1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-2384
------
TRW INC.
--------------
(Exact name of registrant as specified in its charter)
Ohio 34-0575430
--------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Richmond Road, Cleveland, Ohio 44124
-----------------------------------------
(Address of principal executive offices)
(Zip Code)
(216) 291-7000
--------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 4, 2000, there were 124,112,891 shares of
TRW Common Stock, $0.625 par value, outstanding.
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Statements of Operations (unaudited)
TRW Inc. and subsidiaries
- --------------------------------------------------------------------------------------------------------------------
Second quarter ended Six months ended
June 30 June 30
In millions except per share data 2000 1999 2000 1999
- -------------------------------------------------------------------------------- ------------------------------
Sales $4,476 $4,785 $9,041 $7,882
Cost of sales 3,693 3,974 7,499 6,624
- -------------------------------------------------------------------------------- ------------------------------
Gross profit 783 811 1,542 1,258
Administrative and selling expenses 275 331 578 515
Research and development expenses 116 137 230 249
Purchased in-process research and
development 12 - 12 85
Interest expense 126 142 262 185
Amortization of goodwill and intangible assets 36 29 68 41
Other (income)expense-net (97) (45) (264) (41)
- -------------------------------------------------------------------------------- ------------------------------
Earnings before income taxes 315 217 656 224
Income taxes 115 78 247 113
- -------------------------------------------------------------------------------- ------------------------------
Net earnings $ 200 $ 139 $ 409 $ 111
- -------------------------------------------------------------------------------- ------------------------------
- -------------------------------------------------------------------------------- ------------------------------
Per share of common stock
Diluted earnings per share $ 1.59 $ 1.14 $ 3.27 $ .91
Basic earnings per share $ 1.62 $ 1.16 $ 3.33 $ .92
Dividends declared $ .33 $ .33 $ .33 $ .33
- -------------------------------------------------------------------------------- ------------------------------
- -------------------------------------------------------------------------------- ------------------------------
Shares used in computing per share
amounts
Diluted 125.6 123.2 125.1 123.0
Basic 123.2 120.6 122.8 120.4
- -------------------------------------------------------------------------------- ------------------------------
2
3
Balance Sheets (unaudited)
TRW Inc. and subsidiaries
- -------------------------------------------------------------------------------------------------------
June 30 December 31
In millions 2000 1999
- -------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 235 $ 228
Accounts receivable 2,634 2,480
Inventories 943 1,039
Prepaid expenses 205 202
Net assets of acquired businesses held for sale - 827
Deferred income taxes 366 423
- -------------------------------------------------------------------------------------------------------
Total current assets 4,383 5,199
Property, plant and equipment-on the basis of cost 7,904 8,026
Less accumulated depreciation and amortization 4,216 4,132
- -------------------------------------------------------------------------------------------------------
Total property, plant and equipment-net 3,688 3,894
Intangible assets
Goodwill 3,795 3,743
Other intangible assets 954 948
- -------------------------------------------------------------------------------------------------------
4,749 4,691
Less accumulated amortization 434 360
- -------------------------------------------------------------------------------------------------------
Total intangible assets-net 4,315 4,331
Investments in affiliated companies 1,304 1,185
Other notes and accounts receivable 297 257
Prepaid pension cost 2,821 2,876
Other assets 511 524
- -------------------------------------------------------------------------------------------------------
$ 17,319 $ 18,266
- -------------------------------------------------------------------------------------------------------
Liabilities and shareholders' investment
Current liabilities
Short-term debt $ 1,610 $ 2,444
Trade accounts payable 1,711 1,638
Current portion of long-term debt 601 758
Other current liabilities 1,823 1,889
- -------------------------------------------------------------------------------------------------------
Total current liabilities 5,745 6,729
Long-term liabilities 2,119 1,991
Long-term debt 4,865 5,369
Deferred income taxes 1,393 1,352
Minority interests in subsidiaries 206 113
Capital stock 77 76
Other capital 471 465
Retained earnings 2,672 2,312
Treasury shares-cost in excess of par value (485) (549)
Accumulated other comprehensive income(loss) 256 408
- -------------------------------------------------------------------------------------------------------
Total shareholders' investment 2,991 2,712
- -------------------------------------------------------------------------------------------------------
$ 17,319 $ 18,266
- -------------------------------------------------------------------------------------------------------
3
4
Statements of Cash Flows (unaudited)
TRW Inc. and subsidiaries
- -------------------------------------------------------------------------------------------------------
Six months ended
June 30
In millions 2000 1999
- -------------------------------------------------------------------------------------------------------
Operating activities
Net earnings $ 409 $ 111
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 427 363
Purchased in-process research and development 12 85
Gain on sale of nonoperating assets (239) (95)
Gain on Endwave merger (55) -
Pension income (128) (61)
Deferred income taxes 57 (131)
Other-net 23 16
Changes in assets and liabilities, net of effects of
businesses acquired or sold:
Accounts receivable (240) (131)
Inventories 48 75
Trade accounts payable 126 (10)
Prepaid expenses and other liabilities (54) 137
Other-net 16 (13)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 402 346
- -------------------------------------------------------------------------------------------------------
Investing activities
Net proceeds from divestitures 1,396 91
Capital expenditures including other intangibles (312) (356)
Acquisitions, net of cash acquired 21 (6,049)
Other-net (29) 48
- -------------------------------------------------------------------------------------------------------
Net cash provided by(used in) investing activities 1,076 (6,266)
- -------------------------------------------------------------------------------------------------------
Financing activities
(Decrease)increase in short-term debt (944) 2,551
Proceeds from debt in excess of 90 days 1,113 4,901
Principal payments on debt in excess of 90 days (1,623) (854)
Dividends paid (82) (80)
Other-net 38 (32)
- -------------------------------------------------------------------------------------------------------
Net cash (used in)provided by financing activities (1,498) 6,486
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash flows 27 (40)
- -------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 7 526
Cash and cash equivalents at beginning of period 228 83
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 235 $ 609
- -------------------------------------------------------------------------------------------------------
4
5
Operating Segments (unaudited)
TRW Inc. and subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
Second quarter ended Six months ended
June 30 June 30
In millions 2000 1999 2000 1999
- -------------------------------------------------------------------------------------- --------------------------------
Sales
Occupant Safety Systems $ 728 $ 778 $ 1,488 $ 1,574
Chassis Systems 1,511 1,538 3,039 2,152
Automotive Electronics 437 540 909 857
Other Automotive 217 437 492 675
Space & Electronics 467 453 953 914
Systems & Information Technology 837 757 1,611 1,410
Aeronautical Systems 279 282 549 300
- -------------------------------------------------------------------------------------- --------------------------------
Sales $ 4,476 $ 4,785 $ 9,041 $ 7,882
- -------------------------------------------------------------------------------------- --------------------------------
Profit before taxes
Occupant Safety Systems $ 59 $ 40 $ 73 $ 93
Chassis Systems 112 69 191 104
Automotive Electronics 33 26 65 48
Other Automotive 23 24 82 50
Space & Electronics 143 139 370 222
Systems & Information Technology 77 52 124 58
Aeronautical Systems 39 30 66 32
- -------------------------------------------------------------------------------------- --------------------------------
486 380 971 607
Purchased in-process research and (12) - (12) (85)
development
Corporate expense and other (85) (66) (149) (147)
Pension income 54 58 111 58
Financing costs (128) (155) (265) (209)
- -------------------------------------------------------------------------------------- --------------------------------
Earnings before income taxes $ 315 $ 217 $ 656 $ 224
- -------------------------------------------------------------------------------------- --------------------------------
5
6
NOTES TO FINANCIAL STATEMENTS
(unaudited)
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. The consolidated financial statements
reflect the allocation of the purchase price for LucasVarity Limited
(LucasVarity), formerly known as LucasVarity plc, and the consolidated results
of LucasVarity's operations and cash flows subsequent to the date of
acquisition, March 25, 1999.
ACQUISITION
ENDWAVE CORPORATION
On March 31, 2000, Endgate Corporation merged with TRW Milliwave Inc., a
wholly-owned subsidiary of the Company. Endgate was the surviving corporation in
the merger and changed its name to Endwave Corporation. The financial statements
of Endwave are consolidated with the Company's financial statements as the
Company has a 52.6 percent majority ownership interest in Endwave.
The merger was accounted for as a purchase. Assets and liabilities of Endgate
were recorded at their respective fair values by an independent appraisal.
In-process research and development was determined using the income approach
under the proportional method.
The purchase price allocation resulted in $12 million, $6 million after the
effect of minority interest, for the fair value of five acquired in-process
research and development projects that had not reached technological feasibility
and had no alternative future use; $16 million for technology; $7 million for
other identifiable intangible assets; $25 million for operating assets and
liabilities; and goodwill of approximately $79 million.
Goodwill and identifiable intangible assets are being amortized on a
straight-line basis over six years.
The Company recorded a net gain of $52 million, $34 million after tax, for the
excess of fair value of the Company's ownership interest in Endgate that
exceeded the book value of Milliwave.
