-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kfb95ifawPsbh6abQgyV3qGk7MTEKtce59VPK07+kIW00beLakTIFmnPXf5V4gp2 PWpmI/bhQIIjySaG8Eh/3A== 0000950152-98-008345.txt : 19981027 0000950152-98-008345.hdr.sgml : 19981027 ACCESSION NUMBER: 0000950152-98-008345 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981026 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRW INC CENTRAL INDEX KEY: 0000100030 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 340575430 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02384 FILM NUMBER: 98730895 BUSINESS ADDRESS: STREET 1: 1900 RICHMOND RD CITY: CLEVELAND STATE: OH ZIP: 44124 BUSINESS PHONE: 2162917000 MAIL ADDRESS: STREET 1: 1900 RICHMOND ROAD CITY: CLEVELAND STATE: OH ZIP: 44124 10-Q 1 TRW INC. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________to____________ Commission file number 1-2384 ------ TRW Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 34-0575430 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1900 Richmond Road, Cleveland, Ohio 44124 ----------------------------------------- (Address of principal executive offices) (Zip Code) (216) 291-7000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of October 21, 1998, there were 119,752,498 shares of TRW Common Stock, $0.625 par value, outstanding. 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements
Statements of Earnings (unaudited) TRW Inc. and subsidiaries - ---------------------------------------------------------------------------------------------------- Third quarter ended Nine months ended September 30 September 30 In millions except per share data 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------- Sales $2,836 $2,521 $8,959 $8,033 Cost of sales 2,314 2,055 7,370 6,551 - ---------------------------------------------------------------------------------------------------- Gross profit 522 466 1,589 1,482 Administrative and selling expenses 201 165 592 501 Research and development expenses 126 115 370 338 Interest expense 24 20 100 57 Other (income)expense-net 7 - (39) 6 - ---------------------------------------------------------------------------------------------------- Earnings before income taxes 164 166 566 580 Income taxes 60 58 207 218 - ---------------------------------------------------------------------------------------------------- Net earnings $ 104 $ 108 $ 359 $ 362 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Per share of common stock Diluted earnings per share $ .85 $ .85 $ 2.88 $ 2.83 Basic earnings per share $ .86 $ .88 $ 2.95 $ 2.92 Dividends declared $ .31 $ .31 $ .62 $ .62 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Shares used in computing per share amounts Diluted 123.2 127.4 124.9 128.1 Basic 120.5 123.1 121.7 124.0 - ----------------------------------------------------------------------------------------------------
3
Balance Sheets (unaudited) TRW Inc. and subsidiaries - -------------------------------------------------------------------------------------------- September 30 December 31 In millions 1998 1997 - -------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 79 $ 70 Accounts receivable 1,635 1,617 Inventories 685 573 Prepaid expenses 141 79 Deferred income taxes 284 96 - -------------------------------------------------------------------------------------------- Total current assets 2,824 2,435 Property, plant and equipment-on the basis of cost 6,522 6,074 Less accumulated depreciation and amortization 3,883 3,453 - -------------------------------------------------------------------------------------------- Total property, plant and equipment-net 2,639 2,621 Intangible assets Intangibles arising from acquisitions 790 673 Other 344 232 - -------------------------------------------------------------------------------------------- 1,134 905 Less accumulated amortization 126 94 - -------------------------------------------------------------------------------------------- Total intangible assets-net 1,008 811 Investments in affiliated companies 276 139 Other assets 455 404 - -------------------------------------------------------------------------------------------- $7,202 $6,410 - -------------------------------------------------------------------------------------------- Liabilities and shareholders' investment Current liabilities Short-term debt $ 875 $ 411 Accounts payable 856 859 Current portion of long-term debt 19 128 Other current liabilities 1,195 1,321 - -------------------------------------------------------------------------------------------- Total current liabilities 2,945 2,719 Long-term liabilities 817 788 Long-term debt 1,443 1,117 Deferred income taxes 41 57 Minority interests in subsidiaries 92 105 Capital stock 75 79 Other capital 455 450 Retained earnings 1,989 1,778 Accumulated other comprehensive income (11) (120) Treasury shares-cost in excess of par value (644) (563) - -------------------------------------------------------------------------------------------- Total shareholders' investment 1,864 1,624 - -------------------------------------------------------------------------------------------- $7,202 $6,410 - --------------------------------------------------------------------------------------------
