##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004
  FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 24, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from

to
. Commission File No. 001-31970 (TRW AUTOMOTIVE LOGO) TRW Automotive Holdings Corp. (Exact name of registrant as specified in its charter) Delaware
    
    81-0597059(State or other jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)
 12025 Tech Center Drive
Livonia, Michigan 48150
(734) 855-2600  Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $0.01 par value per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes o No x As of October 27, 2004, the number of shares outstanding of the registrants
Common Stock was 98,936,697 shares.




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TRW Automotive Holdings Corp.
Index PagePART I  FINANCIAL INFORMATIONITEM 1. CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
    
    
    2Consolidated Statements of Operations for the Three Months Ended
September 24, 2004 and September 26, 2003Consolidated and Combined Statements of Operations for the Nine Months
Ended September 24, 2004, the Seven Months Ended September 26, 2003, and the
Two Months Ended February 28, 2003Consolidated Balance Sheets  September 24, 2004 and December 31, 2003Consolidated and Combined Statements of Cash Flows for the Nine Months
Ended September 24, 2004, the Seven Months Ended September 26, 2003, and the
Two Months Ended February 28, 2003Notes to Consolidated and Combined Financial StatementsITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    20ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    40ITEM 4. CONTROLS AND PROCEDURES
    
    
    41PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    42ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    42ITEM 5. OTHER INFORMATION
    
    
    42ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    43Employment Agreement for Neil E. MarchukRestricted Stock AgreementRestricted Stock Unit AgreementNote Purchase and Settlement AgreementLucas Funded Executive Pension Scheme No.4Third Amended and Restated Credit Agreement302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  i




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS TRW Automotive Holdings Corp. 
 Consolidated Statements of Operations
(unaudited)
 Three months endedSeptember 24,
    
    September 26,(In millions, except per share amounts)
    
    2004
    
    2003Sales
    
    $
    2,739
    
    
    $
    2,536Cost of sales
    
    
    2,462
    
    
    
    2,294Gross profit
    
    
    277
    
    
    
    242Administrative and selling expenses
    
    
    131
    
    
    
    127Research and development expenses
    
    
    36
    
    
    
    38Amortization of intangible assets
    
    
    8
    
    
    
    9Other (income) expense  net
    
    
    7
    
    
    
    (4
    )Operating income
    
    
    95
    
    
    
    72Interest expense, net
    
    
    60
    
    
    
    84Loss on retirement of debt
    
    
    
    
    
    
    31Earnings (losses) before income taxes
    
    
    35
    
    
    
    (43
    )Income tax expense (benefit)
    
    
    22
    
    
    
    (9
    )Net earnings (losses)
    
    $
    13
    
    
    $
    (34
    )Basic earnings (losses) per share:Earnings (losses) per share
    
    $
    0.13
    
    
    $
    (0.39
    )Weighted average shares
    
    
    98.9
    
    
    
    86.8Diluted earnings (losses) per share:Earnings (losses) per share
    
    $
    0.13
    
    
    $
    (0.39
    )Weighted average shares
    
    
    101.2
    
    
    
    86.8
 See accompanying notes to consolidated and combined financial statements. 2




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TRW Automotive Holdings Corp. 
 Consolidated and Combined Statements of Operations
 Successor
    
    PredecessorNine months
    
    Seven months
    
    Two monthsended
    
    ended
    
    endedSeptember 24,
    
    September 26,
    
    February 28,(In millions, except per share amounts)
    
    2004
    
    2003
    
    2003(unaudited)
    
    (unaudited)Sales
    
    $
    8,825
    
    
    $
    6,453
    
    
    $
    1,916Cost of sales
    
    
    7,855
    
    
    
    5,782
    
    
    
    1,686Gross profit
    
    
    970
    
    
    
    671
    
    
    
    230Administrative and selling expenses
    
    
    389
    
    
    
    302
    
    
    
    100Research and development expenses
    
    
    115
    
    
    
    92
    
    
    
    27Purchased in-process research and development
    
    
    
    
    
    
    85
    
    
    
    Amortization of intangible assets
    
    
    25
    
    
    
    19
    
    
    
    2Other (income) expense  net
    
    
    (9
    )
    
    
    (28
    )
    
    
    4Operating income
    
    
    450
    
    
    
    201
    
    
    
    97Interest expense, net
    
    
    183
    
    
    
    204
    
    
    
    47Loss on retirement of debt
    
    
    48
    
    
    
    31
    
    
    
    Loss on sales of receivables
    
    
    
    
    
    
    25
    
    
    
    Earnings (losses) before income taxes
    
    
    219
    
    
    
    (59
    )
    
    
    50Income tax expense
    
    
    128
    
    
    
    41
    
    
    
    19Net earnings (losses)
    
    $
    91
    
    
    $
    (100
    )
    
    $
    31Basic earnings (losses) per share:Earnings (losses) per share
    
    $
    0.93
    
    
    $
    (1.15
    )Weighted average shares
    
    
    97.4
    
    
    
    86.8Diluted earnings (losses) per share:Earnings (losses) per share
    
    $
    0.91
    
    
    $
    (1.15
    )Weighted average shares
    
    
    100.2
    
    
    
    86.8
 See accompanying notes to consolidated and combined financial statements. 3




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TRW Automotive Holdings Corp. 
 Consolidated Balance Sheets
 As ofSeptember 24,
    
    December 31,(Dollars in millions)
    
    2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    438
    
    
    $
    828Marketable securities
    
    
    16
    
    
    
    16Accounts receivable  net
    
    
    2,192
    
    
    
    1,643Inventories
    
    
    617
    
    
    
    635Prepaid expenses
    
    
    102
    
    
    
    65Deferred income taxes
    
    
    118
    
    
    
    120Total current assets
    
    
    3,483
    
    
    
    3,307Property, plant and equipment
    
    
    3,064
    
    
    
    2,911Less accumulated depreciation and amortization
    
    
    702
    
    
    
    388Total property, plant and equipment  net
    
    
    2,362
    
    
    
    2,523Goodwill
    
    
    2,359
    
    
    
    2,503Intangible assets  net
    
    
    772
    
    
    
    795Prepaid pension cost
    
    
    163
    
    
    
    120Deferred income taxes
    
    
    121
    
    
    
    129Other assets
    
    
    522
    
    
    
    530$
    9,782
    
    
    $
    9,907LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    27
    
    
    $
    76Current portion of long-term debt
    
    
    23
    
    
    
    24Trade accounts payable
    
    
    1,651
    
    
    
    1,626Accrued compensation
    
    
    319
    
    
    
    282Income taxes
    
    
    237
    
    
    
    187Other current liabilities
    
    
    913
    
    
    
    931Total current liabilities
    
    
    3,170
    
    
    
    3,126Long-term debt
    
    
    3,189
    
    
    
    3,708Post-retirement benefits other than pensions
    
    
    937
    
    
    
    935Pension benefits
    
    
    823
    
    
    
    838Deferred income taxes
    
    
    223
    
    
    
    222Long-term liabilities
    
    
    293
    
    
    
    300Total liabilities
    
    
    8,635
    
    
    
    9,129Minority interests
    
    
    62
    
    
    
    50Stockholders equity:Capital stock
    
    
    1
    
    
    
    1Paid-in-capital
    
    
    1,131
    
    
    
    868Accumulated deficit
    
    
    (10
    )
    
    
    (101
    )Accumulated other comprehensive losses
    
    
    (37
    )
    
    
    (40
    )Total stockholders equity
    
    
    1,085
    
    
    
    728$
    9,782
    
    
    $
    9,907
 See accompanying notes to consolidated and combined financial statements. 4




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TRW Automotive Holdings Corp. 
 Consolidated and Combined Statements of Cash Flows
 Successor
    
    PredecessorNine months
    
    Seven months
    
    Two monthsended
    
    ended
    
    endedSeptember 24,
    
    September 26,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2003(unaudited)
    
    (unaudited)Operating activitiesNet earnings (losses)
    
    $
    91
    
    
    $
    (100
    )
    
    $
    31Adjustments to reconcile net earnings (losses) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    366
    
    
    
    278
    
    
    
    84Interest on pay-in-kind Seller Note
    
    
    34
    
    
    
    24
    
    
    
    Purchased in-process research and development
    
    
    
    
    
    
    85
    
    
    
    Pension and other post-retirement benefits, net of contributions
    
    
    (35
    )
    
    
    3
    
    
    
    (28
    )Amortization of deferred financing fees
    
    
    7
    
    
    
    7
    
    
    
    Loss on retirement of debt
    
    
    48
    
    
    
    31
    
    
    
    Deferred income taxes
    
    
    5
    
    
    
    
    
    
    
    (3
    )Other  net
    
    
    5
    
    
    
    9
    
    
    
    6Changes in assets and liabilities, net of effects of businesses
acquired or divested:Accounts receivable, net
    
    
    (582
    )
    
    
    (322
    )
    
    
    (284
    )Inventories
    
    
    (31
    )
    
    
    65
    
    
    
    2Trade accounts payable
    
    
    25
    
    
    
    (37
    )
    
    
    64Other assets
    
    
    (13
    )
    
    
    67
    
    
    
    17Other liabilities
    
    
    116
    
    
    
    187
    
    
    
    38Net cash provided by (used in) operating activities
    
    
    36
    
    
    
    297
    
    
    
    (73
    )Investing activitiesCapital expenditures including other intangibles
    
    
    (248
    )
    
    
    (152
    )
    
    
    (66
    )Acquisitions, net of cash acquired
    
    
    (5
    )
    
    
    (3,291
    )
    
    
    Acquisition transaction fees
    
    
    
    
    
    
    (56
    )
    
    
    Net proceeds from divestitures
    
    
    10
    
    
    
    31
    
    
    
    Proceeds from asset sales
    
    
    69
    
    
    
    
    
    
    
    Other  net
    
    
    
    
    
    
    17
    
    
    
    (2
    )Net cash used in investing activities
    
    
    (174
    )
    
    
    (3,451
    )
    
    
    (68
    )Financing activitiesIncrease (decrease) in short-term debt
    
    
    6
    
    
    
    (58
    )
    
    
    (321
    )Redemption of long-term debt
    
    
    (1,855
    )
    
    
    (46
    )
    
    
    (18
    )Proceeds from issuance of long-term debt
    
    
    1,290
    
    
    
    3,085
    
    
    
    Debt issue costs
    
    
    (7
    )
    
    
    (114
    )
    
    
    Proceeds from initial public offering
    
    
    638
    
    
    
    
    
    
    
    Repurchase of capital stock
    
    
    (319
    )
    
    
    
    
    
    
    Equity contributions
    
    
    
    
    
    
    698
    
    
    
    Net transfers from parent company
    
    
    
    
    
    
    
    
    
    
    503Other  net
    
    
    (3
    )
    
    
    1
    
    
    
    78Net cash provided by (used in) financing activities
    
    
    (250
    )
    
    
    3,566
    
    
    
    242Effect of exchange rate changes on cash
    
    
    (2
    )
    
    
    (13
    )
    
    
    (13
    )Increase (decrease) in cash and cash equivalents
    
    
    (390
    )
    
    
    399
    
    
    
    88Cash and cash equivalents at beginning of period
    
    
    828
    
    
    
    
    
    
    
    188Cash and cash equivalents at end of period
    
    $
    438
    
    
    $
    399
    
    
    $
    276
 See accompanying notes to consolidated and combined financial statements. 5




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TRW Automotive Holdings Corp. 
 Notes to Consolidated and Combined Financial Statements
 1. Description of Business and Change in Ownership Description of Business TRW Automotive Holdings Corp. (also referred to herein as the Company or the
Successor) is among the worlds largest and most diversified suppliers of
automotive systems, modules and components to global automotive vehicle
manufacturers (VMs) and related aftermarkets. The Company conducts
substantially all of its operations through subsidiaries. These operations
primarily encompass the design, manufacture and sale of active and passive
safety related products. Active safety related products principally refer to
vehicle dynamic controls (primarily braking and steering), and passive safety
related products principally refer to occupant restraints (primarily air bags
and seat belts) and crash sensors. The Company is primarily a Tier-1 supplier
(a supplier which sells directly to VMs), with over 85% of its sales in 2003
made directly to VMs. Change in Ownership TRW Automotive Inc. (which the Company did not acquire and was renamed Richmond
TAI Corp.) (Automotive) was incorporated in Delaware on June 3, 2002 as a
wholly owned subsidiary of TRW Inc. (Old TRW) in contemplation of the
spin-off announced by the Old TRW Board of Directors in March 2002.
Automotive, together with Old TRWs other subsidiaries engaged in the
automotive business, comprised Old TRWs automotive business. This automotive
business is referred to herein as the Companys predecessor and financial
information related to this automotive business is included in the predecessor
financial statements included herein. Prior to the consummation of the planned spin-off, Old TRW entered into an
Agreement and Plan of Merger with Northrop Grumman Corporation (Northrop),
dated June 30, 2002, whereby Northrop would acquire all of the outstanding
common stock of Old TRW, including Old TRWs automotive business, in exchange
for Northrop shares. The acquisition of Old TRW by Northrop was completed on
December 11, 2002 (the Merger). Additionally, on November 18, 2002, an entity controlled by affiliates of The
Blackstone Group, L.P. (Blackstone), entered into a master purchase
agreement, as amended, (the Master Purchase Agreement) pursuant to which the
Company, a newly-formed entity, would cause its indirect wholly-owned
subsidiary, TRW Automotive Acquisition Corp., to purchase the shares of the
subsidiaries of Old TRW engaged in the automotive business from Northrop (the
Acquisition). The predecessors 51% interest in the joint venture, TRW Koyo
Steering Systems Company (TKS), was not transferred to the Company as part of
the Acquisition. The Acquisition was completed on February 28, 2003. Subsequent to the
Acquisition, TRW Automotive Acquisition Corp. changed its name to TRW
Automotive Inc. (referred to herein as TRW Automotive). Upon completion of
the Acquisition, a subsidiary of Northrop retained a 19.6% interest in the
Company. The Company was capitalized by cash equity contributions totaling $698 million
(further described below) and contributed the $698 million in cash plus newly
issued shares of its common stock having an implied value of $170 million to
TRW Automotive Intermediate Holdings Corp. (Intermediate), which is the
direct parent of TRW Automotive. Intermediate issued a $600 million face amount
subordinated 8% pay-in-kind note due 2018 (the Seller Note) to an affiliate
of Northrop to acquire a portion of the stock of certain Old TRW automotive
subsidiaries. The Seller Note had an estimated fair value of $348 million
(excluding related deferred tax) as of the Acquisition date. Intermediate
contributed such stock together with cash equity contributions of $698 million
and the $170 million of the Companys common stock to TRW Automotive for 6




