##### 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 1934For the quarterly period ended June 25, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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) 266-2600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants Principal Executive Offices) 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 July 28, 2004, the number of shares outstanding of the registrants
Common Stock was 98,918,266 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 June
25, 2004
and June 27, 2003Consolidated and Combined Statements of Operations for the Six Months
Ended
June 25, 2004, the Four Months Ended June 27, 2003, and the Two Months
Ended
February 28, 2003Consolidated Balance Sheets  June 25, 2004 and December 31, 2003Consolidated and Combined Statements of Cash Flows for the Six Months
Ended June 25, 2004,
the Four Months Ended June 27, 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
    
    
    18ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    36ITEM 4. CONTROLS AND PROCEDURES
    
    
    37PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    38ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    388% $600,000,000 Pay-in-kind Note dated February 28, 2003Letter Agreement dated June 23, 2004 between Richmond TASSI Inc.Amendment No.1 dated as of May 6, 2004 to the Second Amended & Restated Credit AgreementAmendment No.1 dated as of May 18, 2004 to Performance GuarantyRestricted Stock Unit Agreement with Francois J. CastaingCertification of Chief Executive Officer pursuant to Section 302Certification of Chief Financial Officer pursuant to Section 302Certification of Chief Executive Officer pursuant to Section 906Certification of Chief Financial Officer pursuant to Section 906
  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 endedJune 25,
    
    June 27,(In millions, except per share amounts)
    
    2004
    
    2003Sales
    
    $
    3,163
    
    
    $
    2,977Cost of sales
    
    
    2,790
    
    
    
    2,625Gross profit
    
    
    373
    
    
    
    352Administrative and selling expenses
    
    
    134
    
    
    
    137Research and development expenses
    
    
    42
    
    
    
    41Purchased in-process research and development
    
    
    
    
    
    
    85Amortization of intangible assets
    
    
    8
    
    
    
    9Other income  net
    
    
    (12
    )
    
    
    (18
    )Operating income
    
    
    201
    
    
    
    98Interest expense, net
    
    
    60
    
    
    
    78Loss on retirement of debt
    
    
    1
    
    
    
    Loss on sales of receivables
    
    
    
    
    
    
    7Earnings before income taxes
    
    
    140
    
    
    
    13Income tax expense
    
    
    65
    
    
    
    33Net earnings (losses)
    
    $
    75
    
    
    $
    (20
    )Basic earnings (losses) per share:Earnings (losses) per share
    
    $
    0.76
    
    
    $
    (0.23
    )Weighted average shares
    
    
    98.9
    
    
    
    86.8Diluted earnings (losses) per share:Earnings (losses) per share
    
    $
    0.74
    
    
    $
    (0.23
    )Weighted average shares
    
    
    101.3
    
    
    
    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
    
    PredecessorSix months
    
    Four months
    

    Two monthsended
    
    ended
    
    endedJune 25,
    
    June 27,
    
    February 28,(In millions, except per share amounts)
    
    2004
    
    2003
    
    2003(unaudited)
    
    (unaudited)Sales
    
    $
    6,086
    
    
    $
    3,917
    
    
    $
    1,916Cost of sales
    
    
    5,394
    
    
    
    3,488
    
    
    
    1,686Gross profit
    
    
    692
    
    
    
    429
    
    
    
    230Administrative and selling expenses
    
    
    258
    
    
    
    175
    
    
    
    100Research and development expenses
    
    
    79
    
    
    
    54
    
    
    
    27Purchased in-process research and development.
    
    
    
    
    
    
    85
    
    
    
    Amortization of intangible assets
    
    
    17
    
    
    
    10
    
    
    
    2Other (income) expense  net
    
    
    (16
    )
    
    
    (24
    )
    
    
    4Operating income
    
    
    354
    
    
    
    129
    
    
    
    97Interest expense, net
    
    
    123
    
    
    
    120
    
    
    
    47Loss on retirement of debt
    
    
    48
    
    
    
    
    
    
    
    Loss on sales of receivables
    
    
    
    
    
    
    25
    
    
    
    Earnings (losses) before income taxes
    
    
    183
    
    
    
    (16
    )
    
    
    50Income tax expense
    
    
    106
    
    
    
    50
    
    
    
    19Net earnings (losses)
    
    $
    77
    
    
    $
    (66
    )
    
    $
    31Basic earnings (losses) per share:Earnings (losses) per share
    
    $
    0.80
    
    
    $
    (0.76
    )Weighted average shares
    
    
    96.6
    
    
    
    86.8Diluted earnings (losses) per share:Earnings (losses) per share
    
    $
    0.77
    
    
    $
    (0.76
    )Weighted average shares
    
    
    99.5
    
    
    
    86.8
 See accompanying notes to consolidated and combined financial statements. 3




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TRW Automotive Holdings Corp. 
 Consolidated Balance Sheets
 As ofJune 25,
    
    December 31,(Dollars in millions)
    
    2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    519
    
    
    $
    828Marketable securities
    
    
    15
    
    
    
    16Accounts receivable, net
    
    
    2,274
    
    
    
    1,643Inventories
    
    
    578
    
    
    
    635Prepaid expenses
    
    
    103
    
    
    
    73Deferred income taxes
    
    
    118
    
    
    
    120Total current assets
    
    
    3,607
    
    
    
    3,315Property, plant and equipment
    
    
    2,920
    
    
    
    2,877Less accumulated depreciation and amortization
    
    
    577
    
    
    
    378Total property, plant and equipment  net
    
    
    2,343
    
    
    
    2,499Intangible assets:Goodwill
    
    
    2,487
    
    
    
    2,503Other intangible assets
    
    
    865
    
    
    
    8563,352
    
    
    
    3,359Less accumulated amortization
    
    
    66
    
    
    
    37Total intangible assets  net
    
    
    3,286
    
    
    
    3,322Prepaid pension cost
    
    
    149
    
    
    
    120Deferred income taxes
    
    
    122
    
    
    
    129Other assets
    
    
    481
    
    
    
    522$
    9,988
    
    
    $
    9,907LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    65
    
    
    $
    76Current portion of long-term debt
    
    
    23
    
    
    
    24Trade accounts payable
    
    
    1,756
    
    
    
    1,626Accrued compensation
    
    
    358
    
    
    
    338Income taxes
    
    
    267
    
    
    
    187Other current liabilities
    
    
    938
    
    
    
    875Total current liabilities
    
    
    3,407
    
    
    
    3,126Long-term debt
    
    
    3,155
    
    
    
    3,708Post-retirement benefits other than pensions
    
    
    933
    
    
    
    935Pension benefits
    
    
    821
    
    
    
    838Deferred income taxes
    
    
    223
    
    
    
    222Long-term liabilities
    
    
    296
    
    
    
    300Total liabilities
    
    
    8,835
    
    
    
    9,129Minority interests
    
    
    62
    
    
    
    50Stockholders equity:Capital stock
    
    
    1
    
    
    
    1Paid-in-capital
    
    
    1,183
    
    
    
    868Accumulated deficit
    
    
    (24
    )
    
    
    (101
    )Accumulated other comprehensive losses
    
    
    (69
    )
    
    
    (40
    )Total stockholders equity
    
    
    1,091
    
    
    
    728$
    9,988
    
    
    $
    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
    
    PredecessorSix months
    
    Four months
    
    Two monthsended
    
    ended
    
    endedJune 25,
    
    June 27,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2003(unaudited)
    
    (unaudited)Operating activitiesNet earnings (losses)
    
    $
    77
    
    
    $
    (66
    )
    
    $
    31Adjustments to reconcile net earnings (losses) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    246
    
    
    
    161
    
    
    