4
Statements of Cash Flows (unaudited) TRW Inc. and subsidiaries - -------------------------------------------------------------------------------- Nine months ended September 30 In millions 1998 1997 - -------------------------------------------------------------------------------- Operating activities Net earnings $ 359 $ 362 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 414 366 Deferred income taxes (217) 21 Other-net 4 14 Changes in assets and liabilities, net of effects of businesses acquired or sold: Accounts receivable 20 (66) Inventories and prepaid expenses (151) (48) Accounts payable and other accruals (109) (141) Other-net (4) 19 - -------------------------------------------------------------------------------- Net cash provided by operating activities 316 527 - -------------------------------------------------------------------------------- Investing activities Capital expenditures (361) (361) Acquisitions, net of cash acquired (247) (415) Other-net (57) (34) - -------------------------------------------------------------------------------- Net cash used in investing activities (665) (810) - -------------------------------------------------------------------------------- Financing activities Increase in short-term debt 43 258 Proceeds from debt in excess of 90 days 912 107 Principal payments on debt in excess of 90 days (314) (37) Reacquisition of common stock (179) (207) Dividends paid (114) (116) Other-net 19 37 - -------------------------------------------------------------------------------- Net cash provided by financing activities 367 42 - -------------------------------------------------------------------------------- Effect of exchange rate changes on cash (9) (9) - -------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 9 (250) Cash and cash equivalents at beginning of period 70 386 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 79 $ 136 - --------------------------------------------------------------------------------
5
Results by Business Segments (unaudited) TRW Inc. and subsidiaries - --------------------------------------------------------------------------------------- Third quarter ended Nine months ended September 30 September 30 In millions 1998 1997 1998 1997 - --------------------------------------------------------------------------------------- Sales Automotive $1,685 $1,570 $5,384 $5,239 Space, Defense & Information Systems 1,151 951 3,575 2,794 - --------------------------------------------------------------------------------------- Sales $2,836 $2,521 $8,959 $8,033 - --------------------------------------------------------------------------------------- Operating profit Automotive $ 105 $ 136 $ 400 $ 485 Space, Defense & Information Systems 106 77 327 235 - --------------------------------------------------------------------------------------- Operating profit 211 213 727 720 Company Staff and other (20) (29) (55) (77) Minority interest in earnings of consolidated subsidiaries (3) (3) (9) (14) Interest expense (24) (20) (100) (57) Earnings from affiliates - 5 3 8 - --------------------------------------------------------------------------------------- Earnings before income taxes $ 164 $ 166 $ 566 $ 580 - ---------------------------------------------------------------------------------------
6 NOTES TO FINANCIAL STATEMENTS (unaudited) Principles of Consolidation The financial statements include the accounts of the Company and its subsidiaries except for two wholly owned insurance subsidiaries. The insurance subsidiaries and the investments in affiliated companies, which are not significant individually, are accounted for by the equity or cost method as appropriate. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of this Statement requires that unrealized gains or losses on the Company's available-for-sale securities, foreign currency translation and minimum pension liability adjustments be included in other comprehensive income, which prior to adoption were reported separately in shareholders' equity. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. The components of comprehensive income, net of related tax, for the third quarter and first nine months of 1998 and 1997 are as follows:
Third quarter ended Nine months ended (In millions) September 30 September 30 ------------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net earnings $104 $108 $359 $362 Unrealized gains on securities 45 15 41 15 Foreign currency translation gains (losses) 77 (39) 68 (108) ----- ----- ----- ----- Comprehensive income $226 $ 84 $468 $269 ----- ----- ----- -----
The components of accumulated other comprehensive income, net of related tax, at September 30, 1998 and December 31, 1997 are as follows:
September 30 December 31 (In millions) 1998 1997 ------------------------------- Unrealized gains on securities $ 53 $ 12 Foreign currency translation gains (losses) (62) (130) Minimum pension liability adjustments (2) (2) ---- ----- Accumulated other comprehensive income $(11) $(120) ---- -----
