<PAGE> 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:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
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
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
(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
- ------------ ------------ --------- ----- ----
<S> <C> <C> <C> <C>
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
</TABLE>
On a segment basis, capital expenditures during 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
CAPITAL EXPENDITURES
SPACE, DEFENSE &
YEAR ENDED AUTOMOTIVE INFORMATION
DECEMBER 31, SEGMENTS SYSTEMS SEGMENTS
- ------------ -------- ----------------
<S> <C> <C>
1998 $390 $147
1997 390 156
</TABLE>
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.
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<PAGE> 11
Automotive Segments
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Principal Use North Asia/
of Facility America Europe Pacific Other Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Manufacturing 34 54 17 9 114
- -----------------------------------------------------------------------------
Warehouse 2 1 -- -- 3
- -----------------------------------------------------------------------------
Office 4 2 2 -- 8
- -----------------------------------------------------------------------------
Total 40 57 19 9 125
- -----------------------------------------------------------------------------
</TABLE>
Space, Defense & Information Systems Segments
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Principal Use North Asia/
of Facility America Europe Pacific Total
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Research and
Development 1 -- -- 1
- -------------------------------------------------------------------
Office 28 13 1 42
- -------------------------------------------------------------------
Total 29 13 1 43
- -------------------------------------------------------------------
</TABLE>
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
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<PAGE> 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 $.38 per share, of impairment losses that were primarily a result of
technological changes and the decision to close certain facilities in the
automotive business.
The items in the preceding paragraph are set forth in the following table:
<TABLE>
<CAPTION>
($ in millions except per share data)
- ---------------------------------------------------------------------------------------------------------
Income (Loss) 1998 1997 1996
---------------- ----------------- ----------------
Per Per Per
Amount Share Amount Share Amount Share
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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
==== ===== ===== ====== ==== =====
- ---------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
The above listed items are included in the Statements of Operations as follows:
<TABLE>
<CAPTION>
($ in millions)
- ---------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
==== ===== =====
- ---------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
(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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
(in millions) SPECIAL
SALES SEGMENT PROFIT BEFORE TAX CHARGES
-------------------------------------- ------------------------------------------------- -------
Net Cost
Acquisitions Volume Exchange Price Acquisitions Reductions Price R&D Exchange
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
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
<PAGE> 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
<PAGE> 18
The changes in sales and segment profit noted above are detailed by operating
segment in the following table:
<TABLE>
<CAPTION>
(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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
(in millions) SEGMENT 1996
PROFIT SPECIAL
SALES BEFORE TAX CHARGES
----- ---------- -------
<S> <C> <C> <C>
Space & Electronics $200 $ 57 $(23)
Systems & Information Technology 235 22 (66)
Total Space, Defense & Information
Systems Business $435 $ 79 $(89)
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Phase Percentage-of-completion
-------------------------------------------------------------------------
<S> <C>
Project Startup 100
-------------------------------------------------------------------------
Inventory and Assessment 99
-------------------------------------------------------------------------
Conversion, Upgrade and Renovation 81
-------------------------------------------------------------------------
Validation 56
-------------------------------------------------------------------------
Implementation 56
-------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<S> <C> <C>
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
</TABLE>
January 19, 1999
28
<PAGE> 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
<PAGE> 30
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
TRW Inc. and subsidiaries
(In millions except per share data)
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.
30
<PAGE> 31
<TABLE>
BALANCE SHEETS
<CAPTION>
TRW Inc. and subsidiaries
(In millions)
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
31
<PAGE> 32
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
TRW Inc. and subsidiaries
(In millions)
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.
32
<PAGE> 33
<TABLE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------------------
<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.
33
<PAGE> 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
<PAGE> 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-
<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 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:
<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>
35
<PAGE> 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.
<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 (.40) $1.41
- ----------------------------------------------------------------------- -------------------
Diluted earnings(loss) per share from
continuing operations 3.83 (.40) 1.37
- ----------------------------------------------------------------------- -------------------
</TABLE>
36
<PAGE> 37
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>
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
<PAGE> 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.
<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>
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
<PAGE> 39
OTHER EXPENSE(INCOME)-NET
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------ ---------------
<S> <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.
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>
39
<PAGE> 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.
<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>
40
<PAGE> 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:
<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 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)
- ---------------------------------------------------------------- -------------------
</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>
41
<PAGE> 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:
<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 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
- -------------------------------------------------------- --------------------------------------
</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.
42
<PAGE> 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
<PAGE> 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:
<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>
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
<PAGE> 45
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 obligations 100 (83)
- ------------------------------------------------------------------------------
</TABLE>
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
-------- ------
<CAPTION>
Long-term debt
(In millions) 1998 1997
- ------------------------------------------------------------------------ ------
<S> <C> <C>
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.
45
<PAGE> 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
<PAGE> 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.
<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>
47
<PAGE> 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:
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------------------
<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.
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
<PAGE> 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
<PAGE> 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
<PAGE> 51
<TABLE>
<CAPTION>
Occupant Systems &
Safety Chassis Automotive Other Space & Information
(In millions) Systems Systems Electronics Automotive Electronics Technology Total
- -----------------------------------------------------------------------------------------------------------------------
1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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:
<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>
51
<PAGE> 52
<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 for and as of 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.
52
<PAGE> 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
<PAGE> 54
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
----------------- ----------------- ----------------- -------------------
(In millions except per share data) 1998 1997 1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E)(F)
<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 $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
<PAGE> 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.
<TABLE>
<CAPTION>
Price of Dividends paid
traded Shares per 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
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