    84Interest on pay-in-kind Seller Note
    
    
    22
    
    
    
    13
    
    
    
    Purchased in-process research and development
    

    
    
    
    
    
    85
    
    
    
    Pension and other post-retirement benefits, net of contributions
    
    
    (23
    )
    
    
    4
    
    
    
    (28
    )Amortization of deferred financing fees
    
    
    4
    
    
    
    5
    
    
    
    Loss on retirement of debt
    
    
    18
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    4
    
    
    
    
    
    
    
    (3
    )Other  net
    
    
    (6
    )
    
    
    5
    
    
    
    6Changes in assets and liabilities, net of effects of businesses
acquired or divested:Accounts receivable, net
    
    
    (677
    )
    
    
    (495
    )
    
    
    (284
    )Securitization of accounts receivable
    
    
    
    
    
    
    150
    
    
    
    Inventories
    
    
    4
    
    
    
    73
    
    
    
    2Trade accounts payable
    
    
    143
    
    
    
    185
    
    
    
    64Prepaid expenses and other assets
    
    
    (14
    )
    
    
    32
    
    
    
    17Other liabilities
    
    
    193
    
    
    
    182
    
    
    
    39Other  net
    
    
    7
    
    
    
    (31
    )
    
    
    (1
    )Net cash provided by (used in) operating activities
    
    
    (2
    )
    
    
    303
    
    
    
    (73
    )Investing activitiesCapital expenditures including other intangibles
    
    
    (162
    )
    
    
    (65
    )
    
    
    (66
    )Acquisitions, net of cash acquired
    
    
    (5
    )
    
    
    (3,293
    )
    
    
    Acquisition transaction fees
    
    
    
    
    
    
    (56
    )
    
    
    Net proceeds from divestitures
    
    
    10
    
    
    
    31
    
    
    
    Proceeds from asset sales
    
    
    98
    
    
    
    
    
    
    
    Other  net
    
    
    
    
    
    
    6
    
    
    
    (2
    )Net cash used in investing activities
    
    
    (59
    )
    
    
    (3,377
    )
    
    
    (68
    )Financing activitiesIncrease (decrease) in short-term debt
    
    
    4
    
    
    
    9
    
    
    
    (321
    )Proceeds from debt in excess of 90 days
    
    
    1,268
    
    
    
    
    
    
    
    Principal payments on debt in excess of 90 days
    
    
    (1,822
    )
    
    
    (4
    )
    
    
    (18
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    3,085
    
    
    
    Debt issue costs
    
    
    (7
    )
    
    
    (110
    )
    
    
    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
    
    
    (241
    )
    
    
    3,679
    
    
    
    242Effect of exchange rate changes on cash
    
    
    (7
    )
    
    
    12
    
    
    
    (13
    )Increase (decrease) in cash and cash equivalents
    
    
    (309
    )
    
    
    617
    
    
    
    88Cash and cash equivalents at beginning of period
    
    
    828
    
    
    
    
    
    
    
    188Cash and cash equivalents at end of period
    
    $
    519
    
    
    $
    617
    
    
    $
    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. (TRW) in contemplation of the spin-off
announced by the TRW Board of Directors in March 2002. Automotive, together
with TRWs other subsidiaries engaged in the automotive business, comprised
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, 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 TRW, including TRWs automotive business, in exchange for
Northrop shares. The acquisition of 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, 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 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 the stock of certain 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 100% of TRW Automotives
stock. Intermediate has no independent operations or investments other than its
investment in 6




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##### Table of Contents



ITEM 1. Consolidated and Combined Financial Statements Notes to Consolidated and Combined Financial Statements(unaudited)
 TRW Automotive. Intermediate will be dependent on the cash flows of TRW
Automotive to repay the Seller Note upon maturity. 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). 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 predecessor unaudited combined financial statements 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 six months
ended June 25, 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
    
    Six monthsended
    
    Four monthsendedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,(In millions)
    
    2004
    
    2003
    
    2004
    
    2003Weighted average shares outstanding
    
    
    98.9
    
    
    
    86.8
    
    
    
    96.6
    
    
    
    86.8Effect of dilutive securities
    
    
    2.4
    
    
    
    
    
    
    
    2.9
    
    
    
    Diluted shares outstanding
    
    
    101.3
    
    
    
    86.8
    
    
    
    99.5
    
    
    
    86.8
 Basic and diluted losses per share for the three and four months ended June 27,
2003 have been retroactively adjusted to reflect the 100 for 1 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. Warranties.Product warranty liabilities are recorded based upon management
estimates including such factors as the written agreement with the customer,
the length of the warranty period, the historical performance of the product
and likely changes in performance of newer products and the mix and volume of
products sold. The liability is reviewed on a regular basis and adjusted to
reflect actual experience. 7




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ITEM 1. Consolidated and Combined Financial Statements Notes to Consolidated and Combined Financial Statements(unaudited)
 The following table presents the movement in the product warranty liability for
the three and six months ended June 25, 2004, the three and four months ended
June 27, 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 June 25, 2004
    
    $
    86
    
    
    $
    14
    
    
    $
    (7
    )
    
    $
    (1
    )
    
    $
    92Six months ended June 25, 2004
    
    
    74
    
    
    
    33
    
    
    
    (14
    )
    
    
    (1
    )
    
    
    92Three months ended June 27, 2003
    
    
    46
    
    
    
    11
    
    
    
    (9
    )
    
    
    2
    
    
    
    50Four months ended June 27, 2003
    
    
    46
    
    
    
    13
    
    
    
    (11
    )
    
    
    2
    
    
    
    50Two 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
    
    Six monthsended
    
    Four monthsended
    
    Two monthsendedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,
    
    February 28,(In millions, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Net earnings (losses), as reported
    
    $
    75
    
    
    $
    (20
    )
    
    $
    77
    
    
    $
    (66
    )
    
    $
    31Add: Stock-based compensation as reported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: Stock-based compensation under
SFAS 123 fair value method, net of
related tax effects
    
    
    (2
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    (3
    )
    

    
    Adjusted net earnings (losses), fair
value method
    
    $
    73
    
    
    $
    (22
    )
    
    $
    73
    
    
    $
    (69
    )
    
    $
    31Basic earnings (losses) per share:Earnings (losses) per share
    
    $
    0.74
    
    
    $
    (0.25
    )
    
    $
    0.76
    
    
    $
    (0.79
    )
    
    NAWeighted average shares
    
    
    98.9
    
    
    
    86.8
    
    
    
    96.6
    
    
    
    86.8
    
    
    NADiluted earnings (losses) per share:Earnings (losses) per share
    
    $
    0.72
    
    
    $
    (0.25
    )
    
    $
    0.73
    
    
    $
    (0.79
    )
    
    NAWeighted average shares
    
    
    101.3
    
    
    
    86.8
    
    
    
    99.5
    
    
    
    86.8
    
    
    NA
 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 postretirement 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). Regardless of whether a sponsor
elects that deferral, the FSP required certain disclosures in financial
statements of fiscal years ending after December 7, 2003 pending further
consideration of the underlying 8




