. In connection with financing the previously discussed acquisition of Avondale for approximately $590 million, the Company issued $400 million of 8.0% senior notes due 2009 while short-term borrowings provided the funds for the remainder of the purchase price. Management believes that cash flow from operations will be sufficient to meet future anticipated operating needs and to fund the capital spending programs. At July 31, 2000, the Company had unused credit commitments of $400 million under a revolving credit agreement with various banks available for its general use and a short-term credit agreement totaling $400 million, which serves as a back-up facility for its commercial paper program.
Net interest expense was higher in the current year primarily as a result of the 8.0% senior notes due 2009 and commercial paper issued in connection with the August 1999 acquisition of Avondale.
Environmental Matters
As previously reported, the Company 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 has 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 potential liability for additional expenditures associated with such owned or leased sites and other sites to which it may have contributed wastes over the amounts currently accrued would not result in a material adverse effect on its consolidated financial statements.
Market Risk Disclosure
The Company has exposures to interest rate risk primarily from its short-term and long-term borrowings and to exchange rate risk with respect to its foreign operations and from foreign currency transactions. In general, the Company's long-term borrowings are fixed rate debt and the short-term borrowings are variable rate debt. See Note C for components of the Company's short-term and long-term obligations. The carrying values of the long-term fixed rate borrowings were $1.23 billion and $782.4 million at July 31, 2000 and 1999,
respectively, compared with estimated fair values of $1.19 billion and $742.6 million, respectively. If the interest rates were 10% lower, the projected fair value at July 31, 2000 would have been $1.25 billion and $804.6 million at July 31, 1999. Based on short-term borrowings outstanding at July 31, 2000 and the weighted-average interest rates related to such borrowings as of July 31, 2000, a hypothetical 10% increase to the interest rates would not have a significant impact on the Company's consolidated financial statements. The Company from time to time enters into foreign currency exchange contracts to hedge certain foreign currency transactions and commitments and to reduce its exposure resulting from investments in certain foreign operations. Such contracts had notional amounts of $49.0 million and $29.3 million at July 31, 2000 and 1999, respectively. A hypothetical 10% change in the relevant currency rates at July 31, 2000 would not have a material impact on the Company's consolidated financial statements.
New Accounting Standards
Effective August 1, 1999, the Company adopted Statement of Position 97-3 ("SOP 97-3"), "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", which required a change in the accounting for assessments by the workers' compensation second-injury fund administered by the Department of Labor. The resulting cumulative effect of a change in accounting principle was a charge of $2.8 million, net of tax or $.06 per share.
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was effective for the Company starting its fiscal year 2001 and requires that all derivatives, including foreign currency exchange contracts, be recognized as assets or liabilities in the consolidated balance sheet and measured at fair value. The Company enters into forward contracts primarily to hedge certain sales and purchase commitments denominated in foreign currencies to limit the effect of exchange rate fluctuations on its results of operations and cash flows. These forward contracts have been designated as fair value hedges and are considered to be highly effective as the terms of the forward contracts are generally the same as the sales and purchase commitments. Any gains or losses resulting from changes in fair value would be recognized in net income with an offsetting adjustment to net income for changes in the fair value of the hedged item. The forward contracts generally have maturity dates of up to two years. The adoption of SFAS 133 did not result in a material effect to the post fiscal year 2000 financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", with an effective date no later than the fourth quarter of the Company's fiscal year 2001. The Company believes that its revenue recognition practices are already consistent with the requirements of SAB 101.
Safe Harbor Cautionary Statement
Any statements in this Form 10-K regarding Litton's outlook for its businesses and their respective markets, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends and other matters, are forward-looking statements. These forward-looking statements are identified by terms such as "intends," "estimates," "expects," "projects," "anticipates," "goal," "plan," "should," "believes," "targets," "scheduled," and similar expressions. Litton claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect management's current assumptions and estimates of future performance and economic conditions, and are subject to risks and uncertainties that could cause the actual results to differ materially. No assurance can be given that the results in any forward-looking statement will be achieved and there are many factors that may affect actual results.
Litton does a significant portion of its business with the U.S. government. It also conducts business in international markets which are subject to U.S. export policies or which may be affected by U.S. foreign policies. Changes of policy or enforcement practices, as well as the economic impact of U.S. policy and the availability of funding for such policies, may alter or materially affect the forward-looking statements regarding Litton's future results. Other specific factors that might cause such a difference in results include,
but are not limited to: successful execution of internal performance plans; performance issues with key suppliers and subcontractors; the status or outcome of legal proceedings and/or labor negotiations; changing priorities, reductions, and/or restraints in U.S. government budgets, particularly the amount of government funding for defense procurement; the effects of consolidation in the U.S. defense industry; actual orders issued by the U.S. government against indefinite delivery/indefinite quantity contracts; the ability to successfully convert defense products and technology to commercially viable products; adverse changes in U.S. government statutes, policies, contracts and profit recognition; termination of government contracts due to unilateral government action; customer changes in short-range and long-range plans; the availability of U.S., state and local government funding for information services; and the timing and occurrence or non-occurrence of circumstances beyond Litton's control.
Litton also conducts business with commercial customers within and outside the United States. Factors which may alter or materially affect the forward-looking statements regarding Litton's future results include the market demand for commercial ships built in the United States and Litton's ability to address successfully that market demand; the demand for electronic components and materials fueled by the growth of the telecommunications industry and the sustained growth of that industry; the ability of Litton to innovate and maintain a technological advantage in the rapidly changing telecommunications industry; and the ability to fund capital improvements and research and development to address such changes.
Litton's actual results may differ materially from the forward-looking statements contained in this Form 10-K if it is unable to realize synergies from its recent acquisitions. Its actual results could materially differ based upon its selection and successful execution of strategic options for the Company.
Litton will not update its forward-looking statements during any fiscal period and it will not report on its progress or comment on its earnings target to analysts or investors until it has reported its actual results for such fiscal period. Litton does not undertake any obligation to publicly release any revisions to forward-looking statements to reflect events, circumstances, changes in expectations or the occurrence of unanticipated events after the date of this Form 10-K.
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 Stockholders to be held on December 8, 2000, 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 Stockholders 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 6, 2000 and their business experience during the prior five years:
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 Stockholders to be held on December 8, 2000, 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 Stockholders to be held on December 8, 2000, 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 Stockholders to be held on December 8, 2000, which is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (CONTINUED)
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, 2000
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:
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 accounting principles generally accepted in the United States of America.
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.
Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of the Company and issue a report thereon. They have informed management and the Audit and Compliance Committee of the Board of Directors that their audits were conducted in accordance with auditing standards generally accepted in the United States of America that require a review and evaluation of internal controls to determine the nature, timing, and extent of audit testing. The Independent Auditors' Report is on page of this report.
The Audit and Compliance Committee of the Board of Directors, which consists solely of independent 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/ MICHAEL R. BROWN - -------------------------------------- Michael R. Brown Chairman and Chief Executive Officer
/s/ D. MICHAEL STEUERT - -------------------------------------- D. Michael Steuert Senior Vice President and Chief Financial Officer
/s/ CAROL A. WIESNER - -------------------------------------- Carol A. Wiesner Vice President and Controller
October 10, 2000
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Litton Industries, Inc. Woodland Hills, California
We have audited the accompanying consolidated balance sheets of Litton Industries, Inc. and subsidiary companies (the "Company") as of July 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' investment, and cash flows for each of the three years in the period ended July 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note A of the Notes to the Consolidated Financial Statements, effective August 1, 1999, the Company changed its method of accounting for certain insurance-related assessments.
DELOITTE & TOUCHE LLP
Los Angeles, California October 10, 2000
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accounts of Litton Industries, Inc. and its wholly-owned subsidiaries (the "Company" or "Litton") are included in the accompanying consolidated financial statements. Intercompany accounts and transactions have been eliminated. Certain reclassifications of prior period information were made to conform to the current year presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 AND CASH EQUIVALENTS The Company considers securities purchased within three months of their date of maturity to be cash equivalents.