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ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 100% of TRW Automotives stock. Intermediate has no independent operations or
investments other than its investment in TRW Automotive. The Company reached
an agreement with Northrop on October 10, 2004 to purchase the Seller Note,
subject to financing, and to settle various contractual issues stemming from
the Acquisition. See Note 3. 2. Basis of Presentation These consolidated and combined financial statements should be read in
conjunction with the consolidated and combined financial statements and notes
thereto included in the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, filed with the Securities and Exchange Commission
(SEC). Certain prior period amounts have been reclassified to conform to
current year presentation. As a result of the Acquisition on February 28, 2003, the consolidated financial
statements of the Company reflect the Acquisition under the purchase method of
accounting, in accordance with the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations (SFAS 141). For periods following the Acquisition,
the consolidated financial statements of the Company are presented as
Successor. For periods preceding the Acquisition, the combined financial
statements are presented as Predecessor. The accompanying unaudited consolidated financial statements of the Successor
and the unaudited combined financial statements of the Predecessor have been
prepared pursuant to the rules and regulations of the SEC for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States (GAAP) for complete financial statements. These financial statements
include all adjustments (consisting of normal, recurring adjustments)
considered necessary for a fair presentation of the financial position and
results of operations of the Company. Operating results for the nine months
ended September 24, 2004 are not necessarily indicative of results that may be
expected for the year ending December 31, 2004. Earnings per share.Basic earnings (losses) per share are calculated by
dividing net earnings (losses) by the weighted average shares outstanding
during the period. Diluted earnings (losses) per share reflect the weighted
average impact of all potentially dilutive securities from the date of
issuance. Actual weighted average shares outstanding used in calculating
earnings per share were: SuccessorThree monthsended
    
    Nine monthsended
    
    Seven monthsendedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,(In millions)
    
    2004
    
    2003
    
    2004
    
    2003Weighted average shares outstanding
    
    
    98.9
    
    
    
    86.8
    
    
    
    97.4
    
    
    
    86.8Effect of dilutive securities
    
    
    2.3
    
    
    
    
    
    
    
    2.8
    
    
    
    Diluted shares outstanding
    
    
    101.2
    
    
    
    86.8
    
    
    
    100.2
    
    
    
    86.8
 Basic and diluted losses per share for the three and seven months ended
September 26, 2003 have been retroactively adjusted to reflect the 100 for one
stock split effected on January 27, 2004. Earnings per share are not calculated for the Predecessor period as there were
no shares outstanding during the period. 7




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ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 Warranties.Product warranty liabilities are recorded based upon management
estimates including such factors as written agreements with customers, the
length of the warranty periods, the historical performance of the products and
likely changes in performance of newer products and the mix and volume of
products sold. The liabilities are reviewed on a regular basis and adjusted to
reflect actual experience. The following table presents the movement in the product warranty liabilities
for the three and nine months ended September 24, 2004, the three and seven
months ended September 26, 2003, and the two months ended February 28, 2003: Change inCurrent
    
    Used for
    
    EstimatesBeginning
    
    Period
    
    Purposes
    
    and
    
    Ending(Dollars in millions)
    
    Balance
    
    Accruals
    
    Intended
    
    Translation
    
    BalanceThree months ended September 24, 2004
    
    $
    92
    
    
    $
    16
    
    
    $
    (9
    )
    
    $
    (4
    )
    
    $
    95Nine months ended September 24, 2004
    
    
    74
    
    
    
    49
    
    
    
    (23
    )
    
    
    (5
    )
    
    
    95Three months ended September 26, 2003
    
    
    50
    
    
    
    7
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    52Seven months ended September 26, 2003
    
    
    46
    
    
    
    20
    
    
    
    (15
    )
    
    
    1
    
    
    
    52Two months ended February 28, 2003
    
    
    43
    
    
    
    8
    
    
    
    (5
    )
    
    
    
    
    
    
    46
 Stock-based compensation.Stock options under employee compensation plans are
accounted for using the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
(APB 25) and related interpretations. Pursuant to APB 25, no stock-based
employee compensation expense is reflected in net earnings (losses) if options
granted have exercise prices greater than or equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect on net earnings (losses) as if the
fair value recognition provisions of SFAS 123, Accounting for Stock-Based
Compensation, had been applied to stock-based employee compensation: Successor
    
    PredecessorThree monthsended
    
    Nine months
    
    Seven months
    
    Two monthsended
    
    ended
    
    endedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,
    
    February 28,(In millions, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Net earnings (losses), as reported
    
    $
    13
    
    
    $
    (34
    )
    
    $
    91
    
    
    $
    (100
    )
    
    $
    31Add: Stock-based compensation as reported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: Stock-based compensation under
SFAS 123 fair value method, net of
related tax effects
    
    
    (2
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    (5
    )
    
    
    Adjusted net earnings (losses), fair
value method
    
    $
    11
    
    
    $
    (36
    )
    
    $
    85
    
    
    $
    (105
    )
    
    $
    31Basic earnings (losses) per share:Earnings (losses) per share
    
    $
    0.11
    
    
    $
    (0.41
    )
    
    $
    0.87
    
    
    $
    (1.21
    )
    
    NAWeighted average shares
    
    
    98.9
    
    
    
    86.8
    
    
    
    97.4
    
    
    
    86.8
    
    
    NADiluted earnings (losses) per share:Earnings (losses) per share
    
    $
    0.11
    
    
    $
    (0.41
    )
    
    $
    0.85
    
    
    $
    (1.21
    )
    
    NAWeighted average shares
    
    
    101.2
    
    
    
    86.8
    
    
    
    100.2
    
    
    
    86.8
    
    
    NA
 8




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ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 Recent accounting pronouncements.In January 2004, the FASB issued FASB Staff
Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP
106-1). FSP 106-1 permitted a sponsor of a post-retirement health care plan
that provides a prescription drug benefit to make a one-time election to defer
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the MPD Act). In May 2004, the FASB issued FASB Staff Position No. FAS 106-2 (FSP 106-2),
which superseded FSP 106-1. FSP 106-2 provides authoritative guidance on the
accounting for the federal subsidy provided by the MPD Act and specifies the
disclosure requirements for employers who have adopted FSP 106-2. The Centers
for Medicare and Medicaid Services (CMS), the administrative body for
implementation and maintenance of the prescription drug benefit portion of the
MPD Act, have issued preliminary regulatory guidance on calculation of the
federal subsidy. In accordance with such guidance from the CMS and the
guidance provided by the FASB, the Company has adopted the provisions of FSP
106-2 in the third quarter of 2004 and has elected to recognize the effect of
the subsidy retroactively. See Note 11. 3. Subsequent Event On October 10, 2004, the Company entered into a note purchase and settlement
agreement (the Note Purchase and Settlement Agreement) with Northrop, a
subsidiary of Northrop, Intermediate and Automotive Investors L.L.C. (AI
LLC), an affiliate of Blackstone. The Note Purchase and Settlement Agreement
provides for (i) mutual releases by Northrop and the Company from certain
potential indemnification claims under certain agreements entered into in
connection with the Acquisition (the Released Claims) and (ii) Intermediate
to make a net cash payment of approximately $494 million to Northrop in respect
of the purchase of the Seller Note. The cash payment of approximately $494
million for the Seller Note is net of a credit of approximately $41 million
ascribed to the Released Claims. On November 2, 2004, the Company amended and
restated its existing credit agreement in order to add a six-year tranche E
term loan, which was issued in the amount of $300 million and bears interest at
variable interest rates. The proceeds from the new term loan, together with
available cash on hand and, to the extent needed, funds obtained under existing
liquidity arrangements, will be used by Intermediate to purchase the Seller
Note pursuant to the Note Purchase and Settlement Agreement on or prior to
November 22, 2004. As of September 24, 2004, the Companys third quarter close date, the book
value of the Seller Note, including accrued interest, was $417 million.
Additionally, as of September 24, 2004, the Seller Note had a face value,
including accrued interest, of $678 million. The Company expects to record a
fourth quarter pre-tax charge of approximately $115 million for loss on
retirement of debt resulting primarily from the difference between the purchase
price ascribed to the Seller Note and the book value of the Seller Note on the
Companys balance sheet. This loss is U.S. based and therefore carries zero
tax benefit due to the Companys tax loss position in this jurisdiction. In addition, Northrop agreed to pay directly to AI LLC (for the benefit of AI
LLC and certain other stockholders) an aggregate of approximately $53 million
in respect of a contractual indemnification obligation relating to the
settlement of certain cash OPEB payments. Under the terms of the Master
Purchase Agreement, Northrop was required to make such payments, following the
Companys initial public offering, to the Companys non-employee stockholders
as of the date of the closing of the Acquisition who remain stockholders as of
the date of such payment, in proportion to their beneficial ownership of the
Companys voting securities as of such date of payment. AI LLC in turn had
agreed to share such payments with certain other pre-initial public offering
stockholders. Of the $53 million payment from Northrop to AI LLC, an aggregate
of approximately $1 million is to be paid by AI LLC to certain pre-initial
public offering stockholders (including employees and executive officers) in
proportion to their share ownership as a return of their initial capital
investment. 9




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 In addition, pursuant to the Note Purchase and Settlement Agreement, (i) the
Company caused its salaried pension plan to pay approximately $21 million (plus
associated earnings since the Acquisition) to the salaried pension plan of a
subsidiary of Northrop in connection with the original agreement (at the time
of the Acquisition) regarding the split of pension assets at the time of the
Acquisition and (ii) the Companys salaried pension plan reimbursed such
Northrop subsidiarys salaried pension plan for approximately $5 million in
benefits which it paid to the Companys plan participants. Such payments had
no impact on the Companys financial statements as the payments were
trust-to-trust transfers. The Note Purchase and Settlement Agreement also clarifies certain ongoing
indemnification matters under the Master Purchase Agreement entered into in
connection with the Acquisition, amends certain terms under the related
employee matters agreement to clarify the intent of the parties and settles
certain matters relating to such agreement. The settlement of the matters
relating to the employee matters agreement resulted in the reduction in
short-term debt as of September 24, 2004 referenced below. The Company reduced goodwill by $128 million as of September 24, 2004 related
to settlement of the foregoing matters. The $128 million consisted of $34
million reduction in short-term debt for settlement of certain matters relating to the
employee matters agreement, net of other receivables for contractual matters
recorded at the Acquisition, $41 million ascribed to the Released Claims and
$53 million for the cash OPEB payments. See Note 7. The Note Purchase and Settlement Agreement contains such other releases and
terms as are customary for agreements of this kind. 4. Divestitures and Asset Sales During the three months ended March 26, 2004, the Company completed two
sale-leaseback transactions involving certain land and buildings used for
corporate and engineering activities in Shirley, England and Livonia, Michigan.
The Company received cash on the disposals of approximately $90 million
(including unremitted VAT of approximately $14 million) and $7 million,
respectively. The Shirley transaction included a capital lease component of
$21 million due to the retention of interest by the Company in certain
buildings. On January 9, 2004, the Company completed the disposal of its North American
Independent Aftermarket business, (Autospecialty) which had sales of
approximately $55 million in 2003. Proceeds from the sale were approximately
$10 million, net of cash retained in the business. Through the sale date,
Autospecialtys financial position and results of operations were included in
the Companys consolidated and combined financial statements. 5. Restructuring For the three months ended September 24, 2004, Chassis Systems, Occupant Safety
Systems and Automotive Components recorded charges of $1 million, $2 million
and $2 million, respectively, for severance and costs related to the
consolidation of certain facilities. For the nine months ended September 24, 2004, Chassis Systems, Occupant Safety
Systems and Automotive Components recorded charges of $11 million, $3 million,
and $4 million, respectively, for severance and costs related to the
consolidation of certain facilities. For the three and seven months ended September 26, 2003, Chassis Systems
recorded charges totaling $13 million and $16 million, respectively, for
severance costs related to the consolidation of certain entities. For the two
months ended February 28, 2003, Chassis Systems and Occupant Safety Systems
recorded charges of $2 million and $1 million, respectively, for severance and
costs related to the consolidation of certain facilities. 10




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 The following table illustrates the movement of the restructuring reserves: ProvisionAdministrative
    
    Cost
    
    
    PurchaseBeginning
    
    and
    
    of
    
    
    Price
    
    Used for Purposes
    
    Ending(Dollars in millions)
    
    Balance
    
    Selling
    
    Sales
    
    
    Allocation
    
    Intended
    
    BalanceThree months ended September 24, 2004
    
    $
    54
    
    
    $
    1
    
    
    $
    4
    
    
    
    $
    
    
    
    $
    (13
    )
    
    $
    46Nine months ended September 24, 2004
    
    
    79
    
    
    
    3
    
    
    
    15
    
    
    
    
    2
    
    
    
    (53
    )
    
    
    46Three months ended September 26, 2003
    
    
    79
    
    
    
    5
    
    
    
    8
    
    
    
    
    
    
    
    
    (17
    )
    
    
    75Seven months ended September 26, 2003
    
    
    51
    
    
    
    8
    
    
    
    8
    
    
    
    
    37
    
    
    
    (29
    )
    
    
    75Two months ended February 28, 2003
    
    
    61
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    
    (13
    )
    
    
    51
 Of the $46 million restructuring reserve accrued at September 24, 2004,
approximately $15 million is expected to be paid through the remainder of 2004,
and approximately $15 million relates to involuntary employee termination
arrangements outside the United States to be paid over the next several years
in accordance with local law. 6. Inventories As ofSeptember 24,
    
    December 31,(Dollars in millions)
    
    2004
    
    2003Finished products and work in process
    
    $
    334
    
    
    $
    385Raw materials and supplies
    
    
    283
    
    
    
    250$
    617
    
    
    $
    635
 7. Goodwill and Intangible Assets Goodwill The changes in goodwill for the period are as follows: OccupantChassis
    
    Safety
    
    AutomotiveSystems
    
    Systems
    
    Components(Dollars in millions)
    
    Segment
    
    Segment
    
    Segment
    
    TotalBalance as of December 31, 2003
    
    $
    1,001
    
    
    $
    971
    
    
    $
    531
    
    
    $
    2,503First quarter purchase price adjustments
    
    
    (6
    )
    
    
    (10
    )
    
    
    
    
    
    
    (16
    )Third quarter purchase price adjustments
(Northrop settlement  See Note 3)
    
    
    (52
    )
    
    
    (49
    )
    
    
    (27
    )
    
    
    (128
    )Balance as of September 24, 2004
    
    $
    943
    
    
    $
    912
    
    
    $
    504
    
    
    $
    2,359
 The Company reduced goodwill by $128 million as of September 24, 2004 related
to settlement of the matters in the Note Purchase and Settlement Agreement.
The $128 million consisted of $34 million reduction in short-term debt for settlement of
certain matters relating to the employee matters agreement, net of other
receivables for contractual matters recorded at the Acquisition, $41 million
ascribed to the Released Claims and $53 million for the cash OPEB payments.
See Note 3. 11




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 Intangible Assets The following table reflects intangible assets and related amortization
information: As of
    
    As ofSeptember 24, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    Carrying
    
    Accumulated(Dollars in millions)
    
    Amount
    
    Amortization
    
    Amount
    
    AmortizationIntangible assets subject to amortizationCustomer relationships
    
    $
    452
    
    
    $
    (36
    )
    
    
    451
    
    
    
    (19
    )Developed technology
    
    
    80
    
    
    
    (16
    )
    
    
    79
    
    
    
    (8
    )Total
    
    
    532
    
    
    $
    (52
    )
    
    
    530
    
    
    $
    (27
    )Intangible assets not subject to amortizationTrademarks
    
    
    292
    
    
    
    
    
    
    
    292Total
    
    $
    824
    
    
    