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##### Table of Contents



ITEM 1. Consolidated and Combined Financial Statements Notes to Consolidated and Combined Financial Statements(unaudited)
 accounting issues. The Company has elected to defer financial recognition of
this legislation and has included the required disclosures in Note 10. 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. Detailed
regulations necessary to implement the MPD Act have not been issued, including
those that would specify the manner in which actuarial equivalency must be
determined, the evidence required to demonstrate actuarial equivalency and the
documentation requirements necessary to be entitled to the subsidy. The
Company is currently evaluating the effect that the adoption of FSP 106-2 will
have on its results of operations and financial condition. Accounting for the
effect of the MPD Act may be made either retroactively (as was required under
FSP 106-1), or prospectively only, at the Companys option. The accounting
guidance must be adopted no later than the third quarter 2004. 3. Acquisitions and Divestitures 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 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. 4. Restructuring For the three months ended June 25, 2004, Chassis Systems, Occupant Safety
Systems and Automotive Components recorded charges of $5 million, $1 million
and $2 million, respectively, for severance and costs related to the
consolidation of certain facilities. For the six months ended June 25, 2004, Chassis Systems, Occupant Safety
Systems and Automotive Components recorded charges of $10 million, $1 million,
and $2 million, respectively, for severance and costs related to the
consolidation of certain facilities. 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. For
the four months ended June 27, 2003, Chassis Systems recorded charges totaling
$3 million for severance and costs related to the consolidation of certain
facilities. In connection with the Acquisition, the Company assumed liabilities (subject to
certain exceptions) totaling approximately $51 million for various
restructuring activities, primarily related to involuntary severance
obligations and costs to exit certain activities. 9




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##### Table of Contents



ITEM 1. Consolidated and Combined Financial Statements Notes to Consolidated and Combined Financial Statements(unaudited)
 The following table illustrates the movement of the restructuring reserves: ProvisionAdministrative
    


    Cost
    
    Purchase
    
    Used forBeginning
    
    and
    
    of
    
    Price
    
    Purposes
    
    Ending(Dollars in millions)
    
    Balance
    
    Selling
    
    Sales
    
    Allocation
    
    Intended
    
    BalanceThree months ended June 25, 2004
    
    $
    59
    
    
    $
    2
    
    
    $
    6
    
    
    $
    
    
    
    $
    (13
    )
    
    $
    54Six months ended June 25, 2004
    
    
    79
    
    
    
    2
    
    
    
    11
    
    
    
    2
    
    
    
    (40
    )
    
    
    54Three months ended June 27, 2003
    
    
    79
    
    
    
    3
    
    
    
    (1
    )
    
    
    7
    
    
    
    (8
    )
    
    
    80Four months ended June 27, 2003
    
    
    51
    
    
    
    3
    
    
    
    
    
    
    
    37
    
    
    
    (11
    )
    
    
    80Two months ended February 28, 2003
    
    
    61
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    (13
    )
    
    
    51
 Of the $54 million restructuring reserve accrued at June 25, 2004,
approximately $27 million is expected to be paid through the remainder of 2004,
and approximately $17 million relates to involuntary employee termination
arrangements outside the United States to be paid over the next several years
in accordance with local law. 5. Inventories As ofJune 25,
    
    December 31,(Dollars in millions)
    
    2004
    
    2003Finished products and work in process
    
    $
    326
    
    
    $
    385Raw materials and supplies
    
    
    252
    
    
    
    250$
    578
    
    
    $
    635
 6. Goodwill and Other 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
    )Balance as of June 25, 2004
    
    $
    995
    
    
    $
    961
    
    
    $
    531
    
    
    $
    2,487
 10




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##### Table of Contents



ITEM
1. Consolidated and Combined Financial Statements Notes to Consolidated and Combined Financial Statements(unaudited)
 Intangible Assets The following table reflects intangible assets and related amortization
information: As of
    
    As ofJune 25, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    Carrying
    
    Accumulated(Dollars in millions)
    
    Amount
    
    Amortization
    
    Amount
    
    AmortizationIntangible assets subject to amortizationCapitalized software
    
    $
    41
    
    
    $
    (23
    )
    
    $
    34
    
    
    $
    (10
    )Customer relationships
    
    
    452
    
    
    
    (30
    )
    
    
    451
    
    
    
    (19
    )Developed technology
    
    
    80
    
    
    
    (13
    )
    
    
    79
    
    
    
    (8
    )Total
    
    
    573
    
    
    $
    (66
    )
    
    
    564
    
    
    $
    (37
    )Intangible assets not subject to amortizationTrademarks
    
    
    292
    
    
    
    
    
    
    
    292Total
    
    $
    865
    
    
    
    
    
    
    $
    856Aggregate Amortization ExpenseFor the six months ended June 25, 2004
    
    $
    24Amortization of capitalized software is
included in cost of sales and
administrative and selling expenses.
 The estimated annual amortization expense is: 2004  $46 million; 2005  $40
million; 2006  $34 million; 2007  $33 million; and 2008  $33 million. 7. Other (Income) Expense  Net Successor
    
    PredecessorThree monthsended
    
    Six monthsended
    
    Four monthsended
    
    Two monthsendedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Minority interest
    
    $
    4
    
    
    $
    4
    
    
    $
    7
    
    
    $
    5
    
    
    $
    4Asset impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Earnings of affiliates
    
    
    (4
    )
    
    
    (3
    )
    
    
    (8
    )
    
    
    (3
    )
    
    
    (1
    )Foreign currency exchange.
    
    
    (3
    )
    
    
    (15
    )
    
    
    
    
    
    
    (20
    )
    
    
    4Miscellaneous other income
    
    
    (9
    )
    
    
    (4
    )
    
    
    (15
    )
    
    
    (6
    )
    
    
    (4
    )$
    (12
    )
    
    $
    (18
    )
    
    $
    (16
    )
    
    $
    (24
    )
    
    $
    4
 11




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##### Table of Contents



ITEM
1. Consolidated and Combined Financial Statements Notes to Consolidated and Combined Financial Statements(unaudited)
 8. Operating Segments Successor
    
    PredecessorThree monthsended
    
    Six monthsended
    
    Four monthsended
    
    Two monthsendedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Sales to external customers:Chassis Systems
    
    $
    1,844
    
    
    $
    1,705
    
    
    $
    3,506
    
    
    $
    2,242
    
    
    $
    1,110Occupant Safety Systems
    
    
    894
    
    
    
    871
    
    
    
    1,753
    
    
    
    1,146
    
    
    
    555Automotive Components
    
    
    425
    
    
    
    401
    
    
    
    827
    
    
    
    529
    
    
    
    251$
    3,163
    
    
    $
    2,977

    
    
    $
    6,086
    
    
    $
    3,917
    
    
    $
    1,916Segment profit before taxes:Chassis Systems
    
    $
    105
    
    
    $
    22
    
    
    $
    175
    
    
    $
    31
    
    
    $
    46Occupant Safety Systems
    
    
    99
    
    
    
    54
    
    
    
    183
    
    
    
    79
    
    
    
    53Automotive Components
    
    
    28
    
    
    
    32
    
    
    
    63
    
    
    
    41
    
    
    
    26Segment profit before taxes
    
    
    232
    
    
    
    108
    
    
    
    421
    
    
    
    151
    
    
    
    125Corporate expense and other
    
    
    (27
    )
    
    
    (9
    )
    
    
    (59
    )
    
    
    (15
    )
    
    
    (44
    )Financing costs
    
    
    (61
    )
    
    
    (87
    )
    
    
    (125
    )
    
    
    (148
    )
    
    
    (47
    )Loss on retirement of debt
    
    
    (1
    )
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    Net employee benefits (expense) income.
    
