<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): February 5, 1999
--------------------
TRW Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 1-2384 34-0575430
--------------- ------------------------ ----------------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification Number)
incorporation)
1900 Richmond Road, Cleveland, Ohio 44124
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(216) 291-7000
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
In connection with the tender offer for all of the issued share
capital of LucasVarity plc, TRW Inc. will be disclosing its audited financial
statements for the fiscal year ended December 31, 1998.
Such financial statements, and the report of Ernst & Young LLP, are set
forth on the following pages.
<PAGE> 3
REPORT OF MANAGEMENT
Management of TRW is responsible for the preparation of the accompanying
consolidated financial statements of the Company and its subsidiaries. The
financial statements have been prepared in conformity with generally accepted
accounting principles and include the estimates and judgments of management. The
financial statements have been audited by Ernst & Young LLP, independent
auditors, whose report appears below.
Management has established and is responsible for maintaining a system of
internal accounting controls that it believes provides reasonable assurance that
assets are safeguarded and transactions are executed and recorded in accordance
with management's authorization. The system is tested and evaluated regularly by
the Company's internal auditors as well as by the independent auditors in
connection with their annual audit.
TRW has an audit committee composed of four directors who are not members of
management. The committee meets regularly with management, the internal auditors
and the independent auditors in connection with its review of matters relating
to the Company's financial statements, the Company's internal audit program, the
Company's system of internal accounting controls and the services of the
independent auditors. The committee also meets with the internal auditors as
well as the independent auditors, without management present, to discuss
appropriate matters. The committee also recommends to the directors the
designation of the independent auditors.
<TABLE>
<S> <C> <C>
Joseph T. Gorman Carl G. Miller Thomas A. Connell
Chairman and Executive Vice President and Vice President and
Chief Executive Officer Chief Financial Officer Corporate Controller
</TABLE>
January 19, 1999
3
<PAGE> 4
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Directors, TRW Inc.
We have audited the accompanying consolidated balance sheets of TRW Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of earnings, cash flows and changes in shareholders' investment for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TRW Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Cleveland, Ohio
January 19, 1999 Ernst & Young LLP
4
<PAGE> 5
STATEMENTS OF EARNINGS
TRW Inc. and subsidiaries
(In millions except per share data)
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- -------------------------------------------------------- --------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------- --------------------
</TABLE>
See notes to financial statements.
5
<PAGE> 6
BALANCE SHEETS
TRW Inc. and subsidiaries
(In millions)
<TABLE>
<CAPTION>
December 31 1998 1997
- --------------------------------------------------------------------- -------
<S> <C> <C>
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
------- -------
</TABLE>
See notes to financial statements.
6
<PAGE> 7
STATEMENTS OF CASH FLOWS
TRW Inc. and subsidiaries
(In millions)
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------- ------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------- ------------------
</TABLE>
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents.
See notes to financial statements.
7
<PAGE> 8
STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
TRW INC. AND SUBSIDIARIES
(IN MILLIONS)
Serial Accumulated
Preference Other Total
Stock II Common Other Retained Treasury Comprehensive Shareholders'
Series 1&3 Stock Capital Earnings Shares Income(Loss) Investment
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION-The financial statements include the accounts of the
Company and its subsidiaries except for two wholly owned insurance subsidiaries.
The insurance subsidiaries and the investments in affiliated companies are
accounted for by the equity or cost method as appropriate.
USE OF ESTIMATES-The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of December 31, 1998 and
1997, and reported amounts of sales and expenses for the years ended December
31, 1998, 1997 and 1996. Actual results could differ from those estimates.
LONG-TERM CONTRACTS-The percentage-of-completion (cost-to-cost) method is used
to estimate sales under fixed-price and fixed-price incentive contracts. Sales
under cost-reimbursement contracts are recorded as costs are incurred. Fees
based on cost, award fees and incentive fees are included in sales at the time
such amounts are reasonably estimable. Losses on contracts are recognized when
determinable.
ACCOUNTS RECEIVABLE-Accounts receivable at December 31, 1998 and 1997, included
$692 million and $640 million, respectively, related to long-term contracts, of
which $339 million and $209 million, respectively, were unbilled. Unbilled
costs, fees and claims represent revenues earned and billable in the following
month as well as revenues earned but not billable under terms of the contracts.
A substantial portion of such amounts is expected to be billed during the
following year. Retainage receivables and receivables subject to negotiation are
not significant.
INVENTORIES-Inventories are stated at the lower of cost, principally the
first-in, first-out (FIFO) method, or market. Inventories applicable to
long-term contracts are not significant.
DEPRECIATION-Depreciation is computed over the assets' estimated useful lives
using the straight-line method for the majority of the Company's depreciable
assets. The remaining assets are depreciated using accelerated methods. The
estimated useful lives of buildings, machinery and equipment, and computers and
other office equipment are between 30-40 years, 8-12 years and 3-5 years,
respectively.
ASSET IMPAIRMENT-The Company records impairment losses on long-lived and
intangible assets used in operations when events and circumstances indicate that
the assets may be impaired and the undiscounted net cash flows estimated to be
generated by those assets are less than their carrying amounts.
INTANGIBLE ASSETS-Intangible assets are stated on the basis of cost and are
being amortized by the straight-line method over the estimated future periods to
be benefited, except for intangibles arising from acquisitions prior to 1971
($49 million) which are not being amortized because there is no indication of
diminished value.
