-----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, KLOOCM+kgHXjYCbbyanpVk9ot6bgo9xC1U5jDVVtMliSn3L56+3Hxlw07wufbUai 0OHGyWOT+Y706GjdUSYAuQ== 0000950152-99-000682.txt : 19990208 0000950152-99-000682.hdr.sgml : 19990208 ACCESSION NUMBER: 0000950152-99-000682 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990205 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990205 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: 8-K SEC ACT: SEC FILE NUMBER: 001-02384 FILM NUMBER: 99522578 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 8-K 1 TRW, INC. 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of report (Date of earliest event reported): February 5, 1999 -------------------- TRW Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 1-2384 34-0575430 --------------- ------------------------ ---------------- (State or other (Commission File Number) (I.R.S. Employer jurisdiction of Identification Number) incorporation) 1900 Richmond Road, Cleveland, Ohio 44124 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 291-7000 N/A - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 Item 5. Other Events. In connection with the tender offer for all of the issued share capital of LucasVarity plc, TRW Inc. will be disclosing its audited financial statements for the fiscal year ended December 31, 1998. Such financial statements, and the report of Ernst & Young LLP, are set forth on the following pages. 3 REPORT OF MANAGEMENT Management of TRW is responsible for the preparation of the accompanying consolidated financial statements of the Company and its subsidiaries. The financial statements have been prepared in conformity with generally accepted accounting principles and include the estimates and judgments of management. The financial statements have been audited by Ernst & Young LLP, independent auditors, whose report appears below. Management has established and is responsible for maintaining a system of internal accounting controls that it believes provides reasonable assurance that assets are safeguarded and transactions are executed and recorded in accordance with management's authorization. The system is tested and evaluated regularly by the Company's internal auditors as well as by the independent auditors in connection with their annual audit. TRW has an audit committee composed of four directors who are not members of management. The committee meets regularly with management, the internal auditors and the independent auditors in connection with its review of matters relating to the Company's financial statements, the Company's internal audit program, the Company's system of internal accounting controls and the services of the independent auditors. The committee also meets with the internal auditors as well as the independent auditors, without management present, to discuss appropriate matters. The committee also recommends to the directors the designation of the independent auditors. Joseph T. Gorman Carl G. Miller Thomas A. Connell Chairman and Executive Vice President and Vice President and Chief Executive Officer Chief Financial Officer Corporate Controller
January 19, 1999 3 4 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholders and Directors, TRW Inc. We have audited the accompanying consolidated balance sheets of TRW Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, cash flows and changes in shareholders' investment for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TRW Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Cleveland, Ohio January 19, 1999 Ernst & Young LLP 4 5 STATEMENTS OF EARNINGS TRW Inc. and subsidiaries (In millions except per share data)
Years ended December 31 1998 1997 1996 - -------------------------------------------------------- -------------------- Sales $ 11,886 $ 10,831 $ 9,857 Cost of sales 9,715 8,826 8,376 - -------------------------------------------------------- -------------------- Gross profit 2,171 2,005 1,481 Administrative and selling expenses 826 684 613 Research and development expenses 522 461 412 Purchased in-process research and development -- 548 -- Interest expense 114 75 84 Other expense(income)-net (37) (3) 70 - -------------------------------------------------------- -------------------- Earnings from continuing operations before income taxes 746 240 302 Income taxes 269 289 120 - -------------------------------------------------------- -------------------- Earnings(loss) from continuing operations 477 (49) 182 Discontinued operations Earnings from operations -- -- 38 Gain on disposal -- -- 260 - -------------------------------------------------------- -------------------- Net earnings(loss) $ 477 $ (49) $ 480 - -------------------------------------------------------- -------------------- - -------------------------------------------------------- -------------------- Per share of common stock Diluted Continuing operations $ 3.83 $ (.40) $ 1.37 Discontinued operations Earnings from operations -- -- .29 Gain on disposal -- -- 1.96 - -------------------------------------------------------- -------------------- Net earnings(loss) per share $ 3.83 $ (.40) $ 3.62 - -------------------------------------------------------- -------------------- Basic Continuing operations $ 3.93 $ (.40) $ 1.41 Discontinued operations Earnings from operations -- -- .29 Gain on disposal -- -- 2.02 - -------------------------------------------------------- -------------------- Net earnings(loss) per share $ 3.93 $ (.40) $ 3.72 - -------------------------------------------------------- --------------------
See notes to financial statements. 5 6 BALANCE SHEETS TRW Inc. and subsidiaries (In millions)
December 31 1998 1997 - --------------------------------------------------------------------- ------- Assets Current assets Cash and cash equivalents $ 83 $ 70 Accounts receivable (net of allowances of $33 million in 1998 and $23 million in 1997) 1,721 1,617 Inventories Finished products and work in-process 316 292 Raw materials and supplies 300 281 - --------------------------------------------------------------------- ------- Total inventories 616 573 Prepaid expenses 104 79 Deferred income taxes 179 96 - --------------------------------------------------------------------- ------- Total current assets 2,703 2,435 Property, plant and equipment-on the basis of cost Land 119 111 Buildings 1,706 1,599 Machinery and equipment 4,779 4,364 - --------------------------------------------------------------------- ------- 6,604 6,074 Less accumulated depreciation and amortization 3,921 3,453 - --------------------------------------------------------------------- ------- Total property, plant and equipment-net 2,683 2,621 Intangible assets Intangibles arising from acquisitions 850 673 Other 360 232 - --------------------------------------------------------------------- ------- 1,210 905 Less accumulated amortization 143 94 - --------------------------------------------------------------------- ------- Total intangible assets-net 1,067 811 Investments in affiliated companies 243 139 Long-term deferred income taxes 33 -- Other notes and accounts receivable 227 194 Other assets 213 210 - --------------------------------------------------------------------- ------- $ 7,169 $ 6,410 ------- ------- Liabilities and shareholders' investment Current liabilities Short-term debt $ 839 $ 411 Accrued compensation 377 338 Trade accounts payable 964 859 Other accruals 631 846 Dividends payable 40 38 Income taxes 137 99 Current portion of long-term debt 30 128 - --------------------------------------------------------------------- ------- Total current liabilities 3,018 2,719 Long-term liabilities 826 788 Long-term debt 1,353 1,117 Deferred income taxes -- 57 Minority interests in subsidiaries 94 105 Shareholders' investment Serial Preference Stock II (involuntary liquidation $7 million in 1998 and $8 million in 1997) -- 1 Common stock (shares outstanding 119.9 million in 1998 and 122.5 million in 1997) 75 78 Other capital 457 450 Retained earnings 2,021 1,778 Treasury shares-cost in excess of par value (637) (563) Accumulated other comprehensive income(loss) (38) (120) - --------------------------------------------------------------------- ------- Total shareholders' investment 1,878 1,624 - --------------------------------------------------------------------- ------- $ 7,169 $ 6,410 ------- -------
See notes to financial statements. 6 7 STATEMENTS OF CASH FLOWS TRW Inc. and subsidiaries (In millions)
