How TRW Came Down to Earth : Conglomerate: Satellites and credit reports are this little-understood firm’s best-known products. But it is auto parts--especially air bags--that sustain it. Indeed, some analysts say the company should dump high-tech.
Once, TRW was a company that fattened its profit and burnished its reputation by helping land American astronauts on the moon. Today, its fortunes ride in large part on keeping American motorists from slamming into their dashboards.
Automotive parts--especially air bag safety restraints--are the products powering TRW today, though the Cleveland-based conglomerate still fields a motley mix of businesses. Its space and defense operation, based in Redondo Beach, remains a premier builder of satellites and other spacecraft. Its consumer credit-reporting division is headquartered in Orange.
For years, that diversity was considered one of TRW’s greatest strengths; its fortunes were not tied to any single business or geographic region.
Now, however, the wisdom of the mix is being questioned, as the auto industry shows new vigor and aerospace continues an unrelenting fade.
Long gone are the 1980s, when TRW’s auto parts and space divisions carried nearly equal weight. TRW is now primarily an auto supply company; its white-hot sales of air bags, engine valves and other car equipment generate nearly two-thirds of its business.
Indeed, some analysts suggest that now is the time to sell the space or credit divisions--or, perhaps, spin them off. That would cut loose the anchor from TRW’s fast-moving automotive group and enhance the prospects for the space and credit groups themselves, the analysts say.
Yet TRW has no such intentions.
Instead, it has embarked on a patient, stay-the-course strategy at a time when many of its competitors--particularly those in the slumping aerospace industry--are trying to reinvent themselves through acquisitions, spinoffs and other corporate razzle-dazzle.
“We have no present plans for any sort of dismemberment,” TRW Chairman Joseph T. Gorman said flatly in an interview from Cleveland, where the firm has its headquarters. “Our current intention is to continue to run the company as one company.”
Indeed, Gorman said, TRW’s diversity now has a new purpose. The space and credit groups will bolster TRW’s automotive division, he said, by providing aerospace technology and computer management know-how that can be transferred to auto parts production.
“There is tremendous opportunity for synergy between and among our three businesses,” he said.
At 56, Gorman is in his sixth year of what has been a down-and-up ride as chairman and chief executive.
He assumed the job from the legendary Ruben F. Mettler, a Caltech-trained engineer for whom a street is named in Redondo Beach. Mettler retired in 1988 after 11 years as TRW’s chief executive, leaving behind a firm with a unique blend of technological sophistication and financial savvy.
Yet, not long after Mettler’s departure, TRW ran into deep financial trouble, leaving it up to Gorman--a square-jawed Yale Law School graduate--to engineer a strong rebound that began in 1992.
Led by the sales growth of its air bag systems, TRW’s auto parts group generated 57% of the company’s $8 billion in revenue in 1993. The space-and-defense group kicked in 35%, and the credit group and other information services provided 8%.
The auto parts division is expected to keep growing sharply in the years ahead, with air bags selling faster than cars themselves, because new autos are increasingly coming equipped with two of the inflatable restraints. TRW is the only major producer of complete air bag systems, including both the bag and the components that do the inflating.
Analysts estimate that TRW’s air bag sales approached $1 billion in 1993, up nearly 50% from the prior year. (The company does not break out sales by product line.) Sales could jump further, to $1.8 billion, over the next three years, said Mark B. Johnson, an analyst at Roulston Research Corp., a securities firm in Cleveland.
Although second air bags for front-seat passengers won’t be mandatory for cars until 1997 (and for light trucks the next year), more than 60% of 1994 model cars are already coming equipped with dual air bags.
“The air bag phenomenon has grown faster than even the government expected, because safety has become a really hot issue with consumers,” said Christopher Cedergren, senior vice president of the research firm AutoPacific Group in Santa Ana. “That has pushed many manufacturers to offer air bags really before they’ve been mandated, and that’s helped TRW tremendously.”