9
<PAGE> 10
Intangibles arising from acquisitions after 1970 are being amortized over
periods primarily ranging from 15 to 40 years. Other intangible assets primarily
include capitalized software and other intangible assets acquired through
acquisitions including core and developed technology, workforce and tradename.
Capitalized software is being amortized over periods not to exceed 10 years.
Other intangible assets acquired through acquisitions are being amortized
primarily over 15 years. The carrying value of intangible assets is assessed for
impairment on a quarterly basis.
FORWARD EXCHANGE CONTRACTS-The Company enters into forward exchange contracts
the majority of which hedge firm foreign currency commitments and certain
intercompany transactions. At December 31, 1998, the Company had contracts
outstanding amounting to $162 million denominated principally in the British
pound, the U.S. dollar, the Spanish peseta, the European currency unit and the
Canadian dollar, maturing at various dates through December 1999. Changes in
market value of the contracts are generally included in the basis of the
transactions. Foreign exchange contracts are placed with a number of major
financial institutions to minimize credit risk. No collateral is held in
relation to the contracts, and the Company anticipates that these financial
institutions will satisfy their obligations under the contracts.
FAIR VALUES OF FINANCIAL INSTRUMENTS-
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
Carrying Fair Carrying Fair
(In millions) Value Value Value Value
- --------------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
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)
- --------------------------------------------------------------------------------- -------------------------
</TABLE>
The fair value of long-term debt was estimated using a discounted cash flow
analysis, based on the Company's current borrowing rates for similar types of
borrowing arrangements. The fair value of interest rate hedges and forward
currency exchange contracts is estimated based on quoted market prices of
offsetting contracts.
ENVIRONMENTAL COSTS-The Company participates in environmental assessments and
remedial efforts at operating facilities, previously owned or operated
facilities, and Superfund or other waste sites. Costs related to these locations
are accrued when it is probable that a liability has been incurred and the
amount of that liability can be reasonably estimated. Estimated costs are
recorded at undiscounted amounts based on experience and assessments and are
regularly evaluated as efforts proceed. Insurance recoveries are recorded as a
reduction of environmental costs when fixed and determinable.
COMPREHENSIVE INCOME-The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" during the first
quarter of 1998. This Statement requires that foreign currency translation,
unrealized gains or losses on the Company's available-for-sale securities and
minimum pension liability adjustments be included in other comprehensive income
and that the accumulated balance of other comprehensive income be separately
displayed. Prior year information has been restated to conform to the
requirements of Statement 130.
10
<PAGE> 11
The components of accumulated other comprehensive income at December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997
- --------------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
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)
- --------------------------------------------------------------------------------------------------- ----------
</TABLE>
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.
<TABLE>
<CAPTION>
(In millions except per share data) 1998 1997 1996
- ------------------------------------------------------ --------------------
<S> <C> <C> <C>
Numerator
Earnings(loss) from continuing operations $ 476.8 $ (48.5) $ 182.4
Preferred stock dividends (.6) (.7) (.7)
- ------------------------------------------------------ --------------------
Numerator for basic earnings per share-
earnings(loss) available to common
shareholders 476.2 (49.2) 181.7
Effect of dilutive securities
Preferred stock dividends .6 -- .7
- ------------------------------------------------------ --------------------
Numerator for diluted earnings per share-
earnings(loss) available to common
shareholders after assumed conversions $ 476.8 $ (49.2) $ 182.4
- ------------------------------------------------------ --------------------
Denominator
Denominator for basic earnings per share-
weighted-average common shares 121.3 123.7 128.7
Effect of dilutive securities
Convertible preferred stock .9 -- 1.1
Employee stock options 2.2 -- 3.0
- ------------------------------------------------------ --------------------
Dilutive potential common shares 3.1 -- 4.1
Denominator for diluted earnings per share-
adjusted weighted-average shares and
assumed conversions 124.4 123.7 132.8
- ------------------------------------------------------ --------------------
Basic earnings(loss) per share from
continuing operations $ 3.93 $ (0.40) $ 1.41
- ------------------------------------------------------ --------------------
Diluted earnings(loss) per share from
continuing operations $ 3.83 $ (0.40) $ 1.37
- ------------------------------------------------------ --------------------
</TABLE>
11
<PAGE> 12
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------- -----------------------
<S> <C> <C> <C>
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
------ ------ ------
</TABLE>
Company-funded research and development programs include research and
development for commercial products and independent research and development and
bid and proposal work related to government products and services. A portion of
the cost incurred for independent research and development and bid and proposal
work is recoverable through overhead charged to government contracts. Product
development costs include engineering and field support for new customer
requirements.
The 1997 amounts exclude the $548 million charge for purchased in-process
research and development.
12
<PAGE> 13
ACQUISITIONS
On February 5, 1997, the Company acquired an 80 percent equity interest in the
air bag and steering wheel businesses of Magna International for cash of $415
million plus assumed net debt of $50 million. On January 30, 1998, the Company
acquired the remaining 20 percent for cash of $102 million. These businesses
supply air bag modules, inflators, propellants, steering wheels and other
related automotive components. The results of operations have been included in
the financial statements from the dates of acquisition. The acquisitions were
accounted for by the purchase method; accordingly, the combined purchase price
has been allocated to the net assets acquired based on their estimated fair
values and to costs for certain restructuring actions, primarily plant closing
and severance costs of $40 million. As of December 31, 1998, the balance of the
restructuring reserve, included in other accruals, was $18 million and will be
used primarily for severance costs in 1999 and 2000. The combined purchase price
in excess of the net assets is $336 million and is being amortized over 40
years.