Years ended December 31 1998 1997 1996 - ----------------------------------------------------------------------------- ------------------ Operating activities Net earnings(loss) $ 477 $ (49) $ 480 Adjustments to reconcile net earnings(loss) to net cash provided by continuing operations Purchased in-process research and development -- 548 -- Depreciation and amortization 566 490 452 Deferred income taxes (223) 116 (182) Discontinued operations -- -- (298) Other-net 8 10 23 Changes in assets and liabilities, net of effects of businesses acquired or sold Accounts receivable (27) 32 (46) Inventories and prepaid expenses (73) (26) 8 Accounts payable and other accruals (73) (166) 298 Other-net 6 (1) (24) - ----------------------------------------------------------------------------- ------------------ Net cash provided by operating activities of continuing operations 661 954 711 Investing activities Capital expenditures (625) (571) (501) Acquisitions, net of cash acquired (249) (1,270) (76) Net proceeds from divestitures -- -- 789 Other-net 17 24 35 - ----------------------------------------------------------------------------- ------------------ Net cash provided by(used in) investing activities (857) (1,817) 247 Financing activities Increase(decrease) in short-term debt (167) 912 (127) Proceeds from debt in excess of 90 days 1,086 113 51 Principal payments on debt in excess of 90 days (397) (89) (91) Dividends paid (154) (154) (148) Acquisition of common stock (184) (247) (361) Other-net 26 41 51 - ----------------------------------------------------------------------------- ------------------ Net cash provided by(used in) financing activities 210 576 (625) Effect of exchange rate changes on cash (1) (29) (6) - ----------------------------------------------------------------------------- ------------------ Increase(decrease) in cash and cash equivalents 13 (316) 327 Cash and cash equivalents at beginning of year 70 386 59 - ----------------------------------------------------------------------------- ------------------ Cash and cash equivalents at end of year $ 83 $ 70 $ 386 - ----------------------------------------------------------------------------- ------------------ Supplemental Cash Flow Information Interest paid (net of amount capitalized) $ 133 $ 76 $ 89 Income taxes paid (net of refunds) 391 78 615 - ----------------------------------------------------------------------------- ------------------
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. See notes to financial statements. 7 8 STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
TRW INC. AND SUBSIDIARIES (IN MILLIONS) Serial Accumulated Preference Other Total Stock II Common Other Retained Treasury Comprehensive Shareholders' Series 1&3 Stock Capital Earnings Shares Income(Loss) Investment - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $ 1 $ 40 $ 398 $1,693 $ (31) $ 71 $2,172 - ----------------------------------------------------------------------------------------------------------- Net earnings - 1996 480 480 Other comprehensive income Translation loss, net of tax of $2 million (29) (29) Minimum pension liability, net of tax of $2 million 3 3 ------ Total comprehensive income 454 Stock dividend 42 (42) -- Dividends declared Preference (1) (1) Common ($1.17 per share) (150) (150) ESOP funding 17 17 Purchase and sale of shares and other (2) 39 (372) (335) Shares sold under stock options 32 32 - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 1 80 437 1,980 (354) 45 2,189 - ----------------------------------------------------------------------------------------------------------- Net earnings(loss)- 1997 (49) (49) Other comprehensive income Translation loss, net of tax of $7 million (177) (177) Unrealized gain on securities, net of tax of $6 million 12 12 ------ Total comprehensive income(loss) (214) Dividends declared Preference (1) (1) Common ($1.24 per share) (152) (152) ESOP funding 2 2 Purchase and sale of shares and other (2) 13 (262) (251) Shares sold under stock options 51 51 - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 1 78 450 1,778 (563) (120) 1,624 - ----------------------------------------------------------------------------------------------------------- Net earnings - 1998 477 477 Other comprehensive income Translation gain, net of tax of $3 million 75 75 Unrealized gain on securities, net of tax of $10 million 18 18 Minimum pension liability, net of tax of $5 million (11) (11) ------ Total comprehensive income 559 Dividends declared Preference (1) (1) Common ($1.28 per share) (154) (154) Purchase and sale of shares and other (1) (3) 7 3 (181) (175) Credits(charges) from issuance of treasury shares (82) 82 -- Shares sold under stock options 25 25 - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ -- $ 75 $ 457 $2,021 $ (637) $ (38) $1,878 - -----------------------------------------------------------------------------------------------------------
See notes to financial statements. 8 9 NOTES TO FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 are accounted for by the equity or cost method as appropriate. USE OF ESTIMATES-The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of December 31, 1998 and 1997, and reported amounts of sales and expenses for the years ended December 31, 1998, 1997 and 1996. Actual results could differ from those estimates. LONG-TERM CONTRACTS-The percentage-of-completion (cost-to-cost) method is used to estimate sales under fixed-price and fixed-price incentive contracts. Sales under cost-reimbursement contracts are recorded as costs are incurred. Fees based on cost, award fees and incentive fees are included in sales at the time such amounts are reasonably estimable. Losses on contracts are recognized when determinable. ACCOUNTS RECEIVABLE-Accounts receivable at December 31, 1998 and 1997, included $692 million and $640 million, respectively, related to long-term contracts, of which $339 million and $209 million, respectively, were unbilled. Unbilled costs, fees and claims represent revenues earned and billable in the following month as well as revenues earned but not billable under terms of the contracts. A substantial portion of such amounts is expected to be billed during the following year. Retainage receivables and receivables subject to negotiation are not significant. INVENTORIES-Inventories are stated at the lower of cost, principally the first-in, first-out (FIFO) method, or market. Inventories applicable to long-term contracts are not significant. DEPRECIATION-Depreciation is computed over the assets' estimated useful lives using the straight-line method for the majority of the Company's depreciable assets. The remaining assets are depreciated using accelerated methods. The estimated useful lives of buildings, machinery and equipment, and computers and other office equipment are between 30-40 years, 8-12 years and 3-5 years, respectively. ASSET IMPAIRMENT-The Company records impairment losses on long-lived and intangible assets used in operations when events and circumstances indicate that the assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying amounts. INTANGIBLE ASSETS-Intangible assets are stated on the basis of cost and are being amortized by the straight-line method over the estimated future periods to be benefited, except for intangibles arising from acquisitions prior to 1971 ($49 million) which are not being amortized because there is no indication of diminished value. 9 10 Intangibles arising from acquisitions after 1970 are being amortized over periods primarily ranging from 15 to 40 years. Other intangible assets primarily include capitalized software and other intangible assets acquired through acquisitions including core and developed technology, workforce and tradename. Capitalized software is being amortized over periods not to exceed 10 years. Other intangible assets acquired through acquisitions are being amortized primarily over 15 years. The carrying value of intangible assets is assessed for impairment on a quarterly basis. FORWARD EXCHANGE CONTRACTS-The Company enters into forward exchange contracts the majority of which hedge firm foreign currency commitments and certain intercompany transactions. At December 31, 1998, the Company had contracts outstanding amounting to $162 million denominated principally in the British pound, the U.S. dollar, the Spanish peseta, the European currency unit and the Canadian dollar, maturing at various dates through December 1999. Changes in market value of the contracts are generally included in the basis of the transactions. Foreign exchange contracts are placed with a number of major financial institutions to minimize credit risk. No collateral is held in relation to the contracts, and the Company anticipates that these financial institutions will satisfy their obligations under the contracts. FAIR VALUES OF FINANCIAL INSTRUMENTS-