    
    (3
    )
    
    
    1
    
    
    
    (6
    )
    
    
    (4
    )
    
    
    16Earnings (losses) before income taxes
    
    $
    140
    
    
    $
    13
    
    
    $
    183
    
    
    $
    (16
    )
    
    $
    50Intersegment sales:Chassis Systems
    
    $
    1
    
    
    $
    
    
    
    $
    1
    
    
    $
    
    
    
    $
    Occupant Safety Systems
    
    
    5
    
    
    
    1
    
    
    
    9
    
    
    
    1
    
    
    
    1Automotive Components
    
    
    13
    
    
    
    11
    
    
    
    26
    
    
    
    15
    
    
    
    7$
    19
    
    
    $
    12
    
    
    $
    36
    
    
    $
    16
    
    
    $
    8
 9. 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 June 25, 2004, was $65
million on pre-tax income of $140 million as compared to $33 million on pre-tax
income of $13 million in the same period a year ago. For the six months ended
June 25, 2004, the Company recorded income tax expense of $106 million on
pre-tax income of $183 million as compared to income tax expense of $50 million
on a pre-tax loss of $16 million for the four months ended June 27, 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 six months
ended June 25, 2004, are charges of $48 million related to debt prepayment and
debt refinancing on which no corresponding tax benefit was recorded due to the
valuation allowance in the United States. Income tax expense for the four month period ended June 27, 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 12




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##### Table of Contents



ITEM
1. Consolidated and Combined Financial Statements Notes to Consolidated and Combined Financial Statements(unaudited)
 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. 10. 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 six months ended
June 25, 2004, the three and four months ended June 27, 2003, and the two
months ended February 28, 2003: Successor
    
    PredecessorThree monthsended
    
    Six monthsended
    
    Four monthsended
    
    Two monthsendedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Non-
    
    
    
    
    
    Non-
    
    
    
    
    
    Non-
    
    
    
    
    
    Non-
    
    
    
    
    
    Non-U.S.
    
    U.S.
    
    U.S.
    
    U.S.
    
    U.S.
    
    U.S.
    
    U.S.
    
    U.S.
    
    U.S.
    
    U.S.Defined benefit plansService cost
    
    $
    8
    
    
    $
    13
    
    
    $
    10
    
    
    $
    11
    
    
    $
    16
    
    
    $
    26
    
    
    $
    13
    
    
    $
    14
    
    
    $
    5
    
    
    $
    7Interest cost on projected benefit
obligations
    
    
    17
    
    
    
    61
    
    
    
    17
    
    
    
    55
    
    
    
    34
    
    
    
    122
    
    
    
    23
    
    
    
    73
    
    
    
    10
    
    
    
    37Expected return on plan assets
    
    
    (13
    )
    
    
    (77
    )
    
    
    (14
    )
    
    
    (72
    )
    
    
    (26
    )
    
    
    (155
    )
    
    
    (19
    )
    
    
    (95
    )
    
    
    (13
    )
    
    
    (80
    )Amortization of unrecognized loss.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    10Net pension cost (income)
    
    $
    12
    
    
    $
    (3
    )
    
    $
    13
    
    
    $
    (6
    )
    
    $
    24
    
    
    $
    (7
    )
    
    $
    17
    
    
    $
    (8
    )
    
    $
    3
    
    
    $
    (26
    )
 The following table provides the components of net post-retirement benefit cost
for the plans for the three and six months ended June 25, 2004, the three and
four months ended June 27, 2003, and the two months ended February 28, 2003: Successor
    
    PredecessorThree monthsended
    
    Six monthsended
    
    Four monthsended
    
    Two monthsendedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Service cost
    
    $
    1
    
    
    $
    2
    
    
    $
    3
    
    
    $
    3
    
    
    $
    2Interest cost
    
    
    16
    
    
    
    16
    
    
    
    32
    
    
    
    22
    
    
    
    10Amortization of unrecognized income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net post-retirement benefit cost
    
    $
    17
    
    
    $
    18
    
    
    $
    35
    
    
    $
    25
    
    
    $
    13
 On December 8, 2003, President Bush signed into law the MPD Act. The MPD Act
expanded Medicare to include, for the first time, coverage for prescription
drugs. The Company sponsors retiree welfare programs and the Company expects
that this legislation will eventually reduce the Companys costs for some of
these programs. At this point, the Companys investigation into its response
to the legislation is preliminary, as we await guidance from various
governmental and regulatory agencies concerning the requirements that must be
met to obtain these cost reductions. Because of the various uncertainties related to the Companys response to this
legislation, the Company has elected to defer financial recognition of this
legislation until the third quarter of 2004 in accordance with FSP 106-2. As
such, measures of the accumulated post-retirement benefits obligation and net
periodic post-retirement benefits cost included in these financial statements
do not reflect the effects of the MPD Act. When issued, that final guidance
could require the Company to change previously reported information.
See Note 2, Recent Accounting Pronouncements, for further discussion. 13




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##### Table of Contents



ITEM
1. Consolidated and Combined Financial Statements Notes to Consolidated and Combined Financial Statements(unaudited)
 11. Debt and Credit Agreements and Capital Stock Total outstanding debt of the Company as of June 25, 2004, and December 31,
2003, consisted of the following: (Dollars in millions)
    
    June 25, 2004
    
    December 31, 2003Short-term debt
    
    $
    65
    
    
    $
    76Long-term debtSenior Notes
    
    $
    1,017
    
    
    $
    1,178Senior Subordinated Notes
    
    
    294
    
    
    
    458Term Loan facilities
    
    
    1,211
    
    
    
    1,480Revolving credit facility
    
    
    
    
    
    
    Lucas Industries Limited debentures due 2020
    
    
    192
    
    
    
    189Seller Note
    
    
    405
    
    
    
    382Capitalized leases
    
    
    37
    
    
    
    19Other borrowings
    
    
    22
    
    
    
    26Total long-term debt
    
    
    3,178
    
    
    
    3,732Less current portion
    
    
    23
    
    
    
    24$
    3,155
    
    
    $
    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. 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 June 25, 2004,
approximately $25 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 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. 14




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##### Table of Contents



ITEM
1. Consolidated and Combined Financial Statements Notes
to Consolidated and Combined Financial Statements (unaudited)
 As of June 25, 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 98,918,266 shares are issued
and outstanding as of June 25, 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 and
outstanding. 12. Other Comprehensive Earnings (Losses) The components of comprehensive earnings (losses), net of related tax, are as
follows: Successor
    
    PredecessorThree monthsended
    
    Six monthsended
    
    Four monthsended
    
    Two monthsendedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,
    
    February 28,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003Net earnings (losses)
    
    $
    75
    
    
    $
    (20
    )
    
    $
    77
    
    
    $
    (66
    )
    
    $
    31Foreign currency translation (losses) gains, net
    
    
    (16
    )
    
    
    44
    
    
    
    (38
    )
    
    
    49
    
    
    
    (58
    )Realized net gains on cash flow hedges, net
    
    
    
    
    
    
    1
    
    
    
    9
    
    
    
    1
    
    
    
    Comprehensive earnings (losses)
    
    $
    59
    
    
    $
    25
    
    
    $
    48
    
    
    $
    (16
    )
    
    $
    (27
    )
 13. 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 $3 million of
which is included in the unaudited consolidated statement of operations for the
six months ended June 25, 2004, and approximately $2 million for the four
months ended June 27, 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. As of June 25, 2004, the Company has recorded certain receivables from Northrop
related to tax, environmental and other indemnities in the Master Purchase
Agreement. In the second quarter of 2004, Intermediate entered into a letter agreement
with subsidiaries of Northrop to amend the Seller Note. The amendment provides
for the delivery of certain financial statements of Intermediate upon request
in exchange for a fee and for certain management support in connection with any 15