On December 24, 1997, the Company acquired the shares of BDM International, Inc.
(BDM) for cash of $880 million plus assumed net debt of $85 million. BDM is an
information technology company operating in the systems and software
integration, computer and technical services and enterprise management and
operations markets. The acquisition was accounted for by the purchase method
with the purchase price allocated to the net assets acquired based on their fair
values. An independent valuation was performed, primarily using the income
approach for valuing the intangible assets. As a result of the valuation, $548
million was allocated to in-process research and development projects that had
not reached technological feasibility and had no alternative future use. This
amount was recognized as an expense with no income tax benefit at the date of
acquisition. The intangible assets of $371 million are being amortized over an
average period of 15 years.
The following unaudited pro forma financial information reflects the
consolidated results of operations of the Company as if the 1997 acquisitions
had taken place at the beginning of the respective periods. The pro forma
information includes adjustments for interest expense that would have been
incurred to finance the acquisitions, additional depreciation based on the fair
market value of the property, plant and equipment acquired, write-off of
purchased in-process research and development and the amortization of intangible
assets arising from the transactions. The pro forma financial information is not
necessarily indicative of the results of operations as they would have been had
the transactions been affected on the assumed dates.
<TABLE>
<CAPTION>
(In millions except per share data)
Year ended (unaudited) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $11,758 $11,231
Loss from continuing operations (85) (392)
Loss per share (.69) (3.05)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
SPECIAL CHARGES AND DIVESTITURE
On July 29, 1998, the Company announced actions intended to enhance the
automotive segment profit margins. The Company will record pre-tax charges of
$125 million to $150 million by the end of 2000, of which $24 million was
expensed in 1998 primarily for plant closing and severance costs. Other accruals
at December 31, 1998 includes $18 million relating to these charges and will be
used in 1999.
During 1996, the Company recorded before-tax charges of $385 million ($252
million after tax, or $1.90 per share) primarily for actions taken in the
automotive and space, defense and information systems businesses. The components
of the charge included severance costs of $40 million, contract reserves of $99
million, litigation and warranty expenses of $127 million, asset writedowns of
$96 million and other items of $23 million. The charges are included in the
Statements of Earnings for 1996 as follows: $321 million included in cost of
sales, $18 million included in interest expense, $65 million included in other
expense(income)-net and a reduction of $19 million included in other captions.
Other accruals at December 31, 1998 and 1997 included $7 million and $21
million, respectively, relating to severance costs. The balance will be expended
in 1999 and 2000.
During 1996, the Company sold substantially all of the businesses in its
Information Systems & Services segment. The financial statements reflect as
discontinued operations for all periods presented that segment's net assets and
operating results, as well as the related transaction gain. Net proceeds of $1.1
billion in cash resulted in a gain of $484 million ($260 million after tax, or
$1.96 per share). Sales of the discontinued operations were $453 million in
1996.
14
<PAGE> 15
<TABLE>
<CAPTION>
OTHER EXPENSE(INCOME)-NET
(In millions) 1998 1997 1996
- ----------------------------------------------------------------------------- -----------------------
<C> <C> <C> <C>
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
----- ----- -----
</TABLE>
Other income in 1998 includes a $49 million benefit from the settlement of
certain patent litigation. Other income in 1997 includes a $15 million gain on
the sale of a property. Other expense in 1996 includes $65 million of special
charges. Refer to the "Special Charges and Divestiture" footnote.
15
<PAGE> 16
INCOME TAXES
<TABLE>
<CAPTION>
Earnings from continuing operations before income taxes
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------- -----------------------
<S> <C> <C> <C>
U.S. $ 534 $ 95 $ 133
Non-U.S. 212 145 169
- ------------------------------------------------------------------------- -----------------------
$ 746 $ 240 $ 302
----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
Provision for income taxes
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------- -----------------------
<S> <C> <C> <C>
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
----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
Effective income tax rate
1998 1997 1996
- --------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C>
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%
---- ----- ----
</TABLE>
The effective tax rate in 1998 was 36.1 percent compared to 120.3 percent in
1997. Excluding the write-off of purchased in-process research and development,
the 1997 effective tax rate would have been 36.6 percent.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1998 and
1997, the Company had unused tax benefits of $39 million and $30 million,
respectively, related to non-U.S. net operating loss carryforwards for income
tax purposes, of which $25 million and $13 million can be carried forward
indefinitely and the balance expires at various dates through 2005. A valuation
allowance at December 31, 1998 and 1997, of $29 million and $25 million,
respectively, has been recognized to offset the related deferred tax assets due
to the uncertainty of realizing the benefit of the loss carryforwards.
16
<PAGE> 17
It is the Company's intention to reinvest undistributed earnings of certain of
its non-U.S. subsidiaries and thereby indefinitely postpone their remittance.
Accordingly, deferred income taxes have not been provided for accumulated
undistributed earnings of $544 million at December 31, 1998.
<TABLE>
<CAPTION>
Deferred tax Deferred tax
assets liabilities
--------------------------------------------------
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
---- ---- ---- ----
</TABLE>
17
<PAGE> 18
PENSION PLANS
At December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
employers' disclosures about pensions and other postretirement benefit plans.
The measurement and recognition requirements for pension or other postretirement
benefit plans have not changed. Prior year information has been restated to
conform to the requirements of the new standard.