LUCASVARITY
On March 25, 1999 the Company acquired LucasVarity for approximately $6.8
billion in cash and assumed debt. The transaction was accounted for as a
purchase. Assets and liabilities have been recorded based on their respective
fair values. The purchase price allocation resulted in an $85 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 $517 million for identifiable intangible assets
including intellectual property and workforce. The purchase price allocation
also included incremental fair value adjustments of approximately $1.5 billion
for prepaid pension cost, primarily from an overfunded pension plan, $200
million for the valuation of fixed rate debt and the write-up of inventory of
$30 million and fixed assets of $137 million.
Total restructuring costs for the automotive, aerospace and corporate
LucasVarity businesses, primarily severance, recorded in the purchase price
allocation were $108 million, of which $29 million was paid in 1999 and $5
million and $10 million were paid in the first and second quarters of 2000,
respectively. The balance of $64 million is expected to be paid during 2000 and
the first quarter of 2001.
6
7
The final allocation of the purchase price is summarized as follows:
(In millions)
- --------------------------------------------------------------------------------
Cash purchase price $ 6,715
Cash and cash equivalents 781
Accounts receivable 883
Inventory 529
Net assets of businesses held for sale 872
Prepaid expenses 137
Current deferred income taxes 105
Property, plant and equipment 1,248
Intangible assets 517
Prepaid pension costs 2,399
Other assets 523
- --------------------------------------------------------------------------------
7,994
Accounts payable (700)
Other accruals (1,235)
Debt (877)
Long-term liabilities (790)
Long-term deferred income taxes (701)
- --------------------------------------------------------------------------------
(4,303)
Minority interest (28)
Purchased in-process research and development 85
- --------------------------------------------------------------------------------
Goodwill $ 2,967
- --------------------------------------------------------------------------------
7
8
Goodwill is being amortized on a straight-line basis over 40 years. Identifiable
intangible assets are being amortized on a straight-line basis over useful lives
ranging from 5 to 30 years.
The following pro forma financial information for the six months ended June 30,
1999, assumes the LucasVarity acquisition occurred as of the beginning of the
period, after giving effect to certain adjustments, including the amortization
of intangible assets, interest expense on acquisition debt, depreciation based
on the adjustments to the fair market value of the property, plant and equipment
acquired, write-off of purchased in-process research and development,
incremental pension income and related income tax effects. The pro forma results
have been prepared for informational purposes only and are not necessarily
indicative of the results of operations which may occur in the future or that
would have occurred had the acquisition of LucasVarity been affected on the date
indicated. The consolidated statement of operations for the quarter ended June
30, 2000 and 1999, and the six months ended June 30, 2000, reflects
LucasVarity's operations.
Six months ended
(In millions except per share data) June 30, 1999
- --------------------------------------------------------------------------------
Sales $9,508
Net earnings 264
Diluted earnings per share 2.15
- --------------------------------------------------------------------------------
RESTRUCTURING
On July 29, 1998, the Company announced actions intended to enhance the legacy
TRW automotive businesses' profit margin, which would result in pre-tax charges
of up to $150 million by the end of 2000. Legacy TRW automotive refers to the
Company's automotive businesses prior to the acquisition of LucasVarity. To
date, the Company has recorded restructuring expenses of $133 million, of which
$14 million was recorded in the second quarter of 2000 and $29 million in the
first half of 2000. Other accruals at June 30, 2000 and December 31, 1999 are
$33 million and $35 million, respectively, relating to these costs. During the
second quarter of 2000, $4 million was used for severance payments and $10
million was used for plant closings and asset impairments. For the six months
ended June 30, 2000, $8 million was used for severance payments and $23 million
was used for plant closings and asset impairments. The balance of $33 million
will be used primarily for severance costs and plant closings during the second
half of 2000 and the first half of 2001.
FORWARD EXCHANGE CONTRACTS
The Company enters into forward exchange contracts that hedge firm foreign
currency commitments, anticipated transactions and certain intercompany
transactions. At June 30, 2000, the Company had contracts outstanding with a
notional amount of $1.1 billion denominated principally in the U.S. dollar, the
Euro, the Canadian dollar, the French franc and the British pound, maturing at
various dates through January 2007.
The combined fair market value of the forward exchange contracts was an asset of
approximately $24 million at June 30, 2000. The fair market value of forward
contracts at December 31, 1999 was an asset of $75 million. Changes in market
value of the contracts that hedge firm foreign currency commitments and
intercompany transactions are generally included in the basis of the
transactions. Changes in the market value of the contracts that hedge
anticipated transactions are generally recognized in earnings.
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.
8
9
INTEREST RATE SWAP AGREEMENTS
In addition to the $525 million interest rate swaps outstanding at December 31,
1999 of which $100 million was forward starting, the Company entered into four
$50 million forward-starting fixed interest rate swaps as a hedge of future
long-term debt issuance during the first quarter of 2000.
During the second quarter of 2000, the Company entered into a $50 million
forward-starting fixed interest rate swap as a hedge of future long-term debt
issuance. In connection with the issuance of $500 million of 8.75% Notes due
2006, the Company terminated $250 million of forward-starting fixed interest
rate swaps at a gain of $7 million. The gain will be amortized over the life of
the long-term debt issued as a reduction of interest expense. The fair market
value of the total interest rate swap agreements is a liability of approximately
$5 million at June 30, 2000. Net payments or receipts under the agreements will
be recognized as an adjustment to interest expense. The agreements were entered
into with major financial institutions. The Company anticipates that the
financial institutions will satisfy their obligations under the agreements. No
collateral is held in relation to the agreements.
FORWARD SALE AGREEMENTS
During the first quarter of 2000, the Company monetized 2 million shares of its
holdings in RF Micro Devices, Inc. (RFMD) through the execution of three forward
sale agreements maturing in February 2003, August 2003 and February 2004. The
Company received cash proceeds of $168 million in consideration for its
agreement to deliver up to 2 million shares of RFMD common stock, in the
aggregate, upon maturity of the contracts. The actual number of shares to be
delivered upon maturity of each agreement will be determined on the basis of a
formula set forth in the agreements, comparing the average closing price of the
shares for the five trading days preceding the maturity date to the floor price
per share. The proceeds from the transactions were used to pay down short-term
debt. The up-front proceeds were reduced by a discount of approximately $48
million and will be amortized as interest expense using the effective interest
rate method over the life of the agreements. Through the setting of a floor and
ceiling price, the forward sales agreements eliminate the Company's exposure to
downside market risk, and at the same time, enable the Company to retain
potential market appreciation up to the respective ceiling price. Certain terms
of the agreements are summarized below:
February August February
2003 2003 2004
Agreement Agreement Agreement
- --------------------------------------------------------------------------------
Number of shares 666,667 666,667 666,666
Floor price per share $108 $108 $108
Ceiling price per share 158 172 187
Up-front proceeds as a
percent of floor price 80% 78% 75%
- --------------------------------------------------------------------------------
The investment in RFMD and the monetization liability are carried at fair market
value. Changes in fair market value of the Company's shares of RFMD, including
the 2 million shares monetized, which are limited to changes in stock price
between the floor and ceiling, are recorded in the Other Comprehensive
Income(Loss) component of Shareholders' Investment.
During the first quarter of 2000, the Company sold 2.2 million shares of RFMD
common stock for $181 million and during the second quarter of 2000 an
additional 422,500 shares were sold for $44 million. At June 30, 2000, the
Company owned approximately 11.5 million shares, including the 2 million shares
the Company pledged to secure its obligations under the forward sales
agreements. The fair value of the Company's investment in RFMD at June 30, 2000
was approximately $1 billion and has been reflected in the balance sheet of the
Company in Investments in Affiliated Companies.
9
10
COMPREHENSIVE INCOME(LOSS)
The components of comprehensive income(loss), net of related tax, for the second
quarter and first six months of 2000 and 1999 are as follows:
Second quarter ended Six months ended
(In millions) June 30 June 30
------------------------------ -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net earnings $ 200 $ 139 $ 409 $ 111
Foreign currency translation loss (57) (186) (210) (310)
Unrealized(losses)gains on securities (362) (14) 58 (25)
------- ------ ------ ------
Comprehensive income(loss) $ (219) $ (61) $ 257 $(224)
------- ------ ------ ------
The components of accumulated other comprehensive income(loss), net of related
tax, at June 30, 2000 and December 31, 1999 are as follows:
June 30 December 31
(In millions) 2000 1999
-----------------------------------
Foreign currency translation loss $(386) $(176)
Unrealized gain on securities 654 596
Minimum pension liability adjustments (12) (12)
------ ------
Accumulated other comprehensive income(loss) $ 256 $ 408
------ ------
DIVESTITURES
During the first quarter of 2000, the Company completed the disposition of Lucas
Diesel Systems, the remaining LucasVarity wiring company and the Company's
Nelson Stud Welding and Australian steering businesses. Sales of the divested
businesses included in the Company's second quarter ended June 30, 1999
Statements of Operations were approximately $336 million. For the Company's six
months ended June 30, 2000 and 1999 Statements of Operations, sales of the
divested businesses were approximately $56 million and $389 million,
respectively. The Company's investment in the LucasVarity wiring company and
Lucas Diesel Systems operations was included in the balance sheet in Net Assets
of Acquired Businesses Held for Sale at December 31, 1999.