    
    
    
    $
    822Aggregate Amortization ExpenseFor the nine months ended September 24, 2004
    
    $
    25
 The estimated annual amortization expense for 2004 through 2008 is $33 million. 8. Other (Income) Expense  Net Successor
    
    PredecessorThree monthsended
    
    Nine monthsended
    
    Seven monthsended
    
    Two monthsendedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Minority interest
    
    $
    3
    
    
    $
    3
    
    
    $
    10
    
    
    $
    8
    
    
    $
    4Asset impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Earnings of affiliates
    
    
    (3
    )
    
    
    (3
    )
    
    
    (11
    )
    
    
    (5
    )
    
    
    (1
    )Foreign currency exchange (gains) losses
    

    
    3
    
    
    
    
    
    
    
    3
    
    
    
    (16
    )
    
    
    4Miscellaneous other (income) expense
    
    
    4
    
    
    
    (4
    )
    
    
    (11
    )
    
    
    (15
    )
    
    
    (4
    )$
    7
    
    
    $
    (4
    )
    
    $
    (9
    )
    
    $
    (28
    )
    
    $
    4
 12




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 9. Operating Segments Successor
    
    PredecessorThree monthsended
    
    Nine monthsended
    
    Seven monthsended
    
    Two monthsendedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 25,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Sales to external customers:Chassis Systems
    
    $
    1,620
    
    
    $
    1,473
    
    
    $
    5,126
    
    
    $
    3,715
    
    
    $
    1,110Occupant Safety Systems
    
    
    751
    
    
    
    725
    
    
    
    2,504
    
    
    
    1,871
    
    
    
    555Automotive Components
    
    
    368
    
    
    
    338
    
    
    
    1,195
    
    
    
    867
    
    
    
    251$
    2,739
    
    
    $
    2,536
    
    
    $
    8,825
    
    
    $
    6,453
    
    
    $
    1,916Segment profit before taxes:Chassis Systems
    
    $
    67
    
    
    $
    29
    
    
    $
    242
    
    
    $
    60
    
    
    $
    46Occupant Safety Systems
    
    
    48
    
    
    
    53
    
    
    
    231
    
    
    
    132
    
    
    
    53Automotive Components
    
    
    17
    
    
    
    24
    
    
    
    80
    
    
    
    65
    
    
    
    26Segment profit before taxes
    
    
    132
    
    
    
    106
    
    
    
    553
    
    
    
    257
    
    
    
    125Corporate expense and other
    
    
    (37
    )
    
    
    (34
    )
    
    
    (103
    )
    
    
    (56
    )
    
    
    (28
    )Financing costs
    
    
    (60
    )
    
    
    (84
    )
    
    
    (183
    )
    
    
    (229
    )
    
    
    (47
    )Loss on retirement of debt
    
    
    
    
    
    
    (31
    )
    
    
    (48
    )
    
    
    (31
    )
    
    
    Earnings (losses) before income taxes
    
    $
    35
    
    
    $
    (43
    )
    
    $
    219
    
    
    $
    (59
    )
    
    $
    50Intersegment sales:Chassis Systems
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    1
    
    
    $
    Occupant Safety Systems
    
    
    7
    
    
    
    3
    
    
    
    16
    
    
    
    4
    
    
    
    1Automotive Components
    
    
    14
    
    
    
    11
    
    
    
    40
    
    
    
    26
    
    
    
    7$
    22
    
    
    $
    15
    
    
    $
    58
    
    
    $
    31
    
    
    $
    8
 10. Income Taxes Under
Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, the Company is required to adjust its effective tax rate each
quarter to be consistent with the estimated annual effective tax rate. The
provision for income taxes for the three months ended September 24, 2004, was
$22 million on pre-tax income of $35 million as compared to income tax benefit
of $9 million on pre-tax loss of $43 million in the same period a year ago.
For the nine months ended September 24, 2004, the Company recorded income tax
expense of $128 million on pre-tax income of $219 million as compared to income
tax expense of $41 million on a pre-tax loss of $59 million for the seven
months ended September 26, 2003 and income tax expense of $19 million on
pre-tax income of $50 million for the two months ended February 28, 2003. The
income tax rate varies from the United States statutory income tax rate due
primarily to losses in the United States without recognition of a corresponding
income tax benefit and higher than United States statutory effective income tax
rates in certain foreign jurisdictions. Included in the tax provision
calculation for the nine months ended September 24, 2004, are charges of $48
million related to debt prepayment and debt refinancing and $12 million in
other charges on which no corresponding tax benefit was recorded due to the
valuation allowance in the United States. Excluding these items, the
Company's estimated annual effective tax rate will be approximately
46%. 13




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 Income tax expense for the seven month period ended September 26, 2003,
resulted primarily from not providing a tax benefit for the losses in the
United States and certain foreign countries. For the two months ended February
28, 2003, the combined statements of operations include an allocation to the
Predecessor of Northrops income taxes, in amounts generally equivalent to the
provisions that would have resulted had these entities filed separate income
tax returns for the period presented. 11. Pension Plans and Post-Retirement Benefits Other Than Pensions (OPEB) The following table provides the components of net pension cost (income) for
the Companys defined benefit pension plans for the three and nine months ended
September 24, 2004, the three and seven months ended September 26, 2003, and
the two months ended February 28, 2003: Successor
    
    PredecessorThree monthsended
    
    Nine monthsended
    
    Seven monthsended
    
    Two monthsendedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,
    
    February 28,2004
    
    2003
    
    2004
    
    2003
    
    2003(Dollars in millions)
    
    U.S.
    
    Non-U.S.
    
    U.S.
    
    Non-U.S.
    
    U.S.
    
    Non-U.S.
    
    U.S.
    
    Non- U.S.
    
    U.S.
    
    Non- U.S.Defined benefit plansService cost
    
    $
    8
    
    
    $
    15
    
    
    $
    8
    
    
    $
    12
    
    
    $
    24
    
    
    $
    39
    
    
    $
    21
    
    
    $
    26
    
    
    $
    5
    
    
    $
    7Interest cost on projected benefit
obligations
    
    
    17
    
    
    
    69
    
    
    
    14
    
    
    
    60
    
    
    
    51
    
    
    
    184
    
    
    
    37
    
    
    
    133
    
    
    
    10
    
    
    
    37Expected return on plan assets
    
    
    (13
    )
    
    
    (87
    )
    
    
    (12
    )
    
    
    (78
    )
    
    
    (39
    )
    
    
    (233
    )
    
    
    (31
    )
    
    
    (173
    )
    
    
    (13
    )
    
    
    (80
    )Amortization of unrecognized loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    10Net pension cost (income)
    
    $
    12
    
    
    $
    (3
    )
    
    $
    10
    
    
    $
    (6
    )
    
    $
    36
    
    
    $
    (10
    )
    
    $
    27
    
    
    $
    (14
    )
    
    $
    3
    
    
    $
    (26
    )
 The following table provides the components of net post-retirement benefit cost
for the plans for the three and nine months ended September 24, 2004, the three
and seven months ended September 26, 2003, and the two months ended February
28, 2003. The net post-retirement benefit cost for the nine months ended
September 24, 2004 includes the retroactive recognition of the prescription
drug subsidy provided for in the MPD Act as discussed below: Successor
    
    PredecessorThree monthsended
    
    Nine monthsended
    
    Seven monthsended
    
    Two monthsendedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Service cost
    
    $
    3
    
    
    $
    3
    
    
    $
    6
    
    
    $
    6
    
    
    $
    2Interest cost
    
    
    14
    
    
    
    16
    
    
    
    46
    
    
    
    38
    
    
    
    10Amortization of unrecognized income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net post-retirement benefit cost
    
    $
    17
    
    
    $
    19
    
    
    $
    52
    
    
    $
    44
    
    
    $
    13
 The MPD Act, which was signed into law on December 8, 2003, expanded Medicare
to include, for the first time, coverage for prescription drugs. The Company
sponsors retiree welfare programs and has determined that this legislation
reduces the Companys costs for some of these programs. In accordance with
guidance from the CMS and the FASB, the Company has adopted the provisions of
FSP 106-2 in the third quarter of 2004 and has elected to recognize the effect
of the subsidy retroactively. 14




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 Retroactive recognition of the subsidy reduced expense by $1 million in the
first six months of 2004, which has been reflected in the accompanying
consolidated statement of operations for the nine months ended September 24,
2004. Additionally, recognition of the subsidy reduced expense for the third
quarter of 2004 by $1 million, and has been reflected in the accompanying
consolidated statement of operations for the three and nine months ended
September 24, 2004. The impact on net post-retirement benefit cost for the
fourth quarter of 2004 is expected to be an additional $1 million. The reductions in expense are applicable to service cost, interest cost and
amortization of a portion of the reduction in obligations. The total impact of
the MPD Act on the Companys actuarial liability is expected to be $53 million,
and is being accounted for as an actuarial gain in accordance with guidance
from the FASB. As a result, the gain will be aggregated with other
unrecognized gains and losses, with the portion of such net amount in excess of
10% of the underlying obligations being amortized over various periods relating
to the expected lifetimes or expected future working lifetimes of the related
participants, depending on the plan. Future authoritative regulations issued
by the CMS, including further guidance on determining eligibility for the
subsidy, could require the Company to re-determine the impact of this
legislation. See Note 2 for further discussion. The
assumptions used in the measurement of the post-retirement benefit
obligation as of the measurement date of October 31, 2003 were: Discount rate
    
    
    5.50 - 6.25
    %
 For
the ten months ended December 31, 2003, the following
assumptions were used to
determine net post-retirement benefit cost: Discount rate
    
    
    5.50 - 6.50
    %
 The assumed healthcare cost trend rates as of the measurement date of October
31, 2003 were: Initial rate at end of year
    
    8.00 - 10.00%Ultimate rate
    
    2.25 - 5.00%Year in which ultimate rate is reached
    
    2010
 A one-percentage-point change in the assumed health care cost trend rate would
have had the following effects: One Percentage Point(Dollars in millions)
    
    Increase
    
    DecreaseEffect on total of service and interest cost components
for the ten months ended December 31, 2003
    
    $
    8
    
    
    $
    (7
    )Effect on post-retirement benefit obligations as of December 31, 2003
    
    $
    112
    
    
    $
    (97
    )
 15




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 12. Debt and Capital Stock Total outstanding debt of the Company as of September 24, 2004, and December
31, 2003, consisted of the following: (Dollars in millions)
    
    September 24, 2004
    
    December 31, 2003Short-term debt
    
    $
    27
    
    
    $
    76Long-term debtSenior Notes
    
    $
    1,044
    
    
    $
    1,178Senior Subordinated Notes
    
    
    295
    
    
    
    458Term Loan facilities
    
    
    1,209
    
    
    
    1,480Revolving credit facility
    
    
    
    
    
    
    Lucas Industries Limited debentures due 2020
    
    
    189
    
    
    
    189Seller Note
    
    
    417
    
    
    
    382Capitalized leases
    
    
    37
    
    
    
    19Other borrowings
    
    
    21
    
    
    
    26Total long-term debt
    
    
    3,212
    
    
    
    3,732Less current portion
    
    
    23
    
    
    
    24$
    3,189
    
    
    $
    3,708
 On January 9, 2004, the Company refinanced all of the borrowings under its
then-existing term loan facilities with the proceeds of new term loan
facilities, together with approximately $213 million of available cash on hand.
Deferred debt issuance costs associated with the then-existing term loan
facilities of $11 million were expensed in the first quarter of 2004. The new
term loan facilities consist of tranche A-1 term loan issued in a face amount
of $350 million maturing February 2009 and tranche D term loans issued in face
amounts of $800 million and 93 million maturing February 2011. On April 19, 2004, the Company paid down approximately $51 million equivalent
principal amount under its senior secured credit facilities on the
euro-denominated term loan D-2 with available cash on hand. The outstanding
principal balance after this payment is 50 million. Deferred debt issuance
costs of $1 million were expensed in the second quarter of 2004. See Note 3 for a discussion of the settlement agreement reached with Northrop
that reduced short-term debt and provides for the expected purchase of the
Seller Note by Intermediate. Also, see Note 3 for a discussion of the new $300
million tranche E term loan that was entered into in connection with the
expected purchase of the Seller Note. In January 2004, the Company entered into a series of interest rate swap
agreements with a total notional value of $500 million to effectively change a
fixed rate debt obligation into a floating rate obligation. The total notional
amount of these agreements is equal to the face value of the designated debt
instrument. The swap agreements are expected to settle in February 2013, the
maturity date of the corresponding debt instrument. As of September 24, 2004,
approximately $1 million was reduced from the Companys debt reflecting the
mark-to-market adjustment of the interest rate swap agreements. On February 6, 2004, the Company completed an initial public offering of
24,137,931 shares of common stock. Net proceeds from the offering, after
deducting underwriting discounts and offering expenses, were approximately $636
million. The Company used approximately $319 million of the net proceeds from
the offering to repurchase 12,068,965 shares of common stock held by an
affiliate of Blackstone and approximately $317 million of such proceeds to
repay a portion of each of the dollar and euro Senior Notes 16




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 and Senior Subordinated Notes, in each case including the payment of a related
redemption premium thereon. The related redemption premiums totaling $30
million and deferred debt costs totaling $6 million were expensed in the first
quarter of 2004. As of September 24, 2004, TRW Automotive had approximately $54 million in
outstanding letters of credit, none of which had been drawn against. The Companys authorized capital stock consists of (i) 500 million shares of
common stock, par value $.01 per share, of which 98,934,897 shares are issued
and outstanding as of September 24, 2004, and (ii) 250 million shares of
preferred stock, par value $.01 per share, including 500,000 shares of Series A
junior participating preferred stock of which no shares are currently issued or
outstanding. In the quarter ended September 24, 2004, paid-in capital was reduced by $53
million pursuant to the OPEB indemnity payments from Northrop. See Note 3. 13. Other Comprehensive Earnings (Losses) The components of comprehensive earnings (losses), net of related tax, are as
follows: Successor
    
    PredecessorThree monthsended
    
    Nine monthsended
    
    Seven monthsended
    
    Two monthsendedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Net earnings (losses)
    
    $
    13
    
    
    $
    (34
    )
    
    $
    91
    
    
    $
    (100
    )
    
    $
    31Foreign currency translation (losses)
gains, net
    
    
    34
    
    
    
    10
    
    
    
    (4
    )
    
    
    59
    
    
    
    (58
    )Realized gains (losses) on cash flow
hedges, net
    
    
    (2
    )
    
    
    (5
    )
    
    
    7
    
    
    
    (4
    )
    
    
    Comprehensive earnings (losses)
    
    $
    45
    
    
    $
    (29
    )
    
    $
    94
    
    
    $
    (45
    )
    