The Company has defined benefit pension plans for substantially all employees.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ended
December 31, 1998, and a statement of the funded status as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------- ---------------------
(In millions) U.S. Non-U.S. U.S. Non-U.S.
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligations
Benefit obligations at January 1 $2,872 $ 429 $2,381 $ 412
Service cost 94 16 72 16
Interest cost 200 29 179 29
Amendments 3 1 5 5
Actuarial loss 127 64 320 17
Foreign currency exchange changes -- 7 -- (31)
Acquisitions -- -- 114 --
Benefits paid (254) (29) (199) (19)
- ----------------------------------------------------------------------------------- -------------------
Benefit obligations at December 31 3,042 517 2,872 429
Change in plan assets
Fair value of plan assets at January 1 3,139 322 2,787 314
Actual return on plan assets 392 22 438 24
Foreign currency exchange changes -- (4) -- (13)
Acquisitions -- -- 104 --
Company contributions 27 21 9 13
Plan participant contributions -- 3 -- 3
Benefits paid (254) (29) (199) (19)
- ----------------------------------------------------------------------------------- -------------------
Fair value of plan assets at December 31 3,304 335 3,139 322
Funded status of the plan 262 (182) 267 (107)
Unrecognized actuarial (gain)loss (172) 28 (162) (39)
Unrecognized prior service cost 29 10 33 11
Unrecognized net transition asset (4) (10) (23) (11)
- ----------------------------------------------------------------------------------- -------------------
Total recognized $ 115 $ (154) $ 115 $ (146)
- ----------------------------------------------------------------------------------- -------------------
</TABLE>
The following table provides the amounts recognized in the balance sheet as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
(In millions) U.S. Non-U.S. U.S. Non-U.S.
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
- ----------------------------------------------------------------------------------- ----------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the U.S. pension plans with accumulated benefit obligations
in excess of plan assets were $72 million, $62 million and zero, respectively,
as of December 31, 1998, and $189 million, $167 million and $105 million,
respectively, as of December 31, 1997.
18
<PAGE> 19
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the non-U.S. pension plans with accumulated benefit
obligations in excess of plan assets were $187 million, $169 million and $22
million, respectively, as of December 31, 1998, and $150 million, $138 million
and $21 million, respectively, as of December 31, 1997.
The defined benefit pension plans held approximately 4.8 million and 4.4 million
shares of the Company's common stock with a fair value of approximately $267
million and $232 million at December 31, 1998 and 1997, respectively. The plans
received approximately $6 million and $5 million in dividends on these shares in
1998 and 1997, respectively.
The following table provides the components of net pension cost for the plans
for years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- ------------------------------------------
(In millions) U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S.
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Defined benefit plans
Service cost-benefits earned
during the year $ 94 $ 16 $ 72 $ 16 $ 73 $ 14
Interest cost on projected
benefit obligation 200 29 179 29 165 28
Expected return on plan assets (260) (28) (223) (26) (205) (24)
Amortization of recognized loss 1 1 -- -- 10 4
Amortization of prior service
cost 7 2 7 3 6 6
Amortization of transition asset (18) (1) (18) (1) (18) (1)
- ---------------------------------------------------------------------- --------------------------------------
Defined benefit plans 24 19 17 21 31 27
Defined contribution plans 1 5 1 5 1 5
Employee stock ownership and
savings plan 47 -- 44 -- 40 --
- ---------------------------------------------------------------------- --------------------------------------
Total pension cost $ 72 $ 24 $ 62 $ 26 $ 72 $ 32
- ---------------------------------------------------------------------- --------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
----------------------- -------------------
U.S. Non-U.S. U.S. Non-U.S.
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
- ----------------------------------------------------------------------------------- ----------------
</TABLE>
The expected long-term rate of return on plan assets for U.S. plans was 9.5
percent for 1998 and 9 percent for 1997. For non-U.S. plans the expected
long-term rate of return ranged from 8.5 to 8.75 percent in 1998 and 9 to 9.5
percent in 1997.
The Company sponsors a contributory stock ownership and savings plan for which a
majority of its U.S. employees are eligible. The Company matches employee
contributions up to 3 percent of the participant's qualified compensation. The
Company contributions are held in an unleveraged employee stock ownership plan.
The Company also sponsors other defined contribution pension plans covering
employees at some of its operations.
19
<PAGE> 20
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
At December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
employers' disclosures about pensions and other postretirement benefit plans.
The measurement and recognition requirements for pension or other postretirement
benefit plans have not changed. Prior year information has been restated to
conform to the requirements of the new standard.
The Company provides health care and life insurance benefits for a majority of
its retired employees in the United States and Canada. The health care plans
provide for cost sharing, in the form of employee contributions, deductibles and
coinsurance, between the Company and its retirees. The postretirement health
care plan covering a majority of employees who retired since August 1, 1988,
limits the annual increase in the Company's contribution toward the plan's cost
to a maximum of the lesser of 50 percent of medical inflation or 4 percent. Life
insurance benefits are generally noncontributory. The Company's policy is to
fund the cost of postretirement health care and life insurance benefits in
amounts determined at the discretion of management. Retirees in certain other
countries are provided similar benefits by plans sponsored by their governments.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ended
December 31, 1998, and a statement of the funded status as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
(In millions) 1998 1997
- ---------------------------------------------------------------------------------------------- -----
<S> <C> <C>
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)
- ---------------------------------------------------------------------------------------------- -----
</TABLE>
The following table provides the components of net postretirement benefit cost
for the plans for years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
- ----------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------- -------------------------
</TABLE>
20
<PAGE> 21
The weighted average discount rate used in determining the accumulated
postretirement benefit obligations as of December 31, 1998 and 1997, was 6.75
percent and 7 percent, respectively. The weighted average rate of compensation
increase was 4.0 percent and 4.4 percent for 1998 and 1997, respectively. The
weighted average expected long-term rate of return on plan assets was 9.5
percent for 1998 and 8 percent for 1997. A 7.5 percent annual rate of increase
in the per capita cost of covered health care benefits was assumed for 1999. The
rate was assumed to decrease gradually to 5 percent in the year 2009 and remain
at that level thereafter.