1998 1997 -------------------------- ------------------------- Carrying Fair Carrying Fair (In millions) Value Value Value Value - --------------------------------------------------------------------------------- ------------------------- Cash and cash equivalents $ 83 $ 83 $ 70 $ 70 Short-term debt 839 839 411 411 Floating rate long-term debt 227 227 736 736 Fixed rate long-term debt 1,156 1,249 509 584 Interest rate hedges - (liability) -- -- -- (5) Forward currency exchange contracts - asset(liability) -- 1 -- (2) - --------------------------------------------------------------------------------- -------------------------
The fair value of long-term debt was estimated using a discounted cash flow analysis, based on the Company's current borrowing rates for similar types of borrowing arrangements. The fair value of interest rate hedges and forward currency exchange contracts is estimated based on quoted market prices of offsetting contracts. ENVIRONMENTAL COSTS-The Company participates in environmental assessments and remedial efforts at operating facilities, previously owned or operated facilities, and Superfund or other waste sites. Costs related to these locations are accrued when it is probable that a liability has been incurred and the amount of that liability can be reasonably estimated. Estimated costs are recorded at undiscounted amounts based on experience and assessments and are regularly evaluated as efforts proceed. Insurance recoveries are recorded as a reduction of environmental costs when fixed and determinable. COMPREHENSIVE INCOME-The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" during the first quarter of 1998. This Statement requires that foreign currency translation, unrealized gains or losses on the Company's available-for-sale securities and minimum pension liability adjustments be included in other comprehensive income and that the accumulated balance of other comprehensive income be separately displayed. Prior year information has been restated to conform to the requirements of Statement 130. 10 11 The components of accumulated other comprehensive income at December 31, 1998 and 1997 are as follows:
(In millions) 1998 1997 - --------------------------------------------------------------------------------------------------- ---------- Foreign currency translation loss (net of tax of $1 million in 1998 and $4 million in 1997) $ (55) $(130) Unrealized gain on securities (net of tax of $16 million in 1998 and $6 million in 1997) 30 12 Minimum pension liability adjustments (net of tax of $7 million in 1998 and $2 million in 1997) (13) (2) - --------------------------------------------------------------------------------------------------- ---------- Accumulated other comprehensive income(loss) $ (38) $(120) - --------------------------------------------------------------------------------------------------- ----------
TREASURY STOCK-In February 1996, the Company's Directors authorized the acquisition of up to 20 million shares of the Company's common stock. The Company's purchases of shares of TRW common stock are recorded as treasury stock and result in a reduction of shareholders' investment. When treasury shares are issued, the Company uses a first-in, first-out method and the excess of the purchase price over the issuance price is treated as a reduction of retained earnings. EARNINGS PER SHARE-The effects of preferred stock dividends, convertible preferred stock and employee stock options were excluded from the calculation of 1997 diluted earnings per share as they would have been antidilutive.
(In millions except per share data) 1998 1997 1996 - ------------------------------------------------------ -------------------- Numerator Earnings(loss) from continuing operations $ 476.8 $ (48.5) $ 182.4 Preferred stock dividends (.6) (.7) (.7) - ------------------------------------------------------ -------------------- Numerator for basic earnings per share- earnings(loss) available to common shareholders 476.2 (49.2) 181.7 Effect of dilutive securities Preferred stock dividends .6 -- .7 - ------------------------------------------------------ -------------------- Numerator for diluted earnings per share- earnings(loss) available to common shareholders after assumed conversions $ 476.8 $ (49.2) $ 182.4 - ------------------------------------------------------ -------------------- Denominator Denominator for basic earnings per share- weighted-average common shares 121.3 123.7 128.7 Effect of dilutive securities Convertible preferred stock .9 -- 1.1 Employee stock options 2.2 -- 3.0 - ------------------------------------------------------ -------------------- Dilutive potential common shares 3.1 -- 4.1 Denominator for diluted earnings per share- adjusted weighted-average shares and assumed conversions 124.4 123.7 132.8 - ------------------------------------------------------ -------------------- Basic earnings(loss) per share from continuing operations $ 3.93 $ (0.40) $ 1.41 - ------------------------------------------------------ -------------------- Diluted earnings(loss) per share from continuing operations $ 3.83 $ (0.40) $ 1.37 - ------------------------------------------------------ --------------------
11 12 RESEARCH AND DEVELOPMENT
(In millions) 1998 1997 1996 - --------------------------------------------------------------------------- ----------------------- Customer-funded $1,425 $1,501 $1,425 Company-funded Research and development 522 461 412 Product development 196 184 160 - --------------------------------------------------------------------------- ----------------------- 718 645 572 ------ ------ ------ $2,143 $2,146 $1,997 ------ ------ ------
Company-funded research and development programs include research and development for commercial products and independent research and development and bid and proposal work related to government products and services. A portion of the cost incurred for independent research and development and bid and proposal work is recoverable through overhead charged to government contracts. Product development costs include engineering and field support for new customer requirements. The 1997 amounts exclude the $548 million charge for purchased in-process research and development. 12 13 ACQUISITIONS On February 5, 1997, the Company acquired an 80 percent equity interest in the air bag and steering wheel businesses of Magna International for cash of $415 million plus assumed net debt of $50 million. On January 30, 1998, the Company acquired the remaining 20 percent for cash of $102 million. These businesses supply air bag modules, inflators, propellants, steering wheels and other related automotive components. The results of operations have been included in the financial statements from the dates of acquisition. The acquisitions were accounted for by the purchase method; accordingly, the combined purchase price has been allocated to the net assets acquired based on their estimated fair values and to costs for certain restructuring actions, primarily plant closing and severance costs of $40 million. As of December 31, 1998, the balance of the restructuring reserve, included in other accruals, was $18 million and will be used primarily for severance costs in 1999 and 2000. The combined purchase price in excess of the net assets is $336 million and is being amortized over 40 years. On December 24, 1997, the Company acquired the shares of BDM International, Inc. (BDM) for cash of $880 million plus assumed net debt of $85 million. BDM is an information technology company operating in the systems and software integration, computer and technical services and enterprise management and operations markets. The acquisition was accounted for by the purchase method with the purchase price allocated to the net assets acquired based on their fair values. An independent valuation was performed, primarily using the income approach for valuing the intangible assets. As a result of the valuation, $548 million was allocated to in-process research and development projects that had not reached technological feasibility and had no alternative future use. This amount was recognized as an expense with no income tax benefit at the date of acquisition. The intangible assets of $371 million are being amortized over an average period of 15 years. The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the 1997 acquisitions had taken place at the beginning of the respective periods. The pro forma information includes adjustments for interest expense that would have been incurred to finance the acquisitions, additional depreciation based on the fair market value of the property, plant and equipment acquired, write-off of purchased in-process research and development and the amortization of intangible assets arising from the transactions. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been affected on the assumed dates.
