1
Exhibit 13
Management's Discussion and Analysis of the
Results of Operations and Financial Condition TRW Inc.
RESULTS OF OPERATIONS
Record sales in 1996 resulted in the company reporting the highest net earnings
in its history, exceeding the previous records achieved in 1995. In addition,
the company's liquidity and financial condition improved significantly
during 1996, positioning the company to achieve strong future growth.
Consolidated sales in 1996 of $9.9 billion represented a 3 percent increase
over 1995 sales of $9.6 billion. Compared to 1994 sales of $8.5 billion, 1996
sales increased 16 percent. Net earnings in 1996 of $480 million exceeded
earnings of $446 million in 1995 and $333 million in 1994. Fully diluted
earnings per share were $3.60 in 1996, $3.31 in 1995 and $2.50 in 1994. The
earnings per share amounts have been restated to reflect the company's stock
dividend.
CONSOLIDATED SALES IN BILLIONS
- ------------------------------
94 $8.5
95 $9.6
96 $9.9
NET EARNINGS IN MILLIONS
- ------------------------
94 $333
95 $446
96 $480
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
94 $2.50
95 $3.31
96 $3.60
The 1996 results included three special items. First, the company sold its
information services business for proceeds of $1.1 billion resulting in a gain
of $484 million ($260 million after tax, or $1.95 per share). Second, the
company recorded charges of $314 million ($202 million after tax, or $1.52 per
share) primarily for actions taken, in part, to enhance the company's
competitiveness. And third, the company applied the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," resulting in the
recognition of $71 million ($50 million after tax, or $.37 per share) of
impairment losses. The losses were primarily a result of technological changes
and the decision to close certain facilities in the Automotive segment.
Automotive Segment
Sales in 1996 rose to a record $6.49 billion from the 1995 sales level of $6.47
billion. The increase in sales resulted primarily from higher volume in
virtually all product lines partially offset by lower pricing and the effect of
unfavorable exchange rates. Operating profit in 1996 was $319 million compared
to $607 million in 1995. Included in 1996 operating profit was $290 million of
charges relating to asset impairments and writedowns, consolidation of
manufacturing plants, severance costs and litigation and warranty expenses.
Excluding these charges, operating profit in 1996 was $609 million. The increase
in operating profit was primarily due to the effect of aggressive cost
reductions and the introduction of new inflator technologies which more than
offset the effects of lower pricing and new product development costs.
SALES IN BILLIONS
- -----------------------
94 $5.68
95 $6.47
96 $6.49
Sales of $6.47 billion in 1995 represented a 14 percent increase over 1994 sales
of $5.68 billion. Operating profit in 1995 increased 28 percent to $607 million
from the $476 million reported in 1994. The increase in sales and operating
profit was the result of higher volume in the North American air bag and
steering systems businesses and all European automotive businesses, primarily in
air bag and steering systems. Favorable exchange rates also contributed to the
sales increase.
OPERATING PROFIT IN MILLIONS
- ----------------------------
94 $476
95 $607
96 $319
The company has invested and expects to continue to invest in areas of
significant potential growth, such as smart restraint systems, side-impact air
bags, power rack and pinion steering, electrically assisted steering and
advanced electronic components. TRW will continue to take advantage of
opportunities to enhance its global
17
2
Management's Discussion and Analysis
of the Results of Operations and Financial Condition TRW Inc.
RESULTS OF OPERATIONS (CONTINUED)
competitiveness through internal growth and strategic alliances. Examples of the
progress made during 1996 include the formation of 10 alliances, joint ventures
and acquisitions in 7 countries and the acquisition of a producer of steering
wheel systems. In addition, we completed in February 1997, the acquisition of an
eighty percent equity interest in the air bag and steering wheel businesses of
Magna International. These operations supply air bag modules, inflators,
propellants, steering wheels and other related automotive components. TRW and
Magna also agreed to form a strategic alliance for the design, development and
production of automotive products for the global market. Under this alliance,
TRW will lead development efforts in occupant restraint systems, including air
bags, seatbelts, inflators, sensors and steering wheels.
The company anticipates that 1997 North American automotive and light truck
production will be stable with the 1996 levels. We foresee modest production
growth in Western Europe and strong growth in the emerging markets of Eastern
Europe and Asia. Strong price pressure is expected to continue across all
product lines. Productivity improvements, material cost reductions and the
introduction of new, lower cost technologies will be the main initiatives taken
to mitigate the price pressure.
Space and Defense Segment
Driven by new contract awards, sales in 1996 increased 9 percent to $3.36
billion compared to $3.10 billion in 1995 and was the third consecutive year of
sales growth. Operating profit in 1996 was $157 million compared to $192 million
in 1995. The lower operating profit was due primarily to the effect of program
reserves more than offsetting the profit from the higher sales volume. Included
in 1996 and 1995 operating profit were $90 million and $30 million,
respectively, of charges related primarily to contract reserves.
SALES IN BILLIONS
- -------------------------
94 $2.81
95 $3.10
96 $3.36
Sales in 1995 increased 10 percent to $3.10 billion from the $2.81 billion
reported in 1994. Operating profit of $192 million was 10 percent higher than
1994's operating profit of $175 million. The strong sales growth resulting from
new contract awards and existing business more than offset the effect of
contracts nearing completion. The increase in operating profit resulted
primarily from the absence of investments for new business initiatives partially
offset by lower fee accruals during the early period of new programs and the net
effect of program reserves.
OPERATING PROFIT IN MILLIONS
- ----------------------------
94 $175
95 $192
96 $157
Continuing pressure on the Department of Defense, NASA and other U.S. Government
agency budgets could affect the level of future revenues and operating profits.
However, government funding for all major TRW contracts appears to be stable,
and the company does not anticipate any unfavorable effect on operations
relating to program terminations or budget reallocations. The diversity of our
programs helps insulate the company from funding fluctuations on any given
contract. We feel that our business is well positioned for growth in our
traditional federal government markets, as well as our targeted commercial and
international markets. We remain focused on bidding and winning new contracts
and on continuing to provide outstanding products and services to our customers.
Backlog estimates at the end of 1996 totaled a record $5.30 billion, up 4
percent from $5.12 billion at the end of 1995. The backlog growth was driven by
a number of key program awards in both defense and non-defense related
markets. Furthermore, our reported backlog has grown by 29 percent since 1994,
an impressive statistic considering the reduction in total defense outlays that
has occurred during this period. Reported backlog at the end of 1996 does not
include $2.9 billion of negotiated and priced, but not exercised, options for
defense and non-defense programs. The exercise of the options is at the
discretion of the customer and, as in the case of Government contracts
generally, dependent on future government funding.
Special Items
During 1996, the company recorded charges totaling $314 million ($202
million after tax, or $1.52 per share). The charges were taken primarily for
actions to enhance the company's competitiveness. The company believes these
actions will provide for a strong future with solid growth. As a result of these
actions, several manufacturing facilities located throughout the world will be
closed or consolidated, and employment company-wide will be
18
3
Management's Discussion and Analysis of the Results
of Operations and Financial Condition TRW Inc.
RESULTS OF OPERATIONS (CONTINUED)
reduced by approximately 2,500 people. Refer to the "Special charges" footnote
in the Notes to Financial Statements for further discussion.
Discontinued Operations
During 1996, the company sold its information services business receiving
proceeds of $1.1 billion. This sale resulted in a gain of $484 million ($260
million after tax, or $1.95 per share). The proceeds from the sale were used to
repay debt, to fund investment opportunities and to repurchase the company's
Common Stock. The operating results of the information services business and the
related transaction gain are reflected as discontinued operations for all
periods presented in the financial statements.
