-----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, SpY11VSHViCHtdpzRv1N6DRokfxhYhUKNTfF+Du4x9ehj3SOmzBD8oRSObFKixH4 VUxPM+ClNI6M/CjFFBOVuQ== 0000950152-99-008813.txt : 19991111 0000950152-99-008813.hdr.sgml : 19991111 ACCESSION NUMBER: 0000950152-99-008813 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991110 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-K/A SEC ACT: SEC FILE NUMBER: 001-02384 FILM NUMBER: 99745960 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-K/A 1 TRW, INC. 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 AMENDMENT NO. 1 TO FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1900 RICHMOND ROAD, CLEVELAND, OHIO 44124 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (216) 291-7000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, par value $0.625 per share New York Stock Exchange Chicago Stock Exchange Pacific Exchange Philadelphia Stock Exchange Rights to Purchase Cumulative Redeemable New York Stock Exchange Serial Preference Stock II, Series 4 Chicago Stock Exchange Pacific Exchange Philadelphia Stock Exchange Cumulative Serial Preference Stock II, New York Stock Exchange $4.40 Convertible Series 1 Cumulative Serial Preference Stock II, New York Stock Exchange $4.50 Convertible Series 3
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None 2 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates was $5,528,014,729 as of March 1, 1999. This amount was computed on the basis of the closing price of the registrant's voting securities included in the NYSE-Composite Transactions report for such date, as published in the Midwest edition of The Wall Street Journal. As of March 1, 1999 there were 120,070,384 shares of TRW Common Stock, $0.625 par value, outstanding. The following documents have been incorporated herein by reference to the extent indicated herein: TRW Proxy Statement dated March 15, 1999 Part III TRW Annual Report to Security Holders for the year ended Parts I, II and IV December 31, 1998 2 3 The Registrant hereby amends the following items of its Annual Report on Form 10-K for the year ended December 31, 1998. Unless otherwise provided herein, each of the items referenced below are amended by deleting them in their entirety and replacing them with the items set forth herein. Any information not expressly amended by this filing shall remain as set forth in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Commission on March 19, 1999. PART I ITEM 1. BUSINESS - ----------------- INDUSTRY SEGMENTS AND PRODUCT CLASSIFICATIONS TRW is an international company that provides advanced technology products and services. The principal businesses of TRW and its subsidiaries are the design, manufacture and sale of products and the performance of systems engineering, research and technical services for industry and the United States Government in the automotive and space, defense and information systems markets. TRW's principal products and services include: o automotive systems and components; o spacecraft; o software and systems engineering support services; o electronic systems, equipment and services; and o information technology. TRW was incorporated under the laws of Ohio on June 17, 1916. When used in this report, the terms "TRW" and the "Company" refer to TRW Inc., to TRW Inc. and its subsidiaries or to a subsidiary of TRW Inc. AUTOMOTIVE TRW's automotive businesses design, manufacture and sell a broad range of steering, suspension, engine, safety, engineered fastening, electronic, and other components and systems for passenger cars and commercial vehicles. These products include: o occupant restraint systems, including sensors, steering wheels, airbag and seat belt systems; o steering systems, including hydraulic and electrically assisted power and manual rack and pinion steering for light vehicles, power steering systems and suspension components for commercial vehicles; o electrical and electronic controls, engineered fasteners and stud welding systems; and o engine valves and valve train parts. TRW sells the products included in these businesses primarily to automotive original equipment manufacturers. In addition, TRW sells its automotive components for use as aftermarket and service parts to automotive original equipment manufacturers and others for resale through their own independent distribution networks. On January 28, 1999, TRW and LucasVarity plc announced that they had reached agreement on the terms of a recommended cash tender offer to be made on behalf of TRW to acquire the entire issued and to be issued share capital of LucasVarity. Pursuant to the offer, which was approved by the Boards of Directors of both companies, TRW will pay 288 pence for each Ordinary Share of LucasVarity and pound sterling 28.80 for each American Depositary Share of LucasVarity, each representing ten Ordinary Shares, for an aggregate value of pound sterling 4.0 billion, or approximately $7.0 billion. The offer commenced on February 6, 1999, and is currently scheduled to expire on March 25, 1999, at 5:00 p.m. New York City time (10:00 p.m. London time). The acquisition received U.S. regulatory clearance by the Federal Trade Commission on February 13, 1999, and was approved by the European Commission on March 11, 1999. The offer remains contingent on valid acceptances being received with respect to no less than 90 percent of the total share capital outstanding or such lower percentage as TRW may decide, provided such securities carry in the aggregate more than 50 percent of the voting rights then normally exercisable at general meetings of LucasVarity security holders, and other customary closing conditions. 3 4 SPACE, DEFENSE & INFORMATION SYSTEMS TRW's space, defense and information systems businesses include spacecraft; electronic systems, equipment, components and services; systems integration, systems engineering services and software development; and information technology systems, products and services. The Company's spacecraft activities include the design and manufacture of: o spacecraft equipment; o propulsion subsystems; o electro-optical and instrument systems; o spacecraft payloads; o high-energy lasers and laser technology; and o other high-reliability components. The Company's electronic systems, equipment, components and services include the design and manufacture of: o space communication systems; o airborne reconnaissance systems; o unmanned aerial vehicles; o avionics systems; o commercial telecommunications; and o other electronic technologies for tactical and strategic applications. TRW's systems integration, systems engineering services and software development are in the fields of: o military command and control; o strategic missiles; o intelligence requirements management; o public safety; o modeling and simulation; o training; o telecommunications; o image processing; o earth observation; o nuclear waste management; o air traffic control; o security and counterterrorism; and o other high-technology systems. The Company's information technology systems, products and services are focused on: o defense; o health and human safety; o integrated supply chain; o warehousing; o logistics; o test and evaluation; o criminal justice; o tax systems modernization; and o financial applications. TRW sells and distributes its products and services in its space, defense and information systems businesses principally to the United States Government, agencies of the United States Government, state, local and foreign governments and international and commercial customers. o TRW's spacecraft business involves the sale to the United States Government of subsystems and components for space propulsion and unmanned spacecraft for defense, scientific research and communications purposes. o The Company sells its software and systems engineering and integration support services primarily to the United States Government defense agencies and to federal, civilian and other state and local governmental agencies. These services include a wide variety of computer software systems and analytical services for space and defense, air traffic control, and advanced communication and data retrieval applications. 4 5 o Sales to the United States Government of electronic systems, equipment and services consist of systems and subsystems for defense and space applications, including communications, command and control, guidance, navigation, electric power, sensing and electronic display equipment. o TRW sells its information technology systems, products and services primarily to the United States Government, agencies of the United States Government, state, local and foreign governments and international and commercial customers. While classified projects are not discussed in this report, the operating results relating to classified projects are included in the Company's consolidated financial statements, and the business risks associated with such projects do not differ materially from those of other projects for the United States Government. TRW also performs diverse testing and general research projects in many of the technical disciplines related to its space, defense and information systems products and services under both private and United States Government contracts, including several advanced defense system projects. RESULTS BY SEGMENT Reference is made to the information relating to the Company's industry segments, including sales, segment profit before tax and segment assets attributable to each segment for each of the years 1996 through 1998, presented under the note entitled "Operating Segments" in the Notes to Financial Statements on pages 49 through 52 of this Annual Report on Form 10-K, as amended. Such information is incorporated herein by reference. FOREIGN AND DOMESTIC OPERATIONS TRW manufactures products or has facilities in 28 countries throughout the world. TRW's operations outside the United States are in Australia, Austria, Belgium, Brazil, Canada, China, the Czech Republic, France, Germany, India, Italy, Japan, South Korea, Malaysia, Mexico, the Netherlands, Poland, Portugal, Saudi Arabia, South Africa, Spain, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Venezuela. TRW also exports products manufactured by it in the United States. Such export sales accounted for: o 6 percent of total sales during 1998, or $674 million; o 7 percent of total sales during 1997, or $732 million; and o 8 percent of total sales during 1996, or $764 million. TRW's foreign operations are subject to the usual risks that may affect such operations, including, among other things: o customary exchange controls and currency restrictions; o currency fluctuations; o changes in local economic conditions; o exposure to possible expropriation or other government actions; o unsettled political conditions; and o foreign government-sponsored boycotts of the Company's products or services for noncommercial reasons. Most of the identifiable assets associated with TRW's foreign operations are located in countries where the Company believes such risks to be minimal. Recent economic conditions in the Asia Pacific region and Latin America, primarily Brazil, have had a negative impact on the Company's operations. Future economic conditions in these regions could have continued unfavorable effects in 1999. Reference is made to the information relating to the dollar amounts of sales and property, plant and equipment-net by geographic area for each of the years 1996 through 1998 presented under the note entitled "Operating Segments" in the Notes to Financial Statements on pages 49 through 52 of this Annual Report on Form 10-K, as amended. Such information is incorporated herein by reference. 5 6 GENERAL COMPETITION TRW encounters intense competition in substantially all segments of its business. The Company's competitive position varies for its different products and services. However, TRW believes that it is a significant supplier of many of the products it manufactures and of many of the services it provides. In the automotive business, competitors include independent suppliers of parts and components as well as the Company's original equipment customers, many of whom are integrated manufacturers who produce or could produce substantial portions of their requirements for parts and components internally. Some of the integrated manufacturers are becoming more aggressive in attempting to sell components to other automotive manufacturers and have or are considering spinning off all or a portion of their components operations which might also make such operations more aggressive competitors. Depending on the particular product, the number of the Company's competitors varies significantly and many of the products have high capital requirements and require high engineering content. In the automotive business, the principal methods of competition are: o price; o engineering excellence; o product quality; o customer service; o delivery time; and o proprietary position. TRW competes for contracts covering a variety of United States Government projects and programs, principally in the space, defense and information systems business. Such competition is based primarily on: o technical ability; o product quality; and o price. TRW's competitors for United States Government contracts typically are large, technically-competent firms with substantial assets, some of which have become considerably larger in recent years. CUSTOMERS Sales, directly and indirectly, to the United States Government, including the Department of Defense, the National Aeronautics & Space Administration and other agencies, represented the following portions of TRW's total sales: o 35 percent for 1998, or $4,119 million; o 33 percent for 1997, or $3,523 million; and o 32 percent for 1996, or $3,121 million. Sales, directly and indirectly, to the United States Government, including the Department of Defense, the National Aeronautics & Space Administration and other agencies, represented the following portions of the sales of the space, defense and information systems business: o 88 percent in 1998, or $4,118 million; o 93 percent in 1997, or $3,523 million; and o 93 percent in 1996, or $3,120 million. As with all companies engaged in United States Government contracting, TRW is subject to certain unique business risks, including: o dependence on Congressional appropriations and administrative allotment of funds; o changes in United States Government policies that may reflect military and political developments; o time required for design and development; o significant changes in contract scheduling; o complexity of designs and the rapidity with which they become obsolete; o necessity of design improvements; o difficulty in forecasting costs and schedules when bidding on developmental and highly sophisticated technical work; and o other factors characteristic of the industry. 