EARNINGS PER SHARE Basic EPS is calculated based on the weighted-average number of shares outstanding and diluted EPS includes the effects of dilutive potential common shares.
The following table sets forth the computation of basic and diluted earnings per share:
INVENTORIES, LONG-TERM CONTRACTS AND REVENUE RECOGNITION Inventory costs under long-term contracts generally reflect actual or average costs and include general and administrative
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
costs of the Ship Systems segment. For the Company's other business segments, general and administrative costs are expensed as incurred. Inventories other than costs under long-term contracts 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 with any remainder included in "Contract liabilities and customer deposits".
Product 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 or costs incurred for the Ship Systems segment and generally on the costs incurred or units-of-delivery basis for the Company's other business segments. Service revenues from fixed price and fixed price incentive contracts are recognized under the percentage of completion method on the basis of costs incurred to estimated total costs. Service revenues on cost reimbursement type contracts and time and materials contracts are recognized as costs are incurred or as work is performed. 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 Worldwide expenditures on research and development activities amounted to $331.5 million, $315.6 million and $233.8 million, of which 28%, 26% and 33% was Company-sponsored, in the years ended July 31, 2000, 1999 and 1998, respectively. Company-sponsored research and development expenditures are charged to expense as incurred.
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 statement 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 "Accumulated other comprehensive loss -- Cumulative currency translation adjustment" component of Stockholders' Investment. Gains and losses 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, 2000.
GOODWILL AND OTHER INTANGIBLES 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, 2000 and 1999 was $1,257.1 million and $1,053.0 million, respectively. The current and future profitability of the operations to which the goodwill relates are evaluated whenever events or circumstances occur. 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 recovery under the Company's U.S. Government contracts, to the extent recoverable. These reimbursements and recoveries are not recorded until collection is probable.
FINANCIAL INSTRUMENTS In addition to the previously discussed cash and cash equivalents and certain long-term notes and debentures disclosed in Note C, the Company's other financial instruments include accounts receivable, accounts payable, short-term debt 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. The Company enters into foreign currency exchange contracts to hedge certain foreign currency transactions and firm commitments. The aggregate notional amounts of these contracts were $49.0 million at July 31, 2000 and $29.3 million at July 31, 1999. The Company, from time to
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
time, enters into foreign currency exchange contracts to reduce its exposure from net investments in certain foreign operations. Gains and losses are included in "Accumulated other comprehensive loss -- Cumulative currency translation adjustment". There were no such outstanding contracts at July 31, 2000 and 1999. As discussed in Note I, the Company has off-balance sheet guarantees and letter of credit agreements with notional values totaling $420 million at July 31, 2000, relating principally to the guarantee of future performance on foreign government contracts.
NEW ACCOUNTING STANDARDS Effective August 1, 1999, the Company adopted Statement of Position 97-3 ("SOP 97-3"), "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", which required a change in the accounting for assessments by the workers' compensation second-injury fund administered by the Department of Labor. The resulting cumulative effect of a change in accounting principle was a charge of $2.8 million, net of tax or $.06 per share.
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was effective for the Company starting its fiscal year 2001 and requires that all derivatives, including foreign currency exchange contracts, be recognized as assets or liabilities in the consolidated balance sheet and measured at fair value. The Company enters into forward contracts primarily to hedge certain sales and purchase commitments denominated in foreign currencies to limit the effect of exchange rate fluctuations on its results of operations and cash flows. These forward contracts have been designated as fair value hedges and are considered to be highly effective as the terms of the forward contracts are generally the same as the sales and purchase commitments. Any gains or losses resulting from changes in fair value are recognized in net income with an offsetting adjustment to net income for changes in the fair value of the hedged item. The forward contracts generally have maturity dates of up to two years. The adoption of SFAS 133 did not result in a material effect to the post fiscal year 2000 financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", with an effective date no later than the fourth quarter of the Company's fiscal year 2001. The Company believes that its revenue recognition practices are already consistent with the requirements of SAB 101.
NOTE B: ACQUISITIONS AND DIVESTITURES
On August 2, 1999, the Company completed the acquisition of Avondale, which is engaged in the design, construction, repair and overhaul of various types of ocean-going vessels for the U.S. Navy and commercial customers, for $39.50 per share in cash. The total purchase price was approximately $590 million and the acquisition has been accounted for under the purchase method of accounting. The resulting goodwill amount of approximately $354 million is being amortized over twenty-five years. Major contracts currently under construction at Avondale include the LPD 17 Class amphibious assault ships and Sealift support ships for the U.S. Navy and double-hulled crude oil carriers for a commercial customer. Under the LPD program, Avondale serves as the prime contractor and is constructing the first two ships while a third is being built by a team member under a cost-reimbursable contract. During the current year, the U.S. Navy exercised an option for a fourth LPD to be built by Avondale under a cost-reimbursable contract. Under the Sealift program, Avondale is under contract to build seven transport vessels for the U.S. Navy of which three have been delivered. Avondale is also building three double-hulled crude oil carriers for a commercial customer with options for two more. Assuming the combination had occurred on August 1, 1998, unaudited pro forma amounts for fiscal year 1999 include sales and service revenues of $5.6 billion, net earnings of $121.8 million and basic and diluted earnings per share of $2.66 and $2.60, respectively.
During fiscal year 2000, the Company also acquired TEC, a United Kingdom manufacturer and supplier of electrical connectors to the military, aerospace, and commercial industries. TEC had sales of $8.6 million for its fiscal year ended December 31, 1998. Acquisitions made during fiscal year 1999 included Denro, which manufactures voice and data electronic switching equipment and data recorders used in air traffic control,
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Tarutin, a Japanese manufacturer of paste solder and soldering products for the consumer electronics and automobile industries, and Retconn, which designs and manufactures coaxial connectors, contacts and cable harnesses for the wireless communications and computer markets. The combined annual revenues for these fiscal 1999 acquisitions totaled $70 million and the aggregate purchase price was $90 million, including goodwill of $84 million. In fiscal year 1998, the Company acquired TASC, a leading provider of information technology and services to the national intelligence sector, the Department of Defense and non-defense and commercial customers, for a total purchase price of $440 million, including a goodwill amount of $378 million. TASC had annual revenues of $440 million for its fiscal year ended December 31, 1997. These acquisitions were accounted for under the purchase method of accounting.
During fiscal year 2000, the Company sold LES which resulted in a pre-tax gain of $7.6 million. Additionally, in the third quarter of fiscal year 2000, the Company completed the sale of its weather information and agricultural imaging businesses for proceeds of $127.6 million and a pre-tax gain on sale of $11.6 million. Prior to the divestitures, these businesses were reported in the Information Systems segment.
In fiscal year 1999, the Company sold its archive software products business which resulted in a pre-tax gain of $12.8 million.
NOTE C: DEBT AND INTEREST
Short-term debt is composed of:
Long-term obligations consist of the following:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term obligations at July 31, 2000 mature as follows:
In connection with the acquisition of Avondale in August 1999, the Company issued $400 million principal amount of 8.00% senior notes due 2009 (the "2009 notes") and sold commercial paper. Interest on these notes is payable semi-annually on April 15 and October 15. The 2009 notes are redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest thereon at U.S. Treasury Rates plus accrued interest to the date of redemption. The aggregate estimated fair value of the $400 million principal amount of the 2009 notes at July 31, 2000 was $400.4 million based on market quotes for debt with similar terms. Obligations assumed in connection with the acquisition of Avondale included the Series 1994 Industrial Revenue Bonds bearing interest from 8.25% to 8.50% and payable in annual installments through June 2014. The estimated fair value of these bonds was $33.6 million at July 31, 2000 compared with a book value of $32.2 million including the current portion.