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Buoyed by air bag sales, TRW saw a profit of $220 million in 1993, up 14% from $194 million the year before (excluding onetime charges related to accounting changes), even though overall sales slipped 4% to $7.95 billion.
Investors like the results. The company’s stock price has doubled since hitting bottom in 1991. It closed at $72.50 a share Friday in New York Stock Exchange trading.
Yet the comeback is hardly complete.
TRW’s credit-reporting and aerospace operations are staring at uncertain futures with modest or no growth. And TRW is still earning less on stockholders’ investment than are rival conglomerates following a similar strategy of trying to solve their problems largely from within.
Two examples: Rockwell International Corp. and AlliedSignal Inc.
Like TRW, both companies have major aerospace and automotive lines. And, like TRW, both have used massive layoffs and other means of cost cutting to bolster profits in the face of slumping defense budgets, while exploiting the current strength of the auto market.
Yet whereas Rockwell and AlliedSignal last year earned returns on stockholder equity of 19.6% and 18.1%, respectively, TRW’s return on equity was 14.3%. That lagged not only its competitors, but the rate of return TRW itself posted back in 1987. (The figures exclude accounting-related charges incurred by all the companies.)
TRW is “just sort of hanging in a respectable manner,” said analyst Michael Lauer of Kidder, Peabody & Co.
Still, Lauer and other analysts praise Gorman for leading TRW to a solid rebound from 1991, when the company was in serious financial trouble.
TRW lost $140 million that year on sales of $7.9 billion, as its auto parts group was pummeled by the recession and disrupted by an explosion at one of its air bag plants. The space group, like other defense contractors, was caught in the grip of Pentagon cuts. And TRW’s credit-reporting business was not only a financial mess, but it had just settled regulators’ lawsuits stemming from massive errors in consumers’ reports.
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Amid all this, TRW’s stock price drifted down to the mid-30s, and the company’s institutional stockholders grumbled. “There was a lot of displeasure,” said Wayne Nordberg, a partner in Lord Abbett & Co., a New York money manager and major TRW stockholder.
But Gorman restored order. And he put TRW back in the black, cutting nearly half its space-and-defense work force--bringing that sector down to 17,000 people today--and shedding several small or poorly performing pieces of its information services unit.
“They’ve done a reasonably decent job of cleaning up their businesses,” said Eli S. Lustgarten, an analyst with Paine Webber Inc.
Herb Dyer, executive director of the State Teachers Retirement System of Ohio, said his group’s ownership of 1.2 million TRW shares reflects its endorsement of Gorman’s approach.
Gorman has also maintained TRW’s market leadership in several automotive markets worldwide--not just in air bags. The company is a major provider of steering and suspension gears, seat belts and engine valves.
Prospects for TRW’s space and credit groups are another matter.
The many layoffs have helped the space group remain profitable despite the downturn in defense and NASA spending, and its order backlog remains strong.
But the division’s earnings and sales continue to shrink, despite TRW’s work on such high-profile defense satellite systems as Milstar (the first satellite was launched earlier this month) and the Defense Support Program early-warning orbiters.
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In 1993, the space group’s operating profit and sales dropped for the third straight year, to $205 million (excluding accounting charges) and $2.8 billion, respectively. Kidder Peabody’s Lauer predicts the space group will see its share of TRW’s overall operating profit dwindle to about 20% by 1996, from more than 50% in 1991.
The division’s problems--and even the suggestion that the division should be unloaded--are particularly painful for TRW, because its roots are in space.
The company began in a Los Angeles barber shop in 1953. Two Caltech graduates, Simon Ramo and Dean Wooldridge, opened for business after leaving Howard Hughes’ fledgling Hughes Aircraft.
The pair hoped to speed the development of a missile system they had devised. And they were quickly rewarded in the mid-1950s, when Ramo-Wooldridge Corp. was tapped to oversee the nation’s development of a ballistic missile system to counter the Soviet Union’s nuclear threat.