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##### Table of Contents



ITEM
1. Consolidated and Combined Financial Statements Notes
to Consolidated and Combined Financial Statements (unaudited)
 efforts by the holder of the note to assign a portion of the note. No such
fees have been paid by Northrop as of June 25, 2004. Under the Master Purchase Agreement related to the Acquisition, Northrop was
obligated to indemnify the Company for certain cash OPEB payments. Also under
the Master Purchase Agreement, the occurrence of the Companys initial public
offering caused such payments with respect to the OPEB indemnity instead to be
directed (when they are paid) to the non-employee shareholders as of the
closing of the Acquisition who remain shareholders 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. In addition, in the first quarter of
2004, Automotive Investors L.L.C. (the affiliate of Blackstone that owns the
Companys shares directly) agreed to share its portion of such indemnity
payment with the employee shareholders who purchased their shares on or prior
to March 25, 2003, including the executive officers of the Company, in
proportion to their ownership of the shares, provided such shareholders are
employees of the Company or its subsidiaries on the date of payment. No such
payment has been made as of June 25, 2004. 14. 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 June 25, 2004, the Company had
reserves for environmental matters of $87 million. 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 June 25, 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
position. 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 TRW upon
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. 16




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##### Table of Contents



ITEM
1. Consolidated and Combined Financial Statements Notes
to Consolidated and Combined Financial Statements (unaudited)
 On May 6, 2002, ArvinMeritor Inc. filed suit against 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
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 TRW for the costs associated with both the
products recalled by TRW and those recalled by ArvinMeritor on its own.
ArvinMeritor is seeking $18.3 million in damages plus legal fees,
administrative expenses and interest. Management believes that the Company has
meritorious defenses and intends to defend vigorously the claims asserted
against the Company, but cannot predict the outcome of this lawsuit. 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. 17




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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 second quarter 2004 results, with net sales of approximately
$3.2 billion, up $186 million or approximately 6.2% from second quarter 2003.
The increase can be attributed to higher customer volume, new product growth,
and favorable currency translation, partially offset by pricing provided to
customers, and a reduction in sales due to divestitures. Net earnings for the
second quarter 2004 were $75 million, up from a net loss of $20 million from
second quarter 2003 due primarily to the absence of purchase accounting
adjustments related to the Acquisition, favorable operating performance due to
the higher customer volume and favorable currency translation. Additionally,
we experienced interest savings resulting from debt repayment, refinancing
actions and swapping fixed rate debt for floating rate debt. During the second quarter and first half of 2004, we continued to work with our
suppliers and customers to mitigate the impact of increasing costs of ferrous
metals and as a result, our operating results were not materially impacted by
these increased costs. However, inflationary pressures on metals continue and
have begun extending into oil and gas based commodities such as resins and
textile yarns. 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. Additionally, we believe the third quarter will be a difficult
production quarter in North America, as we expect customer production to be
down as compared to prior year. Basis of Presentation We did not historically operate as a stand-alone business, but as part of TRW
Inc. (TRW), which became a subsidiary of Northrop Grumman Corporation
(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 four months ended June 27, 2003, have been combined for
convenience of discussion and are collectively referred to as six months ended
June 27, 2003. 18




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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 six months ended June 25, 2004, to the
three and six months ended June 27, 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) Variance Increase (Decrease)Three months endedJune 25,
    
    June 27,(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    
    
    
    
    Operations
    
    TotalSales
    
    $
    3,163
    
    
    $
    2,977
    
    
    $
    
    
    
    
    
    
    
    $
    186
    
    
    $
    186Cost of sales
    
    
    2,790
    
    
    
    2,625
    
    
    
    (7
    )
    (a
    )
    
    
    
    
    172
    
    
    
    165Gross profit
    
    
    373
    
    
    
    352
    
    
    
    7
    
    
    
    
    
    
    
    14
    
    
    
    21Administrative and selling expenses
    
    
    134
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Research and development expenses
    
    
    42
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Purchased in-process research and
development
    
    
    
    
    
    
    85
    
    
    
    (85
    )
    (b
    )
    
    
    
    
    
    
    
    
    (85
    )Amortization of intangible assets
    

    
    8
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Other income  net
    
    
    (12
    )
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Operating income
    
    
    201
    
    
    
    98
    
    
    
    92
    
    
    
    
    
    
    
    11
    
    
    
    103Interest expense, net
    
    
    60
    
    
    
    78
    
    
    
    (5
    )
    (c
    )
    
    
    
    
    (13
    )
    
    
    (18
    )Loss on retirement of debt
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Loss on sales of receivables
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Earnings before income taxes
    
    
    140
    
    
    
    13
    
    
    
    97
    
    
    
    
    
    
    
    30
    
    
    
    127Income tax expense
    
    
    65
    
    
    
    33
    
    
    
    23
    
    (d
    )
    
    
    
    
    9
    
    
    
    32Net earnings (losses)
    
    $
    75
    
    
    $
    (20
    )
    
    $
    74
    
    
    
    
    
    
    $
    21
    
    
    $
    95
   (a)
    
    Reflects the effects of a $7 million inventory write-up recorded as a
result of the Acquisition.(b)
    
    Reflects the fair value of purchased in-process research and development
expensed as a result of purchase accounting.(c)
    
    Reflects net financing costs based upon our new capital structure.(d)
    
    Reflects the tax effect of the above variances at the applicable tax
rates. 19




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  CONSOLIDATED AND COMBINED
STATEMENTS OF OPERATIONS (unaudited) Variance Increase (Decrease)Six months endedJune 25,
    
    June 27,(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    6,086
    
    
    $
    5,833
    
    
    $
    (43
    )(a)
    
    $
    296
    
    
    $
    253Cost of sales
    
    
    5,394
    
    
    
    5,174
    
    
    
    (99
    )(b)
    
    
    319
    
    
    
    220Gross profit
    
    
    692
    
    
    
    659
    
    
    
    56
    
    
    
    (23
    )
    
    
    33Administrative and selling expenses
    
    
    258
    
    
    
    275
    
    
    
    (2
    )(c)
    
    
    (15
    )
    
    
    (17
    )Research and development expenses
    
    
    79
    
    
    
    81
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Purchased in-process research and development
    
    
    
    
    
    
    85
    
    
    
    (85
    )(d)
    
    
    
    
    
    
    (85
    )Amortization of intangible assets
    
    
    17
    
    
    
    12
    
    
    
    3
    (e)
    
    
    2
    
    
    
    5Other income net
    
    
    (16
    )
    
    
    (20
    )
    
    
    1
    (f)
    
    
    (5
    )
    
    
    (4
    )Operating income
    
    
    354
    
    
    
    226
    
    
    
    141
    
    
    
    (13
    )
    
    
    128Interest expense, net
    
    
    123
    
    
    
    167
    
    
    
    (17
    )(g)
    
    
    (27
    )
    
    
    (44
    )Loss on retirement of debt
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    48Loss on sales of receivables
    
    
    
    
    
    
    25
    
    
    
    (17
    )(g)
    
    
    (8
    )
    
    
    (25
    )Earnings (losses) before income taxes
    
    
    183
    
    
    
    34
    
    
    
    175
    
    
    
    (26
    )
    
    
    149Income tax expense
    
    
    106
    
    
    
    69
    
    
    
    38
    (h)
    
    
    (1
    )
    
    
    37Net earnings (losses)
    
    $
    77
    
    
    $
    (35
    )
    
    $
    137
    
    
    $
    (25
    )
    
    $
    112
   (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 $42
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 $1 million of administrative and selling expense 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 capitalized 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. 20




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  The results of operations reflect the impact of various unusual items during
the periods discussed. Pretax earnings for the three and six months ended June
25, 2004, and for the three and six months ended June 27, 2003, were negatively
impacted by the effects of these unusual items as presented in the following
table: Three months ended
    
    Six months endedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003Restructuring charges  Severance and other (cash)
    
    $
    (8
    )
    
    $
    (2
    )
    
    $
    (13
    )
    
    $
    (6
    )Northrop/TRW merger-related transaction costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Unusual items pre-tax earnings (losses)
    