During fiscal year 1999, the Company's Ingalls Shipbuilding, Inc. subsidiary issued, through the Mississippi Business Finance Corporation, $83.7 million in economic development revenue bonds to finance the construction costs of certain port facilities. The bonds mature on May 1, 2024 and interest is payable semi-annually on May 1 and November 1. The estimated fair values of these bonds at July 31, 2000 and 1999 were $80.6 million and $78.2 million, respectively, based on market quotes for debt with similar terms.
In connection with the acquisition of TASC in April 1998, the Company issued $100 million principal amount of 6.05% senior notes due April 15, 2003 (the "2003 notes"), $200 million principal amount of 6.75% senior debentures due April 15, 2018 (the "2018 debentures" and together with the 2003 notes, the "securities") and sold commercial paper. Interest on the securities is payable semi-annually on April 15 and October 15. The 2003 notes are not redeemable prior to maturity. The 2018 debentures are redeemable, in whole or in part, at the option of the Company at any time at a redemption price 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 aggregate estimated fair values of these securities at July 31, 2000 and 1999 were $271.4 million and $274.4 million, respectively, based on market quotes for debt with similar terms.
The $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 were issued in connection with the acquisition of PRC in fiscal year 1996. Interest on these debentures is payable semi-annually on March 15 and September 15. 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 values of the $400 million
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
principal amount of debentures at July 31, 2000 and 1999 were $379.3 million and $390.0 million, respectively, based on market quotes for debt with similar terms.
The Company has unused credit commitments of $400 million under a revolving credit agreement for $400 million with various banks available for its general use. The Company also has a short-term credit agreement totaling $400 million which serves as a back-up facility for its commercial paper program. Commercial paper outstanding at July 31, 2000 and 1999 amounted to $30.0 million and $92.3 million, respectively.
The Company is in compliance with its various debt covenants, the most restrictive of which relate to the Company's incurrence of debt, mergers, consolidations and sale of assets and which require the Company to satisfy certain financial ratios.
Net interest expense is composed of the following:
Total cash interest payments made during fiscal year 2000 amounted to $102.4 million compared with $71.5 million for fiscal year 1999 and $47.8 million for fiscal year 1998. Capitalized interest costs in each of the three years in the period ended July 31, 2000 were not material.
NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES
Following are the details of accounts receivable:
Of the $231.9 million in retentions and amounts not billed at July 31, 2000, $224.0 million is expected to be collected in fiscal year 2001 with the balance to be collected in subsequent years, as contract deliveries are made and warranty periods expire.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized below are the components of inventory balances:
As stated in Note A, certain inventories applicable primarily to government contracts of the Ship Systems segment include general and administrative costs. The total of such costs incurred in fiscal years 2000 and 1999 was $135.2 million and $85.7 million, respectively, and the amount of general and administrative costs in inventory at the end of those years is approximately $40.5 million and $33.5 million, respectively. Production cost of delivered units in excess of anticipated average cost of all units expected to be produced is not significant.
NOTE E: PROPERTY, PLANT AND EQUIPMENT
Investment in property, plant and equipment consists of the following:
The net book value of assets utilized under capital leases was not material at July 31, 2000 and 1999.
The range of estimated useful lives for determining depreciation and amortization of the major classes of assets are:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of July 31, 2000, minimum rental commitments under noncancelable operating leases were:
Minimum rental commitments under capital leases were not material at July 31, 2000.
Rental expense for operating leases was $88.4 million, $79.7 million and $64.0 million for the years ended July 31, 2000, 1999 and 1998, respectively. Contingent and sublease rentals for each of the three fiscal years ending July 31, 2000 were not material. The minimum future rentals receivable under subleases were approximately $19 million at July 31, 2000.
NOTE F: STOCKHOLDERS' INVESTMENT
SHARE INFORMATION At July 31, 2000, 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, 2000. Each share of Common stock is entitled to one vote.
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, 2000. Each share of Series B Preferred Stock is entitled to one vote.
STOCK OPTION INFORMATION The Company has a stock option plan which provides for the grant of incentive awards to officers and other key employees. Incentive awards may be granted in the form of stock options at fair market value of the Company's Common stock on the date of grant. Prior to August 1, 1996, options could have been and were granted at an option price of not less than 50% nor more than 100% of the fair market value of the Company's Common stock. Options subject to grant under the plan consist of 5,000,000 shares originally authorized plus 1.5% of the total issued and outstanding shares of Common stock as of the end of the preceding fiscal year, subject to certain limitations. Options so granted remain exercisable for a period of 10 years from date of grant. Incentive awards may also be made in the form of performance- based restricted stock of which 46,900 shares were granted during fiscal year 2000. These awards will vest at the end of a three-year period provided that certain performance objectives are achieved over that period.
In December 1998, the Company's stockholders approved a new Non-Employee Director Stock Plan (the "Plan") to replace the existing Director Stock Option Plan which terminated on December 31, 1998. The Plan authorizes the Board of Directors to issue up to 460,000 shares of Common stock. All options are granted at the fair market value on the date of grant and are immediately exercisable. The Company's non-employee directors can also elect to convert annual retainers and meeting fees into options to purchase shares of Common stock at fair market value or convert such retainers and fees into shares of Common stock also at fair
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
market value to be paid at the end of the director's Board service. The number of options so granted is based on a formula reviewed and approved by the Board of Directors from time to time.
The following is a summary of stock option activity for the three fiscal years ended July 31, 2000:
Exercisable options at July 31, 2000, 1999 and 1998 were 2,318,201, 1,724,017 and 1,569,089 at weighted-average exercise prices of $39.66, $34.10 and $28.05, respectively.
The following table summarizes information with respect to options outstanding at July 31, 2000:
The Company recognizes compensation expense for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under the provisions of Statement of Financial Accounting Standards No. 123, compensation expense related to stock options would have been measured using a fair value based method, resulting in the following pro forma net earnings, basic earnings per share and diluted earnings per share amounts:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma results are based on estimated weighted-average fair values of options granted during fiscal years 2000, 1999 and 1998 of $19.12, $24.64 and $19.68, respectively. The fair value of each grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:
RESTRICTED STOCK The Company granted 77,908 and 8,333 shares of restricted stock during fiscal years 2000 and 1999, respectively, in connection with the hiring of two executive officers. The 77,908 shares, which vest over seven and five year periods, were issued at the then fair market value of $45.41 per share in equal installments. The 8,333 shares of restricted stock granted in 1999, which vest in equal installments over three and five-year periods, were issued at the then fair market value of $54.63 per share.
RIGHTS PLAN The Company has a 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 redeem the rights for $.01 per right at any time prior to the acquisition of 15% of the Company's Common stock. If a person has acquired, or has announced its intention to acquire, more than 15%, but less than 50% of the Common stock has been acquired, the Company may exchange the rights for one share of Litton Common stock per right. The rights expire in August 2004.
NOTE G: TAXES ON INCOME
Earnings before taxes on income and cumulative effect of a change in accounting principle by geographic area are as follows:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of taxes on income consist of the following provisions (benefits):
The primary components of the Company's deferred income tax assets and liabilities are as follows:
The deferred tax assets and liabilities are classified on the Consolidated Balance Sheets as follows:
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:
Undistributed earnings of non-U.S. subsidiaries included in consolidated retained earnings were $117 million at July 31, 2000. These earnings, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax.
Net cash (refunds) payments for income taxes were approximately $(374) thousand, $66.3 million and $148.9 million in fiscal years 2000, 1999 and 1998, respectively. The payments for fiscal year 1998 included amounts for prior years' taxes.
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Employees of the Company's U.S. subsidiaries except for PRC, TASC and Avondale 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. Avondale also sponsors noncontributory defined benefit pension plans which cover substantially all of its employees.
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. Additionally, PRC, TASC and Avondale have various defined contribution plans covering substantially all of their employees, some of which provide for discretionary contributions.
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 statements. The pension liabilities and their related costs are computed in accordance with the laws of the individual nations and appropriate actuarial practices.