A one-percentage-point change in the assumed health care cost trend rate would
have the following effects:
<TABLE>
<CAPTION>
(In millions) One-percentage-point
------------------------
Increase Decrease
- ------------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
Effect on total of service and interest cost components $ 10 $ (7)
Effect on postretirement benefit obligation 100 (83)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
DEBT AND CREDIT AGREEMENTS
<TABLE>
<CAPTION>
Short-term debt
(In millions) 1998 1997
- -------------------------------------------------------------------------------------------------- -------
<S> <C> <C>
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
------ ------
</TABLE>
The Company maintains two committed U.S. dollar revolving credit agreements. The
first agreement allows the Company to borrow up to $750 million with 17 banks
and extends through June 2002. The second agreement allows the Company to borrow
up to $745 million with 14 banks and extends to December 6, 1999. The interest
rate under the agreements is either a negotiated rate, the banks' prime rates, a
rate based on the banks' costs of funds in the secondary certificate of deposit
market or a rate based on an Interbank Offered Rate. The Company's commercial
paper borrowings are supported by these agreements. At December 31, 1998, there
were no outstanding borrowings under the U.S. revolving credit agreements.
The Company also maintains a committed U.S. dollar denominated revolving credit
agreement with five banks for use by the Company's Brazilian operations. The
agreement allows the Company to borrow up to $50 million and extends through
July 2003. The interest rate under the agreement is a rate based on an Interbank
Offered Rate. At December 31, 1998, there were $20 million in outstanding
borrowings under this agreement.
The Company also maintains a committed multi-currency revolving credit agreement
with 17 banks. The agreement allows the Company to borrow up to $250 million and
extends through June 2002. The interest rate under the agreement is based on
various interest rate indices. At December 31, 1998, there were no outstanding
borrowings under the multi-currency credit agreement.
At December 31, 1998, $191 million of short-term debt was reclassified to
long-term debt as the Company intends to refinance the borrowings on a long-term
basis and has the ability to do so under its U.S. and multi-currency revolving
credit agreements.
During 1998, the Company refinanced short-term debt by issuing $659 million of
notes and debentures that mature at various dates through 2028.
22
<PAGE> 23
The Company established a $1 billion Universal Shelf Registration Statement
during 1998 of which approximately $841 million remains available at December
31, 1998. Securities that may be issued under this shelf registration statement
include debt securities, common stock, warrants to purchase debt securities and
warrants to purchase common stock.
The weighted average interest rate on short-term borrowings outstanding,
including amounts reclassified to long-term debt, at December 31, 1998 and 1997,
is 5.9 percent and 6.4 percent, respectively.
The other medium-term notes bear interest at rates ranging from 5.98 percent to
9.25 percent and mature at various dates through 2020.
Long-term non-U.S. borrowings bear interest, stated in terms of the local
currency borrowing, at rates ranging from 3.3 percent to 9.5 percent at December
31, 1998, and mature at various dates through 2006.
The maturities of long-term debt are, in millions: 1999-$30; 2000-$35;
2001-$29; 2002-$194; 2003-$85; and $1,010 thereafter.
The indentures and other debt agreements impose, among other covenants,
maintenance of minimum net worth. Under the most restrictive interpretation of
these covenants, the payment of dividends was limited to approximately $972
million at December 31, 1998.
Compensating balance arrangements and commitment fees were not material.
23
<PAGE> 24
LEASE COMMITMENTS
The Company leases certain offices, manufacturing and research buildings,
machinery, automobiles and computer and other equipment. Such leases, some of
which are noncancelable and in many cases include renewals, expire at various
dates. The Company pays most maintenance, insurance and tax expenses relating to
leased assets. Rental expense for operating leases was $180 million for 1998,
$146 million for 1997 and $130 million for 1996.
At December 31, 1998, the future minimum lease payments for noncancelable
operating leases totaled $390 million and are payable as follows: 1999-$108;
2000-$82; 2001-$57; 2002-$42; 2003-$30; and $71 thereafter.
24
<PAGE> 25
CAPITAL STOCK
SERIAL PREFERENCE STOCK II - cumulative - stated at $2.75 a share; 5 million
shares authorized.
Series 1 - each share convertible into 8.8 shares of common; redeemable at
$104 per share; involuntary liquidation price of $104 per share; dividend
rate of $4.40 per annum.
Series 3 - each share convertible into 7.448 shares of common; redeemable at
$100 per share; involuntary liquidation price of $40 per share; dividend
rate of $4.50 per annum.
Series 4 - not convertible into common shares; redemption price and
involuntary liquidation price of $125 per one one-hundredth of a share;
annual dividend rate per one one-hundredth of a share of the lesser of $4.00
or the current dividend on common stock; no shares outstanding at December
31, 1998.