(In millions except per share data) Year ended (unaudited) 1997 1996 - -------------------------------------------------------------------------------------------------------------- Sales $11,758 $11,231 Loss from continuing operations (85) (392) Loss per share (.69) (3.05) - --------------------------------------------------------------------------------------------------------------
13 14 SPECIAL CHARGES AND DIVESTITURE On July 29, 1998, the Company announced actions intended to enhance the automotive segment profit margins. The Company will record pre-tax charges of $125 million to $150 million by the end of 2000, of which $24 million was expensed in 1998 primarily for plant closing and severance costs. Other accruals at December 31, 1998 includes $18 million relating to these charges and will be used in 1999. During 1996, the Company recorded before-tax charges of $385 million ($252 million after tax, or $1.90 per share) primarily for actions taken in the automotive and space, defense and information systems businesses. The components of the charge included severance costs of $40 million, contract reserves of $99 million, litigation and warranty expenses of $127 million, asset writedowns of $96 million and other items of $23 million. The charges are included in the Statements of Earnings for 1996 as follows: $321 million included in cost of sales, $18 million included in interest expense, $65 million included in other expense(income)-net and a reduction of $19 million included in other captions. Other accruals at December 31, 1998 and 1997 included $7 million and $21 million, respectively, relating to severance costs. The balance will be expended in 1999 and 2000. During 1996, the Company sold substantially all of the businesses in its Information Systems & Services segment. The financial statements reflect as discontinued operations for all periods presented that segment's net assets and operating results, as well as the related transaction gain. Net proceeds of $1.1 billion in cash resulted in a gain of $484 million ($260 million after tax, or $1.96 per share). Sales of the discontinued operations were $453 million in 1996. 14 15
OTHER EXPENSE(INCOME)-NET (In millions) 1998 1997 1996 - ----------------------------------------------------------------------------- ----------------------- Other income $(123) $ (66) $ (67) Other expense 73 48 119 Minority interests 11 20 12 Earnings of affiliates (5) (12) (1) Foreign currency translation 7 7 7 - ----------------------------------------------------------------------------- ----------------------- $ (37) $ (3) $ 70 ----- ----- -----
Other income in 1998 includes a $49 million benefit from the settlement of certain patent litigation. Other income in 1997 includes a $15 million gain on the sale of a property. Other expense in 1996 includes $65 million of special charges. Refer to the "Special Charges and Divestiture" footnote. 15 16 INCOME TAXES
Earnings from continuing operations before income taxes (In millions) 1998 1997 1996 - ------------------------------------------------------------------------- ----------------------- U.S. $ 534 $ 95 $ 133 Non-U.S. 212 145 169 - ------------------------------------------------------------------------- ----------------------- $ 746 $ 240 $ 302 ----- ----- -----
Provision for income taxes (In millions) 1998 1997 1996 - ------------------------------------------------------------------------- ----------------------- Current U.S. federal $ 359 $ 136 $ 176 Non-U.S. 86 84 73 U.S. state and local 28 23 20 - ------------------------------------------------------------------------- ----------------------- 473 243 269 Deferred U.S. federal (196) 46 (130) Non-U.S. (10) (4) (6) U.S. state and local 2 4 (13) - ------------------------------------------------------------------------- ----------------------- (204) 46 (149) ----- ----- ----- $ 269 $ 289 $ 120 ----- ----- -----
Effective income tax rate 1998 1997 1996 - --------------------------------------------------------------------------- ------------------------ U.S. statutory income tax rate 35.0% 35.0% 35.0% Nondeductible expenses .9 2.7 2.4 U.S. state and local income taxes net of U.S. federal tax benefit 2.6 7.6 3.0 Non-U.S. tax rate variances net of foreign tax credits 2.1 (2.2) 3.4 Prior years' adjustments (.3) (3.5) (1.9) Purchased in-process research and development -- 80.0 -- Other (4.2) .7 (2.3) - ------------------------------------------------------------------------------ ------------------------- 36.1% 120.3% 39.6% ---- ----- ----
The effective tax rate in 1998 was 36.1 percent compared to 120.3 percent in 1997. Excluding the write-off of purchased in-process research and development, the 1997 effective tax rate would have been 36.6 percent. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1998 and 1997, the Company had unused tax benefits of $39 million and $30 million, respectively, related to non-U.S. net operating loss carryforwards for income tax purposes, of which $25 million and $13 million can be carried forward indefinitely and the balance expires at various dates through 2005. A valuation allowance at December 31, 1998 and 1997, of $29 million and $25 million, respectively, has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the benefit of the loss carryforwards. 16 17 It is the Company's intention to reinvest undistributed earnings of certain of its non-U.S. subsidiaries and thereby indefinitely postpone their remittance. Accordingly, deferred income taxes have not been provided for accumulated undistributed earnings of $544 million at December 31, 1998.
Deferred tax Deferred tax assets liabilities -------------------------------------------------- (In millions) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Pensions and postretirement benefits other than pensions $259 $260 $ -- $ 6 Completed contract method of accounting for long-term contracts -- 49 165 457 Service contracts -- -- 24 -- State and local taxes 12 23 1 -- Reserves and accruals 161 142 -- -- Depreciation and amortization -- 10 128 91 Insurance accruals 32 22 -- -- Non-U.S. net operating loss carryforwards 39 30 -- -- Other 106 123 50 41 - ----------------------------------------------------------------------------------- ---------------- 609 659 368 595 Valuation allowance for deferred tax assets (29) (25) -- -- - ----------------------------------------------------------------------------------- ---------------- $580 $634 $368 $595 ---- ---- ---- ----
17 18 PENSION PLANS At December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pensions and other postretirement benefit plans. The measurement and recognition requirements for pension or other postretirement benefit plans have not changed. Prior year information has been restated to conform to the requirements of the new standard. The Company has defined benefit pension plans for substantially all employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ended December 31, 1998, and a statement of the funded status as of December 31, 1998 and 1997:
1998 1997 -------------------- --------------------- (In millions) U.S. Non-U.S. U.S. Non-U.S. - ------------------------------------------------------------------------------------------------------------------- Change in benefit obligations Benefit obligations at January 1 $2,872 $ 429 $2,381 $ 412 Service cost 94 16 72 16 Interest cost 200 29 179 29 Amendments 3 1 5 5 Actuarial loss 127 64 320 17 Foreign currency exchange changes -- 7 -- (31) Acquisitions -- -- 114 -- Benefits paid (254) (29) (199) (19) - ----------------------------------------------------------------------------------- ------------------- Benefit obligations at December 31 3,042 517 2,872 429 Change in plan assets Fair value of plan assets at January 1 3,139 322 2,787 314 Actual return on plan assets 392 22 438 24 Foreign currency exchange changes -- (4) -- (13) Acquisitions -- -- 104 -- Company contributions 27 21 9 13 Plan participant contributions -- 3 -- 3 Benefits paid (254) (29) (199) (19) - ----------------------------------------------------------------------------------- ------------------- Fair value of plan assets at December 31 3,304 335 3,139 322 Funded status of the plan 262 (182) 267 (107) Unrecognized actuarial (gain)loss (172) 28 (162) (39) Unrecognized prior service cost 29 10 33 11 Unrecognized net transition asset (4) (10) (23) (11) - ----------------------------------------------------------------------------------- ------------------- Total recognized $ 115 $ (154) $ 115 $ (146) - ----------------------------------------------------------------------------------- -------------------