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 benefits are unfunded. Avondale also maintains a postretirement welfare plan which provides, among other benefits, specified retirement, life insurance and medical insurance benefits to certain employees.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
The excess of plan assets over the projected benefit obligation at adoption of SFAS No. 87 and subsequent unrecognized gains and losses are amortized over the average remaining service period of active employees expected to receive benefits under the plans, generally 15 years. Plan assets are invested primarily in listed common stock, fixed income securities, United States Government and Agency securities and corporate bonds and notes. Pension assets are included in "Other Assets and Long-term Investments" and the accrued benefit obligation for those defined benefit plans with accumulated benefits in excess of plan assets is included in "Pension and Other Postretirement Benefit Obligations." The minimum pension liability recognized for these unfunded plans as of July 31, 2000 was $9.7 million, with an offset to intangible assets for $2.3 million and as a component of Accumulated Other Comprehensive Loss in equity for $7.4 million. The projected benefit obligation and the accumulated benefit obligation associated with these unfunded plans were $88.7 million and $68.0 million, respectively, at July 31, 2000. The comparative amounts at July 31, 1999 were $71.6 million and $56.9 million, respectively.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net pension income and the net postretirement benefit cost related to the Company's plans include the following components:
The following actuarial assumptions were used to determine the benefit obligations and the net costs related to the Company's defined benefit pension and postretirement benefit plans, as appropriate:
The assumed health care cost trend rate for fiscal year 2001 is 8.98%, decreasing over 17 years to 6% where it is expected to remain thereafter.
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
NOTE I: DEFENSE CONTRACTS, LITIGATION AND CONTINGENCIES
Approximately 68%, 65% and 66% of total sales and service revenues of the Company for the years ended July 31, 2000, 1999 and 1998, respectively, were from U.S. Government contracts and subcontracts. Approximately 60% of these revenues for 2000 related to fixed-price contracts. 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. Contractors, sometimes without their knowledge, are subject to
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 to the consolidated financial statements.
Litton brought suit against Honeywell, Inc. ("Honeywell") for patent infringement relating to the manufacture of ring laser gyro navigation systems used in commercial aircraft. In August 1993, the jury rendered a verdict in favor of Litton that the District Court rejected in January 1995. In July 1996, the Federal Circuit Court of Appeals reversed the District Court's decision and reinstated parts of the jury's verdict related to liability in favor of Litton and ordered a new trial on the amount of damages. In March 1997, the U.S. Supreme Court vacated the Court of Appeals' ruling and remanded the case to the Court of Appeals for further consideration. On April 7, 1998, the Court of Appeals reinstated its finding that the patent was valid and remanded the case back to the District Court for determination on both liability and damages. On September 23, 1999, the U.S. District Court granted Honeywell's motions rejecting the patent and state law claims. On February 28, 2000, the Company filed an appeal of the District Court's ruling in the Federal Circuit Court of Appeals. Briefs have been filed by both sides. A hearing before the Appellate Court has been scheduled for November 1, 2000.
Litton also brought suit against Honeywell for illegal monopolization of the market for inertial reference systems for large commercial air transport, commuter and business aircraft. In February 1996, a jury rendered a verdict in favor of Litton. The District Court upheld the jury's verdict on liability, but declined to enter the jury's damage award on the basis that Litton's damages study did not disaggregate damages among legal and illegal conduct. A new trial limited to the amount of damages resulted in a jury verdict on December 9, 1998, of $250 million in favor of Litton. On January 27, 1999, U.S. District Court Judge Mariana R. Pfaelzer entered a final judgment against Honeywell of $250 million which, by law, is trebled to $750 million, plus post-judgment interest from the date of entry of judgment, costs and attorney fees. On May 20, 1999, the court heard Honeywell's post trial motions. On September 23, 1999, the court denied Honeywell's motions as they related to Litton Systems, Inc. but granted a motion regarding Litton Systems Canada, holding it did not have standing or jurisdiction to bring its claims in the United States. As a result of that ruling, the judgment against Honeywell was reduced to $660 million plus interest, together with attorney fees and costs of $35.6 million. Both Honeywell and Litton have appealed the judge's decision to the Ninth Circuit Court of Appeals. Briefs have been filed and the parties await a hearing before the Appellate Court.
In fiscal 1999 the Company was advised that the United States Attorney's Office in Los Angeles had decided to pursue action against the Company in connection with a lengthy investigation first initiated in 1991, unless the matter could be satisfactorily resolved. After extensive discussions with the U.S. Attorney's Office of the reasons why the Company believed it complied with applicable laws and administrative regulations with respect to payments to foreign consultants and potential terms of settlement, this matter was settled by the payment of $18.5 million during fiscal 1999. Although Litton believed it had meritorious defenses, this settlement, relating to past conduct, was determined to be in the Company's best interests.
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 financial statements.
The Company has issued or is a party to various guarantees and letter of credit agreements totaling $420 million at July 31, 2000, relating principally to the guarantee of future performance on foreign government contracts.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J: BUSINESS SEGMENT REPORTING
The Company's operations are reported in four segments: Advanced Electronics, Information Systems, Ship Systems and Electronic Components and Materials. The reported segments are aggregated consistent with the way management organizes the Company for decision making and assessing performance and have been determined based on several factors, including the nature of products and services, and the class of customers. Segment results are evaluated based on profit from operations before income taxes, interest, and unallocated corporate expenses. The accounting policies relating to the segments are the same as those discussed in Note A. All internal sales and transfers are based on negotiated prices and are eliminated in consolidation. The segment information for fiscal years 1999 and 1998 has been restated to reflect the transfer of the Data Systems division from the Information Systems segment to the Advanced Electronics segment.
The fiscal year 2000 results for the Information Systems segment included a $19.2 million gain on sale of businesses (see Note B) and a $5.8 million special charge (see Note K). Results for the Advanced Electronics segment for fiscal year 2000 included cost growth provisions totaling $52.5 million recorded for two integrated systems development programs and the reversal of special charges totaling $1.1 million recorded in the prior fiscal year. The fiscal year 1999 results included the effects of special charges totaling $74.6 million (discussed in Note K), of which $9.4 million related to the Advanced Electronics segment and $65.2 million related to the Information Systems segment. Additionally, in fiscal year 1999, the Advanced Electronics segment incurred an $18.5 million charge in connection with a voluntary settlement (discussed in Note I) and the Information Systems segment included a $12.8 million gain on sale of business.
The Advanced Electronics segment designs, develops and manufactures inertial navigation, guidance and control, IFF (identification friend or foe) and marine electronic systems. This segment also provides electronic warfare systems and integrates avionics systems and shipboard information and communication systems.
The Information Systems segment designs, develops, integrates and supports computer-based information systems and provides information technology and services primarily for government customers.
The Ship Systems segment is engaged in the building of large multimission surface ships for the U.S. Navy as well as other government and commercial customers worldwide and is a provider of overhaul, repair, modernization, ship design and engineering services. Results for fiscal year 2000 included the Avondale acquisition discussed in Note B.
The U.S. Government is a significant customer of the Advanced Electronics, Information Systems and Ship Systems segments (see Note I).
The Electronic Components and Materials segment is an international supplier of complex backplanes, connectors, laser crystals, solder materials, specialty products and other electronic components used primarily in the telecommunications, industrial and computer markets.
Corporate amounts include primarily cash and cash equivalents, deferred tax assets and general corporate expenses.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPERATIONS BY BUSINESS SEGMENT (MILLIONS OF DOLLARS)
OPERATIONS BY GEOGRAPHIC AREA (MILLIONS OF DOLLARS)
NOTE K: SPECIAL CHARGES
In July 1999, the Company recorded special charges totaling $74.6 million pre-tax and $44.8 million after-tax in connection with a plan to exit the mainframe and professional services businesses at its LES subsidiary and to consolidate certain manufacturing facilities at its Data Systems ("DSD") and Applied Technology ("ATD") (now part of Litton Advanced Systems, Inc.) divisions to reduce excess capacity. The total charges included non-cash asset write-downs of $19.8 million, pre-tax, for goodwill impairment and abandonment of software and facilities improvements. The components and balances of the remainder of the special charges accrual at July 31, 1999 and July 31, 2000 are as follows:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of July 31, 2000, the facilities consolidation process at DSD as announced in July 1999 is complete and the effort at ATD is expected to be completed in the first quarter of fiscal year 2001.