6 7 United States Government contracting laws also provide that the United States Government is to do business only with responsible contractors. In this regard, the United States Department of Defense and other federal agencies have the authority, under certain circumstances, to suspend or debar a contractor or organizational parts of a contractor from further United States Government contracting for a certain period "to protect the Government's interest." Such action may be taken for, among other reasons, commission of fraud or a criminal offense in connection with a United States Government contract. A suspension may also be imposed if a contractor is indicted for such matters. In the event of any suspension or debarment, the Company's existing contracts would continue unless terminated or canceled by the United States Government under applicable contract provisions. Other than the United States Government, TRW's largest customers (determined by including sales to their affiliates throughout the world but excluding sales to such customers or their affiliates that ultimately result in sales to the United States Government) are Ford Motor Company, Volkswagen AG and General Motors Corporation. Such sales by TRW's automotive business to Ford, Volkswagen and General Motors, and their respective subsidiaries, accounted for the following portions of sales of the automotive business: o 20 percent, 13 percent and 9 percent, respectively, during 1998; o 21 percent, 12 percent and 7 percent, respectively, during 1997; and o 23 percent, 10 percent and 9 percent, respectively, during 1996. Had Chrysler Corporation and Daimler Benz AG been combined as of January 1, 1998, sales by TRW's automotive business to the combined entity and its subsidiaries would have accounted for 13 percent of the sales of the automotive business in 1998. Such sales by TRW's automotive business to Ford and its subsidiaries accounted for the following portions of TRW's total sales: o 12 percent for 1998, or $1,423 million; o 14 percent for 1997, or $1,469 million; and o 15 percent for 1996, or $1,470 million. BACKLOG The backlog of orders for TRW's domestic operations is estimated to have been approximately $6,010 million at December 31, 1998 and $6,025 million at December 31, 1997. Of those amounts, United States Government business, directly or indirectly, is estimated to have accounted for approximately $5,119 million at December 31, 1998 and $5,469 million at December 31, 1997. Reported backlog at the end of 1998 does not include approximately $6.6 billion of negotiated and priced, but unexercised, options of the Company's customers to purchase products and services from TRW for defense and non-defense programs. Unexercised options at the end of 1997 were valued at $3.6 billion. The exercise of options is at the discretion of the customer and, in the case of United States Government contracts, is dependent on future government funding. Of the total domestic backlog, 96 percent at December 31, 1998 and 1997 was attributable to the space, defense and information systems business. Substantially all of the backlog attributable to United States Government business is related to that business. The determination of TRW's backlog involves substantial estimating, particularly with respect to customer requirements contracts and long-term contracts of a cost-reimbursement or incentive nature. A substantial portion of the variations in TRW's estimated backlog in recent years is attributable to the timing of the award and performance of United States Government and certain other contracts. Subject to various qualifications, including those set forth herein, and assuming no terminations, cancellations or changes and completion of orders in the normal course, TRW has estimated that approximately 49 percent of the December 31, 1998 backlog will be delivered in 1999, 31 percent in 2000 and 20 percent thereafter. United States Government contracts and related customer orders generally may be terminated in whole or in part at the convenience of the United States Government whenever the United States Government believes that such termination would be in its best interest. Multi-year United States Government contracts and related orders may be canceled if funds for contract performance for any subsequent contract year become unavailable. If any of its United States Government contracts were terminated or canceled under these circumstances, TRW generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. Whether the occurrence of any such termination or cancellation would have an adverse effect on TRW would depend upon the particular contract and the circumstances of the termination or cancellation. 7 8 Backlog data and comparisons as of different dates may not be reliable indicators of either future sales or the ratio of future direct and indirect United States Government sales to other sales. INTELLECTUAL PROPERTY TRW owns significant intellectual property, including a large number of patents, copyrights and trade secrets, and is involved in numerous licensing arrangements. Although TRW's intellectual property plays an important role in maintaining TRW's competitive position in a number of the markets that it serves, no single patent, copyright, trade secret or license, or group of related patents, copyrights, trade secrets or licenses, is, in the opinion of management, of such value to TRW that the business of TRW or of any industry segment of TRW would be materially affected by the expiration or termination thereof. TRW's general policy is to apply for patents on an ongoing basis in the United States and appropriate other countries on its significant patentable developments. TRW also views its name and mark as significant to its business as a whole. In addition, TRW owns a number of other trade names and marks applicable to certain of its businesses and products that it views as important to such businesses and products. RESEARCH AND DEVELOPMENT Research and development costs totaled: o $2,143 million in 1998; o $2,146 million in 1997; and o $1,997 million in 1996 Of these amounts, customer-funded research and development was: o $1,425 million in 1998; o $1,501 million in 1997; and o $1,425 million in 1996. Company-funded research and development costs, which included research and development for commercial products, independent research and development and bid and proposal work related to government products and services, totaled: o $522 million in 1998; o $461 million in 1997; and o $412 million in 1996. A portion of the cost incurred for independent research and development and bid and proposal work is recoverable through overhead charged to government contracts. Company-funded product development costs, including engineering and field support for new customer requirements, were: o $196 million in 1998; o $184 million in 1997; and o $160 million in 1996. The 1997 amounts exclude the $548 million charge for purchased in-process research and development associated with the acquisition of BDM International, Inc. Reference is made to the information concerning this charge in "Management's Discussion and Analysis of the Results of Operations and Financial Condition" under the caption "Acquisitions" on pages 19 and 20 of this Annual Report on Form 10-K, as amended. Such information is incorporated herein by reference. EMPLOYEES At December 31, 1998, TRW had approximately 78,000 employees, of whom approximately 37,800 were employed in the United States. 8 9 RAW MATERIALS AND SUPPLIES Materials used by TRW include or contain: o steel o special alloys o stainless steel o sodium azide o pig iron o glass o ferro-chrome o ceramics o aluminum o plastic powders and laminations o brass o carbon and plastic materials o copper o synthetic rubber o tin o paper o platinum o gold, silver, nickel, zinc and copper plating materials. TRW also purchases from suppliers various types of equipment and component parts that may include such materials. TRW's operations depend upon the ability of its suppliers of materials, equipment and component parts to meet performance and quality specifications and delivery schedules. In some cases, there is only a limited number of suppliers for a material or product due to the specialized nature of the item. Shortages of certain raw materials, equipment and component parts have existed in the past and may exist again in the future. TRW has taken a number of steps to protect against and to minimize the effect of such shortages. However, any future inability of TRW to obtain raw materials, equipment or component parts could have a material adverse effect on the Company. TRW's operations also depend on adequate supplies of energy. TRW has continued its programs to conserve energy used in its operations and has made available alternative sources of energy. ENVIRONMENTAL REGULATIONS Federal, state and local requirements relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had and will continue to have an effect on TRW and its operations. The Company has made and continues to make expenditures for projects relating to the environment, including pollution control devices for new and existing facilities. The Company is conducting a number of environmental investigations and remedial actions at current and former Company locations to comply with various federal, state and local laws 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 reflecting cost ranges is established using standard engineering cost estimating techniques for each matter for which sufficient information is available. In the determination of cost ranges, the professional judgment of the Company's environmental engineers, in consultation with outside environmental specialists, when necessary, is considered. 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. Insurance recoveries are recorded as a reduction of environmental costs when fixed and determinable. The Company does not believe that compliance with environmental protection laws and regulations will have a material effect upon its capital expenditures or competitive position, and TRW's capital expenditures for environmental control facilities during 1999 and 2000 are not expected to be material to the Company. The Company believes that any liability that may result from the resolution of environmental matters for which sufficient information is available to support cost estimates will not have a material adverse effect on the Company's earnings. However, the Company cannot predict the effect on the Company's earnings of expenditures for aspects of certain matters for which there is insufficient information. See also "Legal Proceedings" on page 8 of TRW's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Commission on March 19, 1999. In addition, the Company cannot predict the effect on the Company's earnings of compliance with environmental laws and regulations with respect to currently unknown environmental matters or the possible effect on the Company's earnings of compliance with environmental requirements imposed in the future. 9 10 CAPITAL EXPENDITURES - PROPERTY, PLANT AND EQUIPMENT During the five years ended December 31, 1998, TRW's capital expenditures and the net book value of its assets retired or sold were:
(IN MILLIONS) CAPITAL EXPENDITURES ------------------------------------------ LAND, BUILDINGS NET BOOK VALUE OF YEAR ENDED AND LEASEHOLD MACHINERY AND ASSETS RETIRED OR DECEMBER 31, IMPROVEMENTS EQUIPMENT TOTAL SOLD - ------------ ------------ --------- ----- ---- 1998 $92 $452 $544 $40 1997 86 463 549 54 1996 76 424 500 29 1995 74 392 466 21 1994 92 396 488 19
On a segment basis, capital expenditures during 1998 and 1997 were as follows:
(IN MILLIONS) CAPITAL EXPENDITURES SPACE, DEFENSE & YEAR ENDED AUTOMOTIVE INFORMATION DECEMBER 31, SEGMENTS SYSTEMS SEGMENTS - ------------ -------- ---------------- 1998 $390 $147 1997 390 156
Of total capital expenditures, 52 percent in 1998 and 56 percent in 1997 were invested in the United States. ITEM 2. PROPERTIES - ------------------- TRW's operations include numerous manufacturing, research and development and warehousing facilities. TRW owns or leases principal facilities located in 21 states plus the District of Columbia in the United States and in 27 other countries. Approximately 48 percent of the principal domestic facilities are used by the automotive business and 52 percent are used by the space, defense and information systems business. The automotive business uses a substantial majority of the foreign facilities. Of the total number of principal facilities operated by TRW, 54 percent of such facilities are owned, 35 percent are leased and 11 percent are held by joint ventures in which TRW has an interest. The Company owns its world headquarters in Lyndhurst, Ohio and the headquarters for its Space & Electronics segment in Redondo Beach, California. The Company also owns or leases certain smaller research and development properties and administrative, marketing, sales and office facilities throughout the United States and in various parts of the world. In addition, TRW operates facilities on property owned directly or indirectly by the United States Government. A summary of TRW's principal facilities, by segment, principal use of the facility and geographic region, is set forth in the following tables. Please note that, while the following summaries categorize TRW's facilities by their principal use, a number of these facilities are multi-purpose facilities. For example, TRW's headquarters for its Space & Electronics segment in Redondo Beach, California is categorized as principally office space since the majority of its square footage is utilized as such. However, TRW also maintains significant research and development and manufacturing functions within that facility. 10 11 Automotive Segments
