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, 1997
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
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TRW Inc.
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(Exact name of registrant as specified in its charter)
Ohio 34-0575430
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1900 Richmond Road, Cleveland, Ohio 44124
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(Address of principal executive offices)
(Zip Code)
(216) 291-7000
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(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 1, 1997, there were 123,234,716 shares of
TRW Common Stock, $0.625 par value, outstanding.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Earnings (unaudited)
TRW Inc. and subsidiaries
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Second quarter ended Six months ended
June 30 June 30
In millions except per share data 1997 1996 1997 1996
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Sales $2,852 $2,572 $5,512 $5,086
Cost of sales 2,318 2,093 4,496 4,144
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Gross profit 534 479 1,016 942
Administrative and selling expenses 177 167 336 330
Research and development expenses 117 105 223 205
Interest expense 17 20 37 39
Other (income)expense-net 4 (1) 6 15
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Earnings from continuing operations
before income taxes 219 188 414 353
Income taxes 84 71 160 133
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Earnings from continuing operations 135 117 254 220
Discontinued operations - 13 - 27
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Net earnings $ 135 $ 130 $ 254 $ 247
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PER SHARE OF COMMON STOCK
Fully diluted
Continuing operations $ 1.05 $ .87 $ 1.97 $ 1.63
Discontinued operations - .11 - .21
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Net earnings per share $ 1.05 $ .98 $ 1.97 $ 1.84
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Primary
Continuing operations $ 1.06 $ .88 $ 1.99 $ 1.64
Discontinued operations - .10 - .21
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Net earnings per share $ 1.06 $ .98 $ 1.99 $ 1.85
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Shares used in computing per share
amounts
Fully diluted 128.6 133.8 129.0 134.7
Primary 126.7 132.9 127.5 133.6
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Dividends declared $ .31 $ .275 $ .31 $ .275
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3
Balance Sheets (unaudited)
TRW Inc. and subsidiaries
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June 30 December
In millions 1997 1996
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Assets
Current assets
Cash and cash equivalents $ 83 $ 386
Accounts receivable 1,606 1,378
Inventories 525 524
Prepaid expenses 80 69
Deferred income taxes 284 424
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Total current assets 2,578 2,781
Property, plant and equipment-on the basis of cost 6,116 5,880
Less accumulated depreciation and amortization 3,498 3,400
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Total property, plant and equipment-net 2,618 2,480
Intangible assets
Intangibles arising from acquisitions 517 258
Other 51 31
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568 289
Less accumulated amortization 87 78
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Total intangible assets-net 481 211
Other assets 468 427
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$ 6,145 $ 5,899
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Liabilities and shareholders' investment
Current liabilities
Short-term debt $ 285 $ 52
Accounts payable 802 781
Current portion of long-term debt 79 72
Other current liabilities 1,257 1,252
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Total current liabilities 2,423 2,157
Long-term liabilities 776 767
Long-term debt 498 458
Deferred income taxes 154 272
Minority interests in subsidiaries 106 56
Capital stock 77 81
Other capital 448 437
Retained earnings 2,193 1,978
Cumulative translation adjustments (22) 47
Treasury shares-cost in excess of par value (508) (354)
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Total shareholders' investment 2,188 2,189
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$ 6,145 $ 5,899
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4
Statements of Cash Flows (unaudited)
TRW Inc. and subsidiaries
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Six months ended
June 30
In millions 1997 1996
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Operating activities
Net earnings $ 254 $ 247
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Discontinued operations - (11)
Depreciation and amortization 247 221
Deferred income taxes 17 (5)
Other-net 7 4
Changes in assets and liabilities, net of effects of
businesses acquired or sold:
Accounts receivable (164) (154)
Inventories and prepaid expenses 26 (2)
Accounts payable and other accruals (19) 12
Other-net (10) (6)
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Net cash provided by operating activities 358 306
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Investing activities
Capital expenditures (228) (176)
Acquisitions, net of cash acquired (415) -
Other-net (7) -
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Net cash used in investing activities (650) (176)
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Financing activities
Increase in short-term debt 178 91
Proceeds from debt in excess of 90 days 67 21
Principal payments on debt in excess of 90 days (24) (44)
Reacquisition of common stock (179) (155)
Dividends paid (78) (73)
Other-net 29 34
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Net cash used in financing activities (7) (126)
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Effect of exchange rate changes on cash (4) 1
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Increase (decrease) in cash and cash equivalents (303) 5
Cash and cash equivalents at beginning of period 386 59
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Cash and cash equivalents at end of period $ 83 $ 64
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5
Results by Business Segments (unaudited)
TRW Inc. and subsidiaries
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Second quarter ended Six months ended
June 30 June 30
In millions 1997 1996 1997 1996
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Sales
Automotive $ 1,876 $ 1,700 $ 3,669 $ 3,381
Space & Defense 976 872 1,843 1,705
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Sales $ 2,852 $ 2,572 $ 5,512 $ 5,086
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Operating profit
Automotive $ 181 $ 170 $ 348 $ 310
Space & Defense 82 64 159 124
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Operating profit 263 234 507 434
Company Staff and other (24) (25) (48) (36)
Minority interest in earnings of (11)
consolidated subsidiaries (5) (3) (6)
Interest expense (17) (20) (37) (39)
Earnings from affiliates 2 2 3 -
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Earnings from continuing operations before income
taxes $ 219 $ 188 $ 414 $ 353
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6
NOTES TO FINANCIAL STATEMENTS
(unaudited)
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.