Interest Expense
Interest expense in 1996 was $84 million compared to $95 million in 1995
and $105 million in 1994. The decrease in interest expense in 1996 was
primarily due to lower average debt levels. The decrease in interest expense
from 1994 to 1995 was due to lower average debt levels partially offset by
higher U.S. interest rates.
Income Taxes
The effective tax rate on continuing operations was 39.6 percent compared to
36.8 percent in 1995 and 36.4 percent in 1994. The higher effective tax rate in
1996 was primarily due to the absence of a current tax benefit for certain of
the special charges taken during 1996.
Shareholders' Investment
On October 23, 1996, the company's Board of Directors authorized a two-for-one
stock split effected in the form of a stock dividend. Accordingly, all
references to the number of shares and per share amounts have been restated to
give retroactive recognition to the stock dividend.
International Operations
International sales were $3.94 billion, or 40 percent of TRW sales in 1996;
$3.92 billion, or 41 percent of sales in 1995; and $3.11 billion, or 37 percent
of sales in 1994. U.S. export sales included in those amounts were $764 million
in 1996, $813 million in 1995 and $595 million in 1994. Most of TRW's non-U.S.
operations are included in the Automotive segment and are located in Europe,
Canada, Brazil and the Pacific Basin. TRW's non-U.S. operations are subject to
the usual risks that may affect such operations; however, most of the assets of
its non-U.S. operations are in countries where the company believes such risks
to be minimal.
Liquidity and Financial Position
Cash flow from operations in 1996 of $711 million and net divestiture proceeds
of $789 million were used primarily for capital expenditures of $500 million,
reacquisition of common stock of $361 million, dividend payments of $148 million
and the repayment of debt of $167 million. Net debt at December 31, 1996, was
$196 million compared to $692 million at the end of 1995. The ratio of net debt
(short-term debt, current portion of long-term debt and long-term debt less cash
and cash equivalents) to total capital (net debt, minority interests and
shareholders' investment) was 8 percent at December 31, 1996, compared to 24
percent at December 31, 1995. The percentage of fixed-rate debt to total debt
was 86 percent at the end of 1996.
During 1996, 7.9 million shares of TRW Common Stock were repurchased for
approximately $366 million, of which $5 million was settled in January 1997.
Pursuant to a Board of Directors authorization, the company may repurchase up to
an additional 12 million shares of TRW Common Stock. The company plans to
purchase the additional shares from time to time, depending on market
conditions.
TRW's non-U.S. operations are generally financed by borrowings from banks or
through intercompany loans in the local currency of the borrower and by equity
capital invested by TRW and minority shareholders. There are no significant
restrictions on the remittance of funds by the company's non-U.S. subsidiaries
to the United States. A discussion of TRW's credit facilities is contained in
the "Debt and credit agreements" footnote in the Notes to Financial Statements.
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 risks. 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 after taking into
consideration account-related counterparty risk. 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 counterparties to
the derivative financial instruments. The company diversifies the counterparties
used and has minimum credit standards for counterparties as a means
19
4
Management's Discussion and Analysis of the
Results of Operations and Financial Condition TRW Inc.
RESULTS OF OPERATIONS (CONTINUED)
to limit this exposure and anticipates that the counterparties will fully
satisfy 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. The effect of derivative transactions on the
company's net earnings for each of the three years in the period ended December
31, 1996, is not material.
Capital expenditures were $500 million in 1996, $466 million in 1995 and
$488 million in 1994. The company will maintain a capital program with estimated
capital expenditures for 1997 totaling about $475 million. Approximately
two-thirds of these expenditures will be invested in the Automotive segment and
one-third in the Space and Defense segment. The company will continue to invest
in its automotive growth businesses, including air bag systems, power rack and
pinion steering and automotive electronics technology. Space and defense
expenditures will be used to support major new contract awards and our existing
business base as well as to support research and development of next generation
technologies.
In addition to the planned level of 1997 capital expenditures discussed above,
the company plans to invest in new investment opportunities. These investment
opportunities currently include the acquisition of the Magna International
businesses, with a cost of approximately $450 million. In addition, we expect to
continue our involvement in Odyssey, a venture for which TRW is building a
satellite-based personal communications system. In January 1997, Odyssey entered
into a memorandum of understanding with ChinaSat, a wholly-owned subsidiary of
China's Ministry of Post and Telecommunications. The agreement gives ChinaSat
exclusive rights to distribute Odyssey satellite-based cellular phone, fax and
data services in the People's Republic of China. The level of TRW's investment
in Odyssey will be determined during 1997.
We believe the company's current financial position and financing arrangements
allow flexibility in worldwide financing activities and permit us to respond to
changing conditions in credit markets. The existing arrangements are not
indicative of the company's potential borrowing capacity. We believe that funds
generated from operations and existing borrowing capacity are adequate to fund
the current share repurchase program and support and finance planned growth,
capital expenditures, company-sponsored research and development programs and
dividend payments to shareholders.
Other Matters
Federal, state and local requirements relating to the discharge of materials
into the environment, or otherwise relating to the protection of the
environment, have had and will continue to have an effect on TRW and its
operations. The company is conducting a number of environmental investigations
and remedial actions at current and former company locations and, along with
other companies, has been named a potentially responsible party for certain
waste management sites. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may be resolved
unfavorably to the company. A reserve estimate for each matter is established
using standard engineering cost estimating techniques. In the determination of
such costs, consideration is given to professional judgment of company
environmental engineers in consultation with outside environmental specialists
when necessary. At multi-party sites, the reserve estimate also reflects the
expected allocation of total project costs among the various potentially
responsible parties. At December 31, 1996, the company had reserves for
environmental matters of $77 million, including $7 million of additional
accruals recorded during the year. The company aggressively pursues
reimbursement for environmental costs from its insurance carriers. However,
insurance recoveries are not recorded as a reduction of environmental costs
until they are fixed and determinable. At December 31, 1996, the "Other assets"
caption on the balance sheet includes $36 million of insurance recoveries
related to environmental matters. The company believes that any liability that
may result from the resolution of environmental matters for which sufficient
information is available to support these cost estimates will not have a
material adverse effect on the company's future results of operations and cash
flows. However, the company cannot predict the effect on the company's future
results of operations and cash flows of expenditures for aspects of certain
matters for which there is insufficient information. In addition, the company
cannot predict the effect of compliance with environmental laws and regulations
with respect to unknown environmental matters on the company's future results of
operations and cash flows or the possible effect of compliance with
environmental requirements imposed in the future.
During 1996, the company was advised by the Department of Justice that it had
been named as a defendant in two lawsuits brought by a former employee and filed
under seal under the QUI TAM provisions of the civil False Claims Act. Refer to
the "Contingencies" footnote in the Notes to Financial Statements for further
discussion.
20
5
Financial Statements TRW Inc.
STATEMENTS OF EARNINGS
- -----------------------------------------------------------------------------------------------------
TRW Inc. and subsidiaries
- -----------------------------------------------------------------------------------------------------
In millions except per share data
- ---------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Sales $9,857 $9,568 $8,491
Cost of sales 8,376 7,857 6,936
- -----------------------------------------------------------------------------------------------------
Gross profit 1,481 1,711 1,555
Administrative and selling expenses 613 592 597
Research and development expenses 412 392 390
Interest expense 84 95 105
Other expense(income)-net 70 7 27
- ----------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes 302 625 436
Income taxes 120 230 159
- ----------------------------------------------------------------------------------------------------
Earnings from continuing operations 182 395 277
Discontinued operations:
Earnings from operations 38 51 56
Gain on disposal 260 - -
- ----------------------------------------------------------------------------------------------------
Net earnings $ 480 $ 446 $ 333
- -----------------------------------------------------------------------------------------------------
Per share of common stock
Fully diluted
Continuing operations $1.37 $ 2.93 $ 2.09
Discontinued operations:
Earnings from operations .28 .38 .41
Gain on disposal 1.95 - -
- ----------------------------------------------------------------------------------------------------
Net earnings per share $3.60 $ 3.31 $ 2.50
- ----------------------------------------------------------------------------------------------------
Primary
Continuing operations $1.38 $ 2.96 $ 2.10
Discontinued operations:
Earnings from operations .29 .38 .42
Gain on disposal 1.97 - -
- ----------------------------------------------------------------------------------------------------
Net earnings per share $3.64 $ 3.34 $ 2.52
- ----------------------------------------------------------------------------------------------------
<FN>
See notes to financial statements.