- ----------------------------------------------------------------------------- Principal Use North Asia/ of Facility America Europe Pacific Other Total - ----------------------------------------------------------------------------- Manufacturing 34 54 17 9 114 - ----------------------------------------------------------------------------- Warehouse 2 1 -- -- 3 - ----------------------------------------------------------------------------- Office 4 2 2 -- 8 - ----------------------------------------------------------------------------- Total 40 57 19 9 125 - -----------------------------------------------------------------------------
Space, Defense & Information Systems Segments
- ------------------------------------------------------------------- Principal Use North Asia/ of Facility America Europe Pacific Total - ------------------------------------------------------------------- Research and Development 1 -- -- 1 - ------------------------------------------------------------------- Office 28 13 1 42 - ------------------------------------------------------------------- Total 29 13 1 43 - -------------------------------------------------------------------
In the opinion of management, the Company's facilities are generally well maintained and are suitable and adequate for their intended use. Reference is made to the information concerning long-term rental obligations under operating leases presented under the note entitled "Lease Commitments" in the Notes to Financial Statements on page 46 of this Annual Report on Form 10-K, as amended. This information is incorporated herein by reference. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ Reference is made to the information set forth in the table presented under "Stock Prices and Dividends (Unaudited)" on page 55 of this Annual Report on Form 10-K, as amended, and to the information presented under the note entitled "Debt and Credit Agreements" in the Notes to Financial Statements on pages 45 and 46 of this Annual Report on Form 10-K, as amended. The information contained in such table and the information contained in the second-to-last paragraph of text in such note to financial statements are incorporated herein by reference. The Company's Common Stock is traded principally on the New York Stock Exchange and is also traded on the Chicago, Pacific, Philadelphia, London and Frankfurt exchanges. On March 1, 1999, there were 24,317 shareholders of record of the Company's Common Stock. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS ------------- RESULTS OF OPERATIONS In 1998, the Company was successful in many areas -- improving performance on government contracts, growing the commercial wireless telecommunications product lines and maintaining our worldwide, independent market leadership position based on unit volume in the highly competitive automotive supplier industry by introducing new products. Offsetting these positive developments, the margin in the Company's automotive business declined. As a result, the Company initiated several actions as announced on July 29, 1998 to improve the profitability of the business. Total 1998 sales grew 10 percent to $11.9 billion, compared with $10.8 billion in 1997. Compared to 1996 sales of $9.9 billion, 1997 sales increased 10 percent. Net earnings and diluted earnings per share for the 11 12 year were $477 million, or $3.83 per share, compared with a net loss of $49 million, or a net loss per share of $.40 in 1997. Net earnings and diluted earnings per share for 1996 were $480 million, or $3.62 per share. The above comparative results include the following items. The 1998 results include a $20 million after tax, or $.16 per share, benefit from an interest accrual adjustment relating to a tax litigation settlement and a $32 million after tax, or $.25 per share, benefit from the settlement of certain patent litigation, offset in part by $28 million after tax, or $.21 per share, in charges for litigation and contract reserves and an $18 million after tax, or $.15 per share, charge for the 1998 automotive restructuring. The 1997 results include a $548 million, or $4.43 per share, one-time noncash charge with no income tax benefit related to in-process research and development associated with the acquisition of BDM International, Inc. (BDM) and a $9.7 million after tax, or $.08 per share, gain from the sale of a property. The 1996 results include three special items: a gain of $260 million after tax, or $1.96 per share, related to the sale of the Company's information services business; special charges of $202 million after tax, or $1.52 per share, for actions taken, in part, to enhance the Company's competitiveness; and $50 million after tax, or $.38 per share, of impairment losses that were primarily a result of technological changes and the decision to close certain facilities in the automotive business. The items in the preceding paragraph are set forth in the following table:
($ in millions except per share data) - --------------------------------------------------------------------------------------------------------- Income (Loss) 1998 1997 1996 ---------------- ----------------- ---------------- Per Per Per Amount Share Amount Share Amount Share ------ ----- ------ ----- ------ ----- Gain from the sale of the information services business $ -- $ -- $ -- $ -- $260 $1.96 - --------------------------------------------------------------------------------------------------------- Severance & plant closing costs (18) (.15) -- -- (28) (.21) - --------------------------------------------------------------------------------------------------------- Contract reserves -- -- -- -- (64) (.48) - --------------------------------------------------------------------------------------------------------- Litigation & warranty expenses -- -- -- -- (80) (.60) - --------------------------------------------------------------------------------------------------------- Asset writedowns -- -- -- -- (50) (.38) - --------------------------------------------------------------------------------------------------------- Other expenses -- -- -- -- (30) (.23) - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Purchased in-process research and development - BDM -- -- (548) (4.43) -- -- - --------------------------------------------------------------------------------------------------------- Gain from the sale of a property -- -- 10 .08 -- -- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Interest adjustment from tax litigation settlement 20 .16 -- -- -- -- - --------------------------------------------------------------------------------------------------------- Settlement of patent litigation 32 .25 -- -- -- -- - --------------------------------------------------------------------------------------------------------- Litigation & contract reserves (28) (.21) -- -- -- -- - --------------------------------------------------------------------------------------------------------- $ 6 $ .05 $(538) $(4.35) $ 8 $ .06 ==== ===== ===== ====== ==== ===== - ---------------------------------------------------------------------------------------------------------
12 13 The above listed items are included in the Statements of Operations as follows:
($ in millions) - --------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- Sales $ -- $ -- $ 19 - --------------------------------------------------------------------- Cost of sales 52 -- 321 - --------------------------------------------------------------------- Administrative and selling expenses 13 -- -- - --------------------------------------------------------------------- Purchased in-process research and development -- 548 -- - --------------------------------------------------------------------- Interest expense (30) -- 18 - --------------------------------------------------------------------- Other expense (income) - net (49) (15) 65 - --------------------------------------------------------------------- Income Tax Expense (Benefit) 8 5 (133) - --------------------------------------------------------------------- Discontinued Operations - After Tax Gain on Disposal -- -- 260 ---- ----- ----- - --------------------------------------------------------------------- $ 6 $(538) $ 8 ==== ===== ===== - ---------------------------------------------------------------------
The increase in sales during 1998 from 1997 primarily resulted from the acquisition of BDM which contributed $885 million in sales. The increase in sales during 1997 from 1996 primarily resulted from the acquisition of Magna International's air bag and steering wheel operations and strong program performance in the space, defense and information systems business. Gross profit margin as a percentage of sales for 1998 was 18.3 percent, compared to 18.5 percent for 1997 and 15.0 percent for 1996. The decline in gross profit margin during 1998 from 1997 primarily resulted from a decline in the margin of the automotive business offset in part by the higher margin in the space, defense and information systems business. The increase in gross profit margin during 1997 from 1996 was primarily the result of special charges in 1996 which reduced gross margin by 3.1 percentage points and the higher margin in the space, defense and information systems business in 1997. Administrative and selling expenses increased in 1998 compared to 1997 primarily due to the acquisition of BDM. Administrative and selling expenses increased in 1997 compared to 1996 primarily due to acquired businesses contributing approximately $40 million, additional spending of approximately $10 million for the implementation of new information systems in the automotive business and an increase in spending of approximately $25 million in the space, defense and information systems business to support growth. Research and development expenses increased in 1998 compared to 1997 primarily due to an increase in spending in both the automotive and space, defense and information systems businesses of approximately $30 million and $25 million, respectively, and the addition of approximately $10 million of research and development expenses associated with BDM. Research and development expenses increased in 1997 compared to 1996 primarily due to the research and development expenses of acquired businesses. Purchased in-process research and development expense of $548 million in 1997 was related to the acquisition of BDM. Interest expense in 1998 was $114 million compared with $75 million in 1997 and $84 million in 1996. The increase in interest expense in 1998 from 1997 was primarily due to higher average debt levels, partially offset by the benefit from an interest accrual adjustment of $30 million relating to a tax litigation settlement. The decrease in interest expense in 1997 from 1996 was primarily due to the absence of a 1996 special charge, partially offset by higher average debt levels. 13 14 The increase in other income in 1998 compared to 1997 is primarily due to a $49 million benefit from the settlement of patent litigation. The change in other expense(income)-net during 1997 compared to 1996 is primarily due to special charges of $65 million included in 1996. The effective tax rate for continuing operations was 36.1 percent in 1998 compared with 120.3 percent in 1997 and 39.6 percent in 1996. Excluding the in-process research and development charge, the 1997 effective tax rate would have been 36.6 percent. The effective tax rate for 1998 was lower than the adjusted effective tax rate in 1997 by .5 percentage points primarily due to U.S. export tax incentives and the recognition of tax benefits from divested operations. These items were partially offset by unutilized tax losses. The decrease in the 1997 adjusted effective tax rate from 1996 was attributable to various federal and state tax incentives and the tax benefit from the realignment of certain foreign operations. At December 31, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. At December 31, 1998, the Company also 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. During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." 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 and that the accumulated balance of other comprehensive income be separately displayed. Prior year information has been restated to conform to the requirements of these new standards. In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for years beginning after June 15, 1999, and is expected to be adopted by the Company in 2000. This statement is not expected to have a material effect on the Company's results of operations or financial condition. [Line Graph] 96 9.9 97 10.8 98 11.9 SALES ($ in billions) [Line Graph] 96 182 97 (49) 98 477 EARNINGS FROM CONTINUING OPERATIONS Including 1997 charge for purchased in-process R&D, with no income tax benefit, and 1996 special charges ($ in millions) [Line Graph] 96 1.37 97 (.40) 98 3.83 DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS 14 15 Including 1997 charge for purchased in-process R&D, with no income tax benefit, and 1996 special charges Subsequent Event On January 28, 1999, the Company announced its intention to acquire the entire issued and to be issued share capital of LucasVarity plc in a cash tender offer totaling approximately $7 billion. LucasVarity plc is a U.K. company with ordinary shares traded on the London Stock Exchange and American Depository Shares (ADSs) on the New York Stock Exchange. For the year ended January 31, 1998, LucasVarity had sales of $6.8 billion, $5.6 billion of which were derived from the automotive industry and $1.2 billion from aerospace. The Company has received fully underwritten financing from J.P. Morgan Securities Inc., NationsBanc Montgomery Securities LLC, Salomon Smith Barney Inc. and Barclays Capital. The boards of directors of both companies have approved the transaction and LucasVarity's directors have entered into irrevocable agreements to tender their shares and ADSs in response to the offer. The transaction, which is subject to normal closing conditions, may be completed as early as the first quarter of 1999 and will be accounted for under purchase accounting. Automotive Segments The Company's automotive business is reported as the following four operating segments: Occupant Safety Systems, Chassis Systems, Automotive Electronics and Other Automotive. Sales for 1998 increased 2 percent to $7.2 billion from $7.0 billion reported in 1997. All automotive segments contributed to the sales increase with the Automotive Electronics segment contributing approximately $115 million. Sales for 1998 increased primarily due to higher volume in nearly all product lines by approximately $510 million. The increase was partially offset by lower pricing of approximately $250 million, primarily in occupant restraint products, the effect of a strong U.S. dollar of approximately $90 million and the effect of weakening economic conditions in Brazil and Asia of approximately $50 million. Excluding the 1998 restructuring charge of $24 million, segment profit before tax in 1998 decreased 11 percent to $567 million from $637 million in 1997. The Occupant Safety Systems segment contributed approximately $55 million to the segment profit decrease. Segment profit before tax for 1998 decreased primarily due to lower pricing across all product lines of approximately $250 million, higher research and development costs and start-up costs associated with new product launches of approximately $30 million and $40 million, respectively, and the effects of unfavorable economic conditions in Brazil and Asia of approximately $20 million. The decrease was partially offset by cost reductions net of inflation of approximately $350 million. The changes in sales and segment profit before tax excluding restructuring charges noted above and the restructuring charges are detailed by operating segment in the following table:
(in millions) RESTRUCTURING SALES SEGMENT PROFIT BEFORE TAX CHARGES ------------------------------ ------------------------------------------- ------------- Brazil Brazil and Start-up and Net Cost Volume Price Exchange Asia Price R&D Costs Asia Reductions Occupant Safety Systems $230 $(195) $(20) $ (5) $(195) $ -- $(20) $ -- $180 $ -- Chassis Systems 130 (10) (60) (40) (10) (25) (15) (15) 90 (7) Automotive Electronics 115 (35) (5) -- (35) (15) (5) -- 70 (13) Other Automotive 35 (10) (5) (5) (10) 10 -- (5) 10 (4) ---- ----- ---- ---- ----- ---- ---- ---- ---- ---- Total Automotive Business $510 $(250) $(90) $(50) $(250) $(30) $(40) $(20) $350 $(24)
Sales of $7.0 billion in 1997 represented an 8 percent increase over 1996 sales of $6.5 billion. The Occupant Safety Systems segment contributed approximately $550 million to the sales increase. Sales for 1997 increased primarily from acquisitions and higher volume in most operating segments which contributed 15 16 approximately $650 million and $445 million, respectively, partially offset by the effect of a strong U.S. dollar and lower pricing of approximately $310 and $240 million, respectively. Segment profit before tax for the automotive business increased 2 percent to $637 million in 1997 from $623 million reported in 1996, excluding $293 million of special charges relating to asset impairments and writedowns, consolidation of manufacturing plants, severance, litigation and warranty expenses. The Other Automotive segment contributed approximately $16 million to the segment profit increase. The increase in segment profit before tax for the automotive business was primarily due to acquisitions and cost reductions net of inflation which contributed approximately $65 million and $230 million, respectively, partially offset by the effect of lower pricing, higher new product research and development and the effects of a strong U.S. dollar of approximately $240 million, $40 million and $30 million, respectively, and the effects of the economic weakness in the Asia Pacific region. The changes in sales and segment profit before tax excluding special charges noted above and the special charges are detailed by operating segment in the following table:
(in millions) SPECIAL SALES SEGMENT PROFIT BEFORE TAX CHARGES -------------------------------------- ------------------------------------------------- ------- Net Cost Acquisitions Volume Exchange Price Acquisitions Reductions Price R&D Exchange Occupant Safety Systems $620 $215 $(100) $(180) $65 $140 $(180) $(30) $(10) $(112) Chassis Systems -- 170 (130) (20) -- 40 (20) -- (10) (81) Automotive Electronics 30 -- (50) (30) -- 40 (30) (10) (5) (91) Other Automotive -- 60 (30) (10) -- 10 (10) -- (5) (9) Total Automotive Business $650 $445 $(310) $(240) $65 $230 $(240) $(40) $(30) $(293)
The Company anticipates that 1999 North American and Western European automotive and light truck production will be relatively stable at 1998 levels. The Company foresees growth in the emerging markets of Central and Eastern Europe. Recent economic conditions in the Asia Pacific region and Latin America, primarily Brazil, have had a negative impact on the Company's operations in these regions. Future economic conditions in these regions could have continued unfavorable effects in 1999. Strong price pressure, characteristic of the automotive supply industry as a whole, is expected to continue across all product lines. The Company's goal is to mitigate this pressure with the automotive restructuring program in addition to the continuing cost reduction efforts. On July 29, 1998, the Company announced actions intended to enhance the automotive business profit margin by 1.5 percentage points over two years, which should improve operating cash flow by approximately $100 million a year. To accomplish the improvements, the Company is taking the following actions: closing 10 to 15 percent of the Company's 137 manufacturing plants; reducing direct and indirect hourly and salaried factory personnel and hourly and salaried personnel in administration, sales and marketing, and engineering functions by 7,500; reducing 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; improving 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 reducing aggregate capital expenditures by $300 million over the next five years. The Company estimates that the reduction in personnel in administration, sales and marketing, and engineering functions along with expense reductions by the consolidation of certain staff functions and reductions in discretionary spending will contribute approximately $75 million in savings, a 20 percent reduction in selling, general and administration costs per year. To implement these changes, 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 costs and will be used for severance in 1999. In 1998, three manufacturing facilities have been closed, reducing excess manufacturing capacity, and two noncore businesses have been divested. A management layer has been eliminated and the business has been reorganized into eight global product lines. Through December 31, 1998, approximately 3,800 employees have been notified, with these actions resulting in a net reduction in employees of approximately 2,750. The reorganization is aimed at enhancing customer focus, increasing capacity utilization by managing 16 17 capacity on a global basis and by implementing lean manufacturing techniques, improving the effectiveness of product development and manufacturing process engineering and leveraging global purchasing power. Also, progress has been made in supplier consolidation and improvement in supplier quality. In addition to restructuring actions, the Company has invested and expects to continue to invest in products with significant potential for growth or technological advantage, such as electrically assisted steering, advanced restraint systems, side-impact air bags, power rack and pinion steering, advanced electronic components and new air bag inflator technologies. In 1998, the Company introduced new automotive products including an innovative multistage inflator that was part of a complete advanced restraint system and successfully launched electrically powered hydraulic steering. The Company will continue to take advantage of opportunities to enhance its global competitiveness through internal growth and strategic alliances. During 1998, the Company consummated 13 alliances, joint ventures and acquisitions in seven countries. These strategic actions have served to enhance the Company's capabilities as a global systems supplier. The Company is well positioned to meet its customers' global requirements with quality products and services and anticipates being awarded significant new business. [Line Graph] 96 6.5 97 7.0 98 7.2 AUTOMOTIVE SEGMENTS' SALES ($ in billions) [Line Graph] 96 330 97 637 98 543 AUTOMOTIVE SEGMENTS' PROFIT BEFORE TAX Including 1998 restructuring charge and 1996 special charges ($ in millions) Space, Defense & Information Systems Segments The Company's space, defense and information systems business is reported as the following two operating segments: Space & Electronics and Systems & Information Technology. Sales for 1998 increased 23 percent to $4.7 billion from $3.8 billion reported in 1997 due to the acquisition of BDM, which contributed $885 million in sales. An increase in sales from new contract awards of approximately $290 million was offset by lower volume on existing programs of approximately $200 million and a $60 million contract modification. The contract modification was at the customer's request and reduced the overall value of the contract to exclude subcontract costs. The contract modification did not affect segment profit, as the decrease in sales was offset by lower cost of sales. The increase marks this segment's fifth consecutive year of sales growth. Segment profit before tax in 1998 increased 31 percent to $458 million from $348 million in 1997. The Space & Electronics and Systems & Information Technology segments contributed approximately $60 million and $50 million to the segment profit increase, respectively. The increase was due to the acquisition of BDM which contributed $52 million, new contract awards of approximately $20 million, improved program performance, excellent award and orbital incentive fees and continued success in commercial gallium arsenide products which contributed approximately $40 million in the aggregate and the benefit from the settlement of certain patent litigation of $49 million. The increase was partially offset by charges for litigation and contract reserves of $41 million. 17 18 The changes in sales and segment profit noted above are detailed by operating segment in the following table:
(in millions) SALES SEGMENT PROFIT BEFORE TAX --------------------------------------------- ------------------------------------------------------------ Benefit Litigation New New from and Contract Contract Contract Program Patent Contract Acquisitions Award Volume Modification Acquisitions Awards Performance Litigation Reserves Space & Electronics $ -- $ 45 $ (90) $ -- $-- $ 5 $20 $49 $(15) Systems & Information Technology 885 245 (110) (60) 52 15 20 0 (26) Total Space, Defense & Information Systems Business $885 $290 $(200) $(60) $52 $20 $40 $49 $(41)
Sales in 1997 increased 13 percent to $3.8 billion compared with $3.4 billion reported in 1996. Segment profit before tax in 1997 increased 29 percent to $348 million from $269 million, excluding $89 million of special charges in 1996 related primarily to contract reserves. The increase in sales and segment profit before tax was due to strong program performance. The changes in sales and segment profit before tax excluding special charges noted above and the special charges are detailed by operating segment in the following table:
(in millions) SEGMENT 1996 PROFIT SPECIAL SALES BEFORE TAX CHARGES ----- ---------- ------- Space & Electronics $200 $ 57 $(23) Systems & Information Technology 235 22 (66) Total Space, Defense & Information Systems Business $435 $ 79 $(89)
Government funding for most of the Company's contracts is expected to remain stable while certain contracts remain fiscally constrained. However, increased defense, intelligence and information technology spending is expected to favorably impact many of the Company's major contracts and core businesses. The Company does not anticipate any significant unfavorable operational effects related to program terminations or budget reallocations. The continuing focus on diversification of the segments' sales mix has led to contracts in the civil, state, commercial and international arenas, which further positions the segments for growth. The Company believes the diversity of its programs insulates the Company from both funding fluctuations and the economic uncertainty of global markets. The segments remain focused on investing in new technologies, bidding and winning new contracts and continuing to provide outstanding products and services to customers. Total backlog, primarily in the space, defense and information systems business, at the end of 1998 totaled $6.0 billion, unchanged from 1997. The award of several key programs in both defense and nondefense related markets maintained the backlog while the business targeted awards in new and emerging markets. Reported backlog at the end of 1998 and 1997 does not include $6.6 billion and $3.6 billion, respectively, of negotiated and priced, but not exercised, options for defense and nondefense programs. The exercise of the options is at the discretion of the customer and, in the case of government contracts, is dependent on future government funding. [Line Graph] 96 3.4 97 3.8 98 4.7 SPACE, DEFENSE & INFORMATION SYSTEMS SEGMENTS' SALES ($ in billions) 18 19 [Line Graph] 96 180 97 348 98 458 SPACE, DEFENSE & INFORMATION SYSTEMS SEGMENTS' PROFIT BEFORE TAX Including 1996 special charges ($ in millions) Acquisitions During 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. The remaining 20 percent of Magna International was acquired in 1998 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 and 1997, the balance of the restructuring reserve, included in other accruals, was $18 million and $40 million, respectively. During 1998, $6 million was used for severance payments and $7 million for plant closure costs. The reserve was reduced $9 million due to a change in estimate for severance payments. The remaining reserve will be used primarily for severance and plant closure costs in 1999 and 2000. The combined purchase price in excess of the net assets was $336 million and it is being amortized over 40 years. On December 24, 1997, the Company acquired the stock of BDM for cash of $880 million plus assumed net debt of $85 million. With the acquisition of BDM, the Company gained greater capability to serve the fast-growing market for government information technology as well as the very large, high-growth commercial information technology market. The acquisition