7 Inventories Inventories consist of the following:
(In millions) September 30 December 31 1998 1997 ------------ ----------- Finished products and work in process $359 $292 Raw materials and supplies 326 281 ---- ---- $685 $573 ---- ----
Long-Term Liabilities Long-term liabilities at September 30, 1998 and December 31, 1997 include $653 million, relating to postretirement benefits other than pensions. Other (Income)Expense-Net Other (income)expense-net included the following:
(In millions) Third quarter ended Nine months ended September 30 September 30 ------------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Other income $(14) $(19) $(95) $(47) Other expense 19 18 52 48 Foreign currency translation 2 1 4 5 --- --- --- --- $ 7 $ - $(39) $ 6 --- --- --- ---
Other income for the nine months ended September 30, 1998 includes a $48.5 million benefit from the settlement of certain patent litigation. Supplemental Cash Flow Information
Nine months ended (In millions) September 30 -------------------- 1998 1997 ---- ---- Interest paid (net of amount capitalized) $ 96 $56 Income taxes paid (net of refunds) $396 $36
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. 8 Earnings Per Share
Quarter ended Nine months ended In millions except per share data September 30 September 30 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Numerator Net earnings $104.2 $108.7 $359.4 $362.3 Preferred stock dividends .2 .1 .5 .4 ------ ------ ------ ------ Numerator for basic earnings per share--earnings available to common shareholders 104.0 108.6 358.9 361.9 Effect of dilutive securities Preferred stock dividends .2 .1 .5 .4 ------ ------ ------ ------ Numerator for diluted earnings per share-- earnings available to common shareholders after assumed conversions $104.2 $108.7 $359.4 $362.3 ------ ------ ------ ------ Denominator Denominator for basic earnings per share--weighted-average common shares 120.5 123.1 121.7 124.0 Effect of dilutive securities Convertible preferred stock .9 1.1 .9 1.0 Employee stock options 1.8 3.2 2.3 3.1 ------ ------ ------ ------ Dilutive potential common shares 2.7 4.3 3.2 4.1 Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 123.2 127.4 124.9 128.1 ------ ------ ------ ------ Basic earnings per share $ .86 $ .88 $ 2.95 $ 2.92 ----- ----- ----- ----- Diluted earnings per share $ .85 $ .85 $ 2.88 $ 2.83 ------ ------ ------ ------
Contingencies During 1997, TRW Vehicle Safety Systems Inc., a wholly owned subsidiary of the Company, reported to the Arizona Department of Environmental Quality ("ADEQ") potential violations of the Arizona hazardous waste law at its Queen Creek, Arizona facility for the possible failure to properly label and dispose of wastewater that might be classified as hazardous waste. ADEQ is conducting an investigation into these potential violations and the Company is cooperating with the investigation. If ADEQ initiates proceedings against the Company with respect to such matters, the Company could be liable for penalties and fines and other relief. The Company has been apprised by state and federal officials that there are ongoing civil and criminal investigations with respect to these potential violations. Management is currently evaluating this matter and is unable to make a meaningful estimate of the amount or range of possible liability, if any, at this time, although management believes that the Company would have meritorious defenses. During 1996, the Company was advised by the United States Department of Justice ("DOJ") that it had been named as a defendant in two lawsuits brought by a former employee of the Company's former Space & Technology Group and 9 originally filed under seal in 1994 and 1995, respectively, in the United States District Court for the Central District of California under the qui tam provisions of the civil False Claims Act. The Act permits an individual to bring suit in the name of the United States and share in any recovery. The allegations in the lawsuits relate to the classification of costs incurred by the Company that were charged to certain of its federal contracts. Under the law, the government must investigate the allegations and determine whether it wishes to intervene and take responsibility for the lawsuits. On February 13, 1998, the DOJ intervened in the litigation. On February 19, 1998 and March 4, 1998, the former employee filed amended complaints in the Central District of California that realleged certain of the claims included in the 1994 and 1995 lawsuits and omitted the remainder. The amended complaints allege that the United States has incurred substantial damages and that the Company should be ordered to cease and desist from violations of the civil False Claims Act and is liable for treble damages, penalties, costs, including attorneys' fees, and such other relief as deemed proper by the court. On March 17, 1998, the DOJ filed its complaint against the Company upon intervention in the 1994 lawsuit, which set forth a limited number of the allegations in the 1994 lawsuit and other allegations not in the 1994 lawsuit. The DOJ elected not to pursue the other claims in the 1994 lawsuit or the claims in the 1995 lawsuit. The DOJ's complaint alleges that the Company is liable for treble damages, penalties, interest, costs and "other proper relief." On March 18, 1998, the former employee withdrew the first amended complaint in the 1994 lawsuit at the request of the DOJ. On May 18, 1998, the Company filed answers to the former employee's first amended complaint in the 1995 lawsuit and to the DOJ's complaint, denying all substantive allegations against the Company contained therein. At the same time, the Company filed counterclaims against both the former employee and the federal government. On July 20, 1998, both the former employee and the DOJ filed motions seeking to dismiss the Company's counterclaims. The Company cannot presently predict the outcome of these lawsuits, although management believes that their ultimate resolution will not have a material effect on the Company's financial condition or results of operations. Interim Statements The financial statements are based in part on approximations and are subject to adjustments that may develop, such as unsettled contract and renegotiation matters and matters that arise in connection with the annual audit of the financial statements; however, in the opinion of management, all adjustments (which consist of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented have been included. Results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS
(In millions except per share data) Nine Months Ended Third Quarter September 30 ------------------------------- ------------------------------- Percent Percent 1998 1997 Inc (Dec) 1998 1997 Inc (Dec) ---- ---- --------- ---- ---- --------- Sales $2,836 $2,521 13% $8,959 $8,033 12% Operating Profit $ 211 $ 213 (1%) $ 727 $ 720 1% Net Earnings $ 104 $ 108 (4%) $ 359 $ 362 (1%) Diluted Earnings Per Share $ .85 $ .85 - $ 2.88 $ 2.83 2% Effective Tax Rate 36.5% 34.4% 36.5% 37.5%
Sales for the third quarter and first nine months of 1998 increased due to the acquisition of BDM, new contract awards in the space, defense and information systems business, and from higher volume in most automotive product lines. The increase in sales was partially offset by the reduction of $57 million due to a contract modification in the space, defense and information systems business and by lower volume due to the General Motors strike, the weakening economic conditions in Brazil and Asia and lower pricing across all product lines in the automotive segment. The increase in sales for the first nine months of 1998 was also partially offset by the effect of a strong U.S. dollar. Third quarter operating profit declined slightly as operating profit increases related to the acquisition of BDM and excellent award fees earned on space programs were offset by a $12.6 million automotive restructuring charge, lower volume due to the General Motors strike, higher research and development expenditures, the costs of launching new automotive products, and the weakening economic conditions in Asia and Brazil. The contract modification in the space, defense and information systems business had no impact on operating profit or net earnings. Operating profit for the first nine months of 1998 increased due to the acquisition of BDM, strong performance on space, defense and information systems contracts, the benefit from the settlement of certain patent litigation, cost reductions in the automotive business and higher automotive sales volume. The increase in operating profit was partially offset by lower automotive pricing, charges for litigation and contract reserves and severance costs relating to the combination of the Company's systems integration business with BDM, start-up costs for new facilities and new product introduction, higher research and development expenditures, the automotive restructuring charge, lower volume due to the General Motors strike and the effects of a strong U.S. dollar. Net earnings for the third quarter reflect an $8 million charge relating to the automotive restructuring. Net earnings for the first nine months of 1998 included a $31.5 million benefit from the settlement of certain patent litigation, offset by $26.5 million in charges for litigation and contract reserves, severance costs relating to the combination of the Company's systems integration business with BDM and $8 million relating to the automotive restructuring charge. Interest expense was $100 million for the first nine months of 1998 compared to $57 million for the first nine months of 1997. The increase in interest expense was primarily due to financing the acquisition of BDM. Third quarter interest expense included a reclassification of $8 million from interest 11 expense to compensation expense relating to the appreciation on deferred compensation balances and the benefit from an interest accrual adjustment relating to litigation. The higher 1998 third quarter effective tax rate was primarily attributable to the absence of certain federal and state tax incentives and the tax benefit from the realignment of certain foreign operations realized in 1997. Automotive