    $
    (27
    )
 14. Related Party Transactions As part of the Acquisition, the Company executed a Transaction and Monitoring
Fee Agreement with Blackstone whereby Blackstone agreed to provide the Company
monitoring, advisory and consulting services, including advice regarding (i)
structure, terms and negotiation of debt and equity offerings; (ii)
relationships with the Companys and its subsidiaries lenders and bankers;
(iii) corporate strategy; (iv) acquisitions or disposals and (v) other
financial advisory services as more fully described in the agreement. Pursuant
to this agreement, the Company paid Blackstone a transaction fee of $49 million
at the time of the Acquisition. The Company has agreed to pay an annual
monitoring fee of $5 million for these services, approximately $4 million of
which is included in the unaudited consolidated statement of operations for the
nine months ended September 24, 2004, and approximately $3 million of which is
included for the seven months ended September 26, 2003. The combined statements of operations for the two months ended February 28,
2003, include $8 million of administrative and selling expenses and $48 million
of interest expense allocated from Northrop. The Company used approximately $319 million of the net proceeds from the
Companys initial public offering to repurchase 12,068,965 shares of the
Companys common stock held by Automotive Investors L.L.C., an affiliate of
Blackstone, at a price per share equal to $26.46, which is the proceeds per
share received by the Company less the underwriting discounts. 17




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 As of September 24, 2004, the Company has recorded certain receivables from
Northrop related to tax, environmental and other indemnities in the Master
Purchase Agreement. See Note 3 for discussion of an agreement reached with Northrop and certain
payments to pre-initial public offering stockholders, including employees and
executive officers, subsequent to September 24, 2004. 15. Contingencies Various claims, lawsuits and administrative proceedings are pending or
threatened against the Company or its subsidiaries, covering a wide range of
matters that arise in the ordinary course of its business activities with
respect to commercial, product liability and environmental matters. In
addition, the Company and its subsidiaries are conducting a number of
environmental investigations and remedial actions at current and former
locations of certain of the Companys subsidiaries. Along with other
companies, certain subsidiaries of the Company have been named potentially
responsible parties for certain waste management sites. Each of these matters
is subject to various uncertainties, and some of these matters may be resolved
unfavorably with respect to the Company or the relevant subsidiary. A reserve
estimate for each environmental matter is established using standard
engineering cost estimating techniques on an undiscounted basis. In the
determination of such costs, consideration is given to the 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 September 24, 2004, the Company
had reserves for environmental matters of $85 million. In addition, the
Company has established a receivable from Northrop for a portion of this
environmental liability as a result of indemnification provided for in the
Master Purchase Agreement. The Company believes 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 financial position or results of operations. 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 on the Companys financial position or results of operations 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 September 24, 2004, management does
not anticipate that any related liability, after consideration of insurance
recovery, would have a material adverse effect on the Companys financial
condition or results of operations. In October 2000, Kelsey-Hayes Company (formerly known as Fruehauf Corporation)
was served with a grand jury subpoena relating to a criminal investigation
being conducted by the U.S. Attorney for the Southern District of Illinois.
The U.S. Attorney has informed the Company that the investigation relates to
possible wrongdoing by Kelsey-Hayes Company and others involving certain loans
made by Kelsey-Hayes Companys then-parent corporation to Fruehauf Trailer
Corporation, the handling of the trailing liabilities of Fruehauf Corporation
and actions in connection with the 1996 bankruptcy of Fruehauf Trailer
Corporation. Kelsey-Hayes Company became a wholly owned subsidiary of Old TRW
upon Old TRWs acquisition of Lucas Varity in 1999 and became a subsidiary of
the Company upon the Acquisition. The Company has cooperated with the
investigation and is unable to predict the outcome of the investigation at this
time. On May 6, 2002, ArvinMeritor Inc. filed suit against Old TRW in the United
States District Court for the Eastern District of Michigan, claiming breach of
contract and breach of warranty in connection with certain tie rod ends that
Old TRW supplied to ArvinMeritor and the recall of some of these tie rod ends.
ArvinMeritor subsequently recalled all of the tie rod ends, and claims that it
is entitled to reimbursement from Old TRW for the costs associated with both
the products recalled by Old TRW and those recalled by ArvinMeritor on its own.
The parties are engaged in settlement discussions and the Company currently 18




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##### Table of Contents



ITEM 1.
    
    Consolidated and Combined Financial StatementsNotes to Consolidated and Combined Financial Statements (unaudited)(continued)
 expects that a settlement of this matter will be achieved. The Company
established a reserve for this matter in a prior quarter and believes this
reserve is adequate. While certain of the Companys subsidiaries have been subject in recent years
to asbestos-related claims, management believes that such claims will not have
a material adverse effect on the Companys financial condition or results of
operations. In general, these claims seek damages for illnesses alleged to
have resulted from exposure to asbestos used in certain components sold by the
Companys subsidiaries. Management believes that the majority of the claimants
were assembly workers at the major U.S. automobile manufacturers. The vast majority of these claims name as defendants numerous manufacturers and
suppliers of a wide variety of products allegedly containing asbestos.
Management believes that, to the extent any of the products sold by these
subsidiaries and at issue in these cases contained asbestos, the asbestos was
encapsulated. Based upon several years of experience with such claims,
management believes that only a small proportion of the claimants has or will
ever develop any asbestos-related impairment. Neither settlement costs in connection with asbestos claims nor average annual
legal fees to defend these claims have been material in the past. These claims
are strongly disputed by the Company and its subsidiaries and it has been the
policy to defend against them aggressively. Many of these cases have been
dismissed without any payment whatsoever. Moreover, there is significant
insurance coverage with solvent carriers with respect to these claims.
However, while costs to defend and settle these claims in the past have not
been material, there can be no assurances that this will remain so in the
future. Management believes that the ultimate resolution of the foregoing matters will
not have a material adverse effect on the Companys financial condition or
results of operations. 19




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 The following should be read in conjunction with our Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, as filed with the Securities and
Exchange Commission on March 29, 2004, and the other information included
herein. Executive Overview We achieved strong third quarter 2004 results, with net sales of approximately
$2.7 billion, up $203 million or approximately 8% from third quarter 2003. The
increase resulted primarily from a higher level of sales from new product areas
and foreign currency translation, partially offset by pricing provided to
customers and a reduction in sales due to a first quarter 2004 divestiture.
Operating income for third quarter 2004 was $95 million, an increase of $23
million, compared to the prior year operating income. This increase resulted
primarily from an increased level of sales, a higher level of cost savings and
lower restructuring charges, partially offset by pricing provided to customers,
inflation (primarily in the area of ferrous metals) and reserves for pending
litigation among other matters. We achieved our third quarter results despite a decrease in North American
production of 1% (4% at the Big Three where we have higher sales volume) from
the prior year quarter and the continued rapid rise in inflationary pressures
impacting ferrous metals, and most recently, other commodities. In the third
quarter, we continued to work with our suppliers and customers to mitigate the
impact of increasing costs of ferrous metals and other commodities. However,
these inflationary pressures have placed a significant operational and
financial burden on the Company this year and are expected to continue for the
remainder of the year and into 2005. Consequently, we cannot assure you that
we will not experience increased costs or disruptions in supply over the
remainder of the year or longer term, or that such increased costs will not
adversely impact our future earnings. On November 2, 2004, the Company amended and restated its existing credit
agreement to provide for a new $300 million tranche E term loan, the proceeds
of which, as previously announced, will be used along with a combination of
available cash and, to the extent needed, funds obtained under existing
liquidity arrangements to purchase its acquisition-related 8% pay-in-kind
seller note (Seller Note) with a face value, including accrued interest, of
$678 million, from a subsidiary of Northrop Grumman Corporation (Northrop). Basis of Presentation We did not historically operate as a stand-alone business, but as part of TRW
Inc. (Old TRW), which became a subsidiary of Northrop on December 11, 2002.
TRW Automotive Acquisition Corp. acquired the shares of the subsidiaries of TRW
engaged in the automotive business upon consummation of the February 28, 2003
acquisition (the Acquisition). Subsequent to the Acquisition, TRW Automotive
Acquisition Corp. changed its name to TRW Automotive Inc. (referred to herein
as TRW Automotive). Our predecessors 51% interest in the joint venture, TRW
Koyo Steering Systems Company (TKS), was not transferred to us as part of the
Acquisition. Due to the change in ownership, and the resultant application of purchase
accounting, our predecessors pre-Acquisition and our post-Acquisition
financial statements have been prepared on a different basis for the periods
presented and are not comparable. For purposes of the periods presented in
this Managements Discussion and Analysis of Financial Condition and Results of
Operations, the results of operations of our predecessor for the two months
ended February 28, 2003, prior to the Acquisition, and our results of
operations for the seven months ended September 26, 2003, have been combined
for convenience of discussion and are collectively referred to as nine months
ended September 26, 2003. 20




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##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations(continued)
 Results of Operations The following consolidated and combined statements of operations compare the
results of operations for three and nine months ended September 24, 2004 and
September 26, 2003. The related variances include not only the effects of our operations, but also
the estimated effect of the Transactions. Transactions means, collectively,
the Acquisition, (including the issuance of the senior notes and senior secured
notes, entering into the revolving credit and term loan facilities and the
initiation of the trade accounts receivables securitization program) and the
July 22, 2003, refinancing of our senior secured credit facilities as if they
had occurred on January 1, 2003. Total Company Results of Operations CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited) Three months ended
    
    Variance Increase (Decrease)September 24,
    
    September 26,(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    2,739
    
    
    $
    2,536
    
    
    $
    
    
    
    $
    203
    
    
    $
    203Cost of sales
    
    
    2,462
    
    
    
    2,294
    
    
    
    (1
    ) (a)
    
    
    169
    
    
    
    168Gross profit
    
    
    277
    
    
    
    242
    
    
    
    1
    
    
    
    34
    
    
    
    35Administrative and selling expenses
    
    
    131
    
    
    
    127
    
    
    
    
    
    
    
    4
    
    
    
    4Research and development expenses
    
    
    36
    
    
    
    38
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Amortization of intangible assets
    
    
    8
    
    
    
    9
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Other (income) expense  net
    
    
    7
    
    
    
    (4
    )
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Operating income
    
    
    95
    
    
    
    72
    
    
    
    1
    
    
    
    22
    
    
    
    23Interest expense, net
    
    
    60
    
    
    
    84
    
    
    
    (1
    ) (b)
    
    
    (23
    )
    
    
    (24
    )Loss on retirement of debt
    
    
    
    
    
    
    31
    
    
    
    (31
    ) (b)
    
    
    
    
    
    
    (31
    )Earnings (losses) before income taxes
    
    
    35
    
    
    
    (43
    )
    
    
    33
    
    
    
    45
    
    
    
    78Income tax expense
    
    
    22
    
    
    
    (9
    )
    
    
    4
    (c)
    
    
    27
    
    
    
    31Net earnings (losses)
    
    $
    13
    
    
    $
    (34
    )
    
    $
    29
    
    
    $
    18
    
    
    $
    47
   (a)
    
    Reflects the elimination of a $1 million inventory write-up recorded as a
result of the Acquisition. The related inventory was sold in the third
quarter of 2003.(b)
    
    Reflects net financing costs based upon our new capital structure.(c)
    
    Reflects the tax effect of the above variances at the applicable tax
rates. 21




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##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations(continued)
 CONSOLIDATED AND COMBINED
STATEMENTS OF OPERATIONS
(unaudited) Nine months ended
    
    Variance Increase (Decrease)September 24,
    
    September 26,(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    8,825
    
    
    $
    8,369
    
    
    $
    (43
    ) (a)
    
    $
    499
    
    
    $
    456Cost of sales
    
    
    7,855
    
    
    
    7,468
    
    
    
    (100
    ) (b)
    
    
    487
    
    
    
    387Gross profit
    
    
    970
    
    
    
    901
    
    
    
    57
    
    
    
    12
    
    
    
    69Administrative and selling expenses
    
    
    389
    
    
    
    402
    
    
    
    (2
    ) (c)
    
    
    (11
    )
    
    
    (13
    )Research and development expenses
    
    
    115
    
    
    
    119
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Purchased in-process research and development
    
    
    
    
    
    
    85
    
    
    
    (85
    ) (d)
    
    
    
    
    
    
    (85
    )Amortization of intangible assets
    
    
    25
    
    
    
    21
    
    
    
    3
    (e)
    
    
    1
    
    
    
    4Other income net
    
    
    (9
    )
    
    
    (24
    )
    
    
    1
    (f)
    
    
    (16
    )
    
    
    (15
    )Operating income
    
    
    450
    
    
    
    298
    
    
    
    142
    
    
    
    10
    
    
    
    152Interest expense, net
    
    
    183
    
    
    
    251
    
    
    
    (18
    ) (g)
    
    
    (50
    )
    
    
    (68
    )Loss on retirement of debt
    
    
    48
    
    
    
    31
    
    
    
    (31
    ) (g)
    
    
    48
    
    
    
    17Loss on sales of receivables
    
    
    
    
    
    
    25
    
    
    
    (17
    ) (g)
    
    
    (8
    )
    
    
    (25
    )Earnings (losses) before income taxes
    
    
    219
    
    
    
    (9
    )
    
    
    208
    
    
    
    20
    
    
    
    228Income tax expense
    
    
    128
    
    
    
    60
    
    
    
    42
    (h)
    
    
    26
    
    
    
    68Net earnings (losses)
    
    $
    91
    
    
    $
    (69
    )
    
    $
    166
    
    
    $
    (6
    )
    
    $
    160
   (a)
    
    Reflects the sales of TKS, which was not transferred to us as part of the
Acquisition.(b)
    
    Reflects $40 million of cost of sales of TKS, $12 million in pension and
OPEB adjustments as a result of purchase accounting, the effects of a $43
million inventory write-up recorded as a result of the Acquisition and $5
million net decrease in depreciation and amortization expense resulting
from fair value adjustments to fixed assets and certain intangibles.(c)
    
    Reflects the elimination of $1 million of administrative and selling
expense in respect of TKS, the addition of $1 million in the annual
monitoring fee payable to an affiliate of Blackstone and $2 million
decrease in depreciation and amortization expense resulting from fair
value adjustments to fixed assets and capital software.(d)
    
    Reflects the fair value of purchased in-process research and development
expensed as a result of purchase accounting.(e)
    
    Reflects the incremental increase in amortization resulting from
assignment of fair value to certain intangibles.(f)
    
    Reflects $1 million of other expense related to TKS.(g)
    
    Reflects net financing costs based upon our new capital structure and the
initiation of our receivables facility.(h)
    
    Reflects the tax effect of the above variances at the applicable tax
rates. 22




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##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations(continued)
 The results of operations reflect the impact of various unusual items during
the periods discussed. Pretax earnings for the three and nine months ended
September 24, 2004 and September 26, 2003, were negatively impacted by the
effects of these unusual items as presented in the following table: Three months ended
    
    Nine months endedSeptember 24,
    
    September 26,
    


    September 24,
    
    September 26,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003Restructuring charges  Severance and other (cash)
    
    $
    (5
    )
    
    $
    (13
    )
    
    $
    (18
    )
    
    $
    (19
    )Loss on retirement of debt
    
    
    
    
    
    
    (31
    )
    
    
    (48
    )
    
    
    (31
    )Northrop/Old TRW merger-related transaction costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Unusual items pre-tax earnings (losses)
    
    $
    (5
    )
    
    $
    (44
    )
    
    $
    (66
    )
    
    $
    (56
    )
 These unusual items are classified in the statements of operations as
follows: Three months ended
    
    Nine months endedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003Cost of sales
    
