1
Exhibit 99.3
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma statements of operations for the year ended December
31, 1998 and for the quarter ended March 31, 1999 have been prepared to
illustrate the effect of the acquisition of LucasVarity as if the acquisition
had occurred on January 1, 1998 and January 1, 1999, respectively. Synergies
and expected cost savings from the integration of LucasVarity with TRW's
previously existing businesses have not been included in the pro forma
statements of operations.
The unaudited pro forma statement of operations presented for the year ended
December 31, 1998 includes the historical financial results for the year ended
December 31, 1998 for TRW and the year ended January 31, 1999 for LucasVarity.
The unaudited pro forma statement of operations presented for the quarter ended
March 31, 1999 includes the statement of operations for the quarter ended March
31, 1999 for TRW and the fourth quarter ended January 31, 1999 for LucasVarity.
Unusual and/or one-time items recorded in the two month period ended March 31,
1999 for LucasVarity included primarily the investment banker fees of $21
million relating to the acquisition of LucasVarity by the Company. The
historical statements of operations for LucasVarity have been presented using
U.S. Generally Accepted Accounting Principles (U.S. GAAP). The statements were
translated from British pounds to U.S. dollars using an average exchange rate
for the applicable period.
The unaudited pro forma statements of operations include the adjustments that
have a continuing impact, to reflect the transaction using purchase accounting.
The pro forma adjustments are described in the notes to the unaudited pro forma
statements of operations. The adjustments are based upon preliminary information
and certain management judgments. Certain reclassifications have been reflected
to conform to TRW's presentation. The purchase accounting adjustments are
subject to revisions which will be reflected in future periods. Revisions, if
any, are not expected to have a material effect on the statement of operations
or financial condition of the Company.
The unaudited pro forma statements of operations are presented for illustrative
purposes only and are not necessarily indicative of the results of operations
which may occur in the future, or that would have occurred if the acquisition
had been consummated on January 1, 1998 and January 1, 1999 for the statements
of operations for the year ended December 31, 1998 and the quarter ended March
31, 1999, respectively. The unaudited pro forma statements of operations should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, the consolidated condensed unaudited financial statements and
the notes thereto included in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999 and the consolidated financial statements and
notes thereto of LucasVarity plc for the year ended January 31, 1999 filed as
Exhibit 99.2 to this report.
D-1
2
Unaudited Pro forma Statement of Operations
For the Year Ended December 31, 1998
(In millions, except per share data)
TRW LucasVarity
Historical as Historical as Pro Forma Adjusted
Reported Reported Adjustments TRW
------------- ------------- ----------- --------
Sales $11,886 $7,088 $ (10) (a) $18,964
Cost of sales 9,715 5,542 93 (b) 15,350
------- ------ ----- -------
Gross profit 2,171 1,546 (103) 3,614
Administrative and selling expenses 826 495 -- (c) 1,321
Research and development expenses 522 305 (62) (d) 765
Interest expense 114 58 450 (f) 622
Other expense (income) - net (37) (180) (5) (g) (222)
------- ------ ----- -------
Earnings from continuing
operations before income taxes 746 868 (486) 1,128
Income taxes 269 315 (182) (h) 402
------- ------ ----- -------
Earnings from continuing operations $ 477 $ 553 $(304) $ 726
======= ====== ===== =======
PER SHARE OF COMMON STOCK
Diluted
From continuing operations $ 3.83 $ 5.84