Nine Months Ended (In millions) Third Quarter September 30 ------------------------------ ---------------------------- Percent Percent 1998 1997 Inc (Dec) 1998 1997 Inc (Dec) ---- ---- --------- ---- ---- --------- Sales $1,685 $1,570 7% $5,384 $5,239 3% Operating Profit $ 105 $ 136 (23%) $ 400 $ 485 (17%)
The increase in sales for the third quarter and first nine months of 1998 was primarily due to higher volume in most product lines -- particularly occupant restraint systems and electrically assisted steering. The increase was partially offset by lower pricing across all product lines, primarily occupant restraint systems, weakening economic conditions in Brazil and Asia and lower volume due to the General Motors strike. The increase in sales for the first nine months of 1998 was also partially offset by the effect of a strong U.S. dollar. Lower operating profit for the third quarter and first nine months of 1998 resulted as higher volume and cost reductions were offset by lower pricing, a $12.6 million restructuring charge for severance costs, lower volume due to the General Motors strike, higher research and development expenditures, the effects of launching new products and the weakening economic conditions in Asia and Brazil. Space, Defense & Information Systems
Nine Months Ended (In millions) Third Quarter September 30 ------------------------ ---------------------------- Percent Percent 1998 1997 Inc (Dec) 1998 1997 Inc (Dec) ---- ---- --------- ---- ---- --------- Sales $1,151 $951 21% $3,575 $2,794 28% Operating Profit $ 106 $ 77 39% $ 327 $ 235 39%
The increase in sales for the third quarter and first nine months of 1998 was primarily due to the acquisition of BDM, which contributed $230 million in sales for the third quarter and $684 million year-to-date, and new contract awards. The increase in sales was partially offset by the third quarter reduction of $57 million due to a contract modification. The higher operating profit for the third quarter was due to the acquisition of BDM, excellent award fees earned on a number of Department of Defense space programs, and the continued success in commercial gallium arsenide product lines. The contract modification had no impact on operating profit. The higher operating profit for the first nine months of 1998 was due to the acquisition of BDM, excellent award fees earned on a number of Department of 12 Defense space programs, continued success in commercial gallium arsenide product lines and the benefit from the settlement of certain patent litigation. The increase in operating profit for the first nine months of 1998 was partially offset by charges for litigation and contract reserves and severance costs relating to the combination of the Company's systems integration business with BDM. LIQUIDITY AND FINANCIAL POSITION In the first nine months of 1998, cash flow provided by operating activities of $316 million and a net increase in debt of $641 million were used to fund business acquisitions of $247 million, capital expenditures of $361 million, reacquisition of common stock of $179 million of which $5 million was for the settlement of shares purchased in 1997, dividend payments of $114 million and other items of $47 million. As a result, cash and cash equivalents increased by $9 million. Third quarter operating cash flow included tax payments of $180 million related to the closure of certain long-term contracts and an additional $60 million will be paid in the fourth quarter. Net debt (short-term debt, the current portion of long-term debt and long-term debt less cash and cash equivalents) was $2.3 billion at September 30, 1998, compared to $1.6 billion at December 31, 1997. The ratio of net debt to total capital (net debt, minority interests and shareholders' investment) was 53.6 percent at September 30, 1998, compared to 47.8 percent at December 31, 1997. During the first nine months of 1998, the Company refinanced short-term debt by issuing $659 million of notes and debentures that mature at various dates through 2028. As of the end of the third quarter 1998, $268 million of short-term debt was reclassified to long-term debt as the Company intends to refinance the borrowings on a long-term basis and has the ability to do so under its U.S. and multicurrency revolving credit agreements. During the first quarter 1998, the Company established a $1 billion Universal Shelf Registration Statement. Securities that may be issued under this shelf registration statement include debt securities, common stock, warrants to purchase debt securities and warrants to purchase common stock. During the first nine months of 1998, 3,521,410 shares of TRW common stock were repurchased for $176 million, of which $2 million was settled in October 1998. Management believes that funds generated from operations and existing borrowing capacity are adequate to fund the current share repurchase program and finance planned growth, capital expenditures, working capital requirements including tax requirements, company-sponsored research and development programs and dividend payments to shareholders. OTHER MATTERS During 1997, TRW Vehicle Safety Systems Inc., a wholly owned subsidiary of the Company, reported to ADEQ potential violations of the Arizona hazardous waste law at its Queen Creek, Arizona facility for the possible failure to properly label and dispose of wastewater that might be classified as hazardous waste. If ADEQ initiates proceedings against the Company with respect to such matters, the Company could be liable for penalties and fines and other relief. Management is currently evaluating this matter and is unable to make a meaningful estimate of the amount or range of possible liability, if any, at this time, although management believes that the Company would have meritorious defenses. 