    $
    (8
    )
    
    $
    (2
    )
    
    $
    (13
    )
    
    $
    (12
    )
 These unusual items are classified in the statements of operations as
follows: Three months ended
    
    Six months endedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,(Dollars in millions)
    
    2004
    
    2003
    
    2004
    
    2003Cost of sales
    
    $
    6
    
    
    $
    (1
    )
    
    $
    11
    
    
    $
    3Administrative and selling expenses
    
    
    2
    
    
    
    3
    
    
    
    2
    
    
    
    8Other expense (income)  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Reduction in earnings (losses)
before income taxes
    
    
    8
    
    
    
    2
    
    
    
    13
    
    
    
    12Income tax benefit
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    3Reduction in earnings (losses)
    
    $
    8
    
    
    $
    2
    
    
    $
    11
    
    
    $
    9
 Three Months Ended June 25, 2004 Compared to Three Months Ended June 27, 2003 Salesfor the three months ended June 25, 2004, of $3.2 billion increased $186
million from $3.0 billion for the three months ended June 27, 2003. Higher
sales resulted from the net combination of higher customer volume and new
product growth in excess of price reductions to our customers of $117 million,
and the favorable effect of foreign currency exchange of $100 million. These
increases were primarily offset by a reduction in sales due to net divestitures
of $31 million. Gross profitfor the three months ended June 25, 2004, of $373 million
increased $21 million from $352 million for the three months ended June 27,
2003. Gross profit increased primarily as a result of the positive impact of
higher volume, net of adverse mix, of $37 million, the favorable effect of
foreign currency exchange of $9 million and the absence of costs associated
with the Transactions of $7 million. These increases were partially offset by
the net unfavorable impact of price reductions to our customers and inflation
(which included the effects of higher costs for ferrous metals) in excess of
cost savings of $13 million, a reduction in gross profit due to divested
operations of $5 million and other increased costs of $13 million including
restructuring, net pension and OPEB, and warranty. Gross profit for the three
months ended June 25, 2004, included restructuring charges of $6 million
primarily for severance compared to $1 million income in the three months ended
June 27, 2003. Gross profit as a percentage of sales was 11.8% for each of the
three months ended June 25, 2004, and June 27, 2003. Administrative and selling expensesfor the three months ended June 25, 2004,
of $134 million declined $3 million from $137 million for the three months
ended June 27, 2003. The decline resulted primarily from a reduction in
expenses due to divested operations of $5 million, partially offset by the
unfavorable effect of foreign currency exchange. Administrative and selling
expenses as a percentage of sales for the 21




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  three months ended June 25, 2004, were 4.2% compared to 4.6% for the three
months ended June 27, 2003. Research and development expenseswere $42 million for the three months ended
June 25, 2004, compared to $41 million for the three months ended June 27,
2003. The increase primarily reflected the unfavorable effect of foreign
currency exchange. Research and development expenses as a percentage of sales
were 1.3% for the three months ended June 25, 2004, and 1.4% for the three
months ended June 27, 2003. Purchased in-process research and developmentfor the three months ended June
27, 2003 was $85 million. This expense reflected a write-off of the fair value
of purchased in-process research and development expenses related to the
Acquisition. Other income  netfor the three months ended June 25, 2004, was $12 million
compared to $18 million for the three months ended June 27, 2003. The decrease
was primarily the result of a lower foreign currency exchange gain in the
current period. Interest expense, netfor the three months ended June 25, 2004, was $60 million
compared to $78 million for the three months ended June 27, 2003. The decline
in interest expense resulted primarily from the pay down of debt with the
proceeds from our initial public offering and available cash, the refinancing
of the term loan facilities, and the use of interest rate swap agreements. Loss on retirement of debtfor the three months ended June 25, 2004, was $1
million due to the expensing of deferred debt issuance costs in connection with
the repayment of a portion of the term loan facilities. Income tax expensefor the three months ended June 25, 2004, was $65 million on
pre-tax income of $140 million as compared to income tax expense of $33 million
on a pre-tax income of $13 million for the three months ended June 27, 2003.
The income tax rate varies from the United States statutory income tax rate of
35% 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 June 25, 2004, was
$324 million compared to $220 million for the three months ended June 27, 2003.
The increase in EBITDA resulted primarily from the changes in operating income
line items (gross profit, administrative and selling expenses, research and
development expenses, and other (income) expense-net) previously described and
includes $92 million in expenses associated with the Transactions in 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 22




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  compliance with financial covenants and our ability to engage in certain
activities such as incurring additional debt and making certain payments. The following table provides a reconciliation of net earnings to EBITDA: Three months ended(Dollars in millions)
    
    June 25, 2004
    
    June 27, 2003Net earnings (losses)
    
    $
    75
    
    
    $
    (20
    )Depreciation and amortization
    
    
    123
    
    
    
    122Interest expense, net
    
    
    60
    
    
    
    78Loss on retirement of debt
    
    
    1
    
    
    
    Loss on sales of receivables.
    
    
    
    
    
    
    7Income tax expense
    
    
    65
    
    
    
    33EBITDA
    
    $
    324
    
    
    $
    220
 Six Months Ended June 25, 2004 Compared to Six Months Ended June 27, 2003 Salesfor the six months ended June 25, 2004, of $6.1 billion increased $253
million from $5.8 billion for the six months ended June 27, 2003. The increase
reflected the favorable impact of foreign currency exchange of $341 million,
and the combination of higher volume and sales of new products, net of price
reductions provided to customers, of $27 million. These increases were reduced
by the net loss of sales from divestitures of $72 million and the loss 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 six months ended June 25, 2004, of $692 million increased
$33 million from $659 million for the six months ended June 27, 2003. The
increase resulted primarily from net higher costs incurred in 2003 associated
with the Transactions of $56 million (which included $12 million of net pension
and OPEB income), the favorable effect of foreign currency exchange of $29
million, and the positive impact of higher volume, net of adverse product mix,
of $25 million. These increases were partially offset by an increase in net
pension and OPEB expenses of $39 million, higher warranty expenses primarily in
Europe of $11 million, and the net combined unfavorable impact of price
reductions to our customers and inflation (which included the effects of
increased costs for ferrous metals), net of cost savings, of $10 million.
Gross profit for the six months ended June 25, 2004, was reduced by
restructuring charges of $11 million primarily for severance compared to $3
million of restructuring and unusual charges for the six months ended June 27,
2003. Gross profit as a percentage of sales for the six months ended June 25,
2004, was 11.4% compared to 11.3% for the six months ended June 27, 2003. Administrative and selling expensesfor the six months ended June 25, 2004, of
$258 million declined $17 million from $275 million for the six months ended
June 27, 2003. The decline resulted primarily from cost savings and lower
expenditures of $14 million, lower expenses due to divested operations of $7
million, a reduction in unusual charges of $6 million and absence of costs
incurred in connection with the Transactions of $2 million partially offset by
the unfavorable effect of foreign currency exchange of $12 million.
Administrative and selling expenses for the six months ended June 25, 2004,
included restructuring charges of $2 million related to severance compared to
$8 million in restructuring and unusual charges for the six months ended June
27, 2003. Administrative and selling expenses as a percentage of sales for the
six months ended June 25, 2004, was 4.2% compared to 4.7% for the six months
ended June 27, 2003. Research and development expenseswere $79 million for the six months ended
June 25, 2004, compared to $81 million for the six months ended June 27, 2003.
The reduction in expenses reflected cost savings and lower spending partially
offset by the unfavorable impact of foreign currency exchange. Research 23