Environmental Costs
- -------------------
During the first quarter of 1997, the Company adopted the provisions of AICPA
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities". There
was no financial statement effect of the adoption as the Company's previous
method of accounting for environmental costs was in accordance with SOP 96-1.
Discontinued Operations
- -----------------------
In September 1996, the Company sold substantially all of the businesses of its
Information Systems and Services segment. The financial statements for the first
six months of 1996 reflect as discontinued operations that segment's operating
results of $27 million. Sales of the discontinued operations were $313 million
for the first six months of 1996.
Acquisition
- -----------
In February 1997, the Company completed its purchase of an eighty percent equity
interest in the air bag and steering wheel business of Magna International. The
purchase price of approximately $450 million has been tentatively allocated to
the net assets acquired based on their fair values.
Inventories
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Inventories consist of the following:
(In millions)
June 30 December 31
1997 1996
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Finished products and work in process $280 $295
Raw materials and supplies 245 229
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$525 $524
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Long-Term Liabilities
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Long-term liabilities at June 30, 1997 and December 31, 1996, include $692
million and $681 million, respectively, relating to postretirement benefits
other than pensions.
Other (Income)Expense-Net
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Other (income)expense included the following:
(In millions)
Second quarter ended Six months ended
June 30 June 30
1997 1996 1997 1996
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Other income $ (12) $ (12) $ (28) $ (18)
Other expense 14 10 30 30
Foreign currency translation 2 1 4 3
---- ---- --- ----
$ 4 $ (1) $ 6 $ 15
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Earnings Per Share
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Fully diluted earnings per share have been computed based on the weighted
average number of shares of Common Stock outstanding during each period,
including common stock equivalents 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 period including common stock equivalents.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in a $.03 and
$.02 per share increase in primary earnings per share for the second quarter
ended June 30, 1997 and June 30, 1996, respectively. There is an immaterial
impact of Statement No. 128 on the calculation of fully diluted earnings per
share for these quarters.
In April 1997, the number of authorized shares of TRW Common Stock was increased
from 250,000,000 to 500,000,000 shares.
8
Supplemental Cash Flow Information
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Six months ended
(In millions) June 30
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1997 1996
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Interest paid (net of amount capitalized) $ 36 $ 30
Income taxes paid (net of refunds) $(22) $136
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Other Contingencies
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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
intervene and take responsibility for the lawsuits. The actions 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.
Interim Statements
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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.
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Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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RESULTS OF OPERATIONS
(In millions except per share data)
Six Months Ended
Second Quarter June 30
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Percent Percent
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
---- ---- --------- ---- ---- ---------
Sales $2,852 $2,572 11% $5,512 $5,086 8%
Operating Profit $ 263 $ 234 12% $ 507 $ 434 17%
Earnings from Continuing Operations $ 135 $ 117 15% $ 254 $ 220 15%
Fully Diluted Earnings
Per Share -
Continuing Operations $ 1.05 $ .87 21% $ 1.97 $ 1.63 21%
Effective Tax Rate 38.7% 37.8% 38.7% 37.8%
The increase in sales for the second quarter and first six months of 1997 was
primarily due to the sales contribution from the acquisitions of air bag and
steering wheel operations, and from higher volume in the Automotive and Space
and Defense segments. The sales increase was moderated by the effect of a strong
U.S. dollar.