13 During 1996, the Company was advised by the DOJ that it had been named as a defendant in two lawsuits brought by a former employee and filed under seal in 1994 and 1995, respectively, in the United States District Court for the Central District of California under the qui tam provisions of the civil False Claims Act. The Company cannot presently predict the outcome of these lawsuits, although management believes that their ultimate resolution will not have a material effect on the Company's financial condition or results of operations. Refer to the "Contingencies" footnote in the Notes to Financial Statements for further discussion of these matters. Year 2000 A company-wide Year 2000 ("Y2K") compliance program has been implemented to determine Y2K issues and define a strategy to assure Y2K compliance. The compliance program has four major areas: internal computer systems, factory floor systems, supplier and service management and products and contracts. The general phases common to all areas of the compliance program are: Project Start-up; Inventory and Assessment; Conversion, Upgrade and Renovation; Validation, including testing; and Implementation. The Project Start-up and the Inventory and Assessment phases are essentially complete for all four areas of the program with a limited set of activities relating to the inventory and assessment phase scheduled to be complete by year-end. The remainder of the Y2K compliance program is scheduled to be completed by year-end 1999, except for certain Y2K upgrades for non-material and low priority items. The Company's internal computer systems are comprised of engineering and research and development facilities, business computer systems, end user systems and technical infrastructure. The Company estimates that 49% of internal computer systems have been renovated to date. The remainder of the systems are expected to be renovated by year-end 1998 with a limited set of software upgrades and installations to be completed by April 1999 as initially planned by the Company. The Validation and Implementation phases for this area of the program are expected to be complete by the end of the first quarter 1999. The Company also expects critical contingency plans to be developed by the end of the first quarter 1999. The factory floor systems are comprised of manufacturing and warehousing equipment. The Company estimates that the conversion, upgrade and renovation of these systems is 35% complete to date. A significant portion of the remaining systems are expected to be renovated by year-end 1998, however the renovation of a limited number of systems is expected to complete during the first six months of 1999. Validation, implementation and critical contingency planning for the systems being renovated in 1998, are expected to be complete by the end of the first quarter 1999. Validation, implementation and contingency planning related to the systems being renovated during the first six months of 1999 will complete by year-end 1999. The Company is currently assessing Y2K issues associated with its automotive suppliers by working with the Automotive Industries Action Group (AIAG), which represents several of its largest automotive customers and major tier one suppliers. An analysis has been performed to assess each supplier's criticality and potential business risk to the Company. The analysis includes factors such as the amount purchased from the supplier and the availability of alternate sources of the items purchased. The AIAG sent self-assessment surveys to approximately 9,000 automotive suppliers on the Company's behalf. Approximately 30% of the surveys have been returned to the AIAG to date of which 27% have been released to the Company. The suppliers must provide a signed release in order for the completed surveys to be provided to the Company. The Company is contacting suppliers that have not responded to or released the survey to assure that the surveys and appropriate release forms are returned. In addition, telephone surveys, workshops, or on-site visits will be conducted by the Company for perceived high-risk suppliers. Service providers are also being surveyed to determine Y2K readiness. The Company expects the assessment and validation of automotive suppliers' and service providers' Y2K readiness to be complete by the end of the first quarter 1999. The Company also expects critical contingency plans to be developed for suppliers and service providers by the end of the first quarter 1999. Such plans may include alternate sourcing, stockpiling of inventory and supplies and disaster recovery scenarios. 