OPERATING SEGMENTS
The Company reports its businesses in seven operating segments. The Company's
automotive businesses are reported as Occupant Safety Systems, Chassis Systems,
Automotive Electronics and Other Automotive segments. The Company's aerospace
and information systems' businesses are reported as Space & Electronics, Systems
& Information Technology and Aeronautical Systems segments.
As a result of the dispositions of Lucas Diesel Systems, Nelson Stud Welding and
the remaining LucasVarity wiring company, segment assets for the Other
Automotive segment decreased by approximately $925 million during the first half
of 2000.
10
11
Intersegment sales for each segment are as follows:
Second quarter ended Six months ended
(In millions) June 30 June 30
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
Occupant Safety Systems $ 1 $ - $ 2 $ 1
Chassis Systems 4 2 9 3
Automotive Electronics 26 20 47 27
Other Automotive 2 16 4 17
Space & Electronics 17 6 26 14
Systems & Information Technology 34 3 65 55
Aeronautical Systems - - - -
Corporate expense and other includes approximately $36 million of unrealized
foreign exchange loss in the second quarter of 2000 and $20 million in the
second quarter of 1999. Corporate expense and other for the six months ended
June 30, 2000 and 1999 includes approximately $48 million and $20 million,
respectively, of unrealized foreign exchange loss. In addition, corporate
expense and other for the first half of 1999 includes $50 million of realized
foreign exchange loss related to the acquisition of LucasVarity.
INVENTORIES
Inventories consist of the following:
June 30 December 31
(In millions) 2000 1999
-------------------------------
Finished products and work in process $ 538 $ 612
Raw materials and supplies 405 427
------ -------
$ 943 $ 1,039
------ -------
DEBT AND CREDIT AGREEMENTS
On January 25, 2000, the Company established two revolving credit agreements in
an aggregate amount of $3.3 billion with 29 banks. The first agreement, in an
amount of $2.3 billion, will expire on January 23, 2001 with an option to extend
the maturity of outstanding borrowings at that time to January 23, 2002. The
second agreement, in an amount of $1 billion, will expire on January 25, 2005.
The interest rates under the agreements are either the prime rate or a rate
based on the London Interbank Offered Rate (LIBOR), at the option of the
Company. Also on January 25, 2000, the Company terminated previously existing
revolving credit agreements in an aggregate amount of approximately $5 billion.
During the first quarter of 2000, the Company also completed an issuance
utilizing the Universal Shelf Registration Statement of $300 million of medium
term notes due March 2002. The proceeds of this offering were used to repay
commercial paper. The interest rate is a floating rate based on a three-month
LIBOR.
During the second quarter of 2000, the Company voluntarily reduced its $2.3
billion revolving credit agreement by $300 million. The Company also completed
an issuance utilizing the Universal Shelf Registration Statement of $500 million
of 8.75% Notes due 2006. The proceeds of this offering were used to repay
commercial paper.
At June 30, 2000, $200 million of short-term obligations were reclassified to
long-term obligations, as the Company intends to refinance the obligations on a
long-term basis and has the ability to do so under its revolving credit
agreements.
11
12
OTHER (INCOME)EXPENSE-NET
Other (income)expense-net included the following:
(In millions) Second quarter ended Six months ended
June 30 June 30
-------------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net gain on sale of assets $ (66) $ (80) $ (262) $ (95)
Gain on Endwave merger (55) - (55) -
(Earnings)loss of affiliates (6) (5) (5) (36)
Foreign currency exchange 34 21 43 70
Minority interests 10 6 18 9
Other income (29) (21) (61) (44)
Other expense 15 34 58 55
---- ---- ------ -----
$ (97) $ (45) $ (264) $ (41)
---- ---- ----- -----
During the second quarter of 2000, the net gain on sale of assets includes the
sale of RFMD common stock and exchange of the Company's interest in Paracel
Inc., an affiliate, for shares in Celera Genomics Corporation. In addition, the
Company recorded other income of $55 million during the second quarter of 2000
relating to the merger of TRW Milliwave Inc., a wholly owned subsidiary, with
Endgate Corporation to form Endwave Corporation, of which the Company currently
owns 53 percent. During the six months ended June 30, 2000, the net gain on sale
of assets includes the sale of RFMD common stock, the Company's Nelson Stud
Welding and Australian steering businesses and the exchange of Paracel shares.
During the second quarter of 1999, the Company sold shares of RFMD resulting in
a gain of $79 million.
SUPPLEMENTAL CASH FLOW INFORMATION
Six months ended
(In millions) June 30
-----------------------------
2000 1999
---- ----
Interest paid (net of amount capitalized) $257 $152
Income taxes paid (net of refunds) $115 $111
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.
12
13
EARNINGS PER SHARE
Second quarter ended Six months ended
(In millions except per share data) June 30 June 30
------------------------ -----------------------
2000 1999 2000 1999
---- ---- ---- ----
NUMERATOR
Net earnings $199.5 $139.8 $408.8 $111.4
Preferred stock dividends .1 .1 .3 .3
-------- -------- -------- --------
Numerator for basic earnings per share-- net
earnings available to common shareholders 199.4 139.7 408.5 111.1
Effect of dilutive securities
Preferred stock dividends .1 .1 .3 .3
-------- -------- -------- --------
Numerator for diluted earnings per share--
net earnings available to common shareholders $199.5 $139.8 $408.8 $111.4
-------- -------- -------- --------
DENOMINATOR
Denominator for basic earnings per share--
weighted-average common shares 123.2 120.6 122.8 120.4
Effect of dilutive securities
Convertible preferred stock .8 .8 .8 .8
Employee stock options 1.6 1.8 1.5 1.8
-------- -------- -------- --------
Dilutive potential common shares 2.4 2.6 2.3 2.6
Denominator for diluted earnings per share--
adjusted weighted-average shares after
assumed conversions 125.6 123.2 125.1 123.0
-------- -------- -------- --------
Basic earnings per share $ 1.62 $ 1.16 $ 3.33 $ 0.92
----- ----- ----- ------
Diluted earnings per share $ 1.59 $ 1.14 $ 3.27 $ 0.91
----- ----- ----- ------
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
which summarizes the staff's views regarding the application of generally
accepted accounting principles to selected revenue recognition issues. The
Company is required to adopt SAB 101 no later than the fourth quarter of 2000
(retroactive to January 1, 2000) and is awaiting interpretive guidance, not yet
issued by the SEC, to complete its assessment of the impact SAB 101 may have on
the Company's financial statements.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements and related notes have
been reclassified to conform to the current year presentation.
CONTINGENCIES
TRW Vehicle Safety Systems Inc., a wholly-owned subsidiary of the Company,
reported to the Arizona Department of Environmental Quality, or ADEQ, in 1997,
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, the United States
Environmental Protection Agency, the United States Department of Justice and the
Arizona State Attorney General are conducting civil and criminal investigations
into these potential violations and the Company is cooperating with these
investigations. If proceedings were to be initiated against the Company with
respect to such matters, the Company could be liable for penalties and fines and
other relief. The Company is currently engaged in settlement discussions with
state and federal officials. The Company is not able to predict the outcome of
these discussions at this time.
13
14
On March 31, 2000, TRW Vehicle Safety Systems Inc. was served with a putative
class action lawsuit filed in Maricopa County Superior Court in the State of
Arizona. The lawsuit was filed on behalf of everyone living within a five-mile
radius of the Company's airbag manufacturing plant in Mesa, Arizona. The lawsuit
alleges that emissions from the plant have caused health problems for residents
living near the plant and that the Company concealed information about the
potential health risks of its emissions. The lawsuit also alleges that animals
and plant life have been injured or destroyed through significant exposure to
toxic emissions. Plaintiffs are asking the court to require the Company to
institute medical monitoring for the claimants, to conduct various studies
regarding, among other things, the risks of sodium azide, to cease operations
that release toxic substances into the air and to create a supervised fund to
pay for medical screening and monitoring. Plaintiffs are also seeking attorneys'
fees and punitive damages. The Company believes there is no valid scientific
basis for these claims and intends to defend itself vigorously. The Company is
not able to predict the outcome of this lawsuit at this time.
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. On March 15, 1999, the DOJ was
granted leave to file a First Amended Complaint, which adds certain allegations
concerning the Company's subcontracts. On August 6, 1999, the Government filed
its Second Amended Complaint, which incorporated vouchers, progress payment
requests, and invoices submitted by the Company to higher tier Government
contractors among the class of allegedly false claims challenged by the
Government. On September 29, 1999, the former employee filed his Second Amended
Complaint, which incorporated subcontracts performed by the Company for higher
tier Government contractors among the class of contracts under which allegedly
false claims were presented, and added allegations relating to certain of the
former employee's pre-existing claims. On May 9, 2000, the Company voluntarily
dismissed its remaining counterclaims against the former employee, with
prejudice. On July 10, 2000, the DOJ filed a motion seeking permission to
intervene in the 1995 lawsuit, which motion has not yet been heard by the court.
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.
In 1992, Vinnell Mining & Minerals Corporation and Atlas Corporation, an
unrelated third party, entered into a Consent Decree with the United States
Environmental Protection Agency with respect to an operable unit of the Atlas
Asbestos Mine Superfund site in Fresno County, California. Vinnell Mining &
14
15
Minerals Corporation is a wholly-owned indirect subsidiary of BDM International,
Inc. that was acquired by the Company in December 1997. The Consent Decree
provides, among other things, for the remediation of the site and reimbursement
of oversight costs upon submission of appropriate documentation to Vinnell and
Atlas. In 1999, Vinnell and Atlas filed a Petition for Dispute Resolution in the
U.S. District Court for the Eastern District of California to obtain judicial
review of the oversight cost documentation requirements. In April 2000, the
United States Department of Justice filed a motion for penalties in this matter,
requesting that the court impose penalties in addition to the reimbursement of
oversight costs. The Company has placed the amount of all claimed oversight
costs into escrow awaiting final decision of the court and believes that there
is no basis for the imposition of penalties. The Company is currently engaged in
settlement discussions concerning these claims and management believes that the
ultimate resolution of this matter will not have a material effect on the
Company's financial condition or results of operations.
INTERIM STATEMENTS
The financial statements are based in part on approximations and are subject to
adjustments that may develop, such as unsettled contract and renegotiation
matters and matters that arise in connection with the annual audit of the
financial statements; however, in the opinion of management, all adjustments
(which consist of normal recurring accruals) necessary for a fair presentation
of the results of operations for the periods presented have been included.
Results of operations for any interim period are not necessarily indicative of
the results to be expected for the full year.
Ernst & Young LLP, the Company's independent auditors, have performed a review
of the unaudited interim consolidated financial statements included herein, and
their review report accompanies this filing.
15
16
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Audit Committee of the
Board of Directors
TRW Inc.
We have reviewed the accompanying unaudited balance sheet of TRW Inc. and
subsidiaries as of June 30, 2000, the related unaudited statements of operations
for the three-month and six-month periods ended June 30, 2000 and 1999 and the
unaudited statements of cash flows for the six-month periods ended June 30, 2000
and 1999, included in the Form 10-Q of TRW Inc. for the quarterly period ended
June 30, 2000. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet of TRW Inc. as of December 31,
1999, and the related statements of operations, cash flows, and changes in
shareholders' investment for the year then ended not presented herein, and in
our report dated January 21, 2000, we expressed an unqualified opinion on those
financial statements. Those financial statements and our report on them are
included in the Form 10-K of TRW Inc. for the year ended December 31, 1999. In
our opinion, the information set forth in the accompanying balance sheet as of
December 31, 1999, included in the Form 10-Q of TRW Inc. for the quarterly
period ended June 30, 2000, is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
July 26, 2000
16
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
(In millions except per share data)
Second quarter ended Six months ended
June 30 June 30
----------------------------------------- -----------------------------------------
Percent Percent
2000 1999 Change Inc (Dec) 2000 1999 Change Inc (Dec)
---- ---- ------ --------- ---- ---- ------ ---------
Sales $4,476 $4,785 $(309) (7%) $9,041 $7,882 $1,159 15%
Profit before taxes 486 380 106 28% 971 607 364 60%
Net earnings 200 139 61 43% 409 111 298 267%
Diluted earnings
per share 1.59 1.14 0.45 3.27 0.91 2.36
Effective tax rate 36.7% 35.7% 37.7% 50.4%
The second quarter 2000 sales were $4.5 billion compared with 1999 sales of $4.8
billion. Sales for the second quarter of 2000 were comparable to the prior year,
excluding businesses divested, primarily Lucas Diesel Systems, subsequent to the
second quarter of 1999. Net earnings and diluted earnings per share for the
second quarter of 2000 were $200 million, or $1.59 per share, compared with $139
million, or $1.14 per share, in 1999.
For the second quarter of 2000, unusual items resulted in net earnings of $33
million, or $0.26 per share. The unusual items for the second quarter of 2000
included after-tax gains of $28 million from the sale of RF Micro Devices (RFMD)
stock; $23 million relating to the merger of TRW Milliwave Inc., a wholly owned
subsidiary, with Endgate Corporation to form Endwave Corporation, of which TRW
currently owns approximately 53 percent; and $15 million for the exchange of
TRW's interest in Paracel Inc. for shares in Celera Genomics Corporation. These
gains were partially offset by $10 million of automotive restructuring charges
and $23 million of unrealized losses on foreign currency hedges.
For the second quarter of 1999, unusual items resulted in a net loss of $13
million, or $0.11 per share. These charges included $39 million for automotive
restructuring actions and $26 million for expenses related to the LucasVarity
acquisition, partially offset by $52 million of gains from the sale of assets,
primarily RFMD stock.
Gross profit of $783 million in the second quarter of 2000 decreased 3 percent
from $811 million in 1999, primarily due to the effects of businesses divested
and the effects of a strong U.S. dollar of approximately $20 million. Gross
profit, as a percentage of sales, was 17.5 percent for the second quarter 2000,
compared to 17.0 percent in the second quarter 1999. Gross profit in the second
quarter of 2000 included automotive restructuring expenses of $9 million and
pension income from an overfunded pension plan of $62 million. Gross profit in
the second quarter of 1999 included pension income of $61 million, automotive
restructuring expenses of $59 million, income from companies divested of
approximately $47 million and unusual items relating to expenses from the
acquisition of LucasVarity of $8 million.
Administrative and selling expenses of $275 million in the second quarter of
2000 decreased $56 million from $331 million in 1999, primarily due to the
effects of businesses divested of approximately $37 million and the positive
effects of automotive cost reduction programs of approximately $14 million.
Research and development expenses of $116 million in the second quarter of 2000
decreased $21 million from $137 million in 1999, primarily due to the effects of
the divestitures of Lucas Diesel Systems, LucasVarity wiring companies and
Nelson Stud Welding.
17
18
In the second quarter of 2000, TRW Milliwave Inc., a wholly owned subsidiary,
merged with Endgate Corporation to form Endwave Corporation, of which the
Company currently owns approximately 53 percent. The Company recorded $12
million for the fair value of in-process research and development in connection
with this transaction.
Interest expense of $126 million in the second quarter of 2000 decreased $16
million from $142 million in 1999, primarily due to the reduction of net debt
offset in part by higher short term interest rates and higher interest expense
on fixed rate debt issuances.
Amortization of goodwill and intangible assets was $36 million in the second
quarter of 2000 and $29 million in 1999. The increase of $7 million from 1999 to
2000 primarily resulted from the the Endwave merger as well as the amortization
of intangibles associated with the acquisition of LucasVarity.
Other (income)expense-net was income of $97 million in the second quarter of
2000 and income of $45 million in the second quarter of 1999. Included in 2000
were the following items: other income on Endwave merger of $55 million, gains
on sales of shares of RFMD common stock of $43 million, gain on exchange of
Paracel stock of $23 million and $36 million related to foreign exchange losses.
Included in 1999 were gains on sales of shares of RFMD common stock of $79
million and expenses related to the acquisition of LucasVarity of $32 million.
The effective income tax rate was 36.7 percent in the second quarter of 2000
compared with 35.7 percent in the second quarter of 1999. Excluding the
write-off of purchased in-process research and development of $12 million ($6
million after the effect of minority interest), which has no tax benefit, the
effective tax rate would have been 36 percent for the second quarter of 2000.
Sales for the first half of 2000 were $9.0 billion compared with 1999 sales of
$7.9 billion. Sales for the first half of 2000 increased $1.1 billion due
primarily to the inclusion of LucasVarity. Net earnings and diluted earnings per
share for the first half of 2000 were $409 million, or $3.27 per share, compared
with $111 million, or $0.91 per share, in 1999.
For the first half of 2000, unusual items resulted in net earnings of $90
million, or $0.72 per share. The unusual items for the first half of 2000
included gains of $154 million, or $1.24 per share, from asset sales, including
sales of shares of RFMD common stock and of the Company's Nelson Stud Welding
and Australian Steering businesses; $23 million, or $0.18 per share, relating to
the merger of TRW Milliwave Inc., a wholly owned subsidiary, with Endgate
Corporation to form Endwave Corporation, of which TRW currently owns 53 percent;
and $15 million, or $0.12 per share, on the exchange of TRW's interest in
Paracel Inc. for shares in Celera Genomics Corporation. These gains were
partially offset by a $49 million charge, or $0.39 per share, for warranty
reserves, claims, and threatened litigation; a $22 million charge, or $0.18 per
share, for severance and plant closing costs for the automotive restructuring
program and $31 million, or $0.25 per share, of unrealized losses on foreign
currency hedges.