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  and development expenses as a percentage of sales were 1.3% for the six months
ended June 25, 2004, and 1.4% for the six months ended June 27, 2003. Purchased in-process research and developmentfor the six months ended June 27,
2003 was $85 million. This expense reflected a write-off of the fair value of
purchased in-process research and development expenses related to the
Acquisition. Other income  netfor the six months ended June 25, 2004, was $16 million
compared to $20 million for the six months ended June 27, 2003. The decrease
was primarily the result of a lower foreign currency exchange gain partially
offset by other miscellaneous income. Interest expense, netfor the six months ended June 25, 2004, was $123 million
compared to $167 million for the six months ended June 27, 2003. The decline
in interest expense resulted primarily from the pay down of debt with proceeds
from our initial public offering and available cash, the refinancing of the
term loan facilities, and the use of interest rate swap agreements. Loss on retirement of debtfor the six months ended June 25, 2004, totaled $48
million. The loss resulted from the refinancing of all of the borrowings under
our then-existing term loan facilities with proceeds of new term loan
facilities together with available cash on hand, the repayment of a portion of
each of the dollar and euro senior notes and senior subordinated notes with
proceeds from our initial public offering and a repayment of a portion of the
new term loan facilities. We expensed $11 million of debt issuance costs
related to the then-existing loan facilities, $1 million of debt issuance costs
related to the new loan facilities, $30 million of redemption premiums and $6
million of deferred debt issuance costs related to the senior notes and senior
subordinated notes. Income tax expensefor the six months ended June 25, 2004, was $106 million on
pre-tax income of $183 million as compared to income tax expense of $69 million
on pre-tax income $34 million for the six months ended June 27, 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 six months ended June
25, 2004, pre-tax income is a one-time refinancing charge of $48 million in
which no corresponding tax benefit was recorded due to the valuation allowance
in the United States. EBITDAfor the six months ended June 25, 2004, was $600 million compared to
$471 million for the six months ended June 27, 2003. The increase in EBITDA
resulted primarily from the changes in operating line items (gross profit,
administrative and selling expenses, research and development expenses, and
other (income) expense  net) previously described and includes $141 million in
expenses associated with the Transactions in 2003. The following table provides a reconciliation of net earnings to EBITDA: Six months ended(Dollars in millions)
    
    June 25, 2004
    
    June 27, 2003Net earnings (losses)
    
    $
    77
    
    
    $
    (35
    )Depreciation and amortization
    
    
    246
    
    
    
    245Interest expense, net
    
    
    123
    
    
    
    167Loss on retirement of debt
    
    
    48
    
    
    
    Loss on sales of receivables.
    
    
    
    
    
    
    25Income tax expense
    
    
    106
    
    
    
    69EBITDA
    
    $
    600
    
    
    $
    471
 24




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  CHASSIS SYSTEMS For the three months ended: June 25,
    
    June 27,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    1,844
    
    
    $
    1,705
    
    
    $
    
    
    
    $
    139
    
    
    $
    139Profit before taxes
    
    
    105
    
    
    
    22
    
    
    
    66
    
    
    
    17
    
    
    
    83Restructuring charges included in
profit before taxes
    
    
    (5
    )
    
    
    (2
    )
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )
 For the six months ended: June 25,
    
    June 27,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    3,506
    
    
    $
    3,352
    
    
    $
    (43
    )
    
    $
    197
    
    
    $
    154Profit before taxes
    
    
    175
    
    
    
    77
    
    
    
    89
    
    
    
    9
    
    
    
    98Restructuring charges included in
profit before taxes
    
    
    (10
    )
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )
 Three Months Ended June 25, 2004 Compared to Three Months Ended June 27, 2003 Salesfor the three months ended June 25, 2004, of $1,844 million increased
$139 million from $1,705 million for the three months ended June 27, 2003. The
increase primarily resulted from higher volume and new product growth, net of
pricing provided to customers, of $78 million and the favorable impact of
foreign currency exchange of $58 million. Profit before taxesfor the three months ended June 25, 2004, of $105 million
increased $83 million from $22 million for the three months ended June 27,
2003. Profit before taxes for the three months ended June 27, 2003 included
$66 million of expenses resulting from the Transactions. These expenses
consisted of a write-off of the fair value of purchased in-process research and
development of $59 million and the unfavorable effect of an inventory write-up
of $7 million. In addition to the absence of these Transactions related costs,
the increase resulted primarily from the favorable impact of higher sales
volume, net of negative product mix, of $19 million and the favorable effect of
foreign currency exchange. These increases were partially offset by the net
unfavorable impact of price reductions to our customers and inflation (which
included the effect of higher costs for ferrous metals) net of savings from
cost reductions and an increase in restructuring charges. Profit before tax
for the three months ended June 25, 2004, included restructuring charges for
severance of $5 million compared to $2 million for the three months ended June
27, 2003. Six Months Ended June 25, 2004 Compared to Six Months Ended June 27, 2003 Salesfor the six months ended June 25, 2004, of $3,506 million increased $154
million from $3,352 million for the six months ended June 27, 2003. Higher
sales resulted primarily from the favorable impact of foreign currency exchange
of $197 million, the impact of higher volume and sales of new products in
excess of price reductions provided to customers of $11 million, partially
offset by a reduction in sales due to divestitures of $11 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. 25




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  Profit before taxesfor the six months ended June 25, 2004, of $175 million
increased $98 million from $77 million for the six months ended June 27, 2003.
Profit before tax for the six months ended June 27, 2003 included expenses that
totaled $89 million due the Transactions. Net Transactions costs 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 $26 million,
higher depreciation and amortization expenses of $5 million and TKS profit
before tax of $1 million. Increased profit before tax also reflected primarily
savings from cost reductions, net of price reductions to our customers and
inflation (which included increased costs of ferrous metals) of $11 million,
the favorable impact of higher volume in excess of adverse product mix of $8
million and the favorable impact of foreign currency exchange. These increases
were partially offset by higher net pension and OPEB expenses of $5 million, an
increase in warranty costs of $6 million, and an increase in restructuring
charges of $5 million. Profit before tax for the six months ended June 25,
2004, included restructuring charges for severance of $10 million compared to
$5 million of restructuring charges for severance for the six months ended June
27, 2003. OCCUPANT SAFETY SYSTEMS For the three months ended: June 25,
    
    June 27,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    894
    
    
    $
    871
    
    
    $
    
    
    
    $
    23
    
    
    $
    23Profit before taxes
    
    
    99
    
    
    
    54
    
    
    
    26
    
    
    
    19
    
    
    
    45Restructuring charges included in
profit before taxes
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
 For the six months ended: June 25,
    
    June 27,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    1,753
    
    
    $
    1,701
    
    
    $
    
    
    
    $
    52
    
    
    $
    52Profit before taxes
    
    
    183
    
    
    
    132
    
    
    
    32
    
    
    
    19
    
    
    
    51Restructuring charges included in
profit before taxes
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
 Three Months Ended June 25, 2004 Compared to Three Months Ended June 27, 2003 Salesfor the three months ended June 25, 2004, of $894 million increased $23
million from $871 million for the three months ended June 27, 2003. The
increase resulted primarily from the favorable impact of foreign currency
exchange of $29 million and higher volume in excess of pricing provided to
customers of $28 million, partially offset by a reduction in sales due to the
divestiture of our interest in a joint venture in 2003 of $34 million. Profit before taxesfor the three months ended June 25, 2004, of $99 million
increased $45 million from $54 million for the three months ended June 27,
2003. Profit before tax for the three months ended June 27, 2003 included a
$26 million write-off for the fair value of purchased in-process research and
development due to the Acquisition. In addition, the increase also primarily
resulted from the favorable impact of higher sales volume, net of adverse
product mix, of $15 million and savings from cost reductions in excess of price
reductions and inflation and the favorable effect of foreign currency exchange.
Restructuring charges for the three months ended June 25, 2004, totaled $1
million. 26