    $
    4
    
    
    $
    8
    
    
    $
    15
    
    
    $
    11Administrative and selling expenses
    
    
    1
    
    
    
    5
    
    
    
    3
    
    
    
    13Other expense (income)  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Loss on retirement of debt
    
    
    
    
    
    
    31
    
    
    
    48
    
    
    
    31Reduction in earnings (losses)
before income taxes
    
    
    5
    
    
    
    44
    
    
    
    66
    
    
    
    56Income tax benefit
    
    
    2
    
    
    
    11
    
    
    
    4
    
    
    
    16Reduction in earnings (losses)
    
    $
    3
    
    
    $
    33
    
    
    $
    62
    
    
    $
    40
 Three Months Ended September 24, 2004 Compared to Three Months Ended September 26, 2003 Salesfor the three months ended September 24, 2004 of $2.7 billion increased
$203 million from $2.5 billion for the three months ended September 26, 2003.
Sales increased primarily due to the favorable effect of foreign currency
exchange of $121 million. The increase was also attributable to higher sales
of new products, net of price reductions provided to customers, of $99 million.
Increased sales were partially offset by a net loss of sales of $17 million
due to a first quarter 2004 divestiture. Gross profitfor the three months ended September 24, 2004 of $277 million
increased $35 million from $242 million for the three months ended September
26, 2003. Gross profit increased primarily as a result of cost savings net of
price reductions provided to customers and inflation (which included the
effects of higher costs for ferrous metals) of $28 million, and the positive
impact of higher volume, net of adverse product mix, of $15 million. These
increases were partially offset by $11 million resulting from a combination of
higher warranty expenses and a net increase in litigation reserves.
Gross profit for the three months ended September 24, 2004 and September 26,
2003 included restructuring charges, primarily for severance, of $4 million and
$8 million, respectively. Gross profit for the three months ended September
24, 2004 was 10.1% compared to 9.5% for the three months ended September 26,
2003. Administrative and selling expensesfor the three months ended September 24,
2004 were $131 million compared to $127 million for the three months ended
September 26, 2003. Administrative and selling expenses primarily increased
due to the unfavorable impact of foreign currency exchange and inflation
partially offset by a reduction in restructuring charges. Administrative and
selling expenses for the three months ended September 24, 2004 included
restructuring charges primarily for severance of $1 million compared to $5
million for the three months ended September 26, 2003. Administrative and
selling 23




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##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations(continued)
 expenses as a percentage of sales for the three months ended September 24,
2004, were 4.8% compared to 5.0% for the three months ended September 26, 2003. Research and development expensesfor the three months ended September 24, 2004
were $36 million compared to $38 million for the three months ended September
26, 2003. The reduction in expenses reflected cost savings partially offset by
the unfavorable effect of foreign currency exchange. Research and development
expenses as a percentage of sales were 1.3% for the three months ended
September 24, 2004, and 1.5% for the three months ended September 26, 2003. Other (income) expense  netfor the three months ended September 24, 2004 was
expense of $7 million compared to income of $4 million for the three months
ended September 26, 2003. The decline was primarily a result of foreign
currency exchange losses and lower miscellaneous other income. Interest expense, netfor the three months ended September 24, 2004 was $60
million compared to $84 million for the three months ended September 26, 2003.
The decline in interest expense resulted primarily from the March 2004 pay down
of debt with the proceeds from our initial public offering and available cash,
the January 2004 refinancing, and the use of interest rate swaps. Loss on retirement of debtfor the three months ended September 26, 2003 of $31
million was primarily due to the expensing of unamortized deferred debt
issuance costs in connection with the July 2003 refinancing of the
then-existing term loan bank facilities. Income tax expensefor the three months ended September 24, 2004 was $22
million on pre-tax income of $35 million as compared to income tax benefit of
$9 million on pre-tax losses of $43 million for the three months ended
September 26, 2003. The income tax rate varies from the United States
statutory income tax rate due primarily to losses in the United States without
recognition of a corresponding income tax benefit and higher than United States
statutory effective income tax rates in certain foreign jurisdictions. Earnings before interest, taxes, depreciation and amortization (EBITDA):
EBITDA is defined as earnings (losses) before interest, losses on sales of
receivables, gain (loss) on retirement of debt, taxes, depreciation and
amortization (EBITDA). EBITDA for the three months ended September 24, 2004
was $215 million compared to $189 million for the three months ended September
26, 2003. EBITDA, a measure used by management to measure performance, is reconciled to
net earnings (losses) in the following table. Our management believes EBITDA
is useful to the investors because it is frequently used by securities
analysts, investors and other interested parties in the evaluation of companies
in our industry. EBITDA is not a recognized term under GAAP and does not
purport to be an alternative to net earnings (losses) as an indicator of
operating performance or to cash flows from operating activities as a measure
of liquidity. Because not all companies use identical calculations, this
presentation of EBITDA may not be comparable to other similarly titled measures
of other companies. Additionally, EBITDA is not intended to be a measure of
free cash flow for managements discretionary use, as it does not consider
certain cash requirements such as interest payments, tax payments and debt
service requirements. The amounts shown for EBITDA, as presented herein,
differ from the amounts calculated under the definition of EBITDA used in our
debt instruments. The definition of EBITDA used in our debt instruments is
further adjusted for certain cash and non-cash charges and is used to determine
compliance with financial covenants and our ability to engage in certain
activities such as incurring additional debt and making certain payments. 24




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##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations(continued)
 The following table provides a reconciliation of net earnings (losses) to
EBITDA: Three months ended(Dollars in millions)
    
    September 24, 2004
    
    September 26, 2003Net earnings (losses)
    
    $
    13
    
    
    $
    (34
    )Depreciation and amortization
    
    
    120
    
    
    
    117Interest expense, net
    
    
    60
    
    
    
    84Loss on retirement of debt
    
    
    
    
    
    
    31Income tax expense (benefit)
    
    
    22
    
    
    
    (9
    )EBITDA
    
    $
    215
    
    
    $
    189
 Nine Months Ended September 24, 2004 Compared to Nine Months Ended September 26, 2003 Salesfor the nine months ended September 24, 2004 of $8.8 billion increased
$456 million from $8.4 billion for the nine months ended September 26, 2003.
The increase primarily resulted from the favorable effect of foreign currency
exchange of $462 million and sales of new products, net of price reductions
provided to customers, of $126 million. These increases were offset by the net
loss of sales from divestitures of $89 million and the absence of TKS sales of
$43 million. Our predecessors interest in TKS was not transferred to us as
part of the Acquisition. Gross profitfor the nine months ended September 24, 2004 of $970 million
increased $69 million from $901 million for the nine months ended September 26,
2003. The increase resulted primarily from higher net costs incurred in 2003
associated with the Transactions of $57 million (which included $12 million of
net pension and OPEB income), the positive impact of higher volume, net of
adverse product mix, of $40 million, the favorable effect of foreign currency
exchange of $33 million, and cost savings in excess of price reductions
provided to customers and inflation (which included the effects of increased
costs for ferrous metals) of $18 million. These increases were partially
offset by a $41 million increase in net pension and OPEB expense, and $22
million resulting from a combination of higher expenses for warranty
and a net increase in litigation reserves and increased costs of $9 million
including restructuring and charges relating to one of our Mexican plants
including an inventory obsolescence adjustment and operational issues. Gross
profit for the nine months ended September 24, 2004 included restructuring
charges of $15 million, primarily for severance and costs to consolidate
facilities, compared to $11 million of restructuring and unusual charges for
the nine months ended September 26, 2003. Gross profit as a percentage of
sales for the nine months ended September 24, 2004 was 11.0% compared to 10.8%
for the nine months ended September 26, 2003. Administrative and selling expensesfor the nine months ended September 24,
2004 of $389 million declined $13 million from $402 million for the nine months
ended September 26, 2003. Lower expenses primarily reflected net cost savings
of $12 million, a reduction in unusual charges of $10 million and lower
expenses due to divested operations of $9 million, partially offset by the
unfavorable impact of foreign currency exchange of $17 million. Administrative
and selling expenses for the nine months ended September 24, 2004 included
restructuring charges of $3 million related to severance compared to $13
million in restructuring and unusual charges for the nine months ended
September 26, 2003. Administrative and selling expenses as a percentage of
sales for the nine months ended September 24, 2004 was 4.4% compared to 4.8%
for the nine months ended September 26, 2003. Research and development expenseswere $115 million for the nine months ended
September 24, 2004 compared to $119 million for the nine months ended September
26, 2003. The reduction in expenses primarily resulted from net cost savings
partially offset by the unfavorable impact of foreign currency 25




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) exchange. Research and development expenses as a percentage of sales were 1.3%
for the nine months ended September 24, 2004 and 1.4% for the nine months ended
September 26, 2003. Purchased in-process research and developmentfor the nine months ended
September 26, 2003 was $85 million. This reflected a write-off of the fair
value of purchased in-process research and development expenses related to the
Acquisition. Other income  netfor the nine months ended September 24, 2004 was income of
$9 million compared to income of $24 million for the nine months ended
September 26, 2003. The decrease was primarily the result of lower foreign
currency exchange gains and lower other miscellaneous income, partially offset
by an increase in earnings from affiliates. Interest expense, netfor the nine months ended September 24, 2004 was $183
million compared to $251 million for the nine months ended September 26, 2003.
The reduction in net interest expense was primarily due to the March 2004 pay
down of debt with proceeds from our initial public offering and available cash,
the January 2004 refinancing, and the use of interest rate swap agreements. Loss on retirement of debtfor the nine months ended September 24, 2004 totaled
$48 million compared to $31 million for the nine months ended September 26,
2003. In 2004, we expensed $30 million of redemption fees and $6 million of
unamortized debt issuance costs associated with the March 2004 repayment of a
portion of each of the dollar and euro-denominated senior notes and senior
subordinated notes and $12 million of unamortized debt issuance costs related
to the January 2004 refinancing of the then-existing term loan facilities and
April 2004 pay down. In 2003, we expensed $31 million of unamortized deferred
debt issuance costs in connection with the July 2003 refinancing of the
then-existing term loan facilities. Income tax expensefor the nine months ended September 24, 2004 was $128
million on pre-tax income of $219 million as compared to income tax expense of
$60 million on a pre-tax loss of $9 million for the nine months ended September
26, 2003. The income tax rate varies from the United States statutory income
tax rate due primarily to losses in the United States without recognition of a
corresponding income tax benefit and higher than United States statutory
effective income tax rates in certain foreign jurisdictions. EBITDAfor the nine months ended September 24, 2004 was $816 million compared
to $660 million for the nine months ended September 26, 2003. The following table provides a reconciliation of net earnings (losses) to
EBITDA: Nine months ended(Dollars in millions)
    
    September 24, 2004
    
    September 26, 2003Net earnings (losses)
    
    $
    91
    
    
    $
    (69
    )Depreciation and amortization
    
    
    366
    
    
    
    362Interest expense, net
    
    
    183
    
    
    
    251Loss on retirement of debt
    
    
    48
    
    
    
    31Loss on sales of receivables
    
    
    
    
    
    
    25Income tax expense
    
    
    128
    
    
    
    60EBITDA
    
    $
    816
    
    
    $
    660
 26




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) CHASSIS SYSTEMS For the three months ended: September 24,
    
    September 26,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    1,620
    
    
    $
    1,473
    
    
    $
    
    
    
    $
    147
    
    
    $
    147Profit before taxes
    
    
    67
    
    
    
    29
    
    
    
    1
    
    
    
    37
    
    
    
    38Unusual items 
income (expense)
included in profit
before taxes
    
    
    (1
    )
    
    
    (13
    )
    
    
    
    
    
    
    12
    
    
    
    12
 For the nine months ended: September 24,
    
    September 26,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    5,126
    
    
    $
    4,825
    
    
    $
    (43
    )
    
    $
    344
    
    
    $
    301Profit before taxes
    
    
    242
    
    
    
    106
    
    
    
    90
    
    
    
    46
    
    
    
    136Unusual items 
income (expense)
included in profit
before taxes
    
    
    (11
    )
    
    
    (18
    )
    
    
    
    
    
    
    7
    
    
    
    7
 Three Months Ended September 24, 2004 Compared to Three Months Ended September
26, 2003 Salesfor the three months ended September 24, 2004 of $1,620 million increased
$147 million from $1,473 million for the three months ended September 26, 2003.
The increase primarily resulted from higher volume and sales of new products,
net of pricing provided to customers, of $97 million and the favorable impact
of foreign currency exchange of $67 million, partially reduced by the net loss
of sales from divestitures of $17 million. Profit before taxesfor the three months ended September 24, 2004 of $67
million increased $38 million from $29 million for the three months ended
September 26, 2003. The increase primarily reflected savings from cost
reduction activities, net of price reductions to customers and inflation (which
included the effects of higher costs for ferrous metals), of $20 million, the
positive impact of higher sales volume, net of negative product mix, of $13
million and a decline in restructuring expenses of $12 million. These
increases were partially reduced by the unfavorable impact of foreign currency
exchange of $6 million. Profit before taxes for the three months ended
September 24, 2004 included restructuring charges of $1 million compared to $13
million of restructuring charges primarily for severance for the three months
ended September 26, 2003. Nine Months Ended September 24, 2004 Compared to Nine Months Ended September
26, 2003 Salesfor the nine months ended September 24, 2004 of $5,126 million increased
$301 million from $4,825 million for the nine months ended September 26, 2003.
Increased sales primarily resulted from the favorable impact of foreign
currency exchange of $264 million, higher volume and sales of new products, net
of price reductions provided to customers, of $108 million, partially offset by
a net loss of sales from divested operations of $28 million and the absence of
$43 million of TKS sales. Our predecessors interest in TKS was not
transferred to us as part of the Acquisition. Profit before taxesfor the nine months ended September 24, 2004 of $242
million increased $136 million from $106 million for the nine months ended
September 26, 2003. Profit before taxes for the nine months ended September
26, 2003 included net expenses totaling $90 million due to the Transactions.
Net costs 27




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) related to the Transactions consisted of a write-off of the fair value of
purchased in-process research and development of $59 million, the unfavorable
effect of an inventory write-up of $27 million, higher depreciation and
amortization expenses of $5 million and TKS profit before taxes of $1 million.
In addition to the absence of these costs related to the Transactions, the
increase resulted primarily from the favorable impact of savings from cost
reductions, net of price reductions to customers and inflation (which included
the effects of higher costs for ferrous metals) of $31 million, the positive
effect of higher volume in excess of adverse product mix of $21 million, and a
reduction in restructuring charges of $7 million. These increases were
partially offset by higher net pension and OPEB expenses of $7 million and
increased warranty expenses of $7 million. Profit before taxes for the nine
months ended September 24, 2004 and September 26, 2003 included restructuring
charges primarily for severance of $11 million and $18 million, respectively. OCCUPANT SAFETY SYSTEMS For the three months ended: September 24,
    
    September 26,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    751
    
    
    $
    725
    
    
    $
    
    
    
    $
    26
    
    
    $
    26Profit before taxes
    
    
    48
    
    
    
    53
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Unusual items 
income (expense)
included in profit
before taxes
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
 For the nine months ended: September 24,
    