was accounted for by the purchase method with the purchase price allocated to the net assets acquired based on their fair values and to costs for employee severance of $8 million. As of December 31, 1997, the reserve balance, included in other accruals, was $8 million. During 1998, the $8 million was used for severance payments. The purchase price allocation resulted in a $548 million charge to earnings, with no income tax benefit, for the fair value of acquired in-process research and development that had not reached technological feasibility and had no future alternative use and $152 million of identified intangible assets, including core and developed technology, workforce and trade name. The fair values of in-process research and development and identified intangible assets were determined by an independent valuation using the income approach. Eight commercial projects were included in the valuation. The major projects included: a commercial market adaptation of core network security to achieve the highest level of network security of $201 million; a Web-enabled and substantially enhanced warehouse and distribution management project of $199 million; and a module to enhance certain applications to become compliant with the single European currency for a particular software of $69 million. Due to the high level of risk associated with the successful development of the projects arising from competition, shift in the market, technological feasibility or timeliness to market, discount rates between 25 percent and 30 percent were used to discount the projects' cash flows. Operating margins were assumed to be similar to historical margins of similar products. The market size was verified for reasonableness with outside research sources. The projects were in various stages of completion ranging from approximately one-third to two-thirds complete as of the valuation date. The stage of completion for each project was estimated by evaluating the complexity of the technology, time to market and the cost. Substantially all of the projects were expected to be complete by the end of 1999. To date, several commercial projects, including the Web-enabled warehouse and distribution project, have been delayed about one year due to the following circumstances: competitive pressures in the information technology markets requiring different or added functionality; delay in industry standards to be enacted by third 19 20 parties; change in internal project staffing; and increased focus on Year 2000 compliance by customers. For example, competitive pressures in the warehouse and distribution market resulted in a new systems approach emerging in the July 1998 timeframe which enabled these systems to be implemented in a modular approach by a competitor. This modular approach offered reduced functionality but at a lower cost and with reduced implementation risk to the customer. The costs to complete the projects are substantially unchanged from the assumptions used in the valuation. The delays of the projects are not expected to affect materially the Company's expected investment returns. The Company currently anticipates that these projects will be successfully developed; however, there can be no assurances that the products will be viable in the rapidly changing commercial marketplace. In addition, the development of two projects has changed in scope. Following discussions with a key customer and in conjunction with several independent marketplace assessments during the second half of 1998, it became clear that the potential marketplace opportunity for the network security project had changed and the revenues would be reduced significantly. Four key factors contributed to the reduction in the Company's addressable market for this product: the constraints due to hardware adaptability; the lack of current interest in the commercial market for a high-end capability which would command a premium price; the fact that a number of competitive products have become available; and the increase in Internet traffic resulting in former smaller sites growing to larger sites that require different technology. As a result of the change in the market, the Company will focus on the completion and release of the project in 2000 for core customers. Also, the research and development of the European currency project was divested in November 1998 as part of a transaction that included the sale of TRW's assets in its enterprise resource planning software distribution business in the United Kingdom and the Netherlands. As part of the agreement, the Company received $20 million in cash for its assets, $1.4 million for completion of the development of the European currency project, and was named a global systems integrator for all of the acquirer's products. The assets were sold at book value; thus, no gain or loss was recognized in the statement of operations. Also, the acquirer became a distributor for two of TRW's developed software applications. Although circumstances associated with the three major projects changed substantially subsequent to the valuation, none of these facts or circumstances were known, contemplated or were contingent as of the date the valuation was completed in January 1998. The Company has reevaluated the carrying values of the identified intangible assets recorded as part of the purchase price for impairment and has concluded that the carrying values of the intangible assets will be recovered. As of December 31, 1998, the integration of BDM with the Company's previously existing information technology business has been completed successfully. The financial effect of BDM was relatively neutral to the Company's 1998 earnings and is expected to be accretive beginning in 1999; however, a major portion of the business associated with the value determined by the purchase price allocation, accounting for approximately 57 percent of the total purchase price, has not been developed or implemented into our current business. See the "Acquisitions" footnote in the Notes to Financial Statements for further discussion of these acquisitions. 20 21 Discontinued Operations During 1996, the Company sold its information services business for $1.1 billion. The sale resulted in a gain of $484 million ($260 million after tax, or $1.96 per share). The proceeds from the sale were used to repay debt, fund investment opportunities and acquire the Company's common stock. The operating results of the information services business and the related transaction gain are reflected as discontinued operations for all periods presented in the financial statements. International Operations International sales were $4.5 billion, or 38 percent of the Company's sales in 1998; $4.4 billion, or 40 percent of sales in 1997; and $3.9 billion, or 40 percent of sales in 1996. U.S. export sales included in those amounts were $674 million in 1998, $732 million in 1997 and $764 million in 1996. Most of the Company's non-U.S. operations are included in the automotive business and are located in Europe, Mexico, Canada, Brazil and the Asia Pacific region. The Company's non-U.S. operations are subject to the usual risks that may affect such operations; however, most of the assets of its non-U.S. operations are in countries where the Company believes such risks to be minimal. Liquidity and Financial Position Cash flow from operations in 1998 of $661 million and additional borrowings of $522 million were used primarily for capital expenditures for property, plant and equipment and other intangible assets of $625 million, acquisitions of $249 million, purchases of the Company's common stock of $184 million, of which $5 million was for the settlement of shares purchased in 1997, and dividend payments of $154 million. Net debt at December 31, 1998, was $2,139 million compared with $1,586 million at the end of 1997. The ratio of net debt (short-term debt, current portion of long-term debt and long-term debt less cash and cash equivalents) to total capital (net debt, minority interests and shareholders' investment) was 52 percent at December 31, 1998, compared with 48 percent at December 31, 1997. The percentage of fixed-rate debt to total debt was 52 percent at the end of 1998. During 1998, 3.6 million shares of the Company's common stock were purchased for $179 million. The Company purchased 4.6 million and 8.0 million shares in 1997 and 1996, respectively. The Company's share repurchase program was discontinued in 1999. Capital expenditures for property, plant and equipment and other intangible assets were $625 million in 1998, $571 million in 1997 and $501 million in 1996. The Company will maintain a capital program with estimated capital expenditures for 1999 totaling about $600 million. Approximately two-thirds of these expenditures will be invested in the automotive business and one-third in the space, defense and information systems business. The Company will continue to invest in its automotive growth businesses, including electrically assisted steering, advanced restraint systems, side-impact air bags, power rack and pinion steering and advanced electronic components. The space, defense and information systems business expenditures will be used to support major new contract awards and the existing business base, as well as research and development of next-generation technologies. During the third quarter of 1998, approximately $225 million of deferred tax liabilities related to the closure of certain long-term contracts were paid. During January 1998, the Company acquired 13.5 million shares (as adjusted for a stock split), or approximately 7 percent of the outstanding shares, of ICO Global Communications (Holdings) Limited for approximately $50 million in cash. The Company and ICO dismissed legal proceedings pertaining to certain patent rights related to their proposed global telecommunications systems. As part of the patent litigation settlement, ICO paid the Company $25 million in January 1998 and will pay an additional $25 million by mid-1999. The Company has discontinued efforts related to its Odyssey project, a satellite-based personal communications system. 21 22 The Company's non-U.S. operations generally are financed by borrowings from banks or through intercompany loans in the local currency of the borrower and by equity capital invested by the Company and minority shareholders. There are no significant restrictions on the remittance of funds by the Company's non-U.S. subsidiaries to the United States. A discussion of the Company's credit facilities is contained in the "Debt and Credit Agreements" footnote in the Notes to Financial Statements. During 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. The Company is subject to inherent risks attributed to operating in a global economy. It is the Company's policy to utilize derivative financial instruments to manage its interest rate and foreign currency exchange rate risks. When appropriate, the Company uses derivatives to hedge its exposure to short-term interest rate changes as a lower cost substitute for the issuance of fixed-rate debt. The Company manages cash flow transactional foreign exchange risk pursuant to a written corporate policy. Forward contracts and, to a lesser extent, options are utilized to protect the Company's cash flow from adverse movements in exchange rates. The Company is exposed to credit loss in the event of nonperformance by the other party to the derivative financial instruments. The Company limits this exposure by entering into agreements with a number of major financial institutions that meet credit standards established by the Company and that are expected to satisfy fully their obligations under the contracts. Derivative financial instruments are viewed by the Company as a risk management tool and are not used for speculative or trading purposes. Based on the Company's overall interest rate exposure at December 31, 1998, a one-percentage-point increase in the average interest rate on the Company's variable rate borrowings would not materially affect the results of operations of the Company. Based on the Company's exposure to foreign currency exchange rate risk resulting from derivative foreign currency instruments outstanding at December 31, 1998, a 10 percent uniform weakening in the value of the U.S. dollar relative to the currencies in which those derivative foreign currency instruments are denominated would not materially affect the results of operations of the Company. The Company's sensitivity analyses of the effects of changes in foreign currency exchange rates do not reflect the effect of such changes on the related hedged transactions or on other operating transactions. The Company's sensitivity analyses of the effects of changes in interest rates and foreign currency exchange rates do not factor in a potential change in the level of variable rate borrowings or derivative instruments outstanding that could take place if these hypothetical conditions prevailed. At December 31, 1998 the Company had a working capital deficiency of $315 million primarily due to an increase in short-term debt. Management believes that sufficient resources, in the form of funds generated by operations and existing borrowing capacity, are available to maintain liquidity. Management believes the Company's current financial position and financing arrangements, including financing for the acquisition of LucasVarity, allow flexibility in worldwide financing activities and permit the Company to respond to changing conditions in credit markets. Management believes that funds generated from operations and existing borrowing capacity are adequate to fund capital expenditures, working capital including tax requirements, company-sponsored research and development programs, dividend payments to shareholders and the acquisition of LucasVarity. The Company remains committed to maintaining strong investment grade debt ratings. 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. 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. 22 23 During 1996, the Company was advised by the United States Department of Justice 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. The remainder of the Y2K compliance program is scheduled to be complete by year-end 1999 except for certain Y2K upgrades for nonmaterial and low priority items. The phases for the Y2K Compliance Program, along with corresponding percentage-of-completion, are shown below:
------------------------------------------------------------------------ Phase Percentage-of-completion ------------------------------------------------------------------------- Project Startup 100 ------------------------------------------------------------------------- Inventory and Assessment 99 ------------------------------------------------------------------------- Conversion, Upgrade and Renovation 81 ------------------------------------------------------------------------- Validation 56 ------------------------------------------------------------------------- Implementation 56 -------------------------------------------------------------------------
Project Startup covers establishment of the Y2K Program Office and establishing the budget and resources required for the Program. During the Inventory and Assessment phase, inventory lists were created for each area, such as the factory floor, end user systems, technical infrastructure, suppliers and service providers, and assessed as to whether there was a potential Y2K issue or not. Conversion, Upgrade and Renovation is the remediation phase. During this phase, non-compliant systems are being upgraded, converted to new systems or modified to bring them into compliance. Validation is the testing phase where changes, upgrades or new systems are being tested to validate their Y2K compliance. In addition, mission critical compliant systems are being tested to validate that they are Y2K compliant. Implementation is the installation of the upgraded, renovated or new system into production. 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 82 percent of internal computer systems have been renovated to date. In addition, the Company estimates that approximately 56 percent of internal computer systems are complete with regard to validation and implementation. The remaining renovation, validation and implementation of internal computer systems are expected to be complete by the end of the second quarter 1999. The Company also expects critical contingency plans to be developed by the end of the second 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 are 85 percent complete. In addition, the Company estimates that 58 percent of the factory floor systems have been validated. Validation, implementation and critical contingency planning for the systems renovated in 1998 are expected to be complete by the end of the first quarter 1999. The renovation of the remaining factory floor systems is expected to be complete by the end of the first quarter of 1999. Validation, implementation and contingency planning related to the systems being renovated during the first quarter of 1999 are expected to be complete by the end of the second quarter 1999. Any uncertainty is being managed through extensive testing of factory floor 23 24 systems and contingency planning. Mission critical factory floor systems with a clock function have been tested for Year 2000 compliance. For critical machines, contingency plans have been developed that identify workarounds for the specific production line so that production schedules can be maintained. These contingency plans include, but are not limited to, manually setting the clock, expertise on-call, or utilizing another line or machine to produce the products. The Company is continuing to evaluate Y2K issues associated with suppliers to the automotive business by working with the Automotive Industries Action Group (AIAG), which represents several of the Company's largest automotive customers and major tier one suppliers. The AIAG sent self-assessment surveys to approximately 10,000 automotive suppliers on the Company's behalf. An assessment of each supplier's criticality and potential business risk to the Company has been performed. The assessment includes factors such as the amount purchased from the supplier and the availability of alternate sources of the items purchased. Based on the assessment, the Company determined that approximately 2,400 of the 10,000 suppliers surveyed are critical to the automotive business. The Company is validating the critical suppliers' state of Y2K readiness and evaluating the risk to the Company by reviewing the self-assessment surveys and by conducting telephone surveys, workshops or on-site visits for selected critical suppliers. Approximately 22 percent of the critical suppliers have been validated to date. The Company is contacting critical suppliers that have not responded to the survey to ensure that the surveys are returned. Service providers are also being surveyed to determine Y2K readiness. The Company expects the validation of remaining critical automotive suppliers' and service providers' Y2K readiness to be complete by the end of the second quarter 1999. The Company is currently developing critical contingency plans for suppliers and service providers and will continue this activity throughout 1999. Contingency plans consist of identifying and qualifying alternate sources or the provision of buffer stock. The contingency plan is tailored to the specific supplier or service provider situation, in response to the Company's review of their Y2K readiness. For space, defense and information systems suppliers and service providers, a similar process of evaluation and validation is under way. During 1998, Y2K certification requests were sent to approximately 5,700 suppliers, of which about 1,280 are critical to the space, defense and information systems business. To date, approximately 79 percent of those critical suppliers have responded and have certified Y2K compliance. The Company is contacting suppliers that have not provided certification to ensure that timely responses are received. The Company expects the validation of the space, defense and information systems business critical suppliers and service providers to be complete by the end of the first quarter 1999. The Company also expects the majority of critical contingency plans to be developed by the end of the second quarter 1999. The Company will continue to validate any remaining critical suppliers and service providers, as well as develop necessary contingency plans, throughout 1999. Contingency plans for TRW's space, defense and information systems business are focused on critical suppliers and service providers completing their Y2K readiness activities in the fourth quarter 1999. For critical suppliers and/or service providers where orders or services are anticipated during the first quarter of 2000, contingency plans such as, but not limited to, ordering supplies for late 1999 delivery, stocking additional consumables, qualifying alternate sources and/or holding buffer stock are in process. The Company has assessed its automotive products and determined that there should be no Y2K issues. Contracts entered into by the Company's space, defense and information systems business after January 1, 1996, under which systems have been developed for government and commercial customers, and contract modifications entered into after January 1, 1996 that add major scope to earlier contracts are being evaluated to determine the existence of material Y2K issues. These contracts have been assessed and validated, and the Company has identified approximately 400 contracts having potential Y2K issues. The Company is continuing to work with the applicable customers to determine which party is responsible for renovating the systems with potential Y2K issues. As the determination of the responsible party and development of any necessary renovation timetables must be done in cooperation with the applicable customers, the Company is currently unable to determine the extent or timing of the renovations that will be required to be performed. To date, certain contracts requiring renovation by the Company have been identified, and plans for achieving Y2K compliance are being developed in cooperation with the applicable customers. The Company expects renovations and critical contingency planning to be performed throughout 1999. 24 25 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 are being prepared, updated and implemented as necessary to address the risks identified. Contingency plans are being developed for each unit. The contingency plan is specific to the business scenarios, local situation and risks as seen by the specific unit. The contingency plans include, but are not limited to, ensuring that backups of mission critical computer systems are performed; printing hardcopies of key databases or reports; running key processes in December, where feasible; identifying workarounds for producing products, if a factory floor system should fail, as well as other scenarios. The Company has identified the most likely risks of Y2K noncompliance as the risk that suppliers to the automotive business will not be Y2K compliant and the risk that contracts on which the space, defense and information systems business 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 address their Y2K issues successfully. The total cost of the Company's Y2K compliance program is estimated to be $160 million and includes $79 million for capitalizable costs and $81 million of costs that will be expensed as incurred. The Company has expensed approximately $43 million to date and expects to expense $30 million in 1999. The Company does not anticipate that the overall costs of the Company's Y2K compliance program 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. Euro Conversion On December 31, 1998, certain member countries of the European Union irrevocably fixed the conversion rates between their national currencies and a common currency, the "Euro," which became their legal currency on January 1, 1999. 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 evaluated the business implications of conversion to the Euro, including the need to adapt internal systems to accommodate Euro-denominated transactions, including receipts and payments, the competitive implications of cross-border price transparency and other strategic implications. The Company's primary customers in the automotive industry in Europe are expected to require Euro invoicing during 1999. Invoicing and other business functions will be Euro-capable by the end of the transition period but may be converted earlier where operationally efficient or cost-effective or to meet customer requirements. The Company's exposure to foreign currency risk and the related use of derivative contracts to mitigate that risk is expected to be reduced as a result of conversion to the Euro. The Company does not expect the conversion to the Euro to have a material effect on its financial condition or results of operations. 25 26 Forward-Looking Statements Statements in this filing that are not statements of historical fact may be forward-looking statements. In addition, from time to time, the Company and its representatives make statements that may be forward-looking. All forward-looking statements involve risks and uncertainties. This section provides readers with cautionary statements identifying, for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, important factors that could cause the Company's actual results to differ materially from those contained in forward-looking statements made in this report or otherwise made by, or on behalf of, the Company. The following are some of the factors that could cause actual results to differ materially from estimates contained in the Company's forward-looking statements: The Company's consolidated results could be affected by: the continued development of and demand for new products; the ability to continue technical innovation; availability of funding for research and development; the ability to successfully identify and integrate acquisitions; pricing pressures from customers; pricing pressures resulting from the European Economic Union's conversion to a single currency; the ability to effectively implement the company-wide Y2K compliance program in accordance with the estimated timetable and costs described herein; the introduction of competing products or technology by competitors; the ability to meet performance and delivery requirements on systems for customers; the economic, regulatory and political instability of certain emerging countries; economic conditions in Brazil and Asia; the effects of changes in laws and regulations as they relate to the Company's businesses; foreign exchange rates; the cost and availability of funds; interest rate risk; the impact of legal proceedings; and the ability to attract and retain skilled employees with high-level technical competencies. The Company's automotive business also could be affected by: the ability to effectively implement the Company's automotive restructuring program; changes in consumer debt levels and interest rates; the cyclical nature of the automotive industry; moderation or decline in the automobile build rate; successful new product launches; successful implementation of the Company's Project ELITE (Earning Leadership in Tomorrow's Environment) and the ability to achieve cost reductions; work stoppages; customer warranty claims; changes to the regulatory environment regarding automotive safety; and the Company's ability to increase the vehicle content of its products per vehicle. The Company's space, defense and information systems business also could be affected by: the level of defense funding by the government; the Company's ability to receive contract awards; the termination of existing government contracts; and the ability to develop and market products and services for customers outside of the traditional space, defense and information systems markets. Certain statements contained in this report or otherwise made by or on behalf of the Company regarding the purchase of LucasVarity, particularly those regarding synergies, future performance and costs, depend on certain events, risks and uncertainties that may be outside of the Company's control. Factors which could cause actual operating results to differ materially from those described in such forward-looking statements include: unanticipated events and circumstances may occur rendering the transaction less beneficial to the Company than anticipated; the Company and LucasVarity face intense competition in their markets and there is, accordingly, no guarantee that after consummation of the transaction the Company will achieve the expected financial and operating results and synergies; and the ability of the Company and LucasVarity to integrate successfully their operations and thereby achieve the anticipated cost savings and be in a position to take advantage of potential opportunities for growth. The foregoing list of important factors is not exclusive. The Company cautions that any forward-looking statement reflects only the beliefs of the Company or its management at the time the statement is made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement was made. 26 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- Reference is made to the information presented under the heading "Management's Discussion and Analysis of the Results of Operations and Financial Condition" as it appears under Item 7 of this Annual Report on Form 10-K, as amended. Reference is also made to the information presented under the heading "Summary of Significant Accounting Policies" in the Notes to Financial Statements on pages 34 through 36 of this Annual Report on Form 10-K, as amended. 27 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------- 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 Chief Vice President and Corporate Chief Executive Officer Financial Officer Controller