COMMON STOCK - $0.625 par value; authorized 500 million shares; shares
outstanding were reduced by treasury shares of 13.6 million in 1998 and 10.9
million in 1997.
The Company has a shareholder purchase rights plan under which each shareholder
of record as of May 17, 1996, received one-half of one right for each TRW common
share held. Each right entitles the holder, upon the occurrence of certain
events, to buy one one-hundredth of a share of Cumulative Redeemable Serial
Preference Stock II, Series 4, at a price of $300. In other events, each right
entitles the holder, other than the acquiring party, to purchase $600 of TRW
common stock or common stock of another person at a 50 percent discount. The
Company may redeem these rights at its option at one cent per right under
certain circumstances.
At December 31, 1998, 14.8 million shares of common stock were reserved for the
exercise and issuance of stock options and conversion of the Serial Preference
Stock II, Series 1 and 3. There were 1.2 million shares of Cumulative Redeemable
Serial Preference Stock II, Series 4, reserved for the shareholder purchase
rights plan.
25
<PAGE> 26
STOCK OPTIONS
The Company has granted nonqualified stock options to certain employees to
purchase the Company's common stock at the market price on the date of grant.
Stock options granted become exercisable to the extent of one-third of the
optioned shares for each full year of employment following the date of grant and
expire 10 years after the date of grant. The Company applies the provisions of
Accounting Principles Board Opinion No. 25 in accounting for its employee stock
options and, as such, no compensation expense is recognized as the exercise
price equals the market price of the stock on the date of grant.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------- ----------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
Millions exercise Millions exercise Millions exercise
of shares price of shares price of shares price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------ --------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- --------------------------
Weighted-average Weighted- Weighted-
Millions of remaining average Millions of average
shares contractual life exercise shares exercise
Range of exercise prices outstanding in years price exercisable price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
-------------------------------------------------------------------------------------
</TABLE>
Had the compensation cost for the stock options granted in 1998, 1997 and 1996
been determined based on the fair value at the grant date consistent with the
fair value method of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced by $13 million ($.10 per share) in 1998, $9
million ($.08 per share) in 1997 and $5 million ($.04 per share) in 1996. The
effect on 1996 net earnings is not representative of the effect on future years'
net earnings amounts as the compensation cost reflects expense for only two
years' vesting in 1996.
Fair value was estimated at the date of grant using the Black-Scholes option
pricing model and the following weighted-average assumptions for 1998, 1997 and
1996, respectively: risk-free interest rate of 4.59%, 5.83% and 5.43%; dividend
yield of 2.28%, 2.54% and 2.84%; expected volatility of 23%, 20% and 20%; and an
expected option life of six years for 1998, 1997 and 1996.
26
<PAGE> 27
CONTINGENCIES
The Company is subject to various investigations, claims and legal proceedings
covering a wide range of matters that arise in the ordinary course of its
business activities. In addition, the Company is conducting a number of
environmental investigations and remedial actions at current and former Company
locations and, along with other companies, has been named a potentially
responsible party for certain waste management sites. Each of these matters is
subject to various uncertainties, and some of these matters may be resolved
unfavorably to the Company. A reserve estimate for each matter is established
using standard engineering cost estimating techniques. In the determination of
such costs, consideration is given to professional judgment of Company
environmental engineers in consultation with outside environmental specialists
when necessary. At multi-party sites, the reserve estimate also reflects the
expected allocation of total project costs among the various potentially
responsible parties. At December 31, 1998, the Company had reserves for
environmental matters of $64 million, including $7 million of additional
accruals recorded during the year. The Company aggressively pursues
reimbursement for environmental costs from its insurance carriers. However,
insurance recoveries are not recorded as a reduction of environmental costs
until they are fixed and determinable. At December 31, 1998, the "Other notes
and accounts receivable" caption on the balance sheet includes $22 million of
insurance recoveries related to environmental matters. The Company believes that
any liability that may result from the resolution of environmental matters for
which sufficient information is available to support these cost estimates will
not have a material adverse effect on the Company's financial position. However,
the Company cannot predict the effect on the Company's financial position of
expenditures for aspects of certain matters for which there is insufficient
information. In addition, the Company cannot predict the effect of compliance
with environmental laws and regulations with respect to unknown environmental
matters on the Company's financial position or the possible effect of compliance
with environmental requirements imposed in the future.
Further, product liability claims may be asserted in the future for events not
currently known by management. Although the ultimate liability from these
potential claims cannot be ascertained at December 31, 1998, management does not
anticipate that any related liability, after consideration of insurance
recovery, would have a material adverse effect on the Company's financial
position.
During 1997, TRW Vehicle Safety Systems Inc., a wholly owned subsidiary of the
Company, reported to the Arizona Department of Environmental Quality (ADEQ)
potential violations of the Arizona hazardous waste law at its Queen Creek,
Arizona facility for the possible failure to properly label and dispose of
wastewater that might be classified as hazardous waste. ADEQ is conducting an
investigation into these potential violations and the Company is cooperating
with the investigation. If ADEQ initiates proceedings against the Company with
respect to such matters, the Company could be liable for penalties and fines and
other relief. The Arizona State Attorney General also is investigating matters,
and federal, civil and criminal governmental investigations with respect to
these potential violations are ongoing. Management is currently evaluating this
matter and is unable to make a meaningful estimate of the amount or range of
possible liability, if any, at this time, although management believes that the
Company would have meritorious defenses.