21
6
Financial Statements TRW Inc.
BALANCE SHEETS
- --------------------------------------------------------------------------------------
TRW Inc. and subsidiaries
- ------------------------------------------------------------------------------------
In millions
- ------------------------------------------------------------------------------------
December 31 1996 1995
- -----------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 386 $ 59
Accounts receivable, net of allowances of
$18 million and $16 million 1,378 1,327
Inventories
Finished products and work in process 295 294
Raw materials and supplies 229 236
- ------------------------------------------------------------------------------------
Total inventories 524 530
Prepaid expenses 69 67
Deferred income taxes 424 217
- ------------------------------------------------------------------------------------
Total current assets 2,781 2,200
Property, plant and equipment-on the basis of cost
Land 108 108
Buildings 1,584 1,553
Machinery and equipment 4,188 4,049
- ------------------------------------------------------------------------------------
5,880 5,710
Less accumulated depreciation and amortization 3,400 3,199
- ------------------------------------------------------------------------------------
Total property, plant and equipment-net 2,480 2,511
Intangible assets
Intangibles arising from acquisitions 258 245
Other 31 36
- ------------------------------------------------------------------------------------
289 281
Less accumulated amortization 78 78
- -----------------------------------------------------------------------------------
Total intangible assets-net 211 203
Other assets 427 317
Net assets of discontinued operations - 439
- ------------------------------------------------------------------------------------
$5,899 $5,670
- ------------------------------------------------------------------------------------
22
7
Financial Statements TRW Inc.
Balance Sheets (continued)
- --------------------------------------------------------------------------------
TRW Inc. and subsidiaries
- --------------------------------------------------------------------------------
In millions
- --------------------------------------------------------------------------------
December 31 1996 1995
- --------------------------------------------------------------------------------
Liabilities and shareholders' investment
Current liabilities
Short-term debt $ 52 $ 133
Accrued compensation 386 349
Trade accounts payable 781 776
Other accruals 775 484
Dividends payable 39 36
Income taxes 52 26
Current portion of long-term debt 72 79
- -------------------------------------------------------------------------------
Total current liabilities 2,157 1,883
Long-term liabilities 767 779
Long-term debt 458 539
Deferred income taxes 272 250
Minority interests in subsidiaries 56 47
Shareholders' investment
Serial Preference Stock II (involuntary
liquidation $8 million and $9 million) 1 1
Common stock (shares outstanding 126.1 million
and 131.2 million) 80 40
Other capital 437 398
Retained earnings 1,978 1,688
Cumulative translation adjustments 47 76
Treasury shares - cost in excess of par value (354) (31)
- ---------------------------------------------------------------------------------
Total shareholders' investment 2,189 2,172
- ---------------------------------------------------------------------------------
$5,899 $5,670
- ---------------------------------------------------------------------------------
<FN>
See notes to financial statements.
23
8
Financial Statements TRW Inc.
Statements of Cash Flows
- -----------------------------------------------------------------------------------------------
TRW Inc. and subsidiaries
- -----------------------------------------------------------------------------------------------
In millions
- ------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------
Operating activities
Net earnings $ 480 $ 446 $ 333
Adjustments to reconcile net earnings to
net cash provided by continuing operations:
Discontinued operations (298) (51) (56)
Depreciation and amortization 452 424 391
Deferred income taxes (182) 45 16
Other-net 23 29 22
Changes in assets and liabilities, net of
effects of businesses acquired or sold:
Accounts receivable (46) (61) (110)
Inventories and prepaid expenses 8 (68) (36)
Accounts payable and other accruals 298 28 268
Other-net (24) (44) 38
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities
of continuing operations 711 748 866
Net cash provided by discontinued operations - 28 87
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 711 776 953
Investing activities
Capital expenditures (500) (466) (488)
Net proceeds from divestitures 789 9 12
Other-net (42) 4 (31)
- ------------------------------------------------------------------------------------------------
Net cash provided by(used in) investing activities 247 (453) (507)
Financing activities
Decrease in short-term debt (127) (47) (270)
Proceeds from debt in excess of 90 days 51 36 174
Principal payments on debt in excess of 90 days (91) (207) (151)
Dividends paid (148) (134) (126)
Reacquisition of common stock (361) (16) -
Other-net 51 25 8
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (625) (343) (365)
Effect of exchange rate changes on cash (6) (30) (35)
- ------------------------------------------------------------------------------------------------
Increase(decrease) in cash and cash equivalents 327 (50) 46
Cash and cash equivalents at beginning of year 59 109 63
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 386 $ 59 $ 109
- ------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid (net of amount capitalized) $ 89 $ 88 $ 112
Income taxes paid (net of refunds) $ 615 $ 239 $ 93
- ------------------------------------------------------------------------------------------------
<FN>
For purposes of the statements of cash flows, the company considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
See notes to financial statements.
24
9
Financial Statements TRW Inc.
Statements of Changes in Shareholders' Investment
- ------------------------------------------------------------------------------------------------------
TRW Inc. and subsidiaries
- ------------------------------------------------------------------------------------------------------
In millions
- ------------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Serial Preference Stock II
Series 1
Balance at January 1 and December 31 $ - $ - $ -
- ------------------------------------------------------------------------------------------------------
Series 3
Balance at January 1 and December 31 1 1 1
- ------------------------------------------------------------------------------------------------------
Common stock
Balance at January 1 40 40 40
Stock dividend 42 - -
Purchase of shares and other (2) - -
- ------------------------------------------------------------------------------------------------------
Balance at December 31 80 40 40
- ------------------------------------------------------------------------------------------------------
Other capital
Balance at January 1 398 354 293
Sale of stock and other 39 44 61
- ------------------------------------------------------------------------------------------------------
Balance at December 31 437 398 354
- ------------------------------------------------------------------------------------------------------
Retained earnings
Balance at January 1 1,688 1,383 1,178
Net earnings 480 446 333
Stock dividend and other (39) (3) -
Dividends declared
Preference stock (1) (1) (1)
Common stock ($1.17, $1.05 and $.985 per share) (150) (137) (127)
- ------------------------------------------------------------------------------------------------------
Balance at December 31 1,978 1,688 1,383
- ------------------------------------------------------------------------------------------------------
Cumulative translation adjustments
Balance at January 1 76 66 36
Translation adjustments (29) 10 30
- ------------------------------------------------------------------------------------------------------
Balance at December 31 47 76 66
- ------------------------------------------------------------------------------------------------------
Treasury shares-cost in excess of par value
Balance at January 1 (31) (22) (14)
ESOP funding 17 17 -
Purchase of shares (372) (26) (8)
Sold under stock options 32 - -
- ------------------------------------------------------------------------------------------------------
Balance at December 31 (354) (31) (22)
- ------------------------------------------------------------------------------------------------------
Total shareholders' investment $2,189 $2,172 $1,822
- ------------------------------------------------------------------------------------------------------
<FN>
See notes to financial statements.