Basic
From continuing operations $ 3.93 $ 5.98
SHARES USED IN COMPUTING
PER SHARE AMOUNTS
Diluted 124.4 124.4
Basic 121.3 121.3
See Notes to the Unaudited Pro forma Statement of Operations
D-2
3
Unaudited Pro forma Statement of Operations
For the Quarter Ended March 31, 1999
(In millions, except per share data)
TRW LucasVarity
Historical as Historical as Pro Forma Adjusted
Reported Reported Adjustments TRW
------------- ------------- ----------- --------
Sales $3,097 $1,733 $(107) (a) $4,723
Cost of sales 2,618 1,340 (15) (b) 3,943
------ ------ ---- ------
Gross profit 479 393 (92) 780
Administrative and selling expenses 184 123 (14) (c) 293
Research and development expenses 144 81 (21) (d) 204
Purchased in-process research and development 85 -- (85) (e) --
Interest expense 43 10 106 (f) 159
Other expense (income) - net 16 (152) (31) (g) (167)
------ ----- ---- ------
Earnings from continuing
operations before income taxes 7 331 (47) 291
Income taxes 35 117 (49) (h) 103
------ ------ ---- ------
Earnings (loss) from continuing operations $ (28) $ 214 $ 2 $ 188
====== ====== ==== ======
PER SHARE OF COMMON STOCK
Diluted
From continuing operations $(0.24) $ 1.53
Basic
From continuing operations $(0.24) $ 1.56
SHARES USED IN COMPUTING
PER SHARE AMOUNTS
Diluted 120.1 122.9
Basic 120.1 120.1
See Notes to the Unaudited Pro forma Statement of Operations
D-3
4
NOTES TO THE UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(a) Sales were adjusted to reflect the elimination of sales between TRW and
LucasVarity of $10 million for the year ended December 31, 1998 and $1
million for the quarter ended March 31, 1999. In addition, Sales for
the quarter ended March 31, 1999, were adjusted to eliminate $106
million of LucasVarity sales included in the "TRW Historical as
Reported" amount for the period subsequent to the date of acquisition
(March 25, 1999) to March 31, 1999.
(b) Cost of sales is adjusted to reflect the net amount of the following
adjustments:
Quarter
Year Ended Ended
December 31, 1998 March 31,1999
----------------- -------------
Elimination of LucasVarity Cost of sales included
in the "TRW Historical as Reported" amount $ -- $(84)
Reclassification of restructuring cost
reported in LucasVarity historical accounts
from Other expense (income)-net 73 42
Reclassification of engineering expenses
from Research and development expenses to
conform with TRW's presentation 62 21
Elimination of goodwill amortization reported
in LucasVarity historical amounts (55) (12)
Additional depreciation resulting from the
write-up of fixed assets to fair value. The
assets are depreciated over their estimated
useful lives, primarily from 8 to 20 years.
The adjustment also includes the reduction in
earnings to reflect the adjustment of the
fair market value of inventory 32 23
Capitalization of entry fees associated with
an investment for aerospace partnering
arrangements (17) (6)
Elimination of the cost and profit for sales
between LucasVarity and TRW (10) (1)
Adjustment for LucasVarity pension expense to
reflect the actuarial valuation as of the
acquisition date 8 2
---- ----
$ 93 $(15)
==== ====
(c) Elimination of LucasVarity Administrative and selling expenses of $14
million included in the "TRW Historical as Reported" amount for the
quarter ended March 31, 1999.
(d) Reclassification of $62 million and $21 million of engineering costs to
Cost of sales for the year ended December 31, 1998 and the quarter
ended March 31, 1999, respectively, to conform with TRW's presentation.
(e) Elimination of the charge for Purchased in-process research and
development of $85 million in the quarter ended March 31, 1999
reported in connection with the acquisition of LucasVarity. Although
the charge is part of the purchase price allocation, it has been
excluded from the pro forma adjusted TRW amounts because it does not
have a continuing impact on the Statement of Operations.