The higher operating profit was due to the acquisitions, continued
cost-reduction efforts, and profit from the higher sales volume in the
Automotive and Space and Defense segments, partially offset by the effect of
lower pricing in the Automotive segment. Operating profit for the first six
months of 1996 included a $15 million before tax charge related to the initial
application 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."
Net earnings for the first six months of 1996 included a $12 million benefit
from an insurance claim settlement primarily related to previously divested
businesses, offset by a $13 million noncash charge related to the initial
application of SFAS No. 121.
Interest expense was $37 million for the first six months of 1997 compared to
$39 million for the first half of 1996. The decrease in interest expense was
primarily due to lower foreign debt levels.
10
Automotive
(In millions)
Six Months Ended
Second Quarter June 30
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Percent Percent
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
---- ---- --------- ---- ---- ---------
Sales $1,876 $1,700 10% $3,669 $3,381 9%
Operating Profit $ 181 $ 170 6% $ 348 $ 310 12%
The increase in sales for the second quarter and first six months of 1997 was
primarily due to the sales contribution from the acquisitions of air bag and
steering wheel operations, and from higher volume in the air bag, seat belt, and
steering and engine component businesses. The sales increase was moderated by
the effect of a strong U.S. dollar, as well as lower pricing, principally in the
North American air bag business.
The higher operating profit for the second quarter and first six months of 1997
resulted from the acquisitions, higher sales volume, and continued
cost-reduction efforts, partially offset by the effect of lower pricing.
Operating profit for the first six months of 1996 included a $15 million before
tax charge related to the initial adoption of SFAS No. 121.
Space & Defense
(In millions)
Six Months Ended
Second Quarter June 30
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Percent Percent
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
---- ---- --------- ---- ---- ---------
Sales $976 $872 12% $1,843 $1,705 8%
Operating Profit $ 82 $ 64 28% $ 159 $ 124 28%
Sales and operating profit for the second quarter and first six months of 1997
increased primarily due to the successful conversion of recent contract awards
into revenue growth as well as strong ongoing program performance.
LIQUIDITY AND FINANCIAL POSITION
In the first six months of 1997, cash flow provided by operating activities of
$358 million, a net increase in debt of $221 million, and a net increase of $18
million in other items were used to fund business acquisitions of $415 million,
capital expenditures of $228 million, reacquisition of common stock of $179
million, and dividend payments of $78 million. As a result, cash and cash
equivalents decreased by $303 million.
11
Net debt (short-term debt, the current portion of long-term debt and long-term
debt less cash and cash equivalents) was $779 million at June 30, 1997, compared
to $196 million at December 31, 1996. The ratio of net debt to total capital
(net debt, minority interests and shareholders' investment) at June 30, 1997 was
25 percent compared to 8 percent at December 31, 1996.
During July 1997, the Company issued $30 million in medium-term notes under its
shelf registration statements. The notes were used to refinance short-term debt.
After this issuance, $420 million remains available for borrowing under the
Company's shelf registration statements.
During the second quarter of 1997, the company requested an amendment of the
terms of its U.S. and multicurrency revolving credit agreements to extend the
expiration date of the agreements from July 1, 2001 to July 1, 2002. Also, one
additional bank will join the bank group providing the U.S revolving credit
agreement and one additional bank will join the bank group providing the
multicurrency revolving credit agreement. The amendment is expected to be
executed in August 1997.
During the first six months of 1997, 3,529,133 shares of TRW Common Stock were
repurchased for approximately $184 million, of which approximately $5 million
was settled in July.
Management believes that funds generated from operations and existing borrowing
capacity will be adequate to fund the Company's current share repurchase program
and to support and finance planned growth, capital expenditures,
company-sponsored research and development programs and dividends payments to
shareholders.
OTHER MATTERS
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. See
"Other Contingencies" note in the Notes to Financial Statements for further
information.