25
10
Notes to Financial Statements TRW Inc.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- The financial statements include the accounts of
the company and its subsidiaries except for two insurance subsidiaries. The
wholly-owned insurance subsidiaries and the majority of investments in
affiliated companies, which are not significant individually or in the
aggregate, are accounted for by the equity method.
Use of estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of December 31, 1996 and
1995, respectively, and reported amounts of sales and expenses for the years
ended December 31, 1996, 1995 and 1994, respectively. Actual results could
differ from those estimates.
Long-term contracts -- The percentage-of-completion (cost-to-cost) method
is used to estimate sales under fixed-price and fixed-price incentive
contracts. Sales under cost-reimbursement contracts are recorded as costs are
incurred. Fees based on cost, award fees and incentive fees are included in
sales at the time such amounts are reasonably estimable. Losses on contracts
are recognized when determinable.
Accounts receivable -- Accounts receivable at December 31, 1996 and 1995,
included $547 million and $496 million, respectively, related to long-term
contracts, of which $257 million and $253 million, respectively, were unbilled.
Unbilled costs, fees and claims represent revenues earned and billable in
the following month as well as revenues earned but not billable under terms of
the contracts. A substantial portion of such amounts is expected to be billed
during the following year. Retainage receivables and receivables subject to
negotiation are not significant.
Inventories -- Inventories are stated at the lower of cost, principally the
first-in, first-out (FIFO) method, or market. Inventories applicable to
long-term contracts are not significant.
Depreciation -- Depreciation is computed over the asset's estimated useful lives
using the straight-line method for the majority of the company's depreciable
assets. The remaining assets are depreciated using accelerated methods.
Asset impairment -- In accordance with FASB Statement (FAS) No. 121, the
company records impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets may be impaired and the
undiscounted net cash flows estimated to be generated by those assets are less
than their carrying amounts. During 1996, the company recognized $71 million of
impairment losses, including $15 million recognized upon the initial
application of FAS 121, which are reflected primarily in the cost of sales
caption in the Statements of Earnings. The losses were primarily a result of
technological changes and the decision to close certain facilities in the
Automotive segment and were calculated using the present value of the estimated
future net cash flows as the asset's fair value.
Intangible assets -- Intangible assets are stated on the basis of cost.
Intangibles arising from acquisitions prior to 1971 ($49 million) are not
being amortized because there is no indication of diminished value. Intangibles
arising from acquisitions after 1970 are being amortized by the straight-line
method principally over 40 years. The carrying value of intangible assets is
assessed for impairment on a quarterly basis.
Forward exchange contracts -- The company enters into forward exchange
contracts the majority of which hedge firm foreign currency commitments and
certain intercompany transactions. At December 31, 1996, the company had
contracts outstanding amounting to approximately $244 million denominated in
the German mark, the U.S. dollar, the British pound and the Italian lira,
maturing at various dates through December 1997. Changes in market value of the
contracts are generally included in the basis of the transactions. The company
is exposed to credit loss in the event of nonperformance by the counterparties
to the foreign exchange contracts. No collateral is held in relation to the
contracts, and the company anticipates that the counterparties will satisfy
their obligations under the contracts.
Fair values of financial instruments --
- ------------------------------------------------------------------------------------------------------
In millions 1996 1995
- ------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
value value value value
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents $386 $ 386 $59 $ 59
Short-term debt 52 52 133 133
Floating rate long-term debt 31 31 73 73
Fixed rate long-term debt 499 553 545 630
Interest rate swaps - (liability) - (1) - (2)
Forward currency exchange contracts -asset(liability) - (4) - 1
- ------------------------------------------------------------------------------------------------------
26
11
Notes to Financial Statements TRW Inc.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair value of long-term debt was estimated using a discounted cash flow
analysis, based on the company's current borrowing rates for similar types of
borrowing arrangements. The fair value of interest rate swaps and forward
currency exchange contracts is estimated based on quoted market prices of
offsetting contracts.
Environmental costs -- TRW participates in environmental assessments and
remedial efforts at operating facilities, previously owned or operated
facilities, and Superfund or other waste sites. Costs related to these locations
are accrued when it is probable that a liability has been incurred and the
amount of that liability can be reasonably estimated. Estimated costs are
recorded at undiscounted amounts based on experience and assessments, and are
regularly evaluated as efforts proceed. Insurance recoveries are recorded as a
reduction of environmental costs when fixed and determinable.
Earnings per share -- Fully diluted earnings per share have been computed based
on the weighted average number of shares of common stock outstanding during each
year, including common stock equivalents (stock options) and assuming the
conversion of the Serial Preference Stock II - Series 1 and 3. Primary earnings
per share have been computed based on the weighted average number of shares of
common stock outstanding during each year, including common stock equivalents.
On October 23, 1996, the company's Board of Directors authorized a two-for-one
stock split effected in the form of a stock dividend to shareholders of record
as of November 8, 1996. A total of 66.7 million additional common shares were
issued on December 9, 1996, in conjunction with the stock dividend. As a result,
$42 million was transferred from retained earnings to common stock. All
historical share and per share amounts have been restated to reflect
retroactively the stock dividend.
RESEARCH AND DEVELOPMENT
- ----------------------------------------------------------------------------------------------------
In millions 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Customer-funded $1,425 $1,360 $1,157
Company-funded
Research and development 412 392 390
Product development 144 130 108
- ----------------------------------------------------------------------------------------------------
556 522 498
- -----------------------------------------------------------------------------------------------------
$1,981 $1,882 $1,655
- -----------------------------------------------------------------------------------------------------
Company-funded research and development programs include research and
development for commercial products and independent research and development and
bid and proposal work related to government products and services. A portion of
the cost incurred for independent research and development and bid and proposal
work is recoverable through overhead charged to government contracts. Product
development costs include engineering and field support for new customer
requirements.
DISCONTINUED OPERATIONS
During 1996, the company sold substantially all of the businesses in its
Information Systems and Services segment. The financial statements reflect as
discontinued operations for all periods presented that segment's net assets and
operating results, as well as the related transaction gain. Related footnotes
have been restated to reflect only continuing operations.
Net proceeds of approximately $1.1 billion in cash resulted in a gain of
$484 million ($260 million after tax, or $1.95 per share). Sales of the
discontinued operations were $453 million, $604 million, and $596 million in
1996, 1995, and 1994, respectively.
Net assets of discontinued operations of $439 million at December 31, 1995,
consisted primarily of goodwill and capitalized data files.
27
12
Notes to Financial Statements TRW Inc.
SPECIAL CHARGES
During 1996, the company recorded before-tax charges of $385 million ($252
million after tax, or $1.89 per share) primarily for actions taken in the
automotive and space and defense businesses. As a result of these actions,
several manufacturing facilities throughout the world will be closed or
consolidated, and employment company-wide will be reduced by approximately 2,500
people.
The components of the charge include severance costs of $40 million,
contract reserves of $99 million, litigation and warranty expenses of $127
million, asset writedowns of $96 million, and other items of $23 million. Cash
expenditures made in 1996 for these actions were insignificant. Cash
expenditures related to the severance costs are anticipated to be substantially
completed by the end of 1997.
The charges are included in the Statements of Earnings as follows: $321 million
included in cost of sales; $18 million included in interest expense; $65 million
included in other expense(income)-net; and a reduction of $19 million included
in other captions.
For balance sheet purposes, other accruals in 1996 include $225 million relating
to these charges.