The following table provides the amounts recognized in the balance sheet as of December 31, 1998 and 1997:
1998 1997 ----------------------- ----------------------- (In millions) U.S. Non-U.S. U.S. Non-U.S. - --------------------------------------------------------------------------------------------------------------------- Prepaid benefit cost $ 169 $ 2 $ 157 $(115) Accrued benefit liability (54) (156) (42) (31) Additional minimum liability (13) (20) (16) (7) Intangible asset and other 9 4 13 6 Accumulated other comprehensive income 4 16 3 1 - ----------------------------------------------------------------------------------- ---------------- Total recognized $ 115 $(154) $ 115 $(146) - ----------------------------------------------------------------------------------- ----------------
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the U.S. pension plans with accumulated benefit obligations in excess of plan assets were $72 million, $62 million and zero, respectively, as of December 31, 1998, and $189 million, $167 million and $105 million, respectively, as of December 31, 1997. 18 19 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the non-U.S. pension plans with accumulated benefit obligations in excess of plan assets were $187 million, $169 million and $22 million, respectively, as of December 31, 1998, and $150 million, $138 million and $21 million, respectively, as of December 31, 1997. The defined benefit pension plans held approximately 4.8 million and 4.4 million shares of the Company's common stock with a fair value of approximately $267 million and $232 million at December 31, 1998 and 1997, respectively. The plans received approximately $6 million and $5 million in dividends on these shares in 1998 and 1997, respectively. The following table provides the components of net pension cost for the plans for years 1998, 1997 and 1996:
1998 1997 1996 --------------------- ------------------------------------------ (In millions) U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. - --------------------------------------------------------------------------------------------------------------------- Defined benefit plans Service cost-benefits earned during the year $ 94 $ 16 $ 72 $ 16 $ 73 $ 14 Interest cost on projected benefit obligation 200 29 179 29 165 28 Expected return on plan assets (260) (28) (223) (26) (205) (24) Amortization of recognized loss 1 1 -- -- 10 4 Amortization of prior service cost 7 2 7 3 6 6 Amortization of transition asset (18) (1) (18) (1) (18) (1) - ---------------------------------------------------------------------- -------------------------------------- Defined benefit plans 24 19 17 21 31 27 Defined contribution plans 1 5 1 5 1 5 Employee stock ownership and savings plan 47 -- 44 -- 40 -- - ---------------------------------------------------------------------- -------------------------------------- Total pension cost $ 72 $ 24 $ 62 $ 26 $ 72 $ 32 - ---------------------------------------------------------------------- --------------------------------------
The amount included within other comprehensive income arising from a change in the minimum pension liability was a loss of $11 million, net of tax of $5 million, in 1998, zero in 1997 and a gain of $3 million, net of tax of $2 million, in 1996. The assumptions used in the measurement of the Company's benefit obligations are shown in the following table:
1998 1997 ----------------------- ------------------- U.S. Non-U.S. U.S. Non-U.S. - ---------------------------------------------------------------------------------------------------------------- Actuarial assumptions Discount rate 6.75% 5.5-6.0% 7.00% 6.0-7.0% Rate of increase in compensation levels 4.00% 2.0-3.5% 4.40% 3.5-4.0% - ----------------------------------------------------------------------------------- ----------------
The expected long-term rate of return on plan assets for U.S. plans was 9.5 percent for 1998 and 9 percent for 1997. For non-U.S. plans the expected long-term rate of return ranged from 8.5 to 8.75 percent in 1998 and 9 to 9.5 percent in 1997. The Company sponsors a contributory stock ownership and savings plan for which a majority of its U.S. employees are eligible. The Company matches employee contributions up to 3 percent of the participant's qualified compensation. The Company contributions are held in an unleveraged employee stock ownership plan. The Company also sponsors other defined contribution pension plans covering employees at some of its operations. 19 20 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS At December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pensions and other postretirement benefit plans. The measurement and recognition requirements for pension or other postretirement benefit plans have not changed. Prior year information has been restated to conform to the requirements of the new standard. The Company provides health care and life insurance benefits for a majority of its retired employees in the United States and Canada. The health care plans provide for cost sharing, in the form of employee contributions, deductibles and coinsurance, between the Company and its retirees. The postretirement health care plan covering a majority of employees who retired since August 1, 1988, limits the annual increase in the Company's contribution toward the plan's cost to a maximum of the lesser of 50 percent of medical inflation or 4 percent. Life insurance benefits are generally noncontributory. The Company's policy is to fund the cost of postretirement health care and life insurance benefits in amounts determined at the discretion of management. Retirees in certain other countries are provided similar benefits by plans sponsored by their governments. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ended December 31, 1998, and a statement of the funded status as of December 31, 1998 and 1997:
(In millions) 1998 1997 - ---------------------------------------------------------------------------------------------- ----- Change in benefit obligations Benefit obligations at January 1 $ 794 $ 760 Service cost 19 13 Interest cost 54 54 Actuarial (gain)loss 8 (1) Acquisitions -- 4 Foreign currency exchange rate changes (3) (3) Plan amendments 1 -- Plan participant contributions 5 5 Benefits paid (44) (38) - ---------------------------------------------------------------------------------------------- ----- Benefit obligations at December 31 834 794 Change in plan assets Fair value of plan assets at January 1 129 83 Actual return on plan assets 12 12 Company contributions 49 67 Plan participant contributions 5 5 Benefits paid (44) (38) - ---------------------------------------------------------------------------------------------- ----- Fair value of plan assets at December 31 151 129 - ---------------------------------------------------------------------------------------------- ----- Funded status of the plan (683) (665) Unrecognized actuarial gain (14) (30) Unrecognized prior service cost (5) (6) - ---------------------------------------------------------------------------------------------- ----- Total accrued benefit cost recognized $(702) $(701) - ---------------------------------------------------------------------------------------------- -----
The following table provides the components of net postretirement benefit cost for the plans for years 1998, 1997 and 1996:
(In millions) 1998 1997 1996 - ----------------------------------------------------------------------------- ------------------------- Components of net postretirement benefit cost Service cost $ 19 $ 13 $ 13 Interest cost 54 54 54 Expected return on plan assets (13) (9) (5) - ----------------------------------------------------------------------------- ------------------------- Net postretirement benefit cost $ 60 $ 58 $ 62 - ----------------------------------------------------------------------------- -------------------------