FORWARD-LOOKING STATEMENTS
Statements in this filing that are not historical facts are forward-looking
statements, which involve risks and uncertainties that could affect the
Company's actual results. Information regarding the important factors that could
cause TRW's actual results to differ materially from the forward-looking
statements contained in this filing can be found in TRW's reports filed with the
Securities and Exchange Commission, including TRW's Form 8-K filed on May 20,
1997.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The United States Environmental Protection Agency has issued a notice
of violation to the Company under the Clean Air Act with respect to air
emissions at the former Izumi Industries, Corporation, Inc. facility in Yaphank,
New York, which TRW acquired in November, 1996. The New York State Department of
Environmental Conservation has informed TRW that it may initiate administrative
proceedings against the Company under the New York Environmental Conservation
Law with respect to such emissions. TRW could be liable for civil penalties and
fines and other relief with respect to such matters which, if imposed, are not
expected to have a material effect on TRW's financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) The Company held its 1997 Annual Meeting of Shareholders on April 30,
1997.
(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) J. T. Gorman was elected a Director of the Company with 113,750,268
votes for election, 842,557 votes withheld from voting and 11,135,498
shares not voted, including broker non-votes.
P. S. Hellman was elected a Director of the Company with 113,840,404
votes for election, 752,421 votes withheld from voting and 11,135,498
shares not voted, including broker non-votes.
K. N. Horn was elected a Director of the Company with 113,816,175 votes
for election, 776,650 votes withheld from voting and 11,135,498 shares
not voted, including broker non-votes.
W. S. Kiser was elected a Director of the Company with 113,772,188
votes for election, 820,637 votes withheld from voting and 11,135,498
shares not voted, including broker non-votes.
L. M. Martin was elected a Director of the Company with 113,783,860
votes for election, 808,965 votes withheld from voting and 11,135,498
shares not voted, including broker non-votes.
13
A proposed amendment to the Amended Articles of Incorporation of the
Company to increase the authorized number of shares of common stock was
approved, with 99,967,773 votes for, 13,919,109 votes against, 705,943
votes abstaining and 11,135,498 shares not voted, including broker
non-votes.
The shareholders approved adoption of the 1997 TRW Long-Term Incentive
Plan with 107,323,712 votes for, 6,453,659 votes against, 815,454 votes
abstaining and 11,135,498 shares not voted, including broker non-votes.
The shareholders ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the 1997 fiscal year with
113,945,826 votes for, 271,090 votes against, 375,909 votes abstaining
and 11,135,498 shares not voted, including broker non-votes.
(d) None.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits:
10(a) Letter Agreement dated February 25, 1997 between TRW Inc. and
M. A. Coyle.
10(b) Amendment to Letter Agreement dated April 21, 1997 between TRW
Inc. and M. A. Coyle.
10(c) Consulting Agreement dated February 25,1997 between TRW Inc.
and M. A. Coyle.
10(d) Deferred Compensation Plan for Non-Employee Directors of TRW
Inc. dated July 1, 1997.
11 Computation of Earnings Per Share -- Unaudited.
27 Financial Data Schedule.
99 Computation of Ratio of Earnings to Fixed Charges -- Unaudited
(Supplement to Exhibit 12 of the following Form S-3
Registration Statements of the Company: No. 33-61711, filed
August 10, 1995, and No. 33-42870, filed September 20, 1991).
(b) Reports on Form 8-K:
Current Report on Form 8-K dated May 20, 1997 as to forward-looking
statements.
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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 6, 1997 By: /s/ William B. Lawrence
------------------------------
William B. Lawrence
Executive Vice President and
Secretary
Date: August 6, 1997 By: /s/ Carl G. Miller
------------------------------
Carl G. Miller
Executive Vice President
and Chief Financial Officer
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FORM 10-Q
Quarterly Report for Quarter Ended June 30, 1997
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
10(a) Letter Agreement dated February 25, 1997 between TRW Inc.
and M. A. Coyle.
10(b) Amendment to Letter Agreement dated April 21, 1997 between
TRW Inc. and M. A. Coyle.
10(c) Consulting Agreement dated February 25, 1997 between TRW
Inc. and M. A. Coyle.
10(d) Deferred Compensation Plan for Non-Employee Directors of
TRW Inc. dated July 1, 1997.
11 Computation of Earnings Per Share --Unaudited.
27 Financial Data Schedule.
99 Computation of Ratio of Earnings to Fixed Charges --
Unaudited (Supplement to Exhibit 12 of the following Form
S-3 Registration Statements of the Company: No. 33-61711,
filed August 10, 1995, and No. 33-42870, filed September
20, 1991).