(f) Interest expense is adjusted to reflect the net amount of the following
adjustments:
Quarter
Year Ended Ended
December 31, 1998 March 31, 1999
----------------- --------------
Increase in interest expense to reflect the
cash purchase price of LucasVarity $ 418 $ 93
Reclassification of LucasVarity's interest
income to Other expense(income)-net 32 13
--- ---
$ 450 $ 106
=== ===
D-4
5
(g) Other expense (income)-net is adjusted to reflect the net amount of the
following adjustments:
Quarter
Year Ended Ended
December 31, 1998 March 31, 1999
----------------- --------------
Amortization over 40 years of goodwill resulting
from the acquisition $ 73 $ 18
Reclassification of restructuring costs
reported in LucasVarity's historical
accounts to Cost of sales (73) (42)
Reclassification of LucasVarity interest
income from Interest expense (32) (13)
Amortization of the fair value of identified
intangibles over their estimated useful lives
from 16 to 30 years 15 4
Elimination of the LucasVarity gain on the
formation of a joint venture with TRW 12 --
Elimination of LucasVarity Other expense
(income) - net included in the "TRW
Historical as reported" amount -- 2
---- ----
$ (5) $(31)
==== ====
(h) Reduction in income taxes of $182 million and $49 million for the
applicable tax effect of the before tax pro forma adjustments to the
statement of operations for the year ended December 31, 1998 and the
quarter ended March 31, 1999, respectively. For the year ended
December 31, 1998, the pro forma adjustments do not reflect a tax cost
of $20 million which would have occurred if the Company had acquired
LucasVarity as of January 1, 1998. The $20 million tax cost represents
unused foreign tax credits with the assumption that neither TRW nor
LucasVarity would have paid certain dividends from their respective
foreign subsidiaries.
Unusual and/or one-time special items included in the historical statements of
operations for TRW and LucasVarity for the year ended December 31, 1998 are
set forth below. Excluding these items, the pro forma adjusted earnings from
continuing operations would have been $579 million, or $4.65 per diluted share.
- - an after-tax gain of $32 million from the settlement of certain
patent litigation with the Company
- - an after-tax charge of $22 million for litigation, contract reserves,
and severance costs relating to the combination of the Company's
Systems Integration Businesses with BDM International, Inc., a company
acquired in 1997
- - an after-tax charge of $18 million for restructuring primarily for
plant closings and severance costs for the Company's Automotive
businesses
- - an after-tax benefit of $16 million for the Company's interest
accrual adjustment for tax litigation settlement
- - an after-tax charge for LucasVarity of $21 million for costs
incurred for its proposed change of domicile
- - an after-tax loss of $10 million recognized upon the termination of
LucasVarity's interest rate swap portfolio
D-5
6
- - net after-tax gains of $206 million relating to the sale of businesses
during the year, including LucasVarity's heavy vehicle braking business
- - after-tax charges of $36 million for restructuring related to
LucasVarity's automotive businesses for the closure of two plants and
severance costs and the loss associated with the termination of a
product line within the aerospace business.
Unusual and/or one-time special items included in the historical statements of
operations for TRW and LucasVarity for the quarter ended March 31, 1999 are set
forth below. Excluding these items, the pro forma adjusted earnings from
continuing operations and earnings per diluted share would have been $132
million and $1.07, respectively.
- - after-tax gains of $19 million from the issuance of stock by RF Micro
Devices, Inc., an affiliate of TRW, and $10 million from the Company's
concurrent sale of stock of the affiliate
- - an after-tax charge of $28 million for the Company's losses from a
commercial fixed price contract and a capped cost reimbursable contract
for the U.S. Army
- - a non-recurring after-tax loss of $33 million on foreign currency
hedges relating to the acquisition of LucasVarity
- - an after-tax charge of $8 million for the underwriting and
participation fees incurred to secure committed credit facilities and
the cost of the unutilized credit line in anticipation of the Company's
acquisition of LucasVarity
- - an after-tax charge of $7 million for severance costs relating to
the restructuring of the Company's automotive businesses
- - a cost of $85 million, with no income tax benefit, for the valuation
of in-process research and development associated with the Company's
acquisition of LucasVarity. The cost is eliminated as a pro forma
adjustment
- - an after-tax gain of $129 million principally related to the sale of
LucasVarity's heavy vehicle braking system business
- - an after-tax charge of $26 million for restructuring for the
automotive business of LucasVarity including the closure of two plants
and severance costs.