In December 1999, the Company sold LES which resulted in a pre-tax gain of $7.6 million and a special charge of $5.8 million primarily representing an additional accrual for hardware and software obligations under non-cancelable leases and additional costs in connection with migrating customers to alternative vendors and systems, partly offset by the reversal of termination benefits relating to approximately 250 employees who have continued employment with the buyer. Through July 31, 2000, the Company has incurred approximately $4.1 million to transition customers to other service providers. The obligation under non-cancelable software and hardware leases represents future payments to be made under the current contractual terms which extend through fiscal year 2006.
The $6.1 million in severance and termination payments made during fiscal year 2000 resulted from the termination of 514 employees which along with approximately 250 employees who have continued employment with the buyer of LES account for a total of approximately 800 to be terminated in connection with the above actions.
LITTON INDUSTRIES, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
- --------------- * See Financial Review and Analysis for discussion.
The total of quarterly amounts for earnings per share will not necessarily equal the annual amount, since the computations are based on the weighted-average number of common shares and dilutive potential common shares outstanding during each period.
Litton Common stock is traded principally on the New York Stock Exchange and the Pacific Exchange, Inc. under the symbol "LIT".
As of September 29, 2000, there were approximately 20,200 holders of record of the Common stock.
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS
*Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-1 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS (CONTINUED)
*Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-2 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS (CONTINUED)
E-3 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS (CONTINUED)
E-4 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS (CONTINUED)
- ---------------
*Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-5
EXHIBIT 21
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SUBSIDIARIES OF THE REGISTRANT
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-6
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in (i) Registration Statement No. 333-92823 on Form S-4, (ii) Registration Statement No. 2-93044 on Form S-8, (iii) Registration Statement No. 33-27467 on Form S-8, (iv) Registration Statement No. 33-27468 on Form S-8, (v) Registration Statement No. 33-44684 on Form S-3, (vi) Registration Statement No. 33-55944 on Form S-8, (vii) Registration Statement No. 333-13193 on Form S-3, (viii) Registration Statement No. 333-23447 on Form S-8, (ix) Registration Statement No. 333-28295 on Form S-3, (x) Registration Statement No. 333-50675 on Form S-8, (xi) Registration Statement No. 333-68279 on Form S-8, and (xii) Registration Statement No. 333-75049 on Form S-8 of our report dated October 10, 2000, appearing in this Annual Report on Form 10-K of Litton Industries, Inc. for the year ended July 31, 2000.
DELOITTE & TOUCHE LLP
Los Angeles, California October 10, 2000
E-7
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 Stockholders to be held on December 8, 2000, 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 Stockholders 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 6, 2000 and their business experience during the prior five years:
ITEM 11.
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 Stockholders to be held on December 8, 2000, which is hereby incorporated by reference.
ITEM 12.
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 Stockholders to be held on December 8, 2000, which is hereby incorporated by reference.
ITEM 13.
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 Stockholders to be held on December 8, 2000, which is hereby incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (CONTINUED)
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, 2000
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:
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 accounting principles generally accepted in the United States of America.
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.
Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of the Company and issue a report thereon. They have informed management and the Audit and Compliance Committee of the Board of Directors that their audits were conducted in accordance with auditing standards generally accepted in the United States of America that require a review and evaluation of internal controls to determine the nature, timing, and extent of audit testing. The Independent Auditors' Report is on page of this report.
The Audit and Compliance Committee of the Board of Directors, which consists solely of independent 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/ MICHAEL R. BROWN - -------------------------------------- Michael R. Brown Chairman and Chief Executive Officer
/s/ D. MICHAEL STEUERT - -------------------------------------- D. Michael Steuert Senior Vice President and Chief Financial Officer
/s/ CAROL A. WIESNER - -------------------------------------- Carol A. Wiesner Vice President and Controller
October 10, 2000
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Litton Industries, Inc. Woodland Hills, California
We have audited the accompanying consolidated balance sheets of Litton Industries, Inc. and subsidiary companies (the "Company") as of July 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' investment, and cash flows for each of the three years in the period ended July 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note A of the Notes to the Consolidated Financial Statements, effective August 1, 1999, the Company changed its method of accounting for certain insurance-related assessments.
DELOITTE & TOUCHE LLP
Los Angeles, California October 10, 2000
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accounts of Litton Industries, Inc. and its wholly-owned subsidiaries (the "Company" or "Litton") are included in the accompanying consolidated financial statements. Intercompany accounts and transactions have been eliminated. Certain reclassifications of prior period information were made to conform to the current year presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 AND CASH EQUIVALENTS The Company considers securities purchased within three months of their date of maturity to be cash equivalents.
EARNINGS PER SHARE Basic EPS is calculated based on the weighted-average number of shares outstanding and diluted EPS includes the effects of dilutive potential common shares.
The following table sets forth the computation of basic and diluted earnings per share:
INVENTORIES, LONG-TERM CONTRACTS AND REVENUE RECOGNITION Inventory costs under long-term contracts generally reflect actual or average costs and include general and administrative
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
costs of the Ship Systems segment. For the Company's other business segments, general and administrative costs are expensed as incurred. Inventories other than costs under long-term contracts 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 with any remainder included in "Contract liabilities and customer deposits".
Product 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 or costs incurred for the Ship Systems segment and generally on the costs incurred or units-of-delivery basis for the Company's other business segments. Service revenues from fixed price and fixed price incentive contracts are recognized under the percentage of completion method on the basis of costs incurred to estimated total costs. Service revenues on cost reimbursement type contracts and time and materials contracts are recognized as costs are incurred or as work is performed. 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 Worldwide expenditures on research and development activities amounted to $331.5 million, $315.6 million and $233.8 million, of which 28%, 26% and 33% was Company-sponsored, in the years ended July 31, 2000, 1999 and 1998, respectively. Company-sponsored research and development expenditures are charged to expense as incurred.
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 statement 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 "Accumulated other comprehensive loss -- Cumulative currency translation adjustment" component of Stockholders' Investment. Gains and losses 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, 2000.
GOODWILL AND OTHER INTANGIBLES 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, 2000 and 1999 was $1,257.1 million and $1,053.0 million, respectively. The current and future profitability of the operations to which the goodwill relates are evaluated whenever events or circumstances occur. 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 recovery under the Company's U.S. Government contracts, to the extent recoverable. These reimbursements and recoveries are not recorded until collection is probable.
FINANCIAL INSTRUMENTS In addition to the previously discussed cash and cash equivalents and certain long-term notes and debentures disclosed in Note C, the Company's other financial instruments include accounts receivable, accounts payable, short-term debt 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. The Company enters into foreign currency exchange contracts to hedge certain foreign currency transactions and firm commitments. The aggregate notional amounts of these contracts were $49.0 million at July 31, 2000 and $29.3 million at July 31, 1999. The Company, from time to
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
time, enters into foreign currency exchange contracts to reduce its exposure from net investments in certain foreign operations. Gains and losses are included in "Accumulated other comprehensive loss -- Cumulative currency translation adjustment". There were no such outstanding contracts at July 31, 2000 and 1999. As discussed in Note I, the Company has off-balance sheet guarantees and letter of credit agreements with notional values totaling $420 million at July 31, 2000, relating principally to the guarantee of future performance on foreign government contracts.
NEW ACCOUNTING STANDARDS Effective August 1, 1999, the Company adopted Statement of Position 97-3 ("SOP 97-3"), "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", which required a change in the accounting for assessments by the workers' compensation second-injury fund administered by the Department of Labor. The resulting cumulative effect of a change in accounting principle was a charge of $2.8 million, net of tax or $.06 per share.