OTHER EXPENSE(INCOME)-NET
- -----------------------------------------------------------------------------------------------------
In millions 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Other income $ (63) $ (33) $ (60)
Other expense 130 36 54
Gain on sale of assets (4) (6) (10)
Foreign currency translation 7 10 43
- -----------------------------------------------------------------------------------------------------
$ 70 $ 7 $ 27
- -----------------------------------------------------------------------------------------------------
<FN>
Other expense in 1996 includes $65 million of special charges. Refer to the
"Special charges" footnote.
INCOME TAXES
- -----------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes
- -----------------------------------------------------------------------------------------------------
In millions 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
U.S. $ 133 $ 428 $ 288
Non-U.S. 169 197 148
- -----------------------------------------------------------------------------------------------------
$ 302 $ 625 $ 436
- -----------------------------------------------------------------------------------------------------
Provision for income taxes
- -----------------------------------------------------------------------------------------------------
In millions 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Current
U.S. federal $ 176 $ 90 $ 56
Non-U.S. 73 57 40
U.S. state and local 20 17 20
- ----------------------------------------------------------------------------------------------------
269 164 116
Deferred
U.S. federal (130) 31 38
Non-U.S. (6) 14 5
U.S. state and local (13) 21 -
- -----------------------------------------------------------------------------------------------------
(149) 66 43
- -----------------------------------------------------------------------------------------------------
$ 120 $ 230 $ 159
- -----------------------------------------------------------------------------------------------------
28
13
Notes to Financial Statements TRW Inc.
INCOME TAXES (CONTINUED)
- --------------------------------------------------------------------------------------------------------
Effective income tax rate
- --------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
U.S. statutory income tax rate 35.0% 35.0% 35.0%
Non-deductible expenses 2.4 1.3 1.8
U.S. state and local income taxes net of U.S. federal tax
benefit 3.0 3.8 2.7
Non-U.S. tax rate variances net of foreign tax credits 3.4 (.1) (.5)
Prior years adjustments (1.9) (3.0) -
Other (2.3) (.2) (2.6)
- -------------------------------------------------------------------------------------------------------
Effective income tax rate 39.6% 36.8% 36.4%
- -----------------------------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1996 and
1995, the company had unused tax benefits of $23 million and $33 million,
respectively, related to non-U.S. net operating loss carryforwards for income
tax purposes, of which $18 million and $16 million can be carried forward
indefinitely and the balance expires at various dates through 2001. A valuation
allowance at December 31, 1996 and 1995, of $20 million and $27 million,
respectively, has been recognized to offset the related deferred tax assets due
to the uncertainty of realizing the benefit of the loss carryforwards.
It is the company's intention to reinvest undistributed earnings of certain of
its non-U.S. subsidiaries and thereby indefinitely postpone their remittance.
Accordingly, deferred income taxes have not been provided for accumulated
undistributed earnings of $420 million at December 31, 1996.
- -----------------------------------------------------------------------------------------------------------
Deferred tax assets Deferred tax liabilities
- ------------------------------------------------------------------------------------------------------------
In millions 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
Pensions and postretirement benefits
other than pensions $269 $ 263 $ 23 $ 38
Completed contract method of accounting for
long-term contracts 53 52 421 425
State and local taxes 33 20 8 9
Reserves and accruals 186 69 - -
Depreciation and amortization 11 11 86 89
Insurance accruals 32 26 - -
Non-U.S. net operating loss carryforwards 23 33 - -
Other 143 129 40 48
- -------------------------------------------------------------------------------------------------------------
750 603 578 609
Valuation allowance for deferred tax assets (20) (27) - -
- ------------------------------------------------------------------------------------------------------------
Total $730 $ 576 $578 $609
- -------------------------------------------------------------------------------------------------------------
PENSION PLANS
The company has defined benefit pension plans (generally noncontributory except
for those in the United Kingdom) for substantially all employees. Plans for most
salaried employees provide pay-related benefits based on years of service. Plans
for hourly employees generally provide benefits based on flat-dollar amounts and
years of service.
Under the company's funding policy, annual contributions are made to fund
the plans during the participants' working lifetimes, except for unfunded plans
in Germany and certain non-qualified plans in the U.S. which are funded as
benefits are paid to participants. Annual contributions to funded plans have met
or exceeded ERISA's minimum funding requirements or amounts required by local
law or custom.
The company sponsors a contributory stock savings plan for which a majority
of its U.S. employees are eligible. The company matches employee contributions
up to 3 percent of the participant's qualified compensation. The company
contributions are held in an unleveraged employee stock ownership plan. The
company also sponsors other defined contribution pension plans covering
employees at some of its operations.
29
14
Notes to Financial Statements TRW Inc.
PENSION PLANS (CONTINUED)
- ---------------------------------------------------------------------------------------------------------
In millions 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S.
- ---------------------------------------------------------------------------------------------------------
Defined benefit plans
Service cost--benefits earned during the year $ 73 $ 14 $ 52 $ 15 $ 57 $ 13
Interest cost on projected benefit obligation 165 28 153 27 145 24
Actual (return) loss on plan assets (344) (23) (508) (38) 39 11
Net amortization and deferral 137 8 306 19 (231) (28)
- ---------------------------------------------------------------------------------------------------------
Total pension cost of defined benefit plans 31 27 3 23 10 20
Defined contribution plans 1 5 1 5 1 3
Stock savings plan 40 - 36 - 34 -
- ---------------------------------------------------------------------------------------------------------
$ 72 $ 32 $ 40 $ 28 $ 45 $ 23
- ---------------------------------------------------------------------------------------------------------
Pension cost for 1996 includes $7 million for special retirement incentive
benefits for U.S. employees and $2 million in curtailments and settlements of
defined benefit plans of non-U.S. operations.
- --------------------------------------------------------------------------------------------------------
In millions 1996 1995
- --------------------------------------------------------------------------------------------------------
U.S. Non-U.S. U.S. Non-U.S.
- --------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested benefit obligation $1,947 $ 368 $1,961 $328
- --------------------------------------------------------------------------------------------------------
Overfunded plans $2,050 $ 253 $1,995 $208
Underfunded plans 55 129 128 136
- -------------------------------------------------------------------------------------------------------
Total accumulated benefit obligation $2,105 $ 382 $2,123 $344
- --------------------------------------------------------------------------------------------------------
Projected benefit obligation $2,381 $ 412 $2,367 $378
- --------------------------------------------------------------------------------------------------------
Overfunded plans $2,782 $ 300 $2,508 $249
Underfunded plans 5 14 78 28
- --------------------------------------------------------------------------------------------------------
Total plan assets at fair value
(primarily listed stocks and bonds) 2,787 314 2,586 277
- --------------------------------------------------------------------------------------------------------
Plan assets in excess of(less than)
projected benefit obligation 406 (98) 219 (101)
Unrecognized net gain (253) (47) (35) (18)
Unrecognized net assets from Jan. 1, 1986
(January 1, 1989 for non-U.S. plans) (41) (11) (59) (5)
Unrecognized prior service cost 22 9 30 9
Additional minimum liability (16) (7) (26) (8)
- --------------------------------------------------------------------------------------------------------
Net pension asset(liability) recognized
in the balance sheet $ 118 $(154) $ 129 $(123)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Actuarial Assumptions: 1996 1995
- --------------------------------------------------------------------------------------------------------
U.S. Non-U.S. U.S. Non-U.S.
- --------------------------------------------------------------------------------------------------------
Discount rate 7.5% 6 1/2 - 7 3/4% 7.0% 7.0 - 8 1/2%
Rate of increase in compensation levels 4.4% 4.0 - 5.0% 3.4% 4 1/2 - 5.0%
- --------------------------------------------------------------------------------------------------------
The expected long-term rate of return on plan assets for U.S. plans was 9
percent for 1996, 1995 and 1994. For non-U.S. plans, the expected long-term rate
of return ranged from 7 percent to 9-3/4 percent in 1996, 7 percent to 9-1/2
percent in 1995 and 6 percent to 9-1/2 percent in 1994.