On May 17, 1999, the Company announced that it will divest its engine
businesses, which consist of TRW Engine Components and Lucas Diesel Systems
operations; TRW Nelson Stud Welding; and the LucasVarity Wiring companies. The
estimated net proceeds from these divestitures of $1.2 to $1.5 billion will be
applied to reduce debt incurred to finance the acquisition of LucasVarity. The
unaudited pro forma statements of operations for the year ended December 31,
1998 and the quarter ended March 31, 1999 included sales of $1,980 million and
$485 million, respectively, relating to the businesses to be sold. The results
of operations of the businesses to be divested will be reported in Earnings of
continuing operations up to the date of their disposition. TRW expects to
complete the divestitures of these businesses by year-end 1999.
D-6
7
Unaudited Balance Sheet
As of March 31, 1999
(In millions)
The following unaudited balance sheet of TRW includes the acquisition of
LucasVarity accounted for as a purchase. The March 31, 1999 unaudited balance
sheet of the Company includes the accounts of the Company and LucasVarity. The
balance sheet also reflects a preliminary purchase price allocation based upon
the estimated fair value of assets and liabilities as of the date of
acquisition. A pro forma balance sheet is not included as the unaudited balance
sheet of TRW as of March 31, 1999 includes LucasVarity.
TRW
as
Reported
--------
Assets
Current Assets
Cash and cash equivalents $ 1,058
Accounts receivable 2,826
Inventories 1,123
Prepaid expenses 275
Net assets of acquired businesses held for sale 739
Deferred income taxes 326
--------
Total current assets 6,347
Property, plant, and equipment - on the basis of cost 7,986
Less accumulated depreciation and amortization 3,890
--------
Total property, plant and equipment - net 4,096
Intangible Assets
Intangibles arising from acquisitions 3,759
Other 780
--------
4,539
Less accumulated amortization 150
--------
Total intangible assets - net 4,389
Investments in affiliated companies 335
Other notes and accounts receivable 349
Prepaid pension cost 2,198
Other assets 437
--------
$ 18,151
========
Liabilities and shareholders' investment
Current liabilities
Short-term debt $ 1,837
Short-term payable for LucasVarity plc 2,899
Accounts payable 1,614
Current portion of long-term debt 677
Other current liabilities 1,890
--------
Total current liabilities 8,917
Long-term liabilities 1,764
Long-term payable for LucasVarity plc 3,359
Long-term debt 1,663
Long-term deferred income taxes 590
Minority interests in subsidiaries 131
Shareholders' investment
Capital stock 75
Other capital 459
Retained earnings 1,991
Treasury shares - cost in excess of par value (625)
Accumulated other comprehensive (loss) (173)
--------
Total shareholders' investment 1,727
--------
$ 18,151
========
On May 17, 1999 the Company announced that it will divest its engine businesses,
which consist of TRW Engine Components and Lucas Diesel Systems operations; TRW
Nelson Stud Welding; and the LucasVarity Wiring Companies. The net operating
assets of the LucasVarity businesses to be sold of $739 million as of March 31,
1999 are included in the caption "Net assets of acquired businesses held for
sale." The net assets of the TRW businesses to be sold are approximately $330
million and are reported in their respective balance sheet accounts.
D-7
8
Purchase Price Allocation of LucasVarity
The assets and liabilities of LucasVarity have been consolidated with TRW
based upon the fair value of assets and liabilities. The fair value of
employee benefit assets and liabilities were determined by a preliminary
actuarial valuation. A preliminary allocation of the cash purchase price of
$6,778 million is as follows:
LucasVarity
as of
March 31, 1999
(in millions)
-----------
Cash and cash equivalents $ 774
Accounts receivable 888
Inventory 552
Net assets of businesses
held for sale 739
Other current assets 285
-------
Total current assets 3,238
Property, plant and equipment 1,531
Intangible assets 413
Prepaid pension costs 2,198
Other assets 414
-------
Total assets $ 7,794
=======
Accounts payable $ (686)
Other accruals (798)
Debt (938)
Long-term liabilities (932)
Long-term deferred taxes (631)
-------
Total liabilities $(3,985)
=======
Minority Interests $ (39)
=======
Purchased in-process research
and development $ 85
=======
Excess of purchase price over fair
value of net assets acquired $ 2,923
=======
The purchase price allocation is preliminary and is subject to the final
appraisal and resolution of preacquisition contingencies and restructuring.
D-8