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was effective for the Company starting its fiscal year 2001 and requires that all derivatives, including foreign currency exchange contracts, be recognized as assets or liabilities in the consolidated balance sheet and measured at fair value. The Company enters into forward contracts primarily to hedge certain sales and purchase commitments denominated in foreign currencies to limit the effect of exchange rate fluctuations on its results of operations and cash flows. These forward contracts have been designated as fair value hedges and are considered to be highly effective as the terms of the forward contracts are generally the same as the sales and purchase commitments. Any gains or losses resulting from changes in fair value are recognized in net income with an offsetting adjustment to net income for changes in the fair value of the hedged item. The forward contracts generally have maturity dates of up to two years. The adoption of SFAS 133 did not result in a material effect to the post fiscal year 2000 financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", with an effective date no later than the fourth quarter of the Company's fiscal year 2001. The Company believes that its revenue recognition practices are already consistent with the requirements of SAB 101.
NOTE B: ACQUISITIONS AND DIVESTITURES
On August 2, 1999, the Company completed the acquisition of Avondale, which is engaged in the design, construction, repair and overhaul of various types of ocean-going vessels for the U.S. Navy and commercial customers, for $39.50 per share in cash. The total purchase price was approximately $590 million and the acquisition has been accounted for under the purchase method of accounting. The resulting goodwill amount of approximately $354 million is being amortized over twenty-five years. Major contracts currently under construction at Avondale include the LPD 17 Class amphibious assault ships and Sealift support ships for the U.S. Navy and double-hulled crude oil carriers for a commercial customer. Under the LPD program, Avondale serves as the prime contractor and is constructing the first two ships while a third is being built by a team member under a cost-reimbursable contract. During the current year, the U.S. Navy exercised an option for a fourth LPD to be built by Avondale under a cost-reimbursable contract. Under the Sealift program, Avondale is under contract to build seven transport vessels for the U.S. Navy of which three have been delivered. Avondale is also building three double-hulled crude oil carriers for a commercial customer with options for two more. Assuming the combination had occurred on August 1, 1998, unaudited pro forma amounts for fiscal year 1999 include sales and service revenues of $5.6 billion, net earnings of $121.8 million and basic and diluted earnings per share of $2.66 and $2.60, respectively.
During fiscal year 2000, the Company also acquired TEC, a United Kingdom manufacturer and supplier of electrical connectors to the military, aerospace, and commercial industries. TEC had sales of $8.6 million for its fiscal year ended December 31, 1998. Acquisitions made during fiscal year 1999 included Denro, which manufactures voice and data electronic switching equipment and data recorders used in air traffic control,
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Tarutin, a Japanese manufacturer of paste solder and soldering products for the consumer electronics and automobile industries, and Retconn, which designs and manufactures coaxial connectors, contacts and cable harnesses for the wireless communications and computer markets. The combined annual revenues for these fiscal 1999 acquisitions totaled $70 million and the aggregate purchase price was $90 million, including goodwill of $84 million. In fiscal year 1998, the Company acquired TASC, a leading provider of information technology and services to the national intelligence sector, the Department of Defense and non-defense and commercial customers, for a total purchase price of $440 million, including a goodwill amount of $378 million. TASC had annual revenues of $440 million for its fiscal year ended December 31, 1997. These acquisitions were accounted for under the purchase method of accounting.
During fiscal year 2000, the Company sold LES which resulted in a pre-tax gain of $7.6 million. Additionally, in the third quarter of fiscal year 2000, the Company completed the sale of its weather information and agricultural imaging businesses for proceeds of $127.6 million and a pre-tax gain on sale of $11.6 million. Prior to the divestitures, these businesses were reported in the Information Systems segment.
In fiscal year 1999, the Company sold its archive software products business which resulted in a pre-tax gain of $12.8 million.
NOTE C: DEBT AND INTEREST
Short-term debt is composed of:
Long-term obligations consist of the following:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term obligations at July 31, 2000 mature as follows:
In connection with the acquisition of Avondale in August 1999, the Company issued $400 million principal amount of 8.00% senior notes due 2009 (the "2009 notes") and sold commercial paper. Interest on these notes is payable semi-annually on April 15 and October 15. The 2009 notes are redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest thereon at U.S. Treasury Rates plus accrued interest to the date of redemption. The aggregate estimated fair value of the $400 million principal amount of the 2009 notes at July 31, 2000 was $400.4 million based on market quotes for debt with similar terms. Obligations assumed in connection with the acquisition of Avondale included the Series 1994 Industrial Revenue Bonds bearing interest from 8.25% to 8.50% and payable in annual installments through June 2014. The estimated fair value of these bonds was $33.6 million at July 31, 2000 compared with a book value of $32.2 million including the current portion.
During fiscal year 1999, the Company's Ingalls Shipbuilding, Inc. subsidiary issued, through the Mississippi Business Finance Corporation, $83.7 million in economic development revenue bonds to finance the construction costs of certain port facilities. The bonds mature on May 1, 2024 and interest is payable semi-annually on May 1 and November 1. The estimated fair values of these bonds at July 31, 2000 and 1999 were $80.6 million and $78.2 million, respectively, based on market quotes for debt with similar terms.
In connection with the acquisition of TASC in April 1998, the Company issued $100 million principal amount of 6.05% senior notes due April 15, 2003 (the "2003 notes"), $200 million principal amount of 6.75% senior debentures due April 15, 2018 (the "2018 debentures" and together with the 2003 notes, the "securities") and sold commercial paper. Interest on the securities is payable semi-annually on April 15 and October 15. The 2003 notes are not redeemable prior to maturity. The 2018 debentures are redeemable, in whole or in part, at the option of the Company at any time at a redemption price 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 aggregate estimated fair values of these securities at July 31, 2000 and 1999 were $271.4 million and $274.4 million, respectively, based on market quotes for debt with similar terms.
The $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 were issued in connection with the acquisition of PRC in fiscal year 1996. Interest on these debentures is payable semi-annually on March 15 and September 15. 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 values of the $400 million
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
principal amount of debentures at July 31, 2000 and 1999 were $379.3 million and $390.0 million, respectively, based on market quotes for debt with similar terms.
The Company has unused credit commitments of $400 million under a revolving credit agreement for $400 million with various banks available for its general use. The Company also has a short-term credit agreement totaling $400 million which serves as a back-up facility for its commercial paper program. Commercial paper outstanding at July 31, 2000 and 1999 amounted to $30.0 million and $92.3 million, respectively.
The Company is in compliance with its various debt covenants, the most restrictive of which relate to the Company's incurrence of debt, mergers, consolidations and sale of assets and which require the Company to satisfy certain financial ratios.
Net interest expense is composed of the following:
Total cash interest payments made during fiscal year 2000 amounted to $102.4 million compared with $71.5 million for fiscal year 1999 and $47.8 million for fiscal year 1998. Capitalized interest costs in each of the three years in the period ended July 31, 2000 were not material.
NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES
Following are the details of accounts receivable:
Of the $231.9 million in retentions and amounts not billed at July 31, 2000, $224.0 million is expected to be collected in fiscal year 2001 with the balance to be collected in subsequent years, as contract deliveries are made and warranty periods expire.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized below are the components of inventory balances:
As stated in Note A, certain inventories applicable primarily to government contracts of the Ship Systems segment include general and administrative costs. The total of such costs incurred in fiscal years 2000 and 1999 was $135.2 million and $85.7 million, respectively, and the amount of general and administrative costs in inventory at the end of those years is approximately $40.5 million and $33.5 million, respectively. Production cost of delivered units in excess of anticipated average cost of all units expected to be produced is not significant.
NOTE E: PROPERTY, PLANT AND EQUIPMENT
Investment in property, plant and equipment consists of the following:
The net book value of assets utilized under capital leases was not material at July 31, 2000 and 1999.