    September 26,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    2,504
    
    
    $
    2,426
    
    
    $
    
    
    
    $
    78
    
    
    $
    78Profit before taxes
    
    
    231
    
    
    
    185
    
    
    
    32
    
    
    
    14
    
    
    
    46Unusual items 
income (expense)
included in profit
before taxes
    
    
    (3
    )
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
 Three Months Ended September 24, 2004 Compared to Three Months Ended September
26, 2003 Salesfor the three months ended September 24, 2004 of $751 million increased
$26 million from $725 million for the three months ended September 26, 2003.
The increase resulted primarily from the favorable impact of foreign currency
exchange of $37 million partially offset by price reductions provided to
customers in excess of higher volume of $11 million. Profit before taxesfor the three months ended September 24, 2004 of $48
million declined $5 million from $53 million for the three months ended
September 26, 2003. The decrease resulted primarily from a net increase in
litigation reserves of $7 million, higher restructuring charges, and the
unfavorable effect of adverse product mix, net of the positive effect of higher
sales volume, partially offset by cost savings, net of price reductions
provided to customers and inflation (which included the effects of higher costs
for ferrous metals). Profit before taxes for the three months ended September
24, 2004, included restructuring charges primarily for severance of $2 million. 28




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) Nine Months Ended September 24, 2004 Compared to Nine Months Ended September
26, 2003 Salesfor the nine months ended September 24, 2004 of $2,504 million increased
$78 million from $2,426 million for the nine months ended September 26, 2003.
The increase resulted primarily from the favorable impact of foreign currency
exchange of $133 million, and higher volume, net of price reductions provided
to customers, of $6 million, partially offset by a reduction in sales of $61
million due to the divestiture of our interest in a joint venture in 2003. Profit before taxesfor the nine months ended September 24, 2004 of $231
million increased $46 million from $185 million for the nine months ended
September 26, 2003. Profit before taxes for the nine months ended September
26, 2003 included net expenses related to the Transactions of $32 million. Net
charges related to the Transactions consisted of a write-off of the fair value
of purchased in-process research and development of $26 million and the
unfavorable effect of an inventory write-up of $9 million partially offset by
lower depreciation and amortization expenses of $3 million. In addition to the
absence of the costs related to the Transactions, the increase resulted
primarily from the positive impact of higher volume, net of adverse product
mix, of $14 million, and cost savings, net of price reductions to customers and
inflation (which included the effects of higher costs for ferrous metals), of
$8 million. These increases were partially offset by an increase in costs of
$10 million including an increase in litigation reserves, and higher net
pension and OPEB expenses. Profit before taxes for the nine months ended
September 24, 2004 and September 26, 2003 included restructuring charges
primarily for severance of $3 million and $1 million, respectively. AUTOMOTIVE COMPONENTS For the three months ended: September 24,
    
    September 26,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    368
    
    
    $
    338
    
    
    $
    
    
    
    $
    30
    
    
    $
    30Profit before taxes
    
    
    17
    
    
    
    24
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Unusual items 
income (expense)
included in profit
before taxes
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
 For the nine months ended: September 24,
    
    September 26,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    1,195
    
    
    $
    1,118
    
    
    $
    
    
    
    $
    77
    
    
    $
    77Profit before taxes
    
    
    80
    
    
    
    91
    
    
    
    4
    
    
    
    (15
    )
    
    
    (11
    )Unusual items 
income (expense)
included in profit
before taxes
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )
 Three Months Ended September 24, 2004 Compared to Three Months Ended September
26, 2003 Salesfor the three months ended September 24, 2004 of $368 million increased
$30 million from $338 million for the three months ended September 26, 2003.
The increase resulted primarily from the favorable effect of foreign currency
exchange of $17 million and higher volume in excess of price reductions
provided to customers of $13 million. 29




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) Profit before taxesfor the three months ended September 24, 2004 of $17
million decreased $7 million from $24 million for the three months ended
September 26, 2003. The decrease resulted primarily from an increase in
restructuring costs, a higher level of warranty and pension and OPEB costs and
charges relating to one of our Mexican plants including an inventory
obsolescence adjustment and operational issues. These higher costs were
partially offset by cost savings, net of price reductions to customers and
inflation (which included the effects of higher costs for ferrous metals), and
the positive impact of higher volume, net of adverse product mix. Profit
before taxes for the three months ended September 24, 2004 included
restructuring charges of $2 million for severance and costs to consolidate
certain facilities. Nine Months Ended September 24, 2004 Compared to Nine Months Ended September
26, 2003 Salesfor the nine months ended September 24, 2004 of $1,195 million increased
$77 million from $1,118 million for the nine months ended September 26, 2003.
Higher sales primarily resulted from the favorable impact of foreign currency
exchange of $65 million and the effect of higher volume, net of price
reductions provided to customers, of $12 million. Profit before taxesfor the nine months ended September 24, 2004 of $80 million
declined $11 million from $91 million for the nine months ended September 26,
2003. The decline resulted primarily from price reductions to customers and
inflation (which included the effects of increases costs for ferrous metals),
charges relating to one of our Mexican plants including an inventory
obsolescence adjustment and operational issues, an increase in restructuring
charges and higher warranty expenses partially offset by cost savings, the
absence of costs related to the Transactions, and the favorable impact of
foreign currency exchange. Profit before taxes for the nine months ended
September 24, 2004 included restructuring charges of $4 million primarily for
severance and costs to consolidate certain facilities. Liquidity and Capital Resources Debt and Commitments Our primary source of liquidity is cash flow generated from operations. We also
have availability under our revolving credit facility and receivables
facilities, subject to certain conditions, described below. See Off-Balance
Sheet Arrangements. Our primary liquidity requirements, which are significant,
are expected to be for debt service, working capital, capital expenditures and
research and development costs. We are significantly leveraged. In connection with the Acquisition, TRW
Automotive issued the senior notes and the senior subordinated notes, entered
into senior credit facilities, consisting of a revolving credit facility and
term loan facilities, and initiated a trade accounts receivable securitization
program, or the receivables facility. Also, in connection with the
Acquisition, TRW Automotive Intermediate Holdings Corp., our direct subsidiary
(Intermediate), issued the Northrop subordinated note (the Seller Note) to
an affiliate of Northrop, which Intermediate expects to purchase on or prior to
November 22, 2004. See Settlement with Northrop and Purchase of Seller Note
below. As of September 24, 2004, prior to the amendment and restatement of the
credit agreement described below and the expected purchase of the Seller Note,
we had outstanding $3,239 million in aggregate indebtedness, with an additional
$443 million of borrowing capacity available under our revolving credit
facility, after giving effect to $57 million in outstanding letters of credit
and guarantees, which reduced the amount available. As of September 24, 2004,
approximately $332 million of our total reported accounts receivable balance
was considered eligible for borrowings under our receivables facility, of which
approximately $245 million would have been available for funding, and we had no
advance outstanding under our receivables facility. See Off-Balance Sheet
Arrangements for further discussion of our European facilities, which have
approximately 145 million of funding availability. 30




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) Senior Secured Credit Facilities.The senior secured credit facilities consist
of a secured revolving credit facility and various senior secured term loan
facilities. The revolving credit facility matures in 2009 and provides for
borrowings of up to $500 million including the availability of letters of
credit, and is available in U.S. dollars, euros, pounds sterling and other
currencies. As of September 24, 2004, the term loan facilities, with
maturities ranging from 2009 to 2011, consisted of an aggregate of $1.15
billion dollar-denominated term loans and 50 million euro-denominated term
loan. On November 2, 2004, we entered into an amended and restated credit
agreement with JP Morgan Chase Bank as agent and the other banks and financial
institutions party thereto. The amended and restated credit agreement provides
for a new term loan facility, the proceeds of which will be used towards the
purchase of the Seller Note. The new term loan facility consists of a $300
million tranche E term loan that matures on October 31, 2010 and will amortize
in equal quarterly installments in an amount equal to one percent per annum
during the first five years and nine months and in one final installment on the
maturity date. The tranche E term loan is guaranteed and secured on the same
basis as the existing senior credit facilities, as described below. The senior
credit facilities, as used herein, means the senior credit facilities as
amended to give effect to the November 2, 2004 amendment and restatement of the
credit agreement. After giving effect to the November 2, 2004 amendment and
restatement of the existing credit agreement to provide for the issuance of the
tranche E term loan, the outstanding balance on the term loan facilities
consist of an aggregate of $1.45 billion dollar-denominated term loans and
50 million euro-denominated term loan. Guarantees and Security of Term Loan Facilities. The senior credit facilities
are unconditionally guaranteed on a senior secured basis, in each case, by us,
substantially all our existing and future wholly owned domestic subsidiaries,
including Intermediate, and by TRW Automotive Finance (Luxembourg), S.à.r.l.
In addition, all obligations under the senior credit facilities, including the
new tranche E term loan, and the guarantees of those obligations, are secured
by substantially all of our assets and all the assets of TRW Automotive and
each U.S. guarantor, subject to certain exceptions. The obligations of the
foreign subsidiary borrowers under the senior credit facilities, and foreign
guarantees of such obligations are, subject to certain exceptions and only to
the extent permitted by applicable legal and contractual provisions and to the
extent that it does not result in adverse tax consequences, secured by
substantially all of the assets of the foreign subsidiary borrowers and foreign
subsidiary guarantors. Interest payments. Borrowings under the senior credit facilities bear interest
at a rate equal to an applicable margin plus, at our option, either (a) a base
rate determined by reference to the higher of (1) JPMorgan Chase Banks prime
rate and (2) the federal funds rate plus 1/2 of 1% or (b) a LIBOR or a
eurocurrency rate determined by reference to the costs of funds for deposits in
the currency of such borrowing for the interest period relevant to such
borrowing adjusted for certain additional costs. At September 24, 2004, the
applicable margin for $350 million of the term loans was 0.75% with respect to
base rate borrowings and 1.75% with respect to eurocurrency borrowings and the
applicable margins for borrowings for the remainder of the term loans was 1.25%
with respect to base rate borrowings and 2.25% with respect to eurocurrency
borrowings. At November 2, 2004, the applicable margin for the tranche E term
loan was 0.50% with respect to base rate borrowings and 1.50% with respect to
LIBOR borrowings. The applicable margin for certain of these borrowings may be
reduced based on our attaining certain leverage ratios or increased based on
certain credit ratings for the senior credit facilities. In addition to paying
interest on outstanding principal under the senior credit facilities, we are
required to pay a commitment fee to the lenders under the revolving credit
facility in respect of the unutilized commitments thereunder currently at a
rate equal to 0.50% per annum (which may be reduced or increased under certain
circumstances). We also pay customary letter of credit fees. 31




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) Our senior notes and senior subordinated notes, which mature in 2013, bear
interest (payable semi-annually on February 15 and August 15) at fixed rates
ranging from 9-3/8% to 11-3/4%. Settlement with Northrop and Purchase of Seller Note.On October 10, 2004, the
Company entered into a note purchase and settlement agreement (the Note
Purchase and Settlement Agreement) with Northrop, a subsidiary of Northrop,
Intermediate and Automotive Investors L.L.C. (AI LLC), an affiliate of The
Blackstone Group L.P. (Blackstone). The Note Purchase and Settlement
Agreement provides for (i) mutual releases by Northrop and the Company from
certain (the Released Claims) potential indemnification claims under certain
agreements entered into in connection with the Acquisition and (ii)
Intermediate to make a net cash payment of approximately $494 million to
Northrop in respect of the purchase of the Seller Note. The cash payment of
approximately $494 million for the Seller Note is net of a credit of
approximately $41 million ascribed to the Released Claims. On November 2,
2004, the Company amended and restated its existing credit agreement in order
to add a six-year tranche E term loan, which was issued in the amount of $300
million and bears interest at variable interest rates. The proceeds of the new
term loan, together with available cash on hand and, to the extent needed,
funds obtained under existing liquidity arrangements, will be used by
Intermediate to purchase the Seller Note pursuant to the Note Purchase and
Settlement Agreement on or prior to November 22, 2004. See Other Matters 
Additional Provisions of the Note Purchase and Settlement Agreement for a
description of other provisions of the settlement with Northrop. At the time of the Acquisition, the Company valued the Seller Note based on a
15 year life and 8% pay-in-kind interest, and determined that the fair value of
the Seller Note, and corresponding book value at March 1, 2003, was $348
million using a 12% discount rate. As of September 24, 2004, the Companys
third quarter close date, the book value of the Seller Note, including accrued
interest, was $417 million. Additionally, as of September 24, 2004, the Seller
Note had a face value, including accrued interest, of $678 million. The
Company expects to record a fourth quarter pre-tax charge of approximately $115
million for loss on retirement of debt resulting primarily from the difference
between the purchase price ascribed to the Seller Note and the book value of
the Seller Note on the Companys balance sheet at the time the transaction is
completed. This loss is U.S. based and therefore carries zero tax benefit due
to the Companys tax loss position in this jurisdiction. The new term loan entered into in connection with the purchase of the Seller
Note is described above. Debt Restrictions.The senior credit facilities, senior notes and senior
subordinated notes contain a number of covenants that, among other things,
restrict, subject to certain exceptions, the ability of our subsidiaries to
sell assets, incur additional indebtedness or issue preferred stock, repay
other indebtedness (including, in the case of the senior credit facilities, the
senior notes and senior subordinated notes, as well as the Seller Note), pay
dividends and distributions or repurchase capital stock, create liens on
assets, make investments, loans or advances, make certain acquisitions, engage
in mergers or consolidations, enter into sale and leaseback transactions,
engage in certain transactions with affiliates, amend certain material
agreements governing our indebtedness (including, in the case of the senior
credit facilities, the senior notes, senior subordinated notes and the
receivables facility and change the business conducted by us and our
subsidiaries. In addition, the senior credit facilities contain the following
financial covenants: a maximum total leverage ratio, a minimum interest
coverage ratio, and a maximum capital expenditures limitation and require
certain prepayments from excess cash flows, as defined, and in connection with
certain asset sales and the incurrence of debt not permitted under the senior
credit facilities. 32