14 For Space, Defense & Information Systems (SD&IS) suppliers and service providers, a similar assessment and validation process is underway. Self-assessment surveys were sent to approximately 3,500 suppliers, of which about 350 are critical to SD&IS, during the second quarter. To date, approximately 77% of those critical suppliers surveyed have responded and have certified compliance. Self-assessment surveys were distributed to the remaining 1,400 suppliers at the end of the third quarter with responses anticipated by the end of the fourth quarter. The Company is contacting suppliers that do not respond to the surveys to ensure that timely responses are received. The Company expects the assessment and validation of SD&IS suppliers and service providers to be complete by year-end 1998. The Company also expects critical contingency plans to be developed by the end of the first quarter 1999. The Company has assessed its automotive products and determined that there should be no Y2K issues. Contracts entered into by the Company, under which systems have been developed for commercial and government customers, after January 1, 1996 and contract modifications entered into after January 1, 1996 which add major scope to earlier contracts are being evaluated to determine the existence of material Y2K issues. The Company estimates that 60% of these contracts have been evaluated to date. The assessment and validation of these contracts are expected to be complete by year-end 1998. As the Company determines which systems it will be required to renovate, the Company will work together with the applicable customers to develop mutually acceptable plans and timetables for achieving Y2K compliance. As such timetables must be developed in cooperation with the applicable customers, the Company is currently unable to determine when such renovations will be complete. The Company does expect critical contingency plans to be developed by the end of the first quarter 1999. As part of a continuing process, Y2K issues are being assessed as they are identified, using formal program reviews to assess progress and initiate required actions. As the Y2K compliance program proceeds, contingency plans will be prepared, updated and implemented as necessary to address the risks identified. The Company has identified the most likely risks of Y2K noncompliance as the risk that automotive suppliers will not be Y2K compliant and the risk that contracts on which SD&IS is performing work will have Y2K-related performance issues. Due to the general uncertainty inherent in the Y2K problem, the Company is unable to determine at this time whether the consequences of Y2K compliance failures will have a material effect on the Company's results of operations or financial condition. In addition, the Company does not have control over service providers and as a result cannot currently estimate to what extent future operating results may be adversely affected by the failure of these service providers to successfully address their Y2K issues. The total cost of the Y2K program is estimated to be $150 million and includes $77 million for capitalizable costs and $73 million of costs that will be expensed as incurred. The Company has expensed approximately $31 million to date and expects to expense an additional $12 million by year-end. The Company does not anticipate that the overall costs will have a material effect on the Company's financial results or financial condition. The dates of completion and the costs of the project are based on management's estimates, which were derived utilizing assumptions of future events, including the availability of certain resources, third party modification plans and other factors. There can be no guarantee that these estimates will be achieved, and if the actual timing and costs for the Y2K program differ materially from those anticipated, the Company's financial results and financial condition could be materially adversely affected. 15 Euro Conversion On January 1, 1999, certain member countries of the European Union are scheduled to irrevocably fix the conversion rates between their national currencies and a common currency, the "Euro", which will become their legal currency on that date. The participating countries' former national currencies will continue to exist as denominations of the Euro between January 1, 1999 and January 1, 2002. The Company has established a Steering Committee that is currently evaluating the business implications of conversion to the Euro, including the need to adapt internal systems to accommodate Euro-denominated transactions, the competitive implications of cross-border price transparency, and other strategic implications. While still in the assessment phase, the Company does not expect the conversion to the Euro to have a material effect on its financial