The range of estimated useful lives for determining depreciation and amortization of the major classes of assets are:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of July 31, 2000, minimum rental commitments under noncancelable operating leases were:
Minimum rental commitments under capital leases were not material at July 31, 2000.
Rental expense for operating leases was $88.4 million, $79.7 million and $64.0 million for the years ended July 31, 2000, 1999 and 1998, respectively. Contingent and sublease rentals for each of the three fiscal years ending July 31, 2000 were not material. The minimum future rentals receivable under subleases were approximately $19 million at July 31, 2000.
NOTE F: STOCKHOLDERS' INVESTMENT
SHARE INFORMATION At July 31, 2000, 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, 2000. Each share of Common stock is entitled to one vote.
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, 2000. Each share of Series B Preferred Stock is entitled to one vote.
STOCK OPTION INFORMATION The Company has a stock option plan which provides for the grant of incentive awards to officers and other key employees. Incentive awards may be granted in the form of stock options at fair market value of the Company's Common stock on the date of grant. Prior to August 1, 1996, options could have been and were granted at an option price of not less than 50% nor more than 100% of the fair market value of the Company's Common stock. Options subject to grant under the plan consist of 5,000,000 shares originally authorized plus 1.5% of the total issued and outstanding shares of Common stock as of the end of the preceding fiscal year, subject to certain limitations. Options so granted remain exercisable for a period of 10 years from date of grant. Incentive awards may also be made in the form of performance- based restricted stock of which 46,900 shares were granted during fiscal year 2000. These awards will vest at the end of a three-year period provided that certain performance objectives are achieved over that period.
In December 1998, the Company's stockholders approved a new Non-Employee Director Stock Plan (the "Plan") to replace the existing Director Stock Option Plan which terminated on December 31, 1998. The Plan authorizes the Board of Directors to issue up to 460,000 shares of Common stock. All options are granted at the fair market value on the date of grant and are immediately exercisable. The Company's non-employee directors can also elect to convert annual retainers and meeting fees into options to purchase shares of Common stock at fair market value or convert such retainers and fees into shares of Common stock also at fair
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
market value to be paid at the end of the director's Board service. The number of options so granted is based on a formula reviewed and approved by the Board of Directors from time to time.
The following is a summary of stock option activity for the three fiscal years ended July 31, 2000:
Exercisable options at July 31, 2000, 1999 and 1998 were 2,318,201, 1,724,017 and 1,569,089 at weighted-average exercise prices of $39.66, $34.10 and $28.05, respectively.
The following table summarizes information with respect to options outstanding at July 31, 2000:
The Company recognizes compensation expense for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under the provisions of Statement of Financial Accounting Standards No. 123, compensation expense related to stock options would have been measured using a fair value based method, resulting in the following pro forma net earnings, basic earnings per share and diluted earnings per share amounts:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma results are based on estimated weighted-average fair values of options granted during fiscal years 2000, 1999 and 1998 of $19.12, $24.64 and $19.68, respectively. The fair value of each grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:
RESTRICTED STOCK The Company granted 77,908 and 8,333 shares of restricted stock during fiscal years 2000 and 1999, respectively, in connection with the hiring of two executive officers. The 77,908 shares, which vest over seven and five year periods, were issued at the then fair market value of $45.41 per share in equal installments. The 8,333 shares of restricted stock granted in 1999, which vest in equal installments over three and five-year periods, were issued at the then fair market value of $54.63 per share.
RIGHTS PLAN The Company has a 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 redeem the rights for $.01 per right at any time prior to the acquisition of 15% of the Company's Common stock. If a person has acquired, or has announced its intention to acquire, more than 15%, but less than 50% of the Common stock has been acquired, the Company may exchange the rights for one share of Litton Common stock per right. The rights expire in August 2004.
NOTE G: TAXES ON INCOME
Earnings before taxes on income and cumulative effect of a change in accounting principle by geographic area are as follows:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of taxes on income consist of the following provisions (benefits):
The primary components of the Company's deferred income tax assets and liabilities are as follows:
The deferred tax assets and liabilities are classified on the Consolidated Balance Sheets as follows:
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:
Undistributed earnings of non-U.S. subsidiaries included in consolidated retained earnings were $117 million at July 31, 2000. These earnings, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax.
Net cash (refunds) payments for income taxes were approximately $(374) thousand, $66.3 million and $148.9 million in fiscal years 2000, 1999 and 1998, respectively. The payments for fiscal year 1998 included amounts for prior years' taxes.
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Employees of the Company's U.S. subsidiaries except for PRC, TASC and Avondale 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. Avondale also sponsors noncontributory defined benefit pension plans which cover substantially all of its employees.
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. Additionally, PRC, TASC and Avondale have various defined contribution plans covering substantially all of their employees, some of which provide for discretionary contributions.
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 statements. The pension liabilities and their related costs are computed in accordance with the laws of the individual nations and appropriate actuarial practices.
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 benefits are unfunded. Avondale also maintains a postretirement welfare plan which provides, among other benefits, specified retirement, life insurance and medical insurance benefits to certain employees.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
The excess of plan assets over the projected benefit obligation at adoption of SFAS No. 87 and subsequent unrecognized gains and losses are amortized over the average remaining service period of active employees expected to receive benefits under the plans, generally 15 years. Plan assets are invested primarily in listed common stock, fixed income securities, United States Government and Agency securities and corporate bonds and notes. Pension assets are included in "Other Assets and Long-term Investments" and the accrued benefit obligation for those defined benefit plans with accumulated benefits in excess of plan assets is included in "Pension and Other Postretirement Benefit Obligations." The minimum pension liability recognized for these unfunded plans as of July 31, 2000 was $9.7 million, with an offset to intangible assets for $2.3 million and as a component of Accumulated Other Comprehensive Loss in equity for $7.4 million. The projected benefit obligation and the accumulated benefit obligation associated with these unfunded plans were $88.7 million and $68.0 million, respectively, at July 31, 2000. The comparative amounts at July 31, 1999 were $71.6 million and $56.9 million, respectively.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net pension income and the net postretirement benefit cost related to the Company's plans include the following components:
The following actuarial assumptions were used to determine the benefit obligations and the net costs related to the Company's defined benefit pension and postretirement benefit plans, as appropriate:
The assumed health care cost trend rate for fiscal year 2001 is 8.98%, decreasing over 17 years to 6% where it is expected to remain thereafter.
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
NOTE I: DEFENSE CONTRACTS, LITIGATION AND CONTINGENCIES
Approximately 68%, 65% and 66% of total sales and service revenues of the Company for the years ended July 31, 2000, 1999 and 1998, respectively, were from U.S. Government contracts and subcontracts. Approximately 60% of these revenues for 2000 related to fixed-price contracts. 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. Contractors, sometimes without their knowledge, are subject to
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 to the consolidated financial statements.
Litton brought suit against Honeywell, Inc. ("Honeywell") for patent infringement relating to the manufacture of ring laser gyro navigation systems used in commercial aircraft. In August 1993, the jury rendered a verdict in favor of Litton that the District Court rejected in January 1995. In July 1996, the Federal Circuit Court of Appeals reversed the District Court's decision and reinstated parts of the jury's verdict related to liability in favor of Litton and ordered a new trial on the amount of damages. In March 1997, the U.S. Supreme Court vacated the Court of Appeals' ruling and remanded the case to the Court of Appeals for further consideration. On April 7, 1998, the Court of Appeals reinstated its finding that the patent was valid and remanded the case back to the District Court for determination on both liability and damages. On September 23, 1999, the U.S. District Court granted Honeywell's motions rejecting the patent and state law claims. On February 28, 2000, the Company filed an appeal of the District Court's ruling in the Federal Circuit Court of Appeals. Briefs have been filed by both sides. A hearing before the Appellate Court has been scheduled for November 1, 2000.