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) The senior credit facilities and the indentures governing the notes generally
restrict the payment of dividends or other distributions by TRW Automotive,
subject to specified exceptions. The exceptions include, among others, the
making of payments or distributions in respect of expenses required for us and
Intermediate to maintain our corporate existence, general corporate overhead
expenses, tax liabilities and legal and accounting fees. Since we are a holding
company without any independent operations, we do not have significant cash
obligations, and are able to meet our limited cash obligations under the
exceptions to our debt covenants. Interest Rate Swap Agreements.In January 2004 the Company entered into a
series of interest rate swap agreements with a total notional value of $500
million to effectively change a fixed rate debt obligation into a floating rate
obligation. The total notional amount of these agreements is equal to the face
value of the designated debt instrument. The swap agreements are expected to
settle in February 2013, the maturity date of the corresponding debt
instrument. As of September 24, 2004, debt was reduced by approximately $1
million as a result of reflecting a $1 million obligation associated with
marking to market interest rate swaps. Other Commitments.We are subject to increased OPEB cash costs due to, among
other factors, rising health care costs. In addition, we expect to continue to
have substantial pension funding obligations in the future. Pricing pressure from customers has been a characteristic of the automotive
parts industry in recent years. Virtually all VMs have policies of seeking
price reductions each year. We have taken steps to reduce costs and resist
price reductions; however, price reductions have impacted our sales and profit
margins. If we are not able to offset continued price reductions through
improved operating efficiencies and reduced expenditures, those price
reductions may have a material adverse effect on our results of operations. In addition to pricing concerns, we continue to be approached by our customers
for changes in terms and conditions in our contracts concerning warranty and
recall participation and payment terms on product shipped. We believe that the
likely resolution of these proposed modifications will not have a material
adverse effect on our financial condition, results of operations or cash flow. As previously disclosed, under the master purchase agreement relating to the
Acquisition, we are required to indemnify Northrop for certain tax losses or
liabilities. This indemnification obligation is capped at $67 million (with no
more than $49 million payable this year). Initial payments of approximately
$20 million and approximately $8 million were made in September 2004 and
October 2004, respectively. Funding Our Requirements.We believe that funds generated from operations and
planned borrowing capacity will be adequate to fund debt service requirements,
capital expenditures, working capital requirements and company-sponsored
research and development programs. In addition, we believe that our current
financial position and financing plans will provide flexibility in worldwide
financing activities and permit us to respond to changing conditions in credit
markets. Our ability to continue to fund these items and continue to reduce
debt, however, may be affected by general economic, financial, competitive,
legislative and regulatory factors, and the cost of warranty and recall and
litigation claims, among other things. Therefore, we cannot assure you that
our business will generate sufficient cash flow from operations or that future
borrowings will be available to us under our revolving credit facility or
receivables facility in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. Cash Flows Cash provided by operating activities for the nine months ended September 24,
2004 was $36 million as compared to net cash provided by operating activities
of $224 million for the nine months ended 33




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) September 26, 2003. The change of approximately $188 million resulted from an
increase in working capital requirements primarily related to the timing of
customer payments, and normalized accrued expenses following the Acquisition
due to the fact that certain obligations typically settled in January and
February of each year were paid in December 2002 prior to the Merger. Cash used in investing activities in the first nine months of 2004 decreased by
approximately $3.3 billion over the comparable period in 2003. Cash used to
fund the Acquisition, including related fees, in 2003 accounts for the majority
of the improvement. Proceeds from asset sales and divestitures totaled
approximately $79 million for the nine months ended September 24, 2004,
compared to $31 million in the prior year. Cash used in financing activities was approximately $250 million in the first
nine months of 2004 compared to cash provided by financing activities of
approximately $3.8 billion in the comparable period of 2003. During the nine
months ended September 24, 2004, we sold shares in an initial public offering
for approximately $636 million, net of fees and expenses, repurchased shares
from Blackstone for approximately $319 million and paid down a portion of
principal on our senior notes and senior subordinated notes of approximately
$287 million. In addition, we used approximately $250 million in cash on hand
to pay down a portion of principal on our senior secured credit facilities. In
the same period last year, we received approximately $500 million in net
transfers from our former parent company associated with participation in their
cash management system. In addition, in the first nine months of 2003, we
repaid approximately $300 million in short term debt, issued shares for
approximately $698 million and borrowed approximately $3 billion, net of issue
costs, all in connection with the Acquisition. Capital Expenditures Through September 2004, we have spent $248 million in capital expenditures,
primarily in connection with the continuation of new product launches started
in 2003, upgrading existing products, additional new product launches in 2004
and providing for incremental capacity, infrastructure and equipment at our
facilities to support our manufacturing and cost reduction efforts. We expect
to spend approximately $220 million in such capital expenditures during the
remainder of 2004. Contractual Obligations and Commitments Since December 31, 2003, we reduced principal outstanding on our senior secured
credit facilities by $213 million in January 2004 and $51 million in April 2004
with available cash on hand. We also reduced the principal outstanding on our
senior notes and senior subordinated notes by $287 million in February 2004
with the proceeds of our initial public offering. On November 2, 2004, we
entered into a new $300 million senior secured credit facility. In addition,
in connection with Note Purchase and Settlement Agreement reached with
Northrop, we expect to purchase the Seller Note for approximately $494 million,
net, on or prior to November 22, 2004. Additionally, the settlement of the
matters relating to the employee matters agreement resulted in the reduction in
short-term debt as of September 24, 2004. Off-Balance Sheet Arrangements We do not have guarantees related to unconsolidated entities, which have, or
are reasonably likely to have, a material current or future effect on our
financial position, results of operations or cash flows. In connection with the Acquisition, TRW Automotive entered into a receivables
facility, which, as amended, provides up to $400 million in funding from
commercial paper conduits sponsored by commercial lenders, based on
availability of eligible receivables and other customary factors. 34




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) Certain of our subsidiaries (the sellers) sell trade accounts receivables
(the receivables) originated by them in the United States through the
receivables facility. Receivables are sold to TRW Automotive Receivables LLC
(the transferor) at a discount. The transferor is a bankruptcy-remote
special purpose limited liability company that is our wholly owned consolidated
subsidiary. The transferors purchase of receivables is financed through a
transfer agreement with TRW Automotive Global Receivables LLC (the borrower).
Under the terms of the transfer agreement, the borrower purchases all
receivables sold to the transferor. The borrower is a bankruptcy-remote
qualifying special purpose limited liability company that is wholly owned by
the transferor and is not consolidated when certain requirements are met as
further described below. Generally, multi-seller commercial paper conduits supported by committed
liquidity facilities are available to provide cash funding for the borrowers
purchase of receivables through secured loans/tranches to the extent desired
and permitted under the receivables loan agreement. A note is issued by the
borrower to the transferor for the difference between the purchase price for
the receivables purchased and cash available to be borrowed through the
facility. The sellers of the receivables act as servicing agents per the
servicing agreement and continue to service the transferred receivables for
which they receive a monthly servicing fee at a rate of 1% per annum of the
average daily outstanding balance of receivables. The usage fee under the
facility is 1.50% of outstanding borrowings. In addition, we are required to
pay a fee of 0.50% on the unused portion of the receivables facility. These
rates are per annum and payments of these fees are made to the lenders on the
monthly settlement date. Availability of funding under the receivables facility depends primarily upon
the outstanding trade accounts receivable balance and is determined by reducing
the receivables balance by outstanding borrowings under the program, the
historical rate of collection on those receivables and other characteristics of
those receivables that affect their eligibility (such as bankruptcy or
downgrading below investment grade of the obligor, delinquency and excessive
concentration). Based on the terms of this facility and on the criteria
described above, as of September 24, 2004, approximately $332 million of our
accounts receivable balance was considered eligible for borrowings under the
program, of which approximately $245 million would have been available for
funding. We had no outstanding borrowings under this facility as of September
24, 2004. This facility can be treated as a general financing agreement or as an
off-balance sheet financing arrangement. Whether the funding and related
receivables are shown as liabilities and assets, respectively, on our
consolidated balance sheet, or, conversely, are removed from the consolidated
balance sheet depends on the level of the multi-seller conduits loans to the
borrower. When such level is at least 10% of the fair value of all of the
borrowers assets (consisting principally of receivables sold by the sellers),
the securitization transactions are accounted for as a sale of the receivables
under the provisions of SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and are removed from the
consolidated balance sheet. The proceeds received are included in cash flows
from operating activities in the statements of cash flows. Costs associated
with the receivables facility are recorded as losses on sale of receivables in
our consolidated statement of operations. The book value of our retained
interest in the receivables approximates fair market value due to the current
nature of the receivables. However, at such time as the fair value of the multi-seller commercial paper
conduits loans are less than 10% of the fair value of all of the borrowers
assets, we are required to consolidate the borrower, resulting in the funding
and related receivables being shown as liabilities and assets, respectively, on
our consolidated balance sheet and the costs associated with the receivables
facility being recorded as interest expense. As there were no borrowings
outstanding under the receivables facility on September 24, 2004, the fair
value of the multi-seller conduits loans was less than 10% of the fair value
of all of the borrowers assets and, therefore, the financial position and
results of operations of the borrower were included in our consolidated
financial statements as of September 24, 2004. 35




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) In addition to the receivables facility described above, which was entered into
in connection with the Acquisition, certain of our European subsidiaries
entered into receivables financing arrangements in December 2003 and January
2004. We have approximately 70 million available for a term of two years
through factoring arrangements in which customers send bills of exchange
directly to the bank. We also have 75 million available for a term of one
year through an arrangement involving a wholly-owned special purpose vehicle
which purchases trade receivables from its domestic affiliates and sells those
trade receivables to a domestic bank. In the fourth quarter of 2004, we
entered into an additional receivables financing arrangement in Europe with an
availability of £40 million and a term of one year. These financing
arrangements provide short-term financing to meet our liquidity needs. Environmental Matters A reserve estimate for each environmental matter is established using standard
engineering cost estimating techniques on an undiscounted basis. In the
determination of such costs, consideration is given to the professional
judgment of our 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 September 24, 2004, we had reserves for environmental matters of
$85 million. In addition, the Company has established a receivable from
Northrop for a portion of this environmental liability as a result of the
indemnification provided for in the Master Purchase Agreement. We do not believe that compliance with environmental protection laws and
regulations will have a material effect upon our capital expenditures, results
of operations or competitive position. Our capital expenditures for
environmental control facilities during 2004 and 2005 are not expected to be
material to us. We believe 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
our financial position or results of operations. However, we cannot predict
the effect on our financial position of expenditures for aspects of certain
matters for which there is insufficient information. In addition, we cannot
predict the effect of compliance with environmental laws and regulations with
respect to unknown environmental matters on our financial position or results
of operations or the possible effect of compliance with environmental
requirements imposed in the future. In connection with the Acquisition,
Northrop Grumman has agreed to indemnify us for 50% of any environmental
liabilities associated with the operation or ownership of Old TRWs automotive
business existing at or prior to the Acquisition, subject to certain
exceptions. Contingencies Various claims, lawsuits and administrative proceedings are pending or
threatened against our subsidiaries, covering a wide range of matters that
arise in the ordinary course of our business activities with respect to
commercial, product liability and environmental matters. In October 2000, Kelsey-Hayes Company (formerly known as Fruehauf Corporation)
was served with a grand jury subpoena relating to a criminal investigation
being conducted by the U.S. Attorney for the Southern District of Illinois.
The U.S. Attorney has informed us that the investigation relates to possible
wrongdoing by Kelsey-Hayes Company and others involving certain loans made by
Kelsey- Hayes Companys then parent corporation to Fruehauf Trailer
Corporation, the handling of the trailing liabilities of Fruehauf Corporation
and actions in connection with the 1996 bankruptcy of Fruehauf Trailer
Corporation. Kelsey-Hayes Company became a wholly owned subsidiary of Old TRW
upon Old TRWs acquisition of Lucas Varity in 1999 and became our wholly owned
subsidiary in connection with the 36




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) Acquisition. We have cooperated with the investigation and are unable to
predict the outcome of the investigation at this time. On May 6, 2002, ArvinMeritor Inc. filed suit against Old TRW in the United
States District Court for the Eastern District of Michigan, claiming breach of
contract and breach of warranty in connection with certain tie rod ends that
Old TRW supplied to ArvinMeritor and the voluntary recall of some of these tie
rod ends. ArvinMeritor subsequently recalled all of the tie rod ends, and
claims that it is entitled to reimbursement from Old TRW for the costs
associated with both the products recalled by Old TRW and those recalled by
ArvinMeritor on its own. The parties are engaged in settlement discussions and
the Company currently expects that a settlement of this matter will be
achieved. The Company established a reserve for this matter in a prior quarter
and believes this reserve is adequate. While certain of our subsidiaries have been subject in recent years to
asbestos-related claims, we believe that such claims will not have a material
adverse effect on our financial condition or results of operations. In
general, these claims seek damages for illnesses alleged to have resulted from
exposure to asbestos used in certain components sold by our subsidiaries. We
believe that the majority of the claimants were assembly workers at the major
U.S. automobile manufacturers. The vast majority of these claims name as
defendants numerous manufacturers and suppliers of a wide variety of products
allegedly containing asbestos. We believe that, to the extent any of the
products sold by our subsidiaries and at issue in these cases contained
asbestos, the asbestos was encapsulated. Based upon several years of
experience with such claims, we believe that only a small proportion of the
claimants has or will ever develop any asbestos-related impairment. Neither our settlement costs in connection with asbestos claims nor our average
annual legal fees to defend these claims have been material in the past. These
claims are strongly disputed by us and it has been our policy to defend against
them aggressively. We have been successful in obtaining the dismissal of many
cases without any payment whatsoever. Moreover, there is significant insurance
coverage with solvent carriers with respect to these claims. However, while our costs to defend and settle these claims in the past have not
been material, we cannot assure you that this will remain so in the future. We believe that the ultimate resolution of the foregoing matters will not have
a material effect on our financial condition or results of operations. Other Matters Additional Provisions of the Note Purchase and Settlement Agreement.In
addition, Northrop agreed to pay directly to AI LLC (for the benefit of AI LLC
and certain other stockholders) an aggregate of approximately $53 million in
respect of a contractual indemnification obligation relating to the settlement
of certain cash OPEB payments. Under the terms of the Master Purchase
Agreement, Northrop was required to make such payments, following the Companys
initial public offering, to the Companys non-employee stockholders as of the
date of the closing of the Acquisition who remain stockholders as of the date
of such payment, in proportion to their beneficial ownership of the Companys
voting securities as of such date of payment. AI LLC in turn had agreed to
share such payments with certain other pre-initial public offering
stockholders. Of the $53 million payment from Northrop to AI LLC, an aggregate
of $1.2 million is to be paid by AI LLC to certain pre-initial public offering
stockholders (including employees and executive officers) in proportion to
their share ownership as a return of their initial capital investment. In addition, pursuant to the Note Purchase and Settlement Agreement, (i) the
Company caused its salaried pension plan to pay approximately $21 million (plus
associated earnings since the Acquisition) to the salaried pension plan of a
subsidiary of Northrop in connection with the original agreement (at the time
of 37