January 19, 1999 28 29 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 operations, 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. /s/ Ernst & Young LLP Cleveland, Ohio January 19, 1999, except for the Operating Segments note, as to which the date is November 10, 1999 29 30 STATEMENTS OF OPERATIONS
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. 30 31 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 31 32 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. 32 33 STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
TRW Inc. and subsidiaries (In millions) - --------------------------------------------------------------------------------------------------------------- Accumulated Other Total Serial Common Other Retained Treasury Comprehensive Shareholders' Preference Stock Capital Earnings Shares Income(Loss) Investment Stock II Series 1&3 - --------------------------------------------------------------------------------------------------------------- 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. 33 34 NOTES TO FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION-The financial statements include the accounts of the Company and its subsidiaries. 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. Due to the nature and complexities of the Company's business, where contracts contain both elements of products and services, it is not practical to segregate the revenue and cost of sales elements of the contracts between products and services or to collect financial information for the components in the Company's financial systems. 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. 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 trade name. 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. 34 35 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 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. 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) - ----------------------------------------------------------------------------------------- -----
35 36 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 (.40) $1.41 - ----------------------------------------------------------------------- ------------------- Diluted earnings(loss) per share from continuing operations 3.83 (.40) 1.37 - ----------------------------------------------------------------------- -------------------
36 37 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 ------- -------------------
Customer-funded research and development projects are an integral part of the business and the related costs are included in cost of sales. 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. Product development costs are expensed as incurred and included primarily in cost of sales. The 1997 amounts exclude the $548 million charge for purchased in-process research and development. 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 and 1997, the balance of the restructuring reserve, included in other accruals, was $18 million and $40 million, respectively. During 1998, $6 million was used for severance payments and $7 million for plant closure costs. The reserve was reduced $9 million due to a change in estimate for severance payments. The remaining reserve will be used primarily for severance and plant closure costs in 1999 and 2000. The combined purchase price in excess of the net assets was $336 million and it 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 and to costs for employee severance of $8 million. As of December 31, 1997, the reserve balance, included in other accruals, was $8 million. During 1998, the $8 million was used for severance payments. 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 major projects included: a commercial market adaptation of core network security to achieve the highest level of network security of $201 million; a Web-enabled and substantially enhanced warehouse and distribution management project of $199 million; and a module to enhance certain applications to become compliant with the single European currency for particular software of $69 million. The status of the major projects as of December 31, 1998 is as follows; (1) the expected revenue from the network security project will be reduced significantly due to a change in the market for the product; (2) the Web-enabled warehouse and distribution project has been delayed about one year; and (3) the research and development of the European currency project was divested; however, the Company will generate future revenues as a 37 38 global systems integrator for all of the acquirer's products and for two company-developed software packages the acquirer will distribute. 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) - -------------------------------------------------------------------------------
SPECIAL CHARGES AND DIVESTITURE On July 29, 1998, the Company announced actions intended to enhance the automotive business profit margin. 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 costs and will be used for severance 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 Operations 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. During 1998, $7 million of the reserve was used for severance payments and $7 million was returned to profit. During 1997, the reserve was increased by $10 million for the change in estimated severance and reduced by $28 million for severance payments. 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. 38 39 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. 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% ------- ---------------
39 40 The effective tax rate in 1998 was 36.1 percent compared with 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. 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 ---------------- ---------------
40 41 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 table provides 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 rate 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 rate 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) - ---------------------------------------------------------------- -------------------
41 42 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. 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 obligations 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. 42 43 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. 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. 43 44 The following table provides 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 - ------------------------------------------------------------------------ ------------
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 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. 44 45 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 obligations 100 (83) - ------------------------------------------------------------------------------
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. 45 46 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. 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. 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. 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. 46 47 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. 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 - --------------------------------------------- ----------------------------------------------
47 48 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 Range of exercise prices shares contractual life exercise shares exercise 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. 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. 48 49 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. 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. 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. 49 50 For the year ended December 31, 1998, the Company previously reported two operating segments: Automotive and Space, Defense & Information Systems. Based on further review and analysis of its segment reporting, the Company is revising its segment reporting to report six operating segments. The Company's automotive businesses are reported as Occupant Safety Systems, Chassis Systems, Automotive Electronics, and Other Automotive segments. The Company's space, defense, and information systems' businesses are reported as Space & Electronics and Systems & Information Technology segments. The chief operating officer evaluates performance and allocates resources to the total automotive and space, defense and information systems' businesses and also reviews financial results of the six operating segments. 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. The space, defense and information systems segments primarily offer products and services to the United States Government, agencies of the United States Government, state and local governments and international and commercial customers. OCCUPANT SAFETY SYSTEMS-occupant restraint systems, including airbag and seat belt systems and steering wheels. CHASSIS SYSTEMS-steering systems, including hydraulic and electrically assisted power and manual rack and pinion steering for light vehicles. AUTOMOTIVE ELECTRONICS-electrical and electronic controls, sensors and engineered fasteners. OTHER AUTOMOTIVE-engine valves and valve train parts, power steering systems and suspension components for commercial vehicles, and stud welding systems. SPACE & ELECTRONICS-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 and electronic systems, equipment components and services, including the design and manufacture of space communications systems, airborne reconnaissance systems, unmanned aerial vehicles, avionics systems, commercial telecommunications and other electronic technologies for tactical and strategic applications. SYSTEMS & INFORMATION TECHNOLOGY-systems integration, systems engineering services and software development in the fields of military command and control, strategic missiles, intelligence requirements management, public safety, modeling simulation, training, telecommunications, image processing, earth observation, nuclear waste management, air traffic control, security and counterterrorism and other high-technology systems and 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. 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 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: 50 51
Occupant Systems & Safety Chassis Automotive Other Space & Information (In millions) Systems Systems Electronics Automotive Electronics Technology Total - ----------------------------------------------------------------------------------------------------------------------- 1998 - ----------------------------------------------------------------------------------------------------------------------- Revenue from external customers $3,042 $2,201 $1,137 $821 $1,922 $2,763 $11,886 Intersegment revenues 4 11 40 3 40 115 213 Segment profit before income taxes 257 129 73 84 266 192 1,001 Special charges / items included in segment profit -- 7 13 4 (34) 26 16 Segment assets 1,605 809 529 373 366 874 4,556 Depreciation and amortization 184 109 57 46 95 61 552 Capital expenditures 161 145 95 55 115 48 619 - ----------------------------------------------------------------------------------------------------------------------- 1997 - ----------------------------------------------------------------------------------------------------------------------- Revenue from external customers $3,020 $2,181 $1,022 $809 $2,005 $1,794 $10,831 Intersegment revenues 2 14 24 3 27 121 191 Segment profit before income taxes 314 155 70 98 204 144 985 Segment assets 1,528 695 367 336 355 728 4,009 Depreciation and amortization 158 107 53 44 87 28 477 Capital expenditures 171 106 65 56 128 28 554 - ----------------------------------------------------------------------------------------------------------------------- 1996 - ----------------------------------------------------------------------------------------------------------------------- Revenue from external customers $2,465 $2,183 $1,055 $790 $1,805 $1,559 $ 9,857 Intersegment revenues 1 8 19 4 40 148 220 Segment profit before income taxes 214 69 (26) 73 124 56 510 Special charges included in segment profit 112 81 91 9 23 66 382 Segment assets 970 689 356 319 302 355 2,991 Depreciation and amortization 113 102 65 47 79 33 439 Capital expenditures 114 115 65 49 130 27 500 - -----------------------------------------------------------------------------------------------------------------------
The Company accounts for intersegment sales or transfers at current market prices for the automotive segments and at cost for the space, defense and information systems segments. Sales to agencies of the U.S. Government, primarily by the space, defense and information systems segments, 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 segments 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 - ------------------------------------------------------------ ------------------
51 52