For the first half of 1999, unusual items resulted in a net loss of $146
million, or $1.19 per share. These charges include $46 million, or $.38 per
share, for severance and plant closing costs for the automotive restructuring
program; $67 million, or $.55 per share, for expenses related to the acquisition
of LucasVarity plc (LucasVarity); $85 million, or $.69 per share, for a one-time
noncash charge, with no income tax benefit, related to in-process research and
development associated with the LucasVarity acquisition; and $28 million, or
$.23 per share, for losses on fixed-price contracts, offset in part by gains of
$80 million, or $.66 per share, from sales of RFMD common stock.
Gross profit of $1,542 million for the first half of 2000 increased 23 percent
from $1,258 million in 1999 primarily due to the acquisition of LucasVarity.
Gross profit, as a percentage of sales, was 17.1 percent for the first half of
2000, compared to 16.0 percent in 1999. Gross profit in 2000 included unusual
items, including warranty reserves, claims, and threatened litigation, of $40
million and automotive restructuring expenses of $20 million. In addition,
pension income from an overfunded pension plan added $128 million to gross
profit in 2000. Gross profit for the first half of 1999 included automotive
restructuring expenses of $68 million, pension income of $61 million, income
from companies divested of
18
19
approximately $53 million and unusual items relating to losses on fixed-price
contracts of $43 million and expenses from the acquisition of LucasVarity of $8
million.
Administrative and selling expenses of $578 million for the first half of 2000
increased $63 million from $515 million in 1999 primarily due to the acquisition
of the LucasVarity businesses which added $110 million in the first half of
2000. The increase in administrative and selling expenses from LucasVarity were
offset by the effects of the businesses divested of approximately $44 million.
Research and development expenses of $230 million for the first half of 2000
decreased $19 million from $249 million in 1999, primarily due to the
divestitures of Lucas Diesel Systems, LucasVarity wiring companies and Nelson
Stud Welding.
The Company recorded $12 million for the first half of 2000 and $85 million for
the first half of 1999 for the fair value of in-process research and development
for the valuation of Endwave Corporation and LucasVarity, respectively.
Interest expense of $262 million for the first half of 2000 increased $77
million from $185 million in 1999, primarily due to higher average debt
outstanding in 2000, related to the purchase of LucasVarity, higher short term
interest rates and higher interest expense on fixed rate debt issuances.
Amortization of goodwill and intangible assets was $68 million for the first
half of 2000 as compared to $41 million in 1999. The increase of $27 million
from 1999 to 2000 primarily resulted from the amortization of intangibles
associated with the acquisition of LucasVarity.
Other (income)expense-net was income of $264 million in the first half of 2000
and income of $41 million in 1999. Included in 2000 were the following items:
gains on sales of shares of RFMD common stock of $217 million, other income on
Endwave merger $55 million, gain on the exchange of Paracel stock of $23 million
and $48 million related to foreign exchange losses. Included in 1999 were gains
on sales of shares of RFMD common stock of $124 million and expenses related to
the acquisition of LucasVarity of $95 million.
The effective tax rate was 37.7 percent for the six months ended June 30, 2000
compared to 50.4 percent in 1999. Excluding the write-off of purchased
in-process research and development of $12 million for the first half of 2000
($6 million after the effect of minority interest) and $85 million for the first
half of 1999, which have no tax benefit, the effective tax rate would have been
37.4 percent and 36.5 percent for the six months ended June 30, 2000 and 1999,
respectively.
Automotive Segments
Occupant Safety Systems
Second quarter ended Six months ended
(In millions) June 30 June 30
-------------------------------------------- --------------------------------------------------
Percent Percent
2000 1999 Change Inc (Dec) 2000 1999 Change Inc (Dec)
---- ---- ------ --------- ---- ---- ------ ---------
Sales $728 $778 $(50) (7%) $1,488 $1,574 $(86) (6%)
Profit before
taxes 59 40 19 49% 73 93 (20) (21%)
Sales for the second quarter of 2000 of $728 million decreased $50 million from
$778 million in 1999, as increased volume of approximately $26 million was
offset by the effects of a strong U.S. dollar and lower pricing of approximately
$42 million and $40 million, respectively.
Profit before taxes for the second quarter of 2000 of $59 million increased $19
million from $40 million in 1999. Excluding the net change in restructuring
charges of approximately $6 million, profit before taxes increased $13 million.
The higher profit before taxes resulted from cost reductions of approximately
$36 million, operational efficiencies of approximately $14 million and higher
volume of approximately $6
19
20
million, which were offset by lower pricing of approximately $40 million and the
effects of a strong U.S. dollar of approximately $5 million.
Sales for the six months ended June 30, 2000 of $1,488 million decreased $86
million from $1,574 million in 1999 as increased volume of approximately $74
million was offset by the effects of a strong U.S. dollar and lower pricing of
approximately $86 million and $83 million, respectively.
Profit before taxes for the six months ended June 30, 2000 of $73 million
decreased $20 million from $93 million in 1999. Excluding approximately $32
million of unusual items consisting of claims and threatened litigation and the
net change in restructuring charges, profit before taxes increased approximately
$12 million. Lower pricing of approximately $83 million was partially offset by
cost reductions of approximately $74 million and profit from the increased
volume of approximately $17 million.
Chassis Systems
Second quarter ended Six months ended
(In millions) June 30 June 30
----------------------------------------------- --------------------------------------------------
Percent Percent
2000 1999 Change Inc (Dec) 2000 1999 Change Inc (Dec)
---- ---- ------ --------- ---- ---- ------ ---------
Sales $1,511 $1,538 ($27) (2%) $3,039 $2,152 $887 41%
Profit before
taxes 112 69 43 62% 191 104 87 84%
Sales for the second quarter of 2000 of $1,511 million decreased $27 million
from $1,538 million in 1999. Excluding the effects of divestitures of
approximately $35 million, sales increased $8 million as increased volume of
approximately $68 million was partially offset by the effects of a strong U.S.
dollar of approximately $62 million.
Profit before taxes for the second quarter of 2000 of $112 million increased $43
million from $69 million in 1999. Excluding unusual items of approximately $37
million consisting of the net change in restructuring charges of approximately
$40 million and the effects of divestitures of approximately $3 million, profit
before taxes increased $6 million. Cost reductions of approximately $23 million
were offset by lower pricing of approximately $10 million and production
inefficiencies of approximately $7 million.
Sales for the six months ended June 30, 2000 of $3,039 million increased $887
million from $2,152 million in 1999, mainly due to the inclusion of LucasVarity
in the first quarter of 2000 of approximately $894 million. Excluding the
effects of divestitures and the inclusion of LucasVarity of approximately $58
million, sales increased $51 million. Increased volume of approximately $130
million was partially offset by the effects of a strong U.S. dollar of
approximately $87 million.
Profit before taxes for the six months ended June 30, 2000 of $191 million
increased $87 million from $104 million in 1999. Excluding the net effect of
unusual items of approximately $17 million consisting of warranty charges, loss
on the sale of a business, the net change in restructuring charges and the prior
year one-time noncash effect of the LucasVarity inventory write-up, profit
before taxes increased $70 million. The higher profit before taxes resulted
primarily from the inclusion of LucasVarity in the first quarter of 2000 of
approximately $80 million, cost reductions of approximately $24 million and
increased volume of approximately $12 million offset in part by lower pricing of
approximately $17 million and production inefficiencies of approximately $11
million.
20
21
Automotive Electronics
Second quarter ended Six months ended
(In millions) June 30 June 30
---------------------------------------------- --------------------------------------------------
Percent Percent
2000 1999 Change Inc (Dec) 2000 1999 Change Inc (Dec)
---- ---- ------ --------- ---- ---- ------ ---------
Sales $437 $540 $(103) (19%) $909 $857 $52 6%
Profit before
taxes 33 26 7 27% 65 48 17 36%
Sales for the second quarter of 2000 of $437 million decreased $103 million from
$540 million in 1999. Excluding the effects of divestitures of approximately $61
million, sales decreased $42 million primarily due to lower volume of
approximately $25 million and the effects of a strong U.S. dollar of
approximately $15 million.
Profit before taxes for the second quarter of 2000 of $33 million increased $7
million from $26 million in 1999. Excluding the effects of divestitures of
approximately $4 million and the net change in restructuring charges of
approximately $2 million, profit before taxes increased $9 million primarily due
to cost reductions of approximately $11 million offset in part by lower volume
of approximately $4 million.
Sales for the six months ended June 30, 2000 of $909 million increased $52
million from $857 million in 1999. Excluding the effects of divestitures of
approximately $61 million, sales increased $113 million primarily due to the
inclusion of LucasVarity sales in the first quarter of 2000 of approximately
$148 million which was offset by the strong effect of the U.S. dollar of
approximately $28 million and lower pricing of approximately $6 million.
Profit before tax for the six months ended June 30, 2000 of $65 million
increased $17 million from $48 million in 1999. Cost reductions of approximately
$21 million and the inclusion of LucasVarity in the first quarter of
approximately $9 million were offset in part by lower pricing of approximately
$6 million and a higher research and development costs of approximately $5
million.