condition or results of operations. Restructuring On July 29, 1998, the Company announced actions intended to enhance the operating profit margins in its automotive businesses by 1.5 percentage points over the next two years, which will improve operating cash flow by approximately $100 million a year. To accomplish the improvements, the Company will implement the following actions: close 10 to 15 percent of the Company's 137 manufacturing plants; reduce employment by 7,500; eliminate $75 million, or 20 percent, of selling, general and administrative costs per year; reduce the cost of materials through more effective use of global sourcing and purchasing and by reducing the number of automotive suppliers by 50 percent over the next few years; improve productivity by reducing manufacturing costs by at least 25 percent over the next few years through the use of lean manufacturing practices and improved quality; and reduce aggregate capital expenditures by $300 million over the next five years. To implement these changes, the Company will take pre-tax charges of $125 to $150 million over the next 18 months, of which $12.6 million was expensed in the third quarter of 1998 related to severance costs. FORWARD-LOOKING STATEMENTS Statements in this filing that are not historical facts are forward-looking statements, which involve risks and uncertainties that could affect the Company's actual results. Important factors that could cause the Company's actual results to differ materially from the forward-looking statements contained in this report include the ability to achieve cost reductions, mitigate pricing pressure and effectively implement the restructuring program in the Company's automotive business, as well as the ability to effectively implement the company-wide Y2K compliance program in accordance with the estimated timetable and costs described herein. Additional factors can be found in the Company's Form 8-K filed with the Securities and Exchange Commission on May 29, 1998. The Company undertakes no obligation to update any forward-looking statement. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in market risk exposures during the first nine months of 1998 that affect the disclosures presented in the Company's Annual Report to Shareholders for the year ended December 31, 1997. 16 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27 Financial Data Schedule 99 Computation of Ratio of Earnings to Fixed Charges -- Unaudited (Supplement to Exhibit 12 of the following Form S-3 Registration Statement of the Company: No. 333-48443, filed March 23, 1998) (b) Reports on Form 8-K: None. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRW Inc. Date: October 26, 1998 By: /s/ William B. Lawrence -------------------------------------- William B. Lawrence Executive Vice President and Secretary By: /s/ Carl G. Miller -------------------------------------- Carl G. Miller Executive Vice President and Chief Financial Officer EX-27 2 EXHIBIT 27
5 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 79 0 1,635 0 685 2,824 6,522 3,883 7,202 2,945 1,443 0 0 75 1,789 7,202 8,959 8,959 7,370 7,370 0 0 100 566 207 359 0 0 0 359 2.95 2.88
EX-99 3 EXHIBIT 99 1 Exhibit 99 TRW Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges - Unaudited (In millions except ratio data)
Years Ended December 31 Nine Months ended ------------------------------------------------------- September 30, 1998 1997 1996 1995 1994 1993 ------------------ ---- ---- ---- ---- ---- Earnings from continuing operations before income taxes $566.0 $239.7(A) $302.2(B) $625.5 $435.5 $289.2 Unconsolidated affiliates (0.1) (8.0) 1.4 1.3 (0.6) 0.7 Minority earnings 9.3 20.2 11.5 10.8 7.7 1.4 Fixed charges excluding capitalized interest 145.1 123.9 129.0 137.2 145.3 177.5 ------ ------ ------ ------ ------ ------ Earnings $720.3 $375.8 $444.1 $774.8 $587.9 $468.8 ------ ------ ------ ------ ------ ------ Fixed Charges: Interest expense $100.5 $ 75.4 $ 84.2 $ 94.7 $104.7 $137.4 Capitalized interest 2.4 4.5 3.5 5.1 6.6 7.9 Portion of rents representa- tive of interest factor 44.6 48.5 43.2 41.4 39.2 37.9 Interest expense of uncon- solidated affiliates 0.0 0.0 1.6 1.1 1.4 2.2 ------ ------ ------ ------ ------ ------ Total fixed charges $147.5 $128.4 $132.5 $142.3 $151.9 $185.4 ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed 4.9x 2.9x 3.4x 5.4x 3.9x 2.5x charges ------- ------- ------- ------- ------- -------
(A) The 1997 earnings from continuing operations before income taxes of $239.7 million includes a $548 million earnings charge for purchased in-process research and development. See "Acquisitions" footnote in the Notes to Financial Statements of the Company's 1997 Annual Report to Shareholders. (B) The 1996 earnings from continuing operations before income taxes of $302.2 million includes a charge of $384.8 million as a result of actions taken in the automotive and space and defense businesses. See "Divestiture and special charges" footnote in the Notes to Financial Statements of the Company's 1996 Annual Report to Shareholders. -----END PRIVACY-ENHANCED MESSAGE-----