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) the Acquisition) regarding the split of pension assets at the time of the
Acquisition and (ii) the Companys salaried pension plan reimbursed such
Northrop subsidiarys salaried pension plan for approximately $5 million in
benefits which it paid to the Companys plan participants. Such payments had
no impact on the Companys financial statements as the payments were
trust-to-trust transfers. The Note Purchase and Settlement Agreement also clarifies certain ongoing
indemnification matters under the Master Purchase Agreement entered into in
connection with the Acquisition amends certain terms under the related employee
matters agreement to clarify the intent of the parties and settles certain
matters relating to such agreement. The settlement of the matters relating to
the employee matters agreement resulted in the reduction in short-term debt as
of September 24, 2004 referenced below. The Company reduced goodwill by $128 million as of September 24, 2004 related
to settlement of the foregoing matters. The $128 million consisted of $34
million reduction in short-term debt for settlement of certain matters relating to the
employee matters agreement, net of other receivables for contractual matters
recorded at the Acquisition, $41 million ascribed to the Released Claims and
$53 million for the cash OPEB payments. The Note Purchase and Settlement Agreement contains such other releases and
terms as are customary for agreements of this kind. Recent Accounting Pronouncements See Note 2 to the accompanying Consolidated and Combined Financial Statements
for a discussion of recent accounting pronouncements. Outlook We expect full-year 2004 revenue of approximately $11.8 billion and diluted
earnings per share in the range of $0.08 to $0.13, including year-to-date
charges of (i) approximately $48 million, or $0.48 per share, on a fully
diluted basis, for expenses primarily related to debt repayment transactions in
conjunction with the initial public offering and a January 2004 bank debt
refinancing and (ii) the expected fourth quarter charge of $115 million
relating to the loss on retirement of debt associated with the purchase of the
Seller Note or $1.14 per share on a fully-diluted basis. Further, our guidance
includes pre-tax expenses of approximately $33 million for amortization of
intangibles (principally customer relationships) and approximately $35 million
related to restructuring initiatives. Full year EBITDA is expected to be in the range of $1,060 to $1,075 million,
which is based on expected operating income in the range of $572 to $582
million, adding back expected depreciation and amortization of approximately
$490 million. The effective annual tax rate
for 2004 will be negatively impacted by the previously mentioned loss on retirement of debt of
$48 million, other charges of $12 million and expected loss on retirement of
debt of $115 million. Those items are U.S. based and therefore carry zero tax
benefit due to our U.S. tax loss position and related valuation allowances.
Excluding these items, we estimate our annual effective tax rate will be
approximately 46%. The effective tax rate guidance is dependent on several
assumptions, including the level of future income by taxing jurisdiction and
static global corporate tax rates and laws. Annually, we purchase large quantities of ferrous metals for use in our
manufacturing process either indirectly as part of purchased components, or
directly as raw materials, and therefore we are exposed to the recent
inflationary pressures impacting the ferrous metal markets on a worldwide
basis. In addition, and to a much lesser extent, inflationary pressure is now
extending into other commodities. We are also 38




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(continued) concerned about the viability of the tier two and tier three supply base as
they face these inflationary pressures. We are monitoring the situation
closely and where applicable, working with suppliers and customers to mitigate
the potential effect on our financial results. However, our efforts to
mitigate the effects may be insufficient and the pressures may worsen, thus
potentially having a negative impact on our financial results. For the fourth quarter 2004, we expect revenue of approximately $3 billion and
diluted losses per share in the range of $(0.83) to $(0.78), which includes
loss on retirement of debt of $115 million relating to the purchase of the
Seller Note. The Company also expects to incur pre-tax restructuring charges
of approximately $17 million and amortization of intangibles (principally
customer relationships), of approximately $8 million. Forward-Looking Statements This report includes forward-looking statements. Forward-looking statements
include statements concerning our plans, objectives, goals, strategies, future
events, future revenue or performance, capital expenditures, financing needs,
plans or intentions relating to acquisitions, business trends and other
information that is not historical information. When used in this report, the
words estimates, expects, anticipates, projects, plans, intends,
believes, forecasts, or future or conditional verbs, such as will,
should, could or may, and variations of such words or similar expressions
are intended to identify forward-looking statements. All forward-looking
statements, including, without limitation, managements examination of
historical operating trends and data, are based upon our current expectations
and various assumptions. Our expectations, beliefs and projections are
expressed in good faith and we believe there is a reasonable basis for them.
However, there can be no assurance that managements expectations, beliefs and
projections will be achieved. There are a number of risks, uncertainties and other important factors that
could cause our actual results to differ materially from the forward-looking
statements contained in this report. Such risks, uncertainties and other
important factors which could cause our actual results to differ materially
from those suggested by our forward-looking statements are set forth in our
final prospectus dated as of February 2, 2004 (the Prospectus) filed with the
Securities and Exchange Commission (the SEC) pursuant to Rule 424(b)(4), our
Report on Form 10-K for the fiscal year ended December 31, 2003 (the 10-K)
and our Report on Form 10-Q for the quarters ended March 26, 2004 and June 25,
2004 and include: our substantial leverage; limitations on flexibility in
operating our business imposed by our debt agreements; increases in interest
rates; our dependence on our largest customers; the possibility that our
owners interests will conflict with ours; the highly competitive automotive
parts industry; the cyclicality of automotive production and sales; pricing
pressures from our customers; risks associated with our non-U.S. operations;
fluctuations in currency exchange rates; product liability and customer
warranty and recall claims; changes to environmental and automotive safety
regulations; increasing costs for purchased components and raw materials;
non-performance by, or insolvency of, our suppliers; work stoppages; changes in
our relationships with our employees and the unions that represent them; our
ability to attract and retain skilled employees, particularly engineers and
other employees with electronics and software expertise; economic, regulatory
and political conditions domestically and internationally; and other risks and
uncertainties set forth under Risk Factors in the Prospectus and in the 10-K
and in our other SEC filings. All forward-looking statements attributable to us or persons acting on our
behalf apply only as of the date of this report and are expressly qualified in
their entirety by the cautionary statements included in this report, in the
10-K, in the Prospectus and in our other SEC filings. We undertake no
obligation to update or revise forward-looking statements which may be made to
reflect events or circumstances that arise after the date made or to reflect
the occurrence of unanticipated events. 39




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to inherent risks attributed to operating in a global economy.
Our practice is to utilize derivative financial instruments to manage foreign
currency exchange rate risks. Historically, the predecessor managed cash flow
transactional foreign currency exchange risk pursuant to Old TRWs written
corporate policy. Forward contracts and, to a lesser extent, options are
utilized to protect our cash flow from adverse movements in exchange rates.
Forward contracts and options are only used to hedge transaction exposures and
are accounted for according to SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities. Risk associated with translation
exposures are not hedged. Transactional currency exposures are reviewed
monthly and any natural offsets are considered prior to entering into a
derivative financial instrument. Following the Acquisition, we are operating
in accordance with written polices regarding the use of derivative financial
instruments that are similar to those historically maintained by Old TRW, but
we are continuing to evaluate these policies. We are exposed to credit loss in the event of nonperformance by the other party
to the derivative financial instruments. We limit this exposure by entering
into agreements directly with a number of major financial institutions that
meet our credit standards and that are expected to satisfy fully their
obligations under the contracts. We view derivative financial instruments as a
risk management tool and do not use them for speculative or trading purposes. Based on our exposure to foreign currency exchange rate risk relating to
derivative foreign currency instruments outstanding at September 24, 2004, a
10% uniform strengthening in the value of the U.S. dollar relative to the
currencies in which those derivative foreign currency instruments are
denominated would result in an increase in fair value of approximately $14
million. Our sensitivity analyses of the effects of changes in foreign currency exchange
rates do not reflect the effect of such changes on the related hedged
transactions or on other operating transactions. The analyses also do not
factor in a potential change in the level of variable rate borrowings or
derivative instruments outstanding that could take place if these hypothetical
conditions prevailed. As a result of the refinancing on January 9, 2004, we are no longer required
under the senior secured credit facilities to maintain interest protection and
hedging arrangements to ensure that at least 50% of our consolidated
indebtedness would effectively bear interest at a fixed rate for a period of
three years. At September 24, 2004, approximately 54% of our total debt was at
variable interest rates compared to 40% at December 31, 2003. Based on our
interest rate exposure on variable rate borrowings outstanding at September 24,
2004, a one-percentage-point increase in the average interest rate would
increase future interest expense by approximately $17 million per year. At September 24, 2004, approximately 20% of our total debt was in foreign
currencies compared to 21% at December 31, 2003. Based on our foreign currency
exposure on foreign currency denominated borrowings outstanding at December 31,
2003, a 10% adverse change in foreign currency rates would increase future
interest expense by approximately $6 million per year. 40




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ITEM 4. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer, based on their
evaluation of the effectiveness of the Companys disclosure controls and
procedures as of September 24, 2004, have concluded that the Companys
disclosure controls and procedures are adequate and effective in alerting them
on a timely basis to material information relating to the Company required to
be included in the Companys reports filed under the Securities Exchange Act of
1934. There were no significant changes in the Companys internal controls or in
other factors that could significantly affect the Companys internal controls
over financial reporting subsequent to the date of their evaluation. 41




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS Except as set forth in this Quarterly Report under Managements Discussion and
Analysis of Financial Condition and Results of Operations  Contingencies,
there have been no material developments in legal proceedings involving the
Company or its subsidiaries since those reported in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 and Form 10-Q for the
quarters ended March 26, 2004 and June 25, 2004. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Company has no plans or programs to repurchase shares of its common stock.
The independent trustee of our 401(k) plans does purchase shares in the open
market to fund investments by employees in our common stock, one of the
investment options available under such plans, and matching contributions in
Company stock to employee investments. In addition, our stock incentive plan
permits payment of an option exercise price by means of cashless exercise
through a broker and for the satisfaction of tax obligations through stock
withholding. However, the Company does not believe such purchases or
transactions are issuer repurchases for the purposes of this Item 2 of this
Report on Form 10-Q. 
 ITEM 5. OTHER INFORMATION Officer Appointment. On September 7, 2004, the Company appointed Neil E.
Marchuk as Vice President, Human Resources of TRW Automotive. Stockholders Proposals.Stockholders proposals intended to be presented at
the 2005 Annual Meeting of Stockholders must be received between the close of
business on January 13, 2005 and the close of business on February 12, 2005,
for inclusion in the Companys proxy statement and form of proxy for that
meeting. Any such proposal should be mailed to the attention of David L.
Bialosky, Executive Vice President, General Counsel and Secretary at the
address set forth on the cover of this Form 10-Q. Auditor Independence. The Companys independent auditor, Ernst & Young LLP
(E&Y), has recently advised the Securities and Exchange Commission, the
Public Company Accounting Oversight Board and the Audit Committee of the
Companys Board of Directors that certain non-audit work performed by an E&Y
member firm in China (E&Y China) has raised questions regarding E&Ys
independence with respect to its performance of audit services. With respect to the Company, during 2002 and 2001, E&Y China performed tax
calculation and return preparation services for certain immaterial subsidiaries
and expatriate employees of the Companys predecessor. E&Y China held tax
funds on behalf of such subsidiaries and expatriate employees and paid taxes to
the applicable Chinese tax authority. Such services were discontinued in 2002
and a refund of amounts related to such funds, approximately $100,000, was
returned to the Company in July 2004. The fees paid by the Companys
predecessor to E&Y China for the payment services were approximately $12,000
and $16,000 in 2002 and 2001, respectively. Based upon E&Ys disclosure, the Company has evaluated E&Ys non-audit services
provided to the Company during the relevant time periods and did not identify
any additional non-audit services that may compromise E&Ys independence. The
Company and E&Y continue to evaluate and review processes relevant to the
maintenance of E&Ys independence. The Companys Audit Committee and E&Y have discussed E&Ys independence with
respect to the Company and its predecessor in light of the foregoing facts. The
Audit Committee and E&Y have considered the impact that the holding and paying
of these funds may have had on E&Ys independence 42




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with respect to the Company and have concluded that there has been no
impairment of E&Ys independence. In making this determination, the Audit
Committee considered the de minimis amount of funds involved, the ministerial
nature of the actions, and that the subsidiaries involved were immaterial to
the consolidated financial statements of the Company. Amendment and Restatement of Credit Agreement.On November 2, 2004, the
Company entered into an amended and restated credit agreement to provide for a
new $300 million term loan, all as described in Part 1 of this Report on Form
10-Q under Managements Discussion and Analysis of Financial Condition and
Results of Operations- Liquidity. The amended and restated credit agreement
constitutes a Material Definitive Agreement and a Creation of a Direct
Financial Obligation within the meaning of the Form 8-K and, if not previously
disclosed in this Form 10-Q prior to the end of the four business day filing
deadline of the Form 8-K for the entry into this agreement, would have
triggered the filing of a Form 8-K under Item 1.0
1.01 and Item 2.03 thereof. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit Number
    
    Exhibit Name10.1
    
    Employment Agreement for Neil E. Marchuk, dated August 16, 200410.2
    
    Restricted Stock Agreement with Neil E. Marchuk dated September 7, 200410.3
    
    Restricted Stock Unit Agreement with Neil E. Marchuk dated September 7, 200410.4
    
    Note Purchase and Settlement Agreement dated as of October 10, 2004 among
TRW Automotive Holdings Corp, Northrop Grumman Corporation and the other
parties thereto.10.5
    
    Lucas Funded Executive Pension Scheme No. 4  Plan document relating to
previously filed Trust Agreement10.6
    
    Third Amended and Restated Credit Agreement dated as of November 2, 2004,
among TRW Automotive Holdings Corp., TRW Automotive Intermediate Holdings
Corp., TRW Automotive Inc. (f/k/a TRW Automotive Acquisition Corp.), the
Foreign Subsidiary Borrowers party thereto, the Lenders Party thereto from
time to time, JP Morgan Chase Bank as Administrative Agent, Credit Suisse
First Boston, Lehman Commercial Paper Inc., and Deutsche Bank Securities
Inc., as Co-Syndication Agents, and Bank of America, N.A. as Documentation
Agent31 (a)
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200231(b)
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200232 (a)
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232 (b)
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 43




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K continued  b)
    
    Reports on Form 8-K:During the quarter for which this report is filed, the following reports on Form 8-K were filed:July 27, 2004 Form 8-K reporting under Item 12. Results of Operations
and Financial Condition, the filing of financial information for the
second quarter of 2004.September 7, 2004 Form 8-K reporting under Item 1.01. Entry into a
Material Agreement and Item 5.02(c). Departure of Directors or
Principal Officers; Election of Directors; Appointment of Principal
Officers the entry into an employment agreement and restricted stock
agreements with Neil E. Marchuk and the appointment of Mr. Marchuk as
Vice President, Human Resources. 44




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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 Automotive Holdings
Corp.(Registrant)By:
    
    /s/ Joseph S. CantieJoseph S. CantieDate: November 4, 2004
    
    
    
    Executive Vice President and Chief Financial Officer(On behalf of the Registrant and as Principal Financial Officer)
 45




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Exhibit Index Exhibit Number
    
    Exhibit Name10.1
    
    Employment Agreement for Neil E. Marchuk, dated August 16, 200410.2
    
    Restricted Stock Agreement with Neil E. Marchuk dated September 7, 200410.3
    
    Restricted Stock Unit Agreement with Neil E. Marchuk dated September 7, 200410.4
    
    Note Purchase and Settlement Agreement dated as of October 10, 2004 among
TRW Automotive Holdings Corp, Northrop Grumman Corporation and the other
parties thereto.10.5
    
    Lucas Funded Executive Pension Scheme No. 4  Plan document relating to
previously filed Trust Agreement10.6
    
    Third Amended and Restated Credit Agreement dated as of November 2, 2004,
among TRW Automotive Holdings Corp., TRW Automotive Intermediate Holdings
Corp., TRW Automotive Inc. (f/k/a TRW Automotive Acquisition Corp.), the
Foreign Subsidiary Borrowers party thereto, the Lenders Party thereto from
time to time, JP Morgan Chase Bank as Administrative Agent, Credit Suisse
First Boston, Lehman Commercial Paper Inc., and Deutsche Bank Securities
Inc., as Co-Syndication Agents, and Bank of America, N.A. as Documentation
Agent31(a)
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200231(b)
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200232(a)
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232(b)
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002