20 21 The weighted average discount rate used in determining the accumulated postretirement benefit obligations as of December 31, 1998 and 1997, was 6.75 percent and 7 percent, respectively. The weighted average rate of compensation increase was 4.0 percent and 4.4 percent for 1998 and 1997, respectively. The weighted average expected long-term rate of return on plan assets was 9.5 percent for 1998 and 8 percent for 1997. A 7.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5 percent in the year 2009 and remain at that level thereafter. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
(In millions) One-percentage-point ------------------------ Increase Decrease - ------------------------------------------------------------------------------------------------- --------- Effect on total of service and interest cost components $ 10 $ (7) Effect on postretirement benefit obligation 100 (83) - ----------------------------------------------------------------------------------------------------------------
21 22 DEBT AND CREDIT AGREEMENTS
Short-term debt (In millions) 1998 1997 - -------------------------------------------------------------------------------------------------- ------- U.S. borrowings $ 589 $ 318 Non-U.S. borrowings 250 93 - ------------------------------------------------------------------------------------------------- -------- $ 839 $ 411 ------------ ------- Long-term debt (In millions) 1998 1997 - ------------------------------------------------------------------------------------------------- -------- U.S. borrowings $ 141 $ 691 Non-U.S. borrowings 91 54 Medium-term notes 6.05% Notes due 2005 200 -- 6.25% Notes due 2010 150 -- 6.65% Notes due 2028 150 -- 6.30% Notes due 2008 100 -- 9.35% Notes due 2020 (due 2000 at option of note holder) 100 100 9.375% Notes due 2021 100 100 Other medium-term notes 326 278 Other 25 22 - ------------------------------------------------------------------------------------------------- -------- Total long-term debt 1,383 1,245 Less current portion 30 128 - ------------------------------------------------------------------------------------------------- -------- $1,353 $1,117 ------ ------
The Company maintains two committed U.S. dollar revolving credit agreements. The first agreement allows the Company to borrow up to $750 million with 17 banks and extends through June 2002. The second agreement allows the Company to borrow up to $745 million with 14 banks and extends to December 6, 1999. The interest rate under the agreements is either a negotiated rate, the banks' prime rates, a rate based on the banks' costs of funds in the secondary certificate of deposit market or a rate based on an Interbank Offered Rate. The Company's commercial paper borrowings are supported by these agreements. At December 31, 1998, there were no outstanding borrowings under the U.S. revolving credit agreements. The Company also maintains a committed U.S. dollar denominated revolving credit agreement with five banks for use by the Company's Brazilian operations. The agreement allows the Company to borrow up to $50 million and extends through July 2003. The interest rate under the agreement is a rate based on an Interbank Offered Rate. At December 31, 1998, there were $20 million in outstanding borrowings under this agreement. The Company also maintains a committed multi-currency revolving credit agreement with 17 banks. The agreement allows the Company to borrow up to $250 million and extends through June 2002. The interest rate under the agreement is based on various interest rate indices. At December 31, 1998, there were no outstanding borrowings under the multi-currency credit agreement. At December 31, 1998, $191 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 multi-currency revolving credit agreements. During 1998, the Company refinanced short-term debt by issuing $659 million of notes and debentures that mature at various dates through 2028. 22 23 The Company established a $1 billion Universal Shelf Registration Statement during 1998 of which approximately $841 million remains available at December 31, 1998. 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. The weighted average interest rate on short-term borrowings outstanding, including amounts reclassified to long-term debt, at December 31, 1998 and 1997, is 5.9 percent and 6.4 percent, respectively. The other medium-term notes bear interest at rates ranging from 5.98 percent to 9.25 percent and mature at various dates through 2020. Long-term non-U.S. borrowings bear interest, stated in terms of the local currency borrowing, at rates ranging from 3.3 percent to 9.5 percent at December 31, 1998, and mature at various dates through 2006. The maturities of long-term debt are, in millions: 1999-$30; 2000-$35; 2001-$29; 2002-$194; 2003-$85; and $1,010 thereafter. The indentures and other debt agreements impose, among other covenants, maintenance of minimum net worth. Under the most restrictive interpretation of these covenants, the payment of dividends was limited to approximately $972 million at December 31, 1998. Compensating balance arrangements and commitment fees were not material. 23 24 LEASE COMMITMENTS The Company leases certain offices, manufacturing and research buildings, machinery, automobiles and computer and other equipment. Such leases, some of which are noncancelable and in many cases include renewals, expire at various dates. The Company pays most maintenance, insurance and tax expenses relating to leased assets. Rental expense for operating leases was $180 million for 1998, $146 million for 1997 and $130 million for 1996. At December 31, 1998, the future minimum lease payments for noncancelable operating leases totaled $390 million and are payable as follows: 1999-$108; 2000-$82; 2001-$57; 2002-$42; 2003-$30; and $71 thereafter. 24 25 CAPITAL STOCK SERIAL PREFERENCE STOCK II - cumulative - stated at $2.75 a share; 5 million shares authorized. Series 1 - each share convertible into 8.8 shares of common; redeemable at $104 per share; involuntary liquidation price of $104 per share; dividend rate of $4.40 per annum. Series 3 - each share convertible into 7.448 shares of common; redeemable at $100 per share; involuntary liquidation price of $40 per share; dividend rate of $4.50 per annum. Series 4 - not convertible into common shares; redemption price and involuntary liquidation price of $125 per one one-hundredth of a share; annual dividend rate per one one-hundredth of a share of the lesser of $4.00 or the current dividend on common stock; no shares outstanding at December 31, 1998. COMMON STOCK - $0.625 par value; authorized 500 million shares; shares outstanding were reduced by treasury shares of 13.6 million in 1998 and 10.9 million in 1997. The Company has a shareholder purchase rights plan under which each shareholder of record as of May 17, 1996, received one-half of one right for each TRW common share held. Each right entitles the holder, upon the occurrence of certain events, to buy one one-hundredth of a share of Cumulative Redeemable Serial Preference Stock II, Series 4, at a price of $300. In other events, each right entitles the holder, other than the acquiring party, to purchase $600 of TRW common stock or common stock of another person at a 50 percent discount. The Company may redeem these rights at its option at one cent per right under certain circumstances. At December 31, 1998, 14.8 million shares of common stock were reserved for the exercise and issuance of stock options and conversion of the Serial Preference Stock II, Series 1 and 3. There were 1.2 million shares of Cumulative Redeemable Serial Preference Stock II, Series 4, reserved for the shareholder purchase rights plan. 25 26 STOCK OPTIONS The Company has granted nonqualified stock options to certain employees to purchase the Company's common stock at the market price on the date of grant. Stock options granted become exercisable to the extent of one-third of the optioned shares for each full year of employment following the date of grant and expire 10 years after the date of grant. The Company applies the provisions of Accounting Principles Board Opinion No. 25 in accounting for its employee stock options and, as such, no compensation expense is recognized as the exercise price equals the market price of the stock on the date of grant.