30
15
Notes to Financial Statements TRW Inc.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The company provides health care and life insurance benefits for a majority
of its retired employees in the United States and Canada. The health care plans
provide for cost sharing, in the form of employee contributions, deductibles,
and coinsurance, between the company and its retirees. The postretirement health
care plan covering a majority of employees who retired since August 1, 1988,
limits the annual increase in the company's contribution toward the plan's cost
to a maximum of the lessor of 50 percent of medical inflation or 4 percent. Life
insurance benefits are generally noncontributory. The company's policy is to
fund the cost of postretirement health care and life insurance benefits in
amounts determined at the discretion of management. Retirees in certain other
countries are provided similar benefits by plans sponsored by their governments.
- -------------------------------------------------------------------------------------------------------
In millions 1996 1995
- -------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees $ 512 $ 508
Fully eligible active participants 35 38
Other active participants 213 232
- -------------------------------------------------------------------------------------------------------
760 778
Plan assets at fair value (primarily listed stocks and bonds) 83 61
- -------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets (677) (717)
Unrecognized prior service cost (6) (7)
Unrecognized net (gain)loss (35) 7
- -------------------------------------------------------------------------------------------------------
Net liability recognized in the balance sheet $(718) $(717)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
In millions 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Service cost $13 $ 10 $ 13
Interest cost 54 54 52
Actual return on plan assets (7) (9) -
Net amortization and deferral 2 5 (3)
- -------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $62 $ 60 $ 62
- -------------------------------------------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement
benefit obligation as of December 31, 1996 and 1995, was 7-1/2 percent and 7
percent, respectively. At December 31, 1996, the 1997 annual rate of increase in
the per capita cost of covered health care benefits was assumed to be 9 percent
for participants under age 65 and 8 percent for participants age 65 or older.
The rates were assumed to decrease gradually to 6 percent and 5 percent,
respectively, in the year 2009 and remain at that level thereafter. At
December 31, 1995, the 1996 annual rate of increase in the per capita cost of
health care benefits was assumed to be 10 percent for participants under age 65
and 9 percent for participants age 65 and older. The rates were assumed to
decrease gradually to 6 percent and 5 percent, respectively, in the year 2009
and remain at that level thereafter. A 1 percent annual increase in these
assumed cost trend rates would increase the accumulated postretirement benefit
obligation at December 31, 1996, by approximately 12 percent and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for 1996 by approximately 15 percent. The weighted average
expected long-term rate of return on plan assets was 8 percent for 1996 and
1995 and 9 percent for 1994. The trust holding the majority of the plan assets
is not subject to federal income taxes.
31
16
Notes to Financial Statements TRW Inc.
DEBT AND CREDIT AGREEMENTS
- --------------------------------------------------------------------------------------------------------
Short-term debt
- --------------------------------------------------------------------------------------------------------
In millions 1996 1995
- --------------------------------------------------------------------------------------------------------
U.S. borrowings $ 9 $ 13
Non-U.S. borrowings 43 120
- --------------------------------------------------------------------------------------------------------
$ 52 $133
Long-term debt
- --------------------------------------------------------------------------------------------------------
In millions 1996 1995
- --------------------------------------------------------------------------------------------------------
Non-U.S. borrowings $ 44 $ 85
7.3% ESOP obligations due 1997 20 60
Medium-term notes:
9.35% Notes due 2020 (due 2000 at option of note holder) 100 100
9 3/8% Notes due 2021 100 100
Other medium-term notes 234 234
Other 32 39
- --------------------------------------------------------------------------------------------------------
Total long-term debt 530 618
Less current portion 72 79
- --------------------------------------------------------------------------------------------------------
$ 458 $539
- --------------------------------------------------------------------------------------------------------
TRW maintains a committed U.S. revolving credit agreement with 16 banks. The
agreement allows the company to borrow up to $750 million and extends through
June 2001. The interest rate under the agreement is either a negotiated rate,
the banks' prime rates, a rate based upon the banks' costs of funds in the
secondary certificate of deposit market or a rate based upon an Interbank
Offered Rate. TRW's commercial paper borrowings are supported by this agreement.
At December 31, 1996, there were no outstanding borrowings under the U.S.
revolving credit agreement. The weighted average interest rate on short-term
borrowings outstanding at December 31, 1996 and 1995, is 9.9 percent and 7.6
percent, respectively.
The company also maintains a committed multi-currency revolving credit agreement
with 16 banks. The agreement allows the company to borrow up to $250 million and
extends through June 2001. The interest rate under the agreement is based on
various interest rate indices. At December 31, 1996, there were no outstanding
borrowings under the multi-currency credit agreement.
As of December 31, 1996, the company has interest rate swap agreements for
notional borrowings of $32 million in which the company pays a fixed rate and
receives a floating rate. The weighted average pay rate and receive rate under
these agreements is 6.2 percent and 3.2 percent, respectively. These agreements
mature at various dates through 1998.
The floating rates under the interest rate swap agreements are based on
LIBOR rates and have been calculated using these rates at December 31, 1996. Net
payments or receipts under the agreements are recognized as an adjustment to
interest expense. The company is exposed to credit loss in the event of
nonperformance by the counterparties to the interest rate swap agreements. No
collateral is held in relation to the agreements, and the company anticipates
that the counterparties will satisfy their obligations under the agreements.
The other medium-term notes bear interest at rates ranging from 5.98 percent to
9.25 percent and mature at various dates through 2020.
Non-U.S. borrowings bear interest, stated in terms of the local currency
borrowing, at rates ranging from 3.0 percent to 9.48 percent at December 31,
1996, and mature at various dates through 2004.
The maturities of long-term debt are, in millions: 1997-$72; 1998-$35;
1999-$18; 2000-$13; 2001-$38 and $354 thereafter.
The indentures and other debt agreements impose, among other covenants,
restrictions on funded debt and maintenance of minimum tangible net worth. Under
the most restrictive interpretation of these covenants, the payment of dividends
was limited to approximately $1,011 million at December 31, 1996.
Compensating balance arrangements and commitment fees were not material.
32
17
Notes to Financial Statements TRW Inc.
LEASE COMMITMENTS
TRW leases certain offices, manufacturing and research buildings,
machinery, automobiles and data processing and other equipment. Such leases,
some of which are noncancelable and in many cases include renewals, expire at
various dates. The company pays most maintenance, insurance and tax expenses
relating to leased assets. Rental expense for operating leases was $130 million
for 1996, $124 million for 1995 and $118 million for 1994.
At December 31, 1996, future minimum lease payments for noncancelable operating
leases totaled $230 million and are payable as follows: 1997-$71; 1998-$52;
1999-$36; 2000-$21; 2001-$15 and $35 thereafter.
CAPITAL STOCK
Serial Preference Stock II -- cumulative - stated at $2.75 a share; 5 million
shares authorized.
Series 1 -- each share convertible into 8.8 shares of common; redeemable at $104
per share; involuntary liquidation price $104 per share; dividend rate of $4.40
per annum.
Series 3 -- each share convertible into 7.448 shares of common; redeemable at
$100 per share; involuntary liquidation price $40 per share; dividend rate of
$4.50 per annum.
Series 4 --not convertible into common shares; redemption price and involuntary
liquidation price of $125 per one one-hundredth of a share; annual dividend rate
per one one-hundredth of a share of the lesser of $4.00 or the current dividend
on common stock; no shares outstanding at December 31, 1996.
Common stock -- $0.625 par value; authorized 250 million shares; shares
outstanding were reduced by treasury shares of 7.2 million in 1996 and 1.2
million in 1995. Treasury share balances reflect the company's two-for-one stock
dividend.