After merging with auto parts maker Thompson Products Inc. in Cleveland, the new TRW began winning satellite and space vehicle contracts as the Space Age flourished in the 1960s. When man first landed on the moon in 1969, it was a TRW engine that gently lowered Apollo 11’s lunar module onto the Sea of Tranquillity.
TRW attracted some of the nation’s brightest scientists and engineers, drawn by the challenges of the early space and missile programs and California’s allure.
The company became a premier maker of spy and telecommunications satellites and other spacecraft--it has built more than 180 to date--including Pioneer 10 and 11, which provided the first close-up looks of Jupiter and Saturn.
In the 1970s, TRW went on a diversification binge, getting into such areas as oil field drilling equipment, electronic components and its credit-reporting service. But by the mid-1980s, the firm began unloading many of those lines to focus on the three divisions it has today.
Gorman said he is confident the space group’s shrinkage can be reversed.
“Our productivity has improved dramatically” in the aftermath of the layoffs, he said. “We’ve reduced the bureaucracy, we’ve reduced layers of management. I believe we can grow it from here.”
Not so, counters analyst Lauer. “I disagree with the management that revenue with space and defense will commence a recovery,” he said. “It will decline.”
But the space division could grow, Lauer asserted--fit were uncoupled from the company, much as Litton Industries Inc. is about to separate its defense business from its commercial operations--or if the division had its own separate stock.
The latter step was taken by General Motors Corp. a decade ago when it sold shares in its Hughes Aircraft and Electronic Data Systems units but kept control of the units. The move enabled Hughes and EDS to raise cash and map their own futures outside GM.
Lauer said TRW’s space group could use the same method to acquire other firms, enter new ventures and pursue other steps that its parent company would probably skip because they would detract from its robust auto group, Lauer said.
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But it’s all moot for Gorman.
“We have absolutely no intention--let me make myself very clear--no intention whatsoever to sell our space-and-defense business,” he said.
As for the credit-reporting division, “we have no current plans to sell that business, either,” Gorman said, even though analysts don’t see the division contributing much more to TRW’s overall results in the next few years than it currently does.
The credit group has gradually been rebuilding its sales and profit after slashing costs and eliminating the errors and mismanagement that prompted the lawsuits and regulatory clampdown in 1991.
“We hadn’t paid enough attention, frankly, to the nitty-gritty details of making certain that our quality was high enough,” Gorman said. “On top of that, the (division’s) cost structure had become bloated.”
He added: “We have fixed (the division) in terms of quality and service.”
Fixes, in fact, are becoming the TRW way. Although the company has frequently dumped troubled assets in the past, TRW now plans to keep what it has, rehabilitate those operations that are struggling and hope they prosper on their own.
“I felt we could create much more long-term value for the patient shareholder by fixing the businesses,” Gorman said. “I think we have done that. We’re happy with our performance.”
Reasonable Returns from a High-Tech Smorgasbord After a dismal showing in 1991, TRW’s profits are climbing again despite lower sales. But the company still has not achieved the same high yield on its stockholders’ investment that it enjoyed seven years ago. SALES In billions of dollars 1987: 6.82 1988: 6.98 1990: 8.17 1991: 7.91 1989: 7.34 1992: 8.31 1993: $7.95 EARNINGS Net income (loss) in millions of dollars 1987: 243 1988: 261 1989: 263 1990: 208 1991: (140) 1992*: 194 1993*: $220 RETURN ON EQUITY 1987: 18.6% 1988: 17.5% 1989: 15.9% 1990: 11.4% 1991: 0.0% 1992*: 14.1% 1993*: 14.3% *Excludes accounting-related charges of $25 million and $350 million in 1993 and 1992, respectively. TRW BY SEGMENT in sales 1990 Automotive: 50% Space/defense: 41% Information systems: 9% 1996 * Automotive: 65% Space/defense: 27% Information systems: 8% * Kidder Peabody & Co. estimate Source: Company reports, Kidder Peabody & Co.