Other Automotive
Second quarter ended Six months ended
(In millions) June 30 June 30
---------------------------------------------- --------------------------------------------------
Percent Percent
2000 1999 Change Inc (Dec) 2000 1999 Change Inc (Dec)
---- ---- ------ --------- ---- ---- ------ ---------
Sales $217 $437 $(220) (50%) $492 $675 $(183) (27%)
Profit before
taxes 23 24 (1) (4%) 82 50 32 64%
Sales for the second quarter of 2000 of $217 million decreased $220 million from
$437 million in 1999, primarily due to the effects of divestitures of
approximately $225 million.
Profit before taxes for the second quarter of 2000 of $23 million decreased $1
million from $24 million in 1999. Excluding the effects of the divestitures of
approximately $8 million and the net change in restructuring charges of
approximately $3 million, profit before taxes increased $10 million. The higher
profit before taxes resulted from cost reductions and operational efficiencies
of approximately $10 million.
Sales for the six months ended June 30, 2000 of $492 million decreased $183
million from $675 million in 1999, primarily due to the effects of divestitures
of $228 million.
Profit before tax for the six months ended June 30, 2000 of $82 million
increased $32 million from $50 million in 1999, primarily due to the gain on
sale of Nelson Stud Welding of approximately $31 million.
21
22
During the first quarter of 2000, the Company completed the disposition of Lucas
Diesel Systems, Nelson Stud Welding and the remaining LucasVarity wiring
business. Sales of the businesses divested included in the Other Automotive
segment were approximately $336 million for the quarter ended June 30, 1999 and
for the six months ended June 30, 2000 and 1999 were approximately $56 million
and $389 million, respectively.
Automotive Restructuring
On July 29, 1998, the Company announced actions to enhance profit margins of the
legacy automotive businesses. To implement the program, the Company expects to
record before-tax charges of up to $150 million by the end of 2000. To date, the
Company has recorded restructuring expenses of $133 million, of which $14
million was recorded for the quarter ended June 30, 2000 and $29 million was
recorded for the first half of 2000. The Company closed one plant during the
first quarter of 2000, bringing the total to twelve. Three additional plants are
currently in the process of closure or sale. The Company has reduced employee
headcount by more than 6,300 against a goal of 7,500.
In addition, the Company approved several restructuring actions including the
integration of the LucasVarity automotive businesses with the legacy TRW
automotive businesses. The Company recorded approximately $45 million of
restructuring costs, primarily severance, as part of the purchase price
allocation. During 1999, $14 million was used primarily for severance payments
and $8 million was used during the second quarter of 2000 for severance. The
remaining balance of $23 million is expected to be used during 2000 and through
the third quarter of 2001.
Aerospace & Information Systems Segments
Space & Electronics
Second quarter ended Six months ended
(In millions) June 30 June 30
---------------------------------------------- ------------------------------------------------
Percent Percent
2000 1999 Change Inc (Dec) 2000 1999 Change Inc (Dec)
---- ---- ------ --------- ---- ---- ------ ---------
Sales $467 $453 $14 3% $953 $914 $ 39 4%
Profit before
taxes 143 139 4 3% 370 222 148 66%
Sales of $467 million for the second quarter of 2000 increased $14 million from
$453 million in 1999, primarily due to sales from new awards, including the
start-up in the commercial satellite communication line of business, of
approximately $71 million offset in part by lower volume on several defense
programs nearing completion or completed during the quarter of approximately $54
million.
Profit before taxes for the second quarter 2000 and 1999 was $143 million and
$139 million, respectively. Profit before taxes in the second quarter 2000
included unusual items of approximately $43 million related to gains on the
sales of shares of RFMD common stock and $52 million related to the merger of
TRW Milliwave Inc., a wholly owned subsidiary, with Endgate Corporation to form
Endwave Corporation. Profit before taxes in the second quarter 1999 included
unusual items of $79 million related to gains on the sales of shares of RFMD
common stock. Excluding unusual items, profit before taxes for the second
quarter 2000 decreased $12 million, as lower volume on several defense programs
nearing completion or completed during the quarter of approximately $17 million
was partially offset by sales from new awards, including the start-up in the
commercial satellite communication line of business of approximately $11
million.
Sales of $953 million for six months ended June 30, 2000 increased $39 million
from $914 million in 1999, primarily due to sales from new awards, including the
start-up in the commercial satellite communication line of business, of
approximately $135 million and higher volume on existing core programs of
approximately $10 million offset in part by lower volume on several defense
programs nearing completion
22
23
or completed during the year of approximately $80 million and the termination of
the SBIRS Low demonstration and validation contract of approximately $35
million.
Profit before tax for the six months ended June 30, 2000 increased $148 million
from $222 million in 1999 due to a net increase in gains of $94 million related
to RFMD compared to the prior year, a net gain of $52 million related to the
Endwave merger and approximately $18 million due to sales from new awards,
including the start-up in the commercial satellite communication line of
business, which were offset in part by $11 million of charges for a capped cost
reimbursable contract for the U.S. Army.
Systems & Information Technology
Second quarter ended Six months ended
(In millions) June 30 June 30
----------------------------------------------- ----------------------------------------------
Percent Percent
2000 1999 Change Inc (Dec) 2000 1999 Change Inc (Dec)
---- ---- ------ --------- ---- ---- ------ ---------
Sales $837 $757 $80 11% $1,611 $1,410 $201 14%
Profit before
taxes 77 52 25 50% 124 58 66 114%
Sales for the second quarter of 2000 of $837 million increased $80 million from
$757 million in 1999, primarily due to new business of approximately $50 million
and higher volume on existing programs, including space and missile defense
systems contracts and the U.S. Census program, of approximately $65 million. The
higher sales were offset by lower volume on contracts nearing completion or
completed during the quarter of approximately $37 million.
Profit before taxes for the second quarter 2000 of $77 million increased $25
million from $52 million in 1999, primarily due to the gain on exchange of the
Company's interest in Paracel Inc. for shares in Celera Genomics Corporation of
approximately $23 million.
Sales for the six months ended June 30, 2000 of $1,611 million increased $201
million from $1,410 million in 1999, primarily due to higher volume on an
existing programs, including space and missile systems contracts and U.S. Census
and Treasury communications programs of approximately $179 million and new
business of approximately $95 million. The higher sales were offset by lower
volume on contracts nearing completion or completed during the year of
approximately $77 million.
Profit before taxes for the six months ended June 30, 2000 of $124 million
increased $66 million from $58 million in 1999. Profit before taxes for the six
months ended June 30, 2000 included unusual items of a gain on exchange of the
Company's interest in Paracel Inc. of approximately $23 million and a charge for
a commercial fixed-price contract of approximately $33 million for the six
months ended June 30, 1999. Excluding unusual items, profit before taxes for the
six months ended June 30, 2000 increased $10 million primarily due to new
business of approximately $11 million.
23
24
Aeronautical Systems
Second quarter ended Six months ended
(In millions) June 30 June 30
----------------------------------------------- ----------------------------------------------
Percent Percent
2000 1999 Change Inc (Dec) 2000 1999 Change Inc (Dec)
---- ---- ------ --------- ---- ---- ------ ---------
Sales $279 $282 $(3) (1%) $549 $300 $249 83%
Profit before
taxes 39 30 9 31% 66 32 34 109%
Sales for the second quarter of 2000 and 1999 were $279 million and $282
million, respectively. The decrease in sales is due to lower volume of
approximately $11 million and the effects of the strong U.S. dollar of
approximately $11 million partially offset by an increase in sales from an
acquisitions made subsequent to the second quarter in 1999 of approximately $19
million.
Profit before taxes for the second quarter of 2000 of $39 million increased $9
million from $30 million in 1999 due to production efficiencies and cost
reductions of approximately $15 million offset in part by the effects of the
strong U.S. dollar of approximately $3 million.
Sales and profit before taxes for the Aeronautical Systems segment of $549
million and $66 million, respectively, for the first half of 2000, reflect an
entire six months of sales and profit before taxes compared to the first half of
1999 which only includes sales and profit before taxes for the period March 25,
1999, the date of acquisition, through June 30, 1999.
The Company recorded approximately $54 million as a component of the purchase
price allocation for severance and other costs to close certain facilities of
the Aeronautical Systems segment. The cost was included in the purchase price
allocation and reported in other accruals. During 1999, $9 million of the
reserve was used for severance and lease termination costs. During the first and
second quarters of 2000, the reserve was reduced by $4 million and $2 million,
respectively, for severance. The balance of $39 million at June 30, 2000 will be
used primarily for severance payments in the remainder of 2000 and the first
half of 2001.
ACQUISITIONS
ENDWAVE CORPORATION
On March 31, 2000, Endgate Corporation merged with TRW Milliwave Inc., a
wholly-owned subsidiary of the Company. Endgate was the surviving corporation in
the merger and changed its name to Endwave Corporation. The financial statements
of Endwave are consolidated with the Company's financial statements as the
Company has a 52.6 percent majority ownership interest in Endwave.
The merger was accounted for as a purchase. Assets and liabilities of Endgate
were recorded at their respective fair values by an independent appraisal.
In-process research and development was determined using the income approach
under the proportional method.