27
<PAGE> 28
During 1996, the Company was advised by the United States Department of Justice
(DOJ) that it had been named as a defendant in two lawsuits brought by a former
employee of the Company's former Space & Technology Group and originally filed
under seal in 1994 and 1995, respectively, in the United States District Court
for the Central District of California under the qui tam provisions of the civil
False Claims Act. The Act permits an individual to bring suit in the name of the
United States and share in any recovery. The allegations in the lawsuits relate
to the classification of costs incurred by the Company that were charged to
certain of its federal contracts. Under the law, the government must investigate
the allegations and determine whether it wishes to intervene and take
responsibility for the lawsuits. On February 13, 1998, the DOJ intervened in the
litigation. On February 19, 1998 and March 4, 1998, the former employee filed
amended complaints in the Central District of California that realleged certain
of the claims included in the 1994 and 1995 lawsuits and omitted the remainder.
The amended complaints allege that the United States has incurred substantial
damages and that the Company should be ordered to cease and desist from
violations of the civil False Claims Act and is liable for treble damages,
penalties, costs, including attorneys' fees, and such other relief as deemed
proper by the court. On March 17, 1998, the DOJ filed its complaint against the
Company upon intervention in the 1994 lawsuit, which set forth a limited number
of the allegations in the 1994 lawsuit and other allegations not in the 1994
lawsuit. The DOJ elected not to pursue the other claims in the 1994 lawsuit or
the claims in the 1995 lawsuit. The DOJ's complaint alleges that the Company is
liable for treble damages, penalties, interest, costs and "other proper relief."
On March 18, 1998, the former employee withdrew the first amended complaint in
the 1994 lawsuit at the request of the DOJ. On May 18, 1998, the Company filed
answers to the former employee's first amended complaint in the 1995 lawsuit and
to the DOJ's complaint, denying all substantive allegations against the Company
contained therein. At the same time, the Company filed counterclaims against
both the former employee and the federal government. On July 20, 1998, both the
former employee and the DOJ filed motions seeking to dismiss the Company's
counterclaims. On November 23, 1998 (entered as an Order on January 21, 1999),
the court dismissed certain counterclaims asserted against the former employee
and the federal government and took under advisement the former employee's
motion to dismiss certain other counterclaims. The Company cannot presently
predict the outcome of these lawsuits, although management believes that their
ultimate resolution will not have a material effect on the Company's financial
condition or results of operations.
28
<PAGE> 29
OPERATING SEGMENTS
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" during the fourth quarter of 1998. Statement 131
establishes standards for reporting information about operating segments in
annual financial statements and requires that select information about operating
segments be disclosed in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Operating segment and geographic area information for all
periods presented has been restated to conform to Statement 131.
The Company's reportable operating segments include Automotive and Space,
Defense & Information Systems. The operating segments are managed separately as
they each represent a strategic business component that offers different
advanced technology products and serves different markets. Separate financial
results are available for each operating segment and are regularly reviewed by
the chief operating officer for purposes of assessing performance and allocating
resources. The Company's space, defense and information systems businesses have
been aggregated into one operating segment as they exhibit similar economic
characteristics, operate in substantially the same regulatory environment, offer
similar products and services to the same customer base, perform jointly on a
significant number of contracts and exhibit similar methods of developing and
delivering products and services.
The Company is a United States-based company providing advanced technology
products and services for the automotive and space, defense and information
systems markets. The principal markets for the Company's automotive products are
North American, European and Asian original equipment manufacturers and
independent distributors. Space, Defense & Information Systems primarily offers
products and services to the United States Government, agencies of the United
States Government, state and local governments, and international and commercial
customers.
AUTOMOTIVE-Occupant restraint systems, including sensors, steering wheels, air
bag and seat belt systems. Steering systems, including hydraulic and
electrically assisted power and manual rack and pinion steering for light
vehicles, hydraulic steering systems for commercial truck and off-highway
vehicles and suspension components. Electrical and electronic controls,
engineered fasteners and stud welding and control systems. Engine valves and
valve train parts.
SPACE, DEFENSE & INFORMATION SYSTEMS-Spacecraft, including the design and
manufacture of spacecraft equipment, propulsion subsystems, electro-optical and
instrument systems, spacecraft payloads, high-energy lasers and laser technology
and other high-reliability components. Electronic systems, equipment, components
and services, including the design and manufacture of space communication
systems, airborne reconnaissance systems, unmanned aerial vehicles, avionics
systems, commercial telecommunications and other electronic technologies for
tactical and strategic applications. Systems integration, systems engineering
services and software development in the fields of military command and control,
strategic missiles, intelligence requirements management, public safety,
modeling and simulation, training, telecommunications, image processing, earth
observation, nuclear waste management, air traffic control, security and
counterterrorism, and other high-technology systems. Information technology
systems, products and services focused on defense, health and human safety,
integrated supply chain, warehousing, logistics, test and evaluation, criminal
justice, tax systems modernization, and financial applications.
29
<PAGE> 30
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates operating performance based on each segment's profit before income
taxes and total assets net of segment current operating liabilities. Debt and
related interest expense, interest related to the other postretirement benefit
liability, currently payable income taxes, current deferred income taxes,
long-term deferred income taxes in 1998 and corporate staff expenses are
maintained at the corporate level and are not a component of the operating
segment results.