TRW has a shareholder purchase rights plan under which each shareholder of
record as of May 17, 1996, received one-half of one right for each TRW common
share held. Each right entitles the holder, upon the occurrence of certain
events, to buy one one-hundredth of a share of Cumulative Redeemable Serial
Preference Stock II, Series 4, at a price of $300. In other events, each right
entitles the holder, other than the acquiring party, to purchase $600 of TRW
common stock or common stock of another person at a 50 percent discount. The
company may redeem these rights at its option at one cent per right under
certain circumstances. The rights outstanding under the company's former
shareholder rights plan were redeemed at one cent per right.
At December 31, 1996, 11.3 million shares of common stock were reserved for the
exercise and issuance of stock options and conversion of the Serial Preference
Stock II, Series 1 and 3. There were 1.3 million shares of Cumulative Redeemable
Serial Preference Stock II, Series 4, reserved for the shareholder purchase
rights plan.
STOCK OPTIONS
TRW has granted nonqualified stock options to certain employees to purchase
the company's common stock at the market price on the date of grant. Stock
options granted become exercisable to the extent of one-third of the optioned
shares for each full year of employment following the date of grant and expire
10 years after the date of grant. The company applies the provisions of APB
Opinion No. 25 in accounting for its employee stock options, and as such, no
compensation expense is recognized as the exercise price equals the market price
of the stock on the date of grant.
- -----------------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------
Millions Weighted-average Millions Weighted-average
of shares exercise price of shares exercise price
- -----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 9.2 $26.45 9.4 $ 25.09
Granted 1.7 43.98 1.4 32.32
Became exercisable 1.1 32.61 .6 32.61
Exercised 1.9 25.28 1.4 23.33
Canceled, expired or terminated .5 35.51 .2 28.23
Outstanding at end of year 8.5 29.72 9.2 26.45
Exercisable 5.6 25.18 6.6 24.07
Weighted-average fair value of options granted 9.45 8.24
- ------------------------------------------------------------------------------------------------------------------
33
18
Notes to Financial Statements TRW Inc.
STOCK OPTIONS (CONTINUED)
At December 31, 1996, approximately 800 employees were participants in the plan.
As of that date, the per share exercise prices of options outstanding ranged
from $19.88 to $48.00. The weighted-average remaining contractual life of those
options is approximately 6 years.
Had the compensation cost for the stock options granted in 1996 and 1995 been
determined based on the fair value at the grant date consistent with the fair
value method of FASB Statement No. 123, the company's net earnings and earnings
per share would have been reduced by $5 million ($.04 per share) in 1996 and $2
million ($.02 per share) in 1995. The effect on 1996 and 1995 net earnings may
not be representative of the effect on future years' net earnings amounts as the
compensation cost of each year's grant is recognized over the three-year vesting
period.
Fair value was estimated at the date of grant using the Black-Scholes
option pricing model and the following weighted-average assumptions for 1996 and
1995, respectively: risk-free interest rate of 5.43% and 7.44%; dividend yield
of 2.84% and 2.80%; expected volatility of 20% and 19%; and an expected option
life of 6 years for both 1996 and 1995.
TRW grants performance share rights to certain employees under which the
employees are entitled to receive shares of the company's common stock based on
the achievement of a certain return on assets employed. The rights specify a
target number of shares which the employee would receive for each year that
goals for returns on assets employed are met. If the goals are exceeded, the
employee could receive up to 200 percent of the target shares, with the excess
over 100 percent payable in cash, unless the Compensation and Stock Option
Committee of the Board of Directors determines to pay the excess in shares. If
the goals are not met, the employee would receive fewer than the target shares
or no shares. The target number of performance share rights granted to employees
and still outstanding were .4 million and .5 million at December 31, 1996 and
1995, respectively.
CONTINGENCIES
The company is subject to various investigations, claims and legal proceedings
covering a wide range of matters that arise in the ordinary course of its
business activities. In addition, the company is conducting a number of
environmental investigations and remedial actions at current and former company
locations and, along with other companies, has been named a potentially
responsible party for certain waste management sites. Each of these matters is
subject to various uncertainties, and some of these matters may be resolved
unfavorably to the company. The company has established accruals for matters
that are probable and reasonably estimable including $77 million for
environmental matters at December 31, 1996. The company believes that any
liability that may result from the resolution of environmental matters for which
sufficient information is available to support cost estimates will not have a
material adverse effect on the company's financial position. However, the
company cannot predict the effect on the company's financial position of
expenditures for aspects of certain matters for which there is insufficient
information. In addition, the company cannot predict the effect of compliance
with environmental laws and regulations with respect to unknown environmental
matters or the possible effect of compliance with environmental requirements
imposed in the future.
Further, product liability claims may be asserted in the future for events
not currently known by management. Although the ultimate liability from these
potential claims cannot be ascertained at December 31, 1996, management does not
anticipate that any related liability, after consideration of insurance
recovery, would have a material adverse effect on the company's financial
position.
During 1996, the company was advised by the Department of Justice ("DOJ") 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 Act permits an individual to bring
suit in the name of the United States and share in any recovery. The allegations
in the lawsuit 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
remain under seal until the government completes its investigations and
determines whether to intervene. However, permission from the court has been
obtained by the company to make the disclosures contained herein. The company is
cooperating with the DOJ's investigation and is engaged in ongoing discussions
with them regarding the allegations. The company cannot presently predict the
outcome of these matters, although management believes that the company would
have meritorious defenses if either the government decides to pursue the
lawsuits or the former employee decides to do so without government
participation.
34
19
Notes to Financial Statements TRW Inc.
INDUSTRY SEGMENTS
TRW Inc. is a United States-based company providing advanced technology products
and services for the automotive and space and defense markets. The principal
markets for the company's automotive products are North American, European and
Asian original equipment manufacturers and independent distributors. Space and
defense primarily provides products and services to the United States
government, agencies of the United States government and commercial customers.
Automotive -- Occupant restraint systems, including sensors, air bag and seat
belt systems. Steering systems, including power and manual rack and pinion
steering for light vehicles, hydraulic steering systems for commercial truck and
off-highway vehicles and suspension components. Electrical and electronic
controls, engineered fasteners and stud welding and control systems. Engine
valves, valve train parts and pistons.
Space & Defense -- Spacecraft, including the design and manufacture of military
and civilian spacecraft equipment, propulsion subsystems, electro-optical and
instrument systems, spacecraft payloads, high-energy lasers and laser technology
and other high-reliability components. Systems integration, systems engineering
services and software in the fields of military command and control,
intelligence collection, public safety, telecommunications, image processing,
earth observation, nuclear waste management, air traffic control, security and
counterterrorism, and other high-technology space, defense, and civil government
support systems. Electronic systems, equipment and services, including the
design and manufacture of space communication systems, airborne reconnaissance
systems, unmanned aerial vehicles, avionics systems and other electronic
technologies for tactical and strategic space, defense and selected commercial
applications.