The purchase price allocation resulted in $12 million, $6 million after the
effect of minority interest, for the fair value of five acquired in-process
research and development projects that had not reached technological feasibility
and had no alternative future use; $16 million for technology; $7 million for
other identifiable intangible assets; $25 million for operating assets and
liabilities; and goodwill of approximately $79 million.
Goodwill and identifiable intangible assets are being amortized on a
straight-line basis over six years.
The Company recorded a net gain of $52 million, $34 million after tax, for the
excess of fair value of the Company's ownership interest in Endgate that
exceeded the book value of Milliwave.
24
25
LUCASVARITY
On March 25, 1999, the Company acquired LucasVarity for approximately $6.8
billion in cash and assumed net debt. The acquisition was accounted for as a
purchase. The purchase price allocation resulted in an $85 million charge to
earnings, with no income tax benefit, for the fair value of acquired in-process
research and development (IPR&D) that had not reached technological feasibility
and had no future alternative use and $517 million for identifiable intangible
assets including intellectual property and workforce. The purchase price
allocation also included incremental fair value adjustments of approximately
$1.5 billion for a prepaid pension asset, primarily from an overfunded pension
plan, $200 million for the valuation of fixed rate debt and an increase of $30
million and $137 million for the valuation of inventory and fixed assets,
respectively.
The fair value of IPR&D was determined by an independent valuation using the
income approach under the proportional method. The following projects were
included in the valuation: next generation caliper of $26 million, next
generation anti-lock braking systems (ABS) of $23 million, aerospace engine
controls of $18 million, electro hydraulic braking of $12 million and electrical
parking brake of $6 million. The fair value of identifiable intangibles was also
determined by an independent valuation primarily using the income approach. A
risk adjusted discount rate of 18 percent representing the cost of capital and a
premium for the risk was used to discount the projects' cash flows. Operating
margins were assumed to be similar to historical margins of similar products.
The size of the applicable market was verified for reasonableness with outside
research sources. The projects were in various stages of completion ranging from
approximately 40 to 80 percent complete as of the valuation date. The stage of
completion for each project was estimated by evaluating the cost to complete,
complexity of the technology and time to market. The projects are anticipated to
be completed by 2002. The estimated cost to complete the projects was $65
million.
As of December 31, 1999, the next generation caliper project was completed. As
of March 31, 2000, one of the aerospace engine control programs with the
valuation of in-process research and development of $7 million was discontinued.
The Company currently anticipates that the remainder of the projects will be
successfully developed as budgeted for both the estimated cost and time of
completion. Any delay or cancellation of the projects would not have a material
adverse impact on the results of operations or the financial condition of the
Company.
Restructuring costs, primarily severance, included in the purchase price
allocation were approximately $108 million. The reserve was established for
facility consolidations, relocation of certain facilities, elimination of the
LucasVarity corporate facilities and divestiture of nonstrategic or inefficient
facilities in the automotive and aerospace businesses. The balance at June 30,
2000, reported in other current liabilities, was $64 million and will be used
primarily for severance payments during the remainder of 2000 and through the
third quarter of 2001.
See the "Acquisitions" note to Financial Statements for further discussion of
the acquisition of LucasVarity.
LIQUIDITY AND FINANCIAL POSITION
In the first six months of 2000, proceeds from divestitures of $1,396 million,
operating activities of $402 million and other items of $57 million were used
primarily for debt payments of $1,454 million, capital expenditures of $312
million and dividend payments of $82 million. As a result, cash and cash
equivalents increased $7 million. In the first six months of 1999, a net
increase in debt of $6,598 million, cash flow provided by operating activities
of $346 million and proceeds from divestitures of $91 million were used to fund
acquisitions of $6,049 million, capital expenditures of $356 million, dividend
payments of $80 million and other items of $24 million. As a result, cash and
cash equivalents increased by $526 million.
Net debt (short-term debt, the current portion of long-term debt and long-term
debt, less cash and cash equivalents) was $6.8 billion at June 30, 2000,
compared to $8.3 billion at December 31,1999. The ratio of net debt to total
capital (net debt, minority interests and shareholders' investment) was 68
percent at June 30, 2000 and 75 percent at December 31, 1999. The percentage of
fixed rate debt to total debt was 61 percent at the end of the second quarter
2000 compared to 46 percent at the end of 1999.
25
26
On January 25, 2000, the Company established two committed revolving credit
agreements in an aggregate amount of $3.3 billion with 29 banks. The first
agreement for $2.3 billion will expire on January 23, 2001 with an option to
extend the maturity of outstanding borrowings at that time to January 23, 2002.
The second agreement for $1 billion will expire on January 25, 2005. The
interest rates under the agreements are either the prime rate or a rate based on
the London Interbank Offered Rate (LIBOR), at the option of the Company. Also on
January 25, 2000, the Company terminated existing revolving credit agreements in
an aggregate amount of approximately $5 billion.
In addition to the $525 million interest rate swaps outstanding at December 31,
1999 of which $100 million is forward starting, the Company entered into four
$50 million forward-starting fixed interest rate swaps as a hedge of future
long-term debt issuance, during the first quarter of 2000.
During the second quarter of 2000, the Company entered into a $50 million
forward-starting fixed interest rate swap as a hedge of future long-term debt
issuance. In connection with the issuance of $500 million of 8.75% Notes due
2006, the Company terminated $250 million of forward-starting fixed interest
rate swaps at a gain of $7 million. The gain will be amortized over the life of
the long-term debt issued as a reduction of interest expense. The fair market
value of the total interest rate swap agreements is a liability of approximately
$5 million at June 30, 2000.
During the first quarter, the Company also completed an issuance utilizing the
Universal Shelf Registration Statement of $300 million of medium term notes due
March 2002. The proceeds of the offering were used to reduce commercial paper.
The interest rate is a floating rate based on a three-month LIBOR.
During the second quarter of 2000, the Company voluntarily reduced the $2.3
billion revolving credit agreement by $300 million. The Company also completed
an issuance utilizing the Universal Shelf Registration Statement of $500 million
of 8.75% Notes due 2006. The proceeds of this offering were used to repay
commercial paper.
At June 30, 2000, $200 million of short-term obligations were reclassified to
long-term obligations as the Company intends to refinance the obligations on a
long-term basis and has the ability to do so under its existing credit
agreements.
The Company established a $2.5 billion Universal Shelf Registration Statement
during 1999 with $1.7 billion remaining available at June 30, 2000. Securities
that may be issued under this shelf registration statement include debt
securities, common stock, warrants to purchase debt securities, warrants to
purchase common stock, stock purchase contracts and stock purchase units.
Subsequent to the acquisition of LucasVarity, the Company established a goal of
reducing its net debt by $2.5 billion by the end of 2000. As of June 30, 2000,
net debt had been reduced by approximately $1.5 billion during the first six
months of 2000. Combined with the $1.0 billion of net debt reduction achieved in
1999 since the acquisition of Lucas Varity, the debt reduction goal was
achieved. The Company established a new goal to achieve an incremental $300
million of debt reduction by the end of the year. The Company intends to achieve
additional debt reduction through operating cash flow, working capital
improvements, sale of non-core businesses, disposal of nonrevenue producing
assets and management of expenditures.
During the first quarter of 2000, the Company monetized 2 million shares of its
holdings in RF Micro Devices, Inc. (RFMD) through the execution of three forward
sale agreements maturing in February 2003, August 2003 and February 2004. The
Company received cash proceeds of $168 million in consideration for its
agreement to deliver up to 2 million shares of RFMD common stock, in the
aggregate, upon maturity of the contracts. The actual number of shares to be
delivered upon maturity of each agreement will be determined on the basis of a
formula set forth in the agreements, comparing the average closing price of the
shares for the five trading days preceding the maturity date to the floor price
per share. The proceeds from the transactions were used to pay down short-term
debt. The up-front proceeds were reduced by a discount of approximately $48
million and will be amortized as interest expense using the effective interest
rate method over the life of the agreements. Through the setting of a floor and
ceiling price, the forward sales agreements eliminate the Company's exposure to
downside market risk, and at the same time,
26
27
enable the Company to retain potential market appreciation up to the respective
ceiling price. The investment in RFMD and the monetization liability are carried
at fair market value. Changes in fair market value of the Company's shares of
RFMD, including the 2 million shares monetized, which are limited to changes in
stock price between the floor and ceiling, are recorded in the Other
Comprehensive Income(Loss) component of Shareholders' Investment.
During the first quarter of 2000, the Company sold 2.2 million shares of RFMD
common stock for $181 million and 422,500 shares were sold for $44 million
during the second quarter of 2000. At June 30, 2000, the Company owned
approximately 11.5 million shares, including the 2 million shares the Company
pledged to secure its obligations under the forward sales agreements. The fair
value of the Company's investment in RFMD at June 30, 2000 was approximately
$1 billion and has been reflected in the balance sheet of the Company in
investments in affiliated companies.
At June 30, 2000, the Company had a working capital deficiency of approximately
$1.4 billion primarily due to the issuance of debt incurred to purchase
LucasVarity. Management believes that sufficient resources, from funds generated
by operations, dispositions and existing borrowing capacity, are available to
maintain liquidity.