1998 1997 1996 - ------------------------------------------------------- ----------------------- --------------------- Weighted- Weighted- Weighted- average average average Millions exercise Millions exercise Millions exercise of shares price of shares price of shares price - --------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 8.5 $35.02 8.5 $29.72 9.2 $26.45 Granted 2.4 53.31 2.0 50.19 1.7 43.98 Exercised .9 25.68 1.6 25.96 1.9 25.28 Canceled, expired or terminated .2 46.54 .4 38.63 .5 35.51 Outstanding at end of year 9.8 40.11 8.5 35.02 8.5 29.72 Exercisable 5.8 32.31 5.3 27.81 5.6 25.18 Weighted-average fair value of options granted 12.86 11.92 9.45 - ------------------------------------------------------ --------------------------------------------------
At December 31, 1998, approximately 2,000 employees were participants in the plan. As of that date, the per share exercise prices of options outstanding ranged from $19.88 to $58.88. The following table provides certain information with respect to stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------------- -------------------------- Weighted-average Weighted- Weighted- Millions of remaining average Millions of average shares contractual life exercise shares exercise Range of exercise prices outstanding in years price exercisable price - ------------------------------------------------------------------------------------------------------------------- $19.88 - $39.99 4.3 3.8 $27.16 4.3 $27.16 40.00 - 58.88 5.5 8.3 50.21 1.5 46.88 - ----------------------------------------------------------------------------------------------------------------- 9.8 6.3 $40.11 5.8 $32.31 -------------------------------------------------------------------------------------
Had the compensation cost for the stock options granted in 1998, 1997 and 1996 been determined based on the fair value at the grant date consistent with the fair value method of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced by $13 million ($.10 per share) in 1998, $9 million ($.08 per share) in 1997 and $5 million ($.04 per share) in 1996. The effect on 1996 net earnings is not representative of the effect on future years' net earnings amounts as the compensation cost reflects expense for only two years' vesting in 1996. Fair value was estimated at the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rate of 4.59%, 5.83% and 5.43%; dividend yield of 2.28%, 2.54% and 2.84%; expected volatility of 23%, 20% and 20%; and an expected option life of six years for 1998, 1997 and 1996. 26 27 CONTINGENCIES The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. In addition, the Company is conducting a number of environmental investigations and remedial actions at current and former Company locations and, along with other companies, has been named a potentially responsible party for certain waste management sites. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably to the Company. A reserve estimate for each matter is established using standard engineering cost estimating techniques. In the determination of such costs, consideration is given to professional judgment of Company environmental engineers in consultation with outside environmental specialists when necessary. At multi-party sites, the reserve estimate also reflects the expected allocation of total project costs among the various potentially responsible parties. At December 31, 1998, the Company had reserves for environmental matters of $64 million, including $7 million of additional accruals recorded during the year. The Company aggressively pursues reimbursement for environmental costs from its insurance carriers. However, insurance recoveries are not recorded as a reduction of environmental costs until they are fixed and determinable. At December 31, 1998, the "Other notes and accounts receivable" caption on the balance sheet includes $22 million of insurance recoveries related to environmental matters. The Company believes that any liability that may result from the resolution of environmental matters for which sufficient information is available to support these cost estimates will not have a material adverse effect on the Company's financial position. However, the Company cannot predict the effect on the Company's financial position of expenditures for aspects of certain matters for which there is insufficient information. In addition, the Company cannot predict the effect of compliance with environmental laws and regulations with respect to unknown environmental matters on the Company's financial position or the possible effect of compliance with environmental requirements imposed in the future. Further, product liability claims may be asserted in the future for events not currently known by management. Although the ultimate liability from these potential claims cannot be ascertained at December 31, 1998, management does not anticipate that any related liability, after consideration of insurance recovery, would have a material adverse effect on the Company's financial position. 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 Arizona State Attorney General also is investigating matters, and federal, civil and criminal governmental investigations with respect to these potential violations are ongoing. 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. 27 28 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 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. On November 23, 1998 (entered as an Order on January 21, 1999), the court dismissed certain counterclaims asserted against the former employee and the federal government and took under advisement the former employee's motion to dismiss certain other 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. 28 29 OPERATING SEGMENTS The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" during the fourth quarter of 1998. Statement 131 establishes standards for reporting information about operating segments in annual financial statements and requires that select information about operating segments be disclosed in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segment and geographic area information for all periods presented has been restated to conform to Statement 131. The Company's reportable operating segments include Automotive and Space, Defense & Information Systems. The operating segments are managed separately as they each represent a strategic business component that offers different advanced technology products and serves different markets. Separate financial results are available for each operating segment and are regularly reviewed by the chief operating officer for purposes of assessing performance and allocating resources. The Company's space, defense and information systems businesses have been aggregated into one operating segment as they exhibit similar economic characteristics, operate in substantially the same regulatory environment, offer similar products and services to the same customer base, perform jointly on a significant number of contracts and exhibit similar methods of developing and delivering products and services. The Company is a United States-based company providing advanced technology products and services for the automotive and space, defense and information systems markets. The principal markets for the Company's automotive products are North American, European and Asian original equipment manufacturers and independent distributors. Space, Defense & Information Systems primarily offers products and services to the United States Government, agencies of the United States Government, state and local governments, and international and commercial customers. AUTOMOTIVE-Occupant restraint systems, including sensors, steering wheels, air bag and seat belt systems. Steering systems, including hydraulic and electrically assisted power and manual rack and pinion steering for light vehicles, hydraulic steering systems for commercial truck and off-highway vehicles and suspension components. Electrical and electronic controls, engineered fasteners and stud welding and control systems. Engine valves and valve train parts. SPACE, DEFENSE & INFORMATION SYSTEMS-Spacecraft, including the design and manufacture of spacecraft equipment, propulsion subsystems, electro-optical and instrument systems, spacecraft payloads, high-energy lasers and laser technology and other high-reliability components. Electronic systems, equipment, components and services, including the design and manufacture of space communication systems, airborne reconnaissance systems, unmanned aerial vehicles, avionics systems, commercial telecommunications and other electronic technologies for tactical and strategic applications. Systems integration, systems engineering services and software development in the fields of military command and control, strategic missiles, intelligence requirements management, public safety, modeling and simulation, training, telecommunications, image processing, earth observation, nuclear waste management, air traffic control, security and counterterrorism, and other high-technology systems. Information technology systems, products and services focused on defense, health and human safety, integrated supply chain, warehousing, logistics, test and evaluation, criminal justice, tax systems modernization, and financial applications. 29 30 The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company evaluates operating performance based on each segment's profit before income taxes and total assets net of segment current operating liabilities. Debt and related interest expense, interest related to the other postretirement benefit liability, currently payable income taxes, current deferred income taxes, long-term deferred income taxes in 1998 and corporate staff expenses are maintained at the corporate level and are not a component of the operating segment results. Information concerning operating segments as of and for each of the three years ended December 31, is as follows:
Space, Defense & Information (In millions) Automotive Systems Total - ------------------------------------------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------------------------------------------ Revenue from external customers $ 7,201 $ 4,685 $11,886 Segment profit before income taxes 543 458 1,001 Restructuring charges included in segment profit 24 -- 24 Segment assets 3,316 1,240 4,556 Depreciation and amortization 396 156 552 Capital expenditures 456 163 619 - ------------------------------------------------------------------------------------------------------------------ 1997 - ------------------------------------------------------------------------------------------------------------------ Revenue from external customers $ 7,032 $ 3,799 $10,831 Segment profit before income taxes 637 348 985 Segment assets 2,926 1,083 4,009 Depreciation and amortization 362 115 477 Capital expenditures 398 156 554 - ------------------------------------------------------------------------------------------------------------------ 1996 - ------------------------------------------------------------------------------------------------------------------ Revenue from external customers $ 6,493 $ 3,364 $ 9,857 Segment profit before income taxes 330 180 510 Special charges included in segment profit 293 89 382 Segment assets 2,334 657 2,991 Depreciation and amortization 327 112 439 Capital expenditures 343 157 500 - ------------------------------------------------------------------------------------------------------------------
The Company accounts for intersegment sales or transfers at current market prices. Intersegment sales and transfers were not significant. Sales to agencies of the U.S. Government, primarily by the Space, Defense & Information Systems segment, were $4,119 million in 1998, $3,523 million in 1997 and $3,121 million in 1996. Sales to Ford Motor Company by the Automotive segment were $1,423 million in 1998, $1,469 million in 1997 and $1,470 million in 1996. Reconciliations of the items reported for the operating segments to the applicable amounts reported in the consolidated financial statements are as follows:
(In millions) 1998 1997 1996 - -------------------------------------------------------------------------------- ------------------------------ Segment profit before income taxes $1,001 $ 985 $ 510 Purchased in-process research and development -- (548) -- Interest expense (119) (80) (88) Corporate expense and other (136) (117) (120) - -------------------------------------------------------------------------------- ------------------------------ Earnings from continuing operations before income taxes $ 746 $ 240 $ 302 - -------------------------------------------------------------------------------- ------------------------------
30 31
(In millions) 1998 1997 1996 - ------------------------------------------------------------------------------ --------------------------- Segment assets $4,556 $4,009 $2,991 Segment current operating liabilities 1,843 1,828 1,620 Current deferred taxes 179 96 424 Long-term deferred taxes 33 -- -- Segment eliminations and adjustments 122 114 106 Corporate and other 436 363 758 - ------------------------------------------------------------------------------ --------------------------- Total assets $7,169 $6,410 $5,899 - ------------------------------------------------------------------------------ ---------------------------
Information concerning principal geographic areas as of and for the three years ended December 31, is as follows:
United All (In millions) States Germany Other Total - ------------------------------------------------------------------------------------------------------------------- Revenue from external customers 1998 $ 7,658 $ 1,562 $ 2,666 $11,886 1997 6,919 1,442 2,470 10,831 1996 6,469 1,038 2,350 9,857 - ------------------------------------------------------------------------------------------------------------------- Property, plant and equipment-net 1998 $ 1,491 $ 497 $ 695 $ 2,683 1997 1,560 451 610 2,621 1996 1,576 264 640 2,480 - -------------------------------------------------------------------------------------------------------------------
Revenues are attributable to geographic areas based on the location of the assets producing the revenues. Inter-area sales are not significant to the total revenue of any geographic area. 31 32 EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS (UNAUDITED) On January 28, 1999, the Company announced its intention to acquire the outstanding common shares of LucasVarity plc in a cash tender offer totaling approximately $7 billion. TRW has received fully underwritten financing from J.P. Morgan, Bank of America, and Citibank. The Boards of Directors of both companies have approved the transaction and LucasVarity's Board of Directors has entered into irrevocable agreements to support the transaction. The transaction, which is subject to normal closing conditions, is expected to be completed in the second quarter of 1999 and will be accounted for under purchase accounting. 32 33 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In millions except per share data) - -------------------------------------------------------------------------------------------------------------------- First Second Third Fourth ----------------- ----------------- ------------------- ------------------- 1998 1997 1998 1997 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (A) (B) (C) (D)(E) Sales $3,095 $2,660 $3,028 $2,852 $2,836 $2,521 $2,927 $2,798 Gross profit 520 482 547 534 522 466 582 523 Earnings(loss) before income taxes 204 195 198 219 164 166 180 (340) Net earnings(loss) 129 119 126 135 104 108 118 (411) Net earnings(loss) per share Diluted 1.03 .92 1.00 1.05 .85 .85 .96 (3.34) Basic 1.05 .95 1.03 1.09 .86 .88 .98 (3.34) - --------------------------------------------------------------------------------------------------------------------
(A) Earnings(loss) before income taxes includes a $49 million gain ($32 million after tax, 25 cents per share) from the settlement of certain patent litigation and a $34 million charge ($22 million after tax, 17 cents per share) for litigation and contract reserves and severance costs relating to the combination of the Company's systems integration business with BDM International, Inc. (B) Earnings(loss) before income taxes includes a charge of $13 million ($8 million after tax, 7 cents per share) related to the automotive restructuring. (C) Earnings(loss) before income taxes includes a benefit of $25 million ($16 million after tax, 13 cents per share) from an interest accrual adjustment relating to a tax litigation settlement and an $11 million charge ($10 million after tax, 8 cents per share) related to the automotive restructuring. (D) Earnings(loss) before income taxes includes a $548 million ($4.46 per share) one time noncash charge related to in-process research and development with no income tax benefit. (E) Earnings(loss) before income taxes includes a $15 million gain ($10 million after tax, 8 cents per share) related to the sale of a property. 33 34 STOCK PRICES AND DIVIDENDS (UNAUDITED) The book value per common share at December 31, 1998, was $15.61 compared to $13.19 at the end of 1997. The Company's Directors declared the 242nd consecutive quarterly dividend during December 1998. Dividends declared per share in 1998 were $1.28, up 3 percent from $1.24 in 1997. The following table highlights the market prices of the Company's common and preference stocks and dividends paid for the quarters of 1998 and 1997.
Price of Price of Dividends paid per traded shares traded shares share ------------------ -------------------- -------------------- Quarter 1998 1997 1998 1997 ------- ------------------ -------------------- -------------------- High Low High Low - --------------------------------------------------------------------------------------------------------------------- Common stock 1 $ 56-1/4 $ 50-9/16 $ 55-7/8 $ 48-1/8 $ .31 $ .31 Par value $0.625 2 57-3/8 50-1/16 58-3/8 47-3/8 .31 .31 per share 3 56-15/16 42-11/16 61-5/16 51-1/4 .31 .31 4 58 43 61-3/16 50-1/2 .33 .31 - ----------------------------------------------------------- ---------------------- ------------------- Cumulative Serial 1 400 200 500 300 1.10 1.10 Preference Stock II 2 468 468 457-1/2 442 1.10 1.10 $4.40 Convertible 3 495 420 600 300 1.10 1.10 Series 1 4 480 480 495 495 1.10 1.10 - ----------------------------------------------------------- ---------------------- ------------------- Cumulative Serial 1 390 379 400 364 1.125 1.125 Preference Stock II 2 400 400 402 396 1.125 1.125 $4.50 Convertible 3 405 405 423-1/4 423-1/4 1.125 1.125 Series 3 4 350 250 420 400 1.125 1.125 - ----------------------------------------------------------- ---------------------- -------------------
The $4.40 Convertible Series 1 was not actively traded during the first quarter of 1998 and the first and third quarters of 1997. The $4.50 Convertible Series 3 were not actively traded during the fourth quarter of 1998. The prices shown for these quarters represent the range of asked(high) and bid(low) quotations. 34 35 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (c) Exhibits 23 Consent of Ernst & Young LLP 36 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 hereunto duly authorized. TRW INC. Date: February 5, 1999 By: /s/ William B. Lawrence --------------------------------- William B. Lawrence Executive Vice President, General Counsel and Secretary 37 EXHIBIT INDEX Exhibit No. 23 Consent of Ernst & Young LLP EX-23.1 2 EXHIBIT 23.1 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated January 19, 1999 with respect to the consolidated financial statements of TRW Inc. included in its Current Report on Form 8-K dated February 5, 1999, filed with the Securities and Exchange Commission, in the following Registration Statement Nos.: 333-48443 on Form S-3, 333-43931 on Form S-3, 33-61711 on Form S-3, 33-42870 on Form S-3, 333-27003 on Form S-8, 333-27001 on Form S-8, 333-06633 on Form S-8, 333-03973 on Form S-8, 33-58257 on Form S-8, 33-53503 on Form S-8 33-29751 on Form S-8, 333-20351 on Form S-8, 2-90748 on Form S-8 and 2-64035 on Form S-8. /s/ ERNST & YOUNG LLP --------------------- Ernst & Young LLP Cleveland, Ohio February 5, 1999 -----END PRIVACY-ENHANCED MESSAGE-----