Litton also brought suit against Honeywell for illegal monopolization of the market for inertial reference systems for large commercial air transport, commuter and business aircraft. In February 1996, a jury rendered a verdict in favor of Litton. The District Court upheld the jury's verdict on liability, but declined to enter the jury's damage award on the basis that Litton's damages study did not disaggregate damages among legal and illegal conduct. A new trial limited to the amount of damages resulted in a jury verdict on December 9, 1998, of $250 million in favor of Litton. On January 27, 1999, U.S. District Court Judge Mariana R. Pfaelzer entered a final judgment against Honeywell of $250 million which, by law, is trebled to $750 million, plus post-judgment interest from the date of entry of judgment, costs and attorney fees. On May 20, 1999, the court heard Honeywell's post trial motions. On September 23, 1999, the court denied Honeywell's motions as they related to Litton Systems, Inc. but granted a motion regarding Litton Systems Canada, holding it did not have standing or jurisdiction to bring its claims in the United States. As a result of that ruling, the judgment against Honeywell was reduced to $660 million plus interest, together with attorney fees and costs of $35.6 million. Both Honeywell and Litton have appealed the judge's decision to the Ninth Circuit Court of Appeals. Briefs have been filed and the parties await a hearing before the Appellate Court.
In fiscal 1999 the Company was advised that the United States Attorney's Office in Los Angeles had decided to pursue action against the Company in connection with a lengthy investigation first initiated in 1991, unless the matter could be satisfactorily resolved. After extensive discussions with the U.S. Attorney's Office of the reasons why the Company believed it complied with applicable laws and administrative regulations with respect to payments to foreign consultants and potential terms of settlement, this matter was settled by the payment of $18.5 million during fiscal 1999. Although Litton believed it had meritorious defenses, this settlement, relating to past conduct, was determined to be in the Company's best interests.
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 financial statements.
The Company has issued or is a party to various guarantees and letter of credit agreements totaling $420 million at July 31, 2000, relating principally to the guarantee of future performance on foreign government contracts.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J: BUSINESS SEGMENT REPORTING
The Company's operations are reported in four segments: Advanced Electronics, Information Systems, Ship Systems and Electronic Components and Materials. The reported segments are aggregated consistent with the way management organizes the Company for decision making and assessing performance and have been determined based on several factors, including the nature of products and services, and the class of customers. Segment results are evaluated based on profit from operations before income taxes, interest, and unallocated corporate expenses. The accounting policies relating to the segments are the same as those discussed in Note A. All internal sales and transfers are based on negotiated prices and are eliminated in consolidation. The segment information for fiscal years 1999 and 1998 has been restated to reflect the transfer of the Data Systems division from the Information Systems segment to the Advanced Electronics segment.
The fiscal year 2000 results for the Information Systems segment included a $19.2 million gain on sale of businesses (see Note B) and a $5.8 million special charge (see Note K). Results for the Advanced Electronics segment for fiscal year 2000 included cost growth provisions totaling $52.5 million recorded for two integrated systems development programs and the reversal of special charges totaling $1.1 million recorded in the prior fiscal year. The fiscal year 1999 results included the effects of special charges totaling $74.6 million (discussed in Note K), of which $9.4 million related to the Advanced Electronics segment and $65.2 million related to the Information Systems segment. Additionally, in fiscal year 1999, the Advanced Electronics segment incurred an $18.5 million charge in connection with a voluntary settlement (discussed in Note I) and the Information Systems segment included a $12.8 million gain on sale of business.
The Advanced Electronics segment designs, develops and manufactures inertial navigation, guidance and control, IFF (identification friend or foe) and marine electronic systems. This segment also provides electronic warfare systems and integrates avionics systems and shipboard information and communication systems.
The Information Systems segment designs, develops, integrates and supports computer-based information systems and provides information technology and services primarily for government customers.
The Ship Systems segment is engaged in the building of large multimission surface ships for the U.S. Navy as well as other government and commercial customers worldwide and is a provider of overhaul, repair, modernization, ship design and engineering services. Results for fiscal year 2000 included the Avondale acquisition discussed in Note B.
The U.S. Government is a significant customer of the Advanced Electronics, Information Systems and Ship Systems segments (see Note I).
The Electronic Components and Materials segment is an international supplier of complex backplanes, connectors, laser crystals, solder materials, specialty products and other electronic components used primarily in the telecommunications, industrial and computer markets.
Corporate amounts include primarily cash and cash equivalents, deferred tax assets and general corporate expenses.
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPERATIONS BY BUSINESS SEGMENT (MILLIONS OF DOLLARS)
OPERATIONS BY GEOGRAPHIC AREA (MILLIONS OF DOLLARS)
NOTE K: SPECIAL CHARGES
In July 1999, the Company recorded special charges totaling $74.6 million pre-tax and $44.8 million after-tax in connection with a plan to exit the mainframe and professional services businesses at its LES subsidiary and to consolidate certain manufacturing facilities at its Data Systems ("DSD") and Applied Technology ("ATD") (now part of Litton Advanced Systems, Inc.) divisions to reduce excess capacity. The total charges included non-cash asset write-downs of $19.8 million, pre-tax, for goodwill impairment and abandonment of software and facilities improvements. The components and balances of the remainder of the special charges accrual at July 31, 1999 and July 31, 2000 are as follows:
LITTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of July 31, 2000, the facilities consolidation process at DSD as announced in July 1999 is complete and the effort at ATD is expected to be completed in the first quarter of fiscal year 2001.
In December 1999, the Company sold LES which resulted in a pre-tax gain of $7.6 million and a special charge of $5.8 million primarily representing an additional accrual for hardware and software obligations under non-cancelable leases and additional costs in connection with migrating customers to alternative vendors and systems, partly offset by the reversal of termination benefits relating to approximately 250 employees who have continued employment with the buyer. Through July 31, 2000, the Company has incurred approximately $4.1 million to transition customers to other service providers. The obligation under non-cancelable software and hardware leases represents future payments to be made under the current contractual terms which extend through fiscal year 2006.
The $6.1 million in severance and termination payments made during fiscal year 2000 resulted from the termination of 514 employees which along with approximately 250 employees who have continued employment with the buyer of LES account for a total of approximately 800 to be terminated in connection with the above actions.
LITTON INDUSTRIES, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
- --------------- * See Financial Review and Analysis for discussion.
The total of quarterly amounts for earnings per share will not necessarily equal the annual amount, since the computations are based on the weighted-average number of common shares and dilutive potential common shares outstanding during each period.
Litton Common stock is traded principally on the New York Stock Exchange and the Pacific Exchange, Inc. under the symbol "LIT".
As of September 29, 2000, there were approximately 20,200 holders of record of the Common stock.
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS
*Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-1 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS (CONTINUED)
*Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-2 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS (CONTINUED)
E-3 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS (CONTINUED)
E-4 LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO EXHIBITS (CONTINUED)
- ---------------
*Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
E-5
EXHIBIT 21
LITTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SUBSIDIARIES OF THE REGISTRANT
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-6
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in (i) Registration Statement No. 333-92823 on Form S-4, (ii) Registration Statement No. 2-93044 on Form S-8, (iii) Registration Statement No. 33-27467 on Form S-8, (iv) Registration Statement No. 33-27468 on Form S-8, (v) Registration Statement No. 33-44684 on Form S-3, (vi) Registration Statement No. 33-55944 on Form S-8, (vii) Registration Statement No. 333-13193 on Form S-3, (viii) Registration Statement No. 333-23447 on Form S-8, (ix) Registration Statement No. 333-28295 on Form S-3, (x) Registration Statement No. 333-50675 on Form S-8, (xi) Registration Statement No. 333-68279 on Form S-8, and (xii) Registration Statement No. 333-75049 on Form S-8 of our report dated October 10, 2000, appearing in this Annual Report on Form 10-K of Litton Industries, Inc. for the year ended July 31, 2000.
DELOITTE & TOUCHE LLP
Los Angeles, California October 10, 2000
E-7