OTHER MATTERS
TRW Vehicle Safety Systems Inc., a wholly-owned subsidiary of the Company,
reported to the Arizona Department of Environmental Quality, or ADEQ, in 1997,
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, the United States
Environmental Protection Agency, the United States Department of Justice and the
Arizona State Attorney General are conducting civil and criminal investigations
into these potential violations and the Company is cooperating with these
investigations. If proceedings were to be initiated against the Company with
respect to such matters, the Company could be liable for penalties and fines and
other relief. The Company is currently engaged in settlement discussions with
state and federal officials. The Company is not able to predict the outcome of
these discussions at this time.
On March 31, 2000, TRW Vehicle Safety Systems Inc. was served with a putative
class action lawsuit filed in Maricopa County Superior Court in the State of
Arizona. The lawsuit was filed on behalf of everyone living within a five-mile
radius of the Company's airbag manufacturing plant in Mesa, Arizona. The lawsuit
alleges that emissions from the plant have caused health problems for residents
living near the plant and that the Company concealed information about the
potential health risks of its emissions. The lawsuit also alleges that animals
and plant life have been injured or destroyed through significant exposure to
toxic emissions. Plaintiffs are asking the court to require the Company to
institute medical monitoring for the claimants, to conduct various studies
regarding, among other things, the risks of sodium azide, to cease operations
that release toxic substances into the air and to create a supervised fund to
pay for medical screening and monitoring. Plaintiffs are also seeking attorneys'
fees and punitive damages. The Company believes there is no valid scientific
basis for these claims and intends to defend itself vigorously. The Company is
not able to predict the outcome of this lawsuit at this time.
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" note to Financial Statements for further discussion
of these matters.
27
28
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 until January 1, 2002.
The Company 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 Euro
primarily impacts the Company's automotive business. The Company has a
cross-functional team to coordinate changes required to conduct its complete
business operations in compliance with Euro-related regulations. All of the
Company's Euro zone operations currently are able to invoice and receive
payments in Euro, and some of its operations have already transitioned their
accounting records to Euro as the base currency. 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.
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 filing 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: unanticipated events
and circumstances that may occur and render the Company's acquisition of
LucasVarity less beneficial to the Company than anticipated; intense competition
in our markets that make it impossible to guarantee that the Company will
achieve the expected financial and operating results and synergies from the
acquisition of LucasVarity; the ability of the Company to integrate LucasVarity
into its operations and thereby achieve the anticipated cost savings and be in a
position to take advantage of potential growth opportunities; the ability to
continue technical innovation and the development of and demand for new products
and contract awards; the ability to successfully develop commercial applications
for the Company's technologies; pricing pressures from customers; the ability to
reduce the level of outstanding debt from cash flow from operations and the
proceeds from asset dispositions; the introduction of competing products or
technology by competitors; the availability of funding for research and
development; the ability to meet performance and delivery requirements on
systems for customers; the economic, regulatory and political instability of
Brazil, Asia and certain emerging countries; and the ability to attract and
retain skilled employees with high-level technical competencies.
The Company's automotive businesses also could be affected by: the ability to
effectively implement the Company's automotive restructuring program and improve
automotive margins; changes in consumer debt levels and interest rates; the
cyclical nature of the automotive industry; moderation or decline in the
automobile build rate; work stoppages; customer recall and warranty claims;
product liability issues; and changes to the regulatory environment regarding
automotive safety.
The Company's aerospace and information systems businesses also could be
affected by: the level of defense funding by the government; the termination of
existing government contracts; and the ability to
28
29
develop and market products and services for customers outside of the
traditional aerospace and information systems markets.
The above list of important factors is not exclusive. We caution 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.
29
30
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 and as a means of securing long-term, floating-rate debt. Also, the Company
may use interest rate agreements in the management of interest rate exposure on
debt issuances. 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 interest rate exposure on variable rate borrowings at
June 30, 2000, including fixed-rate borrowings exposed due to an interest rate
swap, a one-percentage-point increase in the average interest rate on the
Company's variable rate borrowings would increase future interest expense by
approximately $2 million per month.
Based upon the Company's interest rate exposure with regard to forward starting
interest rate swaps outstanding at June 30, 2000, a 10 percent decrease in fixed
interest rates would result in a $3 million loss in fair value. Based on the
Company's exposure to foreign currency exchange rate risk resulting from
derivative foreign currency instruments outstanding at June 30, 2000, a 10
percent uniform strengthening in the value of the U.S. dollar relative to the
currencies in which those derivative foreign currency instruments are
denominated would result in a $94 million loss in fair value.
The Company's sensitivity analyses of the effects of changes in interest rates
and 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.
Management believes the Company's current financial position and financing
arrangements 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 debt service requirements, capital expenditures, working
capital including tax requirements, company-sponsored research and development
programs and dividend payments to shareholders.
Refer to the "Forward Exchange Contracts" and the "Interest Rate Swap
Agreements" notes to Financial Statements for further discussion of derivative
instruments as of June 30, 2000.
30
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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. On March 15, 1999, the DOJ was
granted leave to file a First Amended Complaint, which adds certain allegations
concerning the Company's subcontracts. On August 6, 1999, the Government filed
its Second Amended Complaint, which incorporated vouchers, progress payment
requests, and invoices submitted by the Company to higher tier Government
contractors among the class of allegedly false claims challenged by the
Government. On September 29, 1999, the former employee filed his Second Amended
Complaint, which incorporated subcontracts performed by the Company for higher
tier Government contractors among the class of contracts under which allegedly
false claims were presented, and added allegations relating to certain of the
former employee's pre-existing claims. On May 9, 2000, the Company voluntarily
dismissed its remaining counterclaims against the former employee, with
prejudice. On July 10, 2000, the DOJ filed a motion seeking permission to
intervene in the 1995 lawsuit, which motion has not yet been heard by the court.
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.
In 1992, Vinnell Mining & Minerals Corporation and Atlas Corporation, an
unrelated third party, entered into a Consent Decree with the United States
Environmental Protection Agency with respect to an operable unit of the Atlas
Asbestos Mine Superfund site in Fresno County, California. Vinnell Mining &
Minerals Corporation is a wholly-owned indirect subsidiary of BDM International,
Inc. that was acquired by the Company in December 1997. The Consent Decree
provides, among other things, for the remediation of the site and reimbursement
of oversight costs upon submission of appropriate documentation to Vinnell and
Atlas. In 1999, Vinnell and Atlas filed a Petition for Dispute Resolution in the
U.S. District Court for the Eastern District of California to obtain judicial
review of the oversight cost documentation requirements. In April 2000, the
United States Department of Justice filed a motion for penalties in this matter,
requesting that the court impose penalties in addition to the reimbursement of
oversight costs. The Company has placed the amount of all claimed oversight
costs into escrow awaiting final decision of the court and believes that there
is no basis for the imposition of penalties. The Company is currently engaged in
settlement discussions concerning these claims and management believes that the
ultimate resolution of this matter will not have a material effect on the
Company's financial condition or results of operations.
31
32
See also Part II, Item 1 in the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its 2000 Annual Meeting of Shareholders on April 26,
2000.
(b) Proxies for the Annual Meeting of Shareholders were solicited
pursuant to Regulation 14 under the Act; there was no solicitation in
opposition to management's nominees as listed in the proxy statement;
and all of such nominees were elected.
(c) David M. Cote was elected a Director of the Company with 105,701,416
votes for election, 1,191,147 votes withheld from voting and
15,312,217 shares not voted, including broker non-votes.
Joseph T. Gorman was elected a Director of the Company with 104,661,224
votes for election, 2,231,339 votes withheld from voting and 15,312,217
shares not voted, including broker non-votes.
Karen N. Horn was elected a Director of the Company with 105,538,122
votes for election, 1,354,441 votes withheld from voting and 15,312,217
shares not voted, including broker non-votes.
Lynn M. Martin was elected a Director of the Company with 105,511,467
votes for election, 1,381,096 votes withheld from voting and 15,312,217
shares not voted, including broker non-votes.
The shareholders ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the 2000 fiscal year with
106,029,147 votes for, 357,023 votes against, 506,393 votes abstaining
and 15,312,217 shares not voted, including broker non-votes.
The shareholders approved the 2000 TRW Long-Term Incentive Plan with
75,735,624 votes for, 30,135,566 votes against, 1,021,373 abstaining
and 15,312,217 shares not voted, including broker non-votes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
15 Letter re: Unaudited Financial Information
27 Financial Data Schedule
99 Computation of Ratio of Earnings to Fixed Charges - Unaudited
(Supplement to Exhibit 12 of the following Registration
Statements of the Company: No. 333-89133 on Form S-3 and No.
333-48443 on Form S-3)
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated May 31, 2000, regarding TRW's sale of
$500 million 8 3/4% Notes due 2006.
32
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRW Inc.
Date: August 14, 2000 By: /s/ William B. Lawrence
-----------------------------------
William B. Lawrence
Executive Vice President, General
Counsel and Secretary
By: /s/ Carl G. Miller
-----------------------------------
Carl G. Miller
Executive Vice President
and Chief Financial Officer
33