(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 for and as of 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. 52 53 EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS (UNAUDITED) On January 28, 1999, the Company announced its intention to acquire the entire issued and to be issued share capital of LucasVarity plc in a cash tender offer totaling approximately $7 billion. TRW has received fully underwritten financing from J.P. Morgan Securities Inc., NationsBanc Montgomery Securities LLC, Salomon Smith Barney Inc. and Barclays Capital. The boards of directors of both companies have approved the transaction and LucasVarity's directors have entered into irrevocable agreements to tender their shares and ADSs in response to the offer. The transaction, which is subject to normal closing conditions, may be completed as early as the first quarter of 1999 and will be accounted for under purchase accounting. 53 54 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth ----------------- ----------------- ----------------- ------------------- (In millions except per share data) 1998 1997 1998 1997 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (A) (B) (C) (D) (E)(F) 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 $7 million charge ($6 million after tax, 4 cents per share) for a contract reserve. (C) Earnings(loss) before income taxes includes a charge of $13 million ($8 million after tax, 7 cents per share) related to the automotive restructuring. (D) 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. (E) 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. (F) 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. 54 55 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 Dividends paid traded Shares per 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 was 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. 55 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- Section (a)(1) of Item 14 is hereby amended by deleting it in its entirety and replacing it with the following: (a) FINANCIAL STATEMENTS AND SCHEDULES (1) FINANCIAL STATEMENTS The following financial statements of the registrant and its subsidiaries are included at Item 8 of this Annual Report on Form 10-K, as amended: Statements of Operations -- Years ended December 31, 1998, 1997 and 1996 (page 30) Balance Sheets -- December 31, 1998 and 1997 (page 31) Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996 (page 32) Statements of Changes in Shareholders' Investment -- Years ended December 31, 1998, 1997 and 1996 (page 33) Notes to Financial Statements -- (pages 34-52) (2) FINANCIAL STATEMENT SCHEDULES All Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. Financial statements and summarized financial information of unconsolidated subsidiaries and 50 percent or less owned persons accounted for by the equity method have been omitted because such subsidiaries and persons, considered individually or in the aggregate, do not constitute a significant subsidiary. (3) EXHIBITS 2(a) Offer to Purchase dated February 6, 1999 (Exhibit (a)(1) to TRW's Schedule 14D-1 dated February 5, 1999, is incorporated herein by reference). 2(b) Form of Irrevocable Undertakings executed by each director of LucasVarity plc (Exhibit (c)(1) to TRW's Schedule 14D-1 dated February 5, 1999, is incorporated herein by reference). 2(c) Break-up Fee Agreement, dated January 28, 1999 between TRW and LucasVarity plc (Exhibit (c)(2) to TRW's Schedule 14D-1 dated February 5, 1999, is incorporated herein by reference). 3(a) Amended Articles of Incorporation as amended May 5, 1997 (Exhibit 3(a) to TRW Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by reference). 3(b) Regulations as amended April 30, 1980 (Exhibit 3(b) to TRW Annual Report on Form 10-K for the year ended December 31, 1980, is incorporated herein by reference). 4(a) Rights Agreement dated as of April 24, 1996 between TRW Inc. and National City Bank, as Rights Agent (Exhibit 1 to TRW Form 8-A Registration Statement dated April 25, 1996, is incorporated herein by reference). 56 57 4(b) Indenture between TRW Inc. and The Chase Manhattan Bank (National Association), as successor Trustee, dated as of May 1, 1986 (Exhibit 2 to TRW Form 8-A Registration Statement dated July 3, 1986, is incorporated herein by reference). 4(c) First Supplemental Indenture between TRW Inc. and The Chase Manhattan Bank (National Association), as successor Trustee, dated as of July 26, 1989 (Exhibit 4(b) to TRW Form S-3 Registration Statement, File No. 33-30350, is incorporated herein by reference). 4(d) Distribution Agreement, dated April 13, 1998, between TRW Inc. and each of Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co. and J.P. Morgan Securities Inc., regarding $1,000,000,000 Medium-Term Notes, Series D, due nine months or more from the date of issuance (Exhibit 1 to TRW Inc.'s Current Report on Form 8-K dated April 13, 1998, is incorporated herein by reference). 4(e) Form of Medium Term Note, Series D (Exhibit 4 to TRW Inc.'s Current Report on Form 8-K dated April 13, 1998, is incorporated herein by reference). *10(a) 1979 Stock Option Plan as amended April 28, 1982 (Exhibit A to TRW Proxy Statement dated March 18, 1982, is incorporated herein by reference). *10(b) TRW Operational Incentive Plan (Exhibit 10(b) to TRW Annual Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference). *10(c) TRW Executive Health Care Plan as amended and restated effective August 1,1995 (Exhibit 10(c) to TRW Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference). *10(d) 1984 Stock Option Plan (Exhibit A to TRW Proxy Statement dated March 19, 1984, is incorporated herein by reference). *10(e) 1989 TRW Long-Term Incentive Plan (Exhibit A to TRW Proxy Statement dated March 17, 1989, is incorporated herein by reference). *10(f) 1994 TRW Long-Term Incentive Plan as amended and restated effective February 4, 1997 (Exhibit 10(f) to TRW Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference). *10(g) 1997 TRW Long-Term Incentive Plan (Exhibit A to TRW Proxy Statement dated March 12, 1997, is incorporated herein by reference). +*10(h) Amendment dated as of December 9, 1998 to 1997 TRW Long-Term Incentive Plan. *10(i) Form of Strategic Incentive Grant (Exhibit 10(h) to TRW Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference). *10(j) Form of U.S. Nonqualified Stock Option Agreement (Exhibit 10(i) to TRW Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference). *10(k) Form of U.S. Transferable Nonqualified Stock Option Agreement (Exhibit 10(j) to TRW Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference). *10(l) Form of Director Transferable Nonqualified Stock Option Agreement (Exhibit 10(k) to TRW Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference). +*10(m) Form of Stock Option Agreement Qualified under the laws of France. *10(n) Deferred Compensation Plan for Non-Employee Directors of TRW Inc. dated July 1, 1997 (Exhibit 10(d) to TRW Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by reference). 57 58 *10(o) TRW Directors' Pension Plan as amended and restated effective August 1, 1990 (Exhibit 10(l) to TRW Annual Report on Form 10-K for the year ended December 31, 1990, is incorporated herein by reference). *10(p) Amendment to the TRW Directors' Pension Plan (as Amended and Restated Effective August 1, 1990) effective June 30, 1997 (Exhibit 10(n) to TRW Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference). *10(q) Form of Amended and Restated Employment Continuation Agreements with executive officers (Exhibit 10(k) to TRW Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference). +*10(r) TRW Inc. Deferred Compensation Plan (as Amended and Restated Effective January 1, 1999). +*10(s) TRW Benefits Equalization Plan (as Amended and Restated Effective January 1, 1999). +*10(t) TRW Supplementary Retirement Income Plan (as Amended and Restated Effective January 1, 1999). *10(u) TRW Inc. Key Executive Life Insurance Plan dated as of February 7, 1996 (Exhibit 10(v) to TRW Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference). *10(v) TRW Inc. Financial Counseling Program (Exhibit 10(w) to TRW Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference). 10(w) Three Year Revolving Credit Agreement dated July 1, 1992 among TRW Inc. and various financial institutions (Exhibit 19.1 to TRW Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, is incorporated herein by reference). 10(x) Amendment dated June 30, 1993 to Three Year Revolving Credit Agreement dated July 1, 1992 among TRW Inc. and various financial institutions (Exhibit 10.1 to TRW Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference). 10(y) Amendment dated as of March 1, 1994 to Three Year Revolving Credit Agreement dated July 1, 1992 among TRW Inc. and various financial institutions (Exhibit 10(cc) to TRW Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference). 10(z) Amendment dated February 28, 1995 to Multi-Year Revolving Credit Agreement (formerly entitled Three Year Revolving Credit Agreement) dated July 1, 1992 among TRW Inc. and various financial institutions (Exhibit 10(u) to TRW Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference). 10(aa) Amendment dated May 8, 1996 to Multi-Year Revolving Credit Agreement (formerly entitled Three Year Revolving Credit Agreement) dated July 1, 1992 among TRW Inc. and various financial institutions (Exhibit 10(y) to TRW Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference). 10(bb) Amendment to Multi-Year Revolving Credit Agreement (as Amended and Restated as of May 8, 1996), dated as of August 7, 1997 among TRW Inc. and various financial institutions (Exhibit 10(a) to TRW Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference). *10(cc) Consulting Agreement dated September 18, 1997 between TRW Inc. and G. H. Heilmeier (Exhibit 10(b) to TRW Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference). *10(dd) TRW Inc. Stock Plan for Non-Employee Directors (as Amended and Restated Effective August 1, 1995) (Exhibit 10.1 to TRW Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, is incorporated herein by reference). 10(ee) Revolving Credit Agreement dated as of December 10, 1997 among TRW Inc. and various financial institutions (Exhibit 10(ee) to TRW Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference). 58 59 +10(ff) Amendment dated as of December 8, 1998 to Revolving Credit Agreement dated as of December 10, 1997 among TRW Inc. and various financial institutions. *10(gg) Employment Agreement dated as of November 20, 1997 between TRW Inc. and Philip A. Odeen (Exhibit 10(ff) to TRW Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference). *10(hh) Form of 1998-2000 Strategic Incentive Program Grant (Exhibit 10(gg) to TRW Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference). 10(ii) Amended and Restated Credit Agreement dated as of January 27, 1999, and amended and restated as of February 26, 1999, among TRW and various financial institutions (Exhibit (b)(2) to TRW's Schedule 14D-1/A dated March 2, 1999, is incorporated herein by reference). +12 Computation of Ratio of Earnings to Fixed Charges - Unaudited (Supplement to Exhibit 12 of the following Form S-3 Registration Statements of the Company: No. 33-32870, filed September 20, 1991, No. 33-61711, filed August 10, 1995, No. 333-43931, filed January 8, 1998 and No. 333-48443, filed March 23, 1998). +13 Portions of the TRW Annual Report to Security Holders for the year ended December 31, 1998 incorporated herein by reference. +21 Subsidiaries of the Registrant. +23(a) Consent of Independent Auditors. +23(b) Consent of Independent Auditors (with respect to financial statements of The TRW Canada Stock Savings Plan). ++23(c) Consent of Independent Auditors (with respect to financial statements and the notes thereto included in Amendment No. 1 to TRW's Annual Report on Form 10-K). +24(a) Power of Attorney. +24(b) Certified Resolutions. +27 Financial Data Schedule. +99(a) Financial Statements of The TRW Canada Stock Savings Plan for the year ended December 31, 1998. Certain instruments with respect to long-term debt have not been filed as exhibits as the total amount of securities authorized under any one of such instruments does not exceed 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees to furnish to the Commission a copy of each such instrument upon request. * Management contract, compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report. + Filed with TRW's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Commission on March 19, 1999. ++ Filed with this Amendment No. 1 to TRW's Annual Report on Form 10-K. (b) REPORTS ON FORM 8-K None. 59 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRW Inc. Date: November 10, 1999 By /s/ William B. Lawrence William B. Lawrence, Executive Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- J. T. GORMAN* Chairman of the Board, November 10, 1999 Chief Executive Officer and Director C. G. MILLER* Executive Vice President and November 10, 1999 Chief Financial Officer T. A. CONNELL* Vice President and Controller November 10, 1999 M. H. ARMACOST* Director November 10, 1999 M. FELDSTEIN* Director November 10, 1999 R. M. GATES* Director November 10, 1999 G. H. HEILMEIER* Director November 10, 1999 K. N. HORN* Director November 10, 1999 E. B. JONES* Director November 10, 1999 W. S. KISER* Director November 10, 1999 D. B. LEWIS* Director November 10, 1999 L. M. MARTIN* Director November 10, 1999 R. W. POGUE* Director November 10, 1999 William B. Lawrence, by signing his name hereto, does hereby sign and execute this report on behalf of each of the above-named officers and Directors of TRW Inc., pursuant to a power of attorney executed by each of such officers and Directors and filed with the Securities and Exchange Commission as an exhibit to this report. November 10, 1999 *By /s/ William B. Lawrence William B. Lawrence, Attorney-in-fact 60 EX-23.C 2 EXHIBIT 23.C 1 EXHIBIT 23(c) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated January 19, 1999 (except for the Operating Segments Note, as to which the date is November 10, 1999), with respect to the consolidated financial statements of TRW Inc. included in the Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 1998, 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, 333-20351 on Form S-8, 333-06633 on Form S-8, 333-03973 on Form S-8, 33-53503 on Form S-8, 33-29751 on Form S-8, 2-90748 on Form S-8 and 2-64035 on Form S-8. /s/ Ernst & Young LLP Cleveland, Ohio November 10, 1999 -----END PRIVACY-ENHANCED MESSAGE-----