Information concerning operating segments as of and for each of the three years
ended December 31, is as follows:
<TABLE>
<CAPTION>
Space,
Defense &
Information
(In millions) Automotive Systems Total
- ------------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue from external customers $ 7,201 $ 4,685 $11,886
Segment profit before income taxes 543 458 1,001
Restructuring charges included in segment
profit 24 -- 24
Segment assets 3,316 1,240 4,556
Depreciation and amortization 396 156 552
Capital expenditures 456 163 619
- ------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------
Revenue from external customers $ 7,032 $ 3,799 $10,831
Segment profit before income taxes 637 348 985
Segment assets 2,926 1,083 4,009
Depreciation and amortization 362 115 477
Capital expenditures 398 156 554
- ------------------------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------------------------
Revenue from external customers $ 6,493 $ 3,364 $ 9,857
Segment profit before income taxes 330 180 510
Special charges included in segment profit 293 89 382
Segment assets 2,334 657 2,991
Depreciation and amortization 327 112 439
Capital expenditures 343 157 500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company accounts for intersegment sales or transfers at current market
prices. Intersegment sales and transfers were not significant. Sales to agencies
of the U.S. Government, primarily by the Space, Defense & Information Systems
segment, were $4,119 million in 1998, $3,523 million in 1997 and $3,121 million
in 1996. Sales to Ford Motor Company by the Automotive segment were $1,423
million in 1998, $1,469 million in 1997 and $1,470 million in 1996.
Reconciliations of the items reported for the operating segments to the
applicable amounts reported in the consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------- ------------------------------
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------ ---------------------------
</TABLE>
Information concerning principal geographic areas as of and for the three years
ended December 31, is as follows:
<TABLE>
<CAPTION>
United All
(In millions) States Germany Other Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues are attributable to geographic areas based on the location of the
assets producing the revenues. Inter-area sales are not significant to the total
revenue of any geographic area.
31
<PAGE> 32
EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS (UNAUDITED)
On January 28, 1999, the Company announced its intention to acquire the
outstanding common shares of LucasVarity plc in a cash tender offer totaling
approximately $7 billion. TRW has received fully underwritten financing from
J.P. Morgan, Bank of America, and Citibank. The Boards of Directors of both
companies have approved the transaction and LucasVarity's Board of Directors has
entered into irrevocable agreements to support the transaction. The transaction,
which is subject to normal closing conditions, is expected to be completed in
the second quarter of 1999 and will be accounted for under purchase accounting.
32
<PAGE> 33
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(In millions except per share data)
- --------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
----------------- ----------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D)(E)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Earnings(loss) before income taxes includes a $49 million gain ($32 million
after tax, 25 cents per share) from the settlement of certain patent
litigation and a $34 million charge ($22 million after tax, 17 cents per
share) for litigation and contract reserves and severance costs relating to
the combination of the Company's systems integration business with BDM
International, Inc.
(B) Earnings(loss) before income taxes includes a charge of $13 million ($8
million after tax, 7 cents per share) related to the automotive
restructuring.
(C) Earnings(loss) before income taxes includes a benefit of $25 million ($16
million after tax, 13 cents per share) from an interest accrual adjustment
relating to a tax litigation settlement and an $11 million charge ($10
million after tax, 8 cents per share) related to the automotive
restructuring.
(D) Earnings(loss) before income taxes includes a $548 million ($4.46 per
share) one time noncash charge related to in-process research and
development with no income tax benefit.
(E) Earnings(loss) before income taxes includes a $15 million gain ($10 million
after tax, 8 cents per share) related to the sale of a property.
33
<PAGE> 34
STOCK PRICES AND DIVIDENDS (UNAUDITED)
The book value per common share at December 31, 1998, was $15.61 compared to
$13.19 at the end of 1997. The Company's Directors declared the 242nd
consecutive quarterly dividend during December 1998. Dividends declared per
share in 1998 were $1.28, up 3 percent from $1.24 in 1997. The following table
highlights the market prices of the Company's common and preference stocks and
dividends paid for the quarters of 1998 and 1997.
<TABLE>
<CAPTION>
Price of Price of Dividends paid per
traded shares traded shares share
------------------ -------------------- --------------------
Quarter 1998 1997 1998 1997
------- ------------------ -------------------- --------------------
High Low High Low
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------- ---------------------- -------------------
</TABLE>
The $4.40 Convertible Series 1 was not actively traded during the first quarter
of 1998 and the first and third quarters of 1997. The $4.50 Convertible Series 3
were not actively traded during the fourth quarter of 1998. The prices shown for
these quarters represent the range of asked(high) and bid(low) quotations.
34
<PAGE> 35
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
23 Consent of Ernst & Young LLP
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRW INC.
Date: February 5, 1999 By: /s/ William B. Lawrence
---------------------------------
William B. Lawrence
Executive Vice President, General
Counsel and Secretary
<PAGE> 37
EXHIBIT INDEX
Exhibit No.
23 Consent of Ernst & Young LLP
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated
January 19, 1999 with respect to the consolidated financial statements of TRW
Inc. included in its Current Report on Form 8-K dated February 5, 1999, filed
with the Securities and Exchange Commission, in the following Registration
Statement Nos.: 333-48443 on Form S-3, 333-43931 on Form S-3, 33-61711 on Form
S-3, 33-42870 on Form S-3, 333-27003 on Form S-8, 333-27001 on Form S-8,
333-06633 on Form S-8, 333-03973 on Form S-8, 33-58257 on Form S-8, 33-53503 on
Form S-8 33-29751 on Form S-8, 333-20351 on Form S-8, 2-90748 on Form S-8 and
2-64035 on Form S-8.
/s/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
Cleveland, Ohio
February 5, 1999