- ----------------------------------------------------------------------------------------------------------
Year ended Space & Company Staff &
In millions December 31 Automotive Defense Other Total
- ----------------------------------------------------------------------------------------------------------
Sales 1996 $6,493 $3,364 $ - $9,857
1995 6,468 3,100 - 9,568
1994 5,679 2,812 - 8,491
- ----------------------------------------------------------------------------------------------------------
Operating profit by 1996 $ 319 $ 157 $ (174) $ 302
segment (1) 1995 607 192 (174) 625
1994 476 175 (215) 436
- ----------------------------------------------------------------------------------------------------------
Identifiable assets by 1996 $3,683 $1,278 $ 938 $5,899
segment (2) 1995 3,706 1,113 851 5,670
1994 3,481 1,111 843 5,435
- ----------------------------------------------------------------------------------------------------------
Depreciation and 1996 $ 321 $ 112 $ 10 $ 443
amortization of property, 1995 304 102 9 415
plant and equipment 1994 264 111 7 382
- ----------------------------------------------------------------------------------------------------------
Capital expenditures 1996 $ 342 $ 157 $ 1 $ 500
1995 314 114 38 466
1994 388 98 2 488
- ----------------------------------------------------------------------------------------------------------
<FN>
(1)The "Company Staff & Other" column includes: (a) Company Staff and other
expenses of $79, $70 and $106 million, (b) interest expense of $84, $95 and
$105 million, (c) minority earnings of $11, $11 and $8 million for each of
the respective years and (d) earnings from affiliates of $2 and $4 million in
1995 and 1994, respectively. The total represents earnings from continuing
operations before income taxes.
(2)The "Company Staff & Other" column includes: (a) eliminations of $(35), $(34)
and $(26) million, (b) Company Staff assets of $922, $398 and $383 million
and (c) investment in affiliates of $51, $48 and $70 million for each of the
respective years and (d) net assets of discontinued operations of $439 and
$416 million in 1995 and 1994, respectively. The total represents
consolidated total assets.
At December 31, 1996 and 1995, accounts receivable in the Automotive segment
were $850 million and $869 million, respectively, and accounts receivable in the
Space & Defense segment, principally from agencies of the U.S. Government, were
$489 million and $478 million, respectively. The company generally does not
require collateral from its customers.
Company Staff assets consist principally of cash and cash equivalents,
current deferred income taxes and administrative facilities. Intersegment sales
were not significant. Sales to agencies of the U.S. Government, primarily by the
Space & Defense segment, were $3,121 million in 1996, $2,890 million in 1995 and
$2,533 million in 1994. Sales to Ford Motor Company by the Automotive segment
were $1,470 million in 1996, $1,474 million in 1995 and $1,363 million in 1994.
35
20
Notes to Financial Statements TRW Inc.
GEOGRAPHIC SEGMENTS
- ----------------------------------------------------------------------------------------------------------
Year ended United Other Company Staff
In millions December 31 States Europe Areas & Other Total
- ----------------------------------------------------------------------------------------------------------
Sales 1996 $6,469 $2,522 $866 $ - $9,857
1995 6,212 2,525 831 - 9,568
1994 5,694 1,965 832 - 8,491
- ----------------------------------------------------------------------------------------------------------
Operating profit by 1996 $ 212 $ 224 $ 40 $(174) $ 302
segment (1) 1995 514 220 65 (174) 625
1994 432 143 76 (215) 436
- ----------------------------------------------------------------------------------------------------------
Identifiable assets by 1996 $3,056 $1,411 $590 $ 842 $5,899
segment (2) 1995 2,871 1,464 537 798 5,670
1994 2,825 1,288 531 791 5,435
- ----------------------------------------------------------------------------------------------------------
<FN>
TRW's operations are located primarily in the United States and Europe.
Interarea sales are not significant to the total revenue of any geographic area.
(1) The "Company Staff & Other" column includes: (a) Company Staff and other
expenses of $79, $70 and $106 million, (b) interest expense of $84, $95 and
$105 million, (c) minority earnings of $11, $11 and $8 million for each of
the respective years and (d) earnings from affiliates of $2 and $4 million
in 1995 and 1994. The total represents earnings from continuing operations
before income taxes.
(2) The "Company Staff & Other" column includes: (a) eliminations of $(131),
$(87) and $(78) million, (b) Company Staff assets of $922, $398 and $383
million and (c) investment in affiliates of $51, $48 and $70 million for
each of the respective years and (d) net assets of discontinued operations
of $439 and $416 million in 1995 and 1994, respectively. The total
represents consolidated total assets.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
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In millions except per share data First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D)
Sales (E) $2,514 $2,447 $2,572 $2,561 $2,320 $2,250 $2,451 $2,310
Gross profit (E) 463 455 479 459 133 384 406 413
Earnings(loss) from continuing
operations before income taxes (E) 165 169 188 175 (218) 119 167 162
Net earnings 117 115 130 123 106 93 127 115
Net earnings per share (F)
Fully diluted .86 .86 .98 .90 .79 .71 .97 .84
Primary .87 .87 .98 .92 .81 .70 .98 .85
- ------------------------------------------------------------------------------------------------------------
<FN>
(A) Earnings from continuing operations before income taxes included a $18
million benefit ($12 million after taxes, 9 cents per share) related to an
insurance claim settlement and a $15 million non-cash charge ($13 million
after taxes, 9 cents per share) related to the initial application of FASB
Statement No. 121.
(B) Net earnings included a $243 million gain ($1.82 per share) related to the
sale of the information services business and a $233 million charge ($1.76
per share) for actions taken in the automotive and space and defense
businesses.
(C) Net earnings included a $17 million gain (13 cents per share) related to the
sale of the remaining interest in the information services business, a $10
million benefit (8 cents per share) related to the recovery of certain tax
costs and a $28 million charge (21 cents per share) related primarily to
product warranties.
(D) Earnings before income taxes included a $35 million gain ($23 million after
taxes, 17 cents per share) related to an insurance claim settlement and a
$31 million charge ($20 million after taxes, 15 cents per share) related to
certain contract reserves.
(E) Amounts have been restated to reflect the company's Information Systems and
Services segment as discontinued operations.
(F) Amonunts have been restated to give retroactive recognition to the
company's two-for-one stock dividend.
36
21
Notes to Financial Statements TRW Inc.
STOCK PRICES AND DIVIDENDS (UNAUDITED)
The book value per common share at December 31, 1996, was $17.30 compared
to $16.49 at the end of 1995. Our directors declared the 234th consecutive
quarterly dividend during December 1996. Dividends declared per share in 1996
were $1.17, up 11 percent from $1.05 in 1995. The following table highlights the
market prices of our common and preference stocks and dividends paid for the
quarters of 1996 and 1995.
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Price of Price of Dividends
traded shares traded shares paid per share
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Quarter 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
High Low High Low
- ---------------------------------------------------------------------------------------------------------
Common stock 1 $ 46-1/8 $ 37-7/16 $ 35 $ 30-7/8 $.275 $.25
Par value $0.625 per share 2 48-1/2 43-1/2 40-7/8 33-1/2 .275 .25
3 50-3/4 41-1/16 41-5/16 35-11/16 .275 .25
4 52 43-3/4 39-5/16 32-1/16 .31 .275
- ---------------------------------------------------------------------------------------------------------
Cumulative Serial 1 379 379 350 225 1.10 1.10
Preference Stock II 2 418 414 349-1/4 348 1.10 1.10
$4.40 Convertible 3 500 300 336-1/2 336-1/2 1.10 1.10
Series 1 4 427 427 325-5/8 300-5/8 1.10 1.10
- ---------------------------------------------------------------------------------------------------------
Cumulative Serial 1 332-1/2 288 236 236 1.125 1.125
Preference Stock II 2 352 350 292-1/4 265 1.125 1.125
$4.50 Convertible 3 425 250 288 283 1.125 1.125
Series 3 4 329 329 290 254 1.125 1.125
- ---------------------------------------------------------------------------------------------------------
The $4.40 Convertible Series 1 was not actively traded during the third
quarter of 1996 and the first quarter of 1995. The $4.50 Convertible Series 3
was not actively traded during the third quarter of 1996. The prices shown
represent the range of asked(high) and bid(low) quotations.
Note: Amounts have been restated to give retroactive recognition to the
company's two-for-one stock dividend.
37