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  Six Months Ended June 25, 2004 Compared to Six Months Ended June 27, 2003 Salesfor the six months ended June 25, 2004, of $1,753 million increased $52
million from $1,701 million for the six months ended June 27, 2003. The
increase resulted primarily from the favorable impact of foreign currency
exchange of $96 million, and higher volume, net of price reductions to our
customers, of $16 million, partially offset by a reduction in sales due to the
divestiture of our interest in a joint venture in 2003 of $61 million. Profit before taxesfor the six months ended June 25, 2004, of $183 million
increased $51 million from $132 million for the six months ended June 27, 2003.
Profit before taxes for the six months ended June 27, 2003 included net
expenses related to the Transactions of $32 million. Net Transactions charges
consisted of a write-off of purchased in-process research and development of
$26 million, the unfavorable effect of an inventory write-up of $9 million
offset by lower depreciation and amortization expenses of $3 million. In
addition, profit before taxes also increased primarily due to the favorable
impact of higher sales volume, net of adverse product mix, of $16 million, and
the favorable impact of foreign currency exchange. Profit before tax for the
six months ended June 25, 2004 and June 27, 2003, included restructuring
charges for severance of $1 million. AUTOMOTIVE COMPONENTS For the three months ended: June 25,
    
    June 27,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    425
    
    
    $
    401
    
    
    $
    
    
    
    $
    24
    
    
    $
    24Profit before taxes
    
    
    28
    
    
    
    32
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Restructuring charges included in
profit before taxes
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
 For the six months ended: June 25,
    
    June 27,
    
    Variance Increase (Decrease)(Dollars in millions)
    
    2004
    
    2003
    
    Transactions
    
    Operations
    
    TotalSales
    
    $
    827
    
    
    $
    780
    
    
    $
    
    
    
    $
    47
    
    
    $
    47Profit before taxes
    
    
    63
    
    
    
    67
    
    
    
    4
    
    
    
    (8
    )
    
    
    (4
    )Restructuring charges included in
profit before taxes
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
 Three Months Ended June 25, 2004 Compared to Three Months Ended June 27, 2003 Salesfor the three months ended June 25, 2004, of $425 million increased $24
million from $401 million for the three months ended June 27, 2003. The
increase resulted from the favorable impact of foreign currency exchange of $13
million and higher volume, net of price reductions to our customers, of $11
million. Profit before taxesfor the three months ended June 25, 2004, of $28 million
decreased $4 million from $32 million for the three months ended June 27, 2003.
The decline resulted primarily from price reductions to our customers and
inflation in excess of savings from cost reduction activities partially offset
by the favorable impact of higher sales volume and the favorable effect of
foreign currency 27




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  exchange. Profit before tax for the three months ended June 25, 2004, included
restructuring charges of $2 million for severance and costs to consolidate
facilities. Six Months Ended June 25, 2004 Compared to Six Months Ended June 27, 2003 Salesfor the six months ended June 25, 2004, of $827 million increased $47
million from $780 million for the six months ended June 27, 2003. Higher sales
primarily resulted from the favorable impact of foreign currency exchange. Profit before taxesfor the six months ended June 25, 2004, of $63 million
declined $4 million from $67 million for the six months ended June 27, 2003.
The decline resulted primarily from price reductions and inflation, net of cost
savings, partially offset by the favorable effect of foreign currency exchange
and the absence of costs related to the Transactions. Profit before tax for
the six months ended June 25, 2004, included restructuring charges primarily
for severance of $2 million. 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 facility,
subject to certain conditions, described below. See Off-Balance Sheet
Arrangements. Our primary liquidity requirements are expected to be for debt
service, working capital, capital expenditures and research and development. We are significantly leveraged. 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. 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. As of June 25, 2004, we
had outstanding $3,243 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 June 25, 2004,
approximately $305 million of our total reported accounts receivable balance
was considered eligible for borrowings under our receivables facility, of which
approximately $222 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 150 million of funding availability. Our liquidity
requirements will be significant, primarily due to debt service requirements
and costs incurred in connection with our receivables facility. 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. The term loan facilities, with maturities ranging from 2009 to
2011, consist of an aggregate of $1.15 billion dollar-denominated term loans
and 93 million euro-denominated term loan. 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 with
available cash on hand. The outstanding balance after this payment is
50
million. 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 28




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  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 June 25, 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. The applicable margin for certain of these borrowings may be
reduced or increased 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. 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%. The Seller Note, which matures in 2018 (or
2015 in certain circumstances), bears interest at 8% per year initially,
payable in kind at the option of Intermediate until maturity. 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, as well as the Seller Note), 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. 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. In addition, notwithstanding Intermediates
option to make cash interest payments on the Seller Note, the indentures
prohibit the payment of dividends by TRW Automotive to Intermediate for the
purpose of making any payments in respect of, or otherwise servicing the
obligations represented by, the Seller Note. If Intermediate declares and pays
a dividend (other than a stock dividend and subject to certain other
exceptions) to its stockholders, then commencing on the payment date for such
dividend, interest on the Seller Note will thereafter be payable in cash, in
quarterly installments. 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 June 25, 2004, debt was reduced by 29




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  approximately $25 million as a result of reflecting a $25 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. Any indemnification from Northrop for
certain cash OPEB payments under the master purchase agreement will go to
certain of our shareholders as of the closing date of the Acquisition instead
of to us as a result of the occurrence of our initial public offering. See
Note 13 to our consolidated and combined financial statements. In addition, we
expect to have substantially increased 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). Although we have made no payments to
date, we expect to make an initial payment on this indemnification in 2004. 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. Our ability to continue to fund these items
and continue to reduce debt 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. 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. We cannot assure you, however, 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 used in operating activities for the six months ended June 25, 2004, was
$2 million as compared to net cash provided by operating activities of $230
million for the four months ended June 27, 2003 and the two months ended
February 28, 2003 combined. The $232 million decrease was due primarily to
proceeds from the securitization of accounts receivable in 2003, which did not
occur in the current period, as well as obligations, ordinarily settled in the
first quarter of each year, being paid in December 2002 prior to the Merger. Cash used in investing activities in the first six months of 2004 decreased by
approximately $3.4 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 $108 million (including VAT of approximately $14 million which
was subsequently 30




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  remitted to the taxing authorities) for the six months ended June 25, 2004,
compared to $31 million in the prior year. Cash used in financing activities was approximately $241 million in the first
six months of 2004 compared to cash provided by financing activities of
approximately $3.9 billion in the comparable period of 2003. During the six
months ended June 25, 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 six
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 June 2004, we have spent $162 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 $275 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 and principal outstanding on our senior notes and
senior subordinated notes by $287 million in February 2004 with the proceeds of
our initial public offering. 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. 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 31




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ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  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 June 25, 2004, approximately $305 million of our
accounts receivable balance was considered eligible for borrowings under the
program, of which approximately $222 million would have been available for
funding. We had no outstanding borrowings under this facility as of June 25,
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 June 25, 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 June 25, 2004. 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 75 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 second half of 2004, we expect to
enter into an additional receivables financing arrangement in Europe with an
availability of approximately £40 million and a term of one year. These
financing arrangements provide or will provide, as the case may be, short-term
financing to meet our liquidity needs. 32




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ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  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 June 25, 2004, we had reserves for environmental matters of $87
million. 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 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 TRW upon TRWs
acquisition of Lucas Varity in 1999 and became our wholly owned subsidiary in
connection with the 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 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
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 TRW for the costs associated with
both the products recalled by TRW and those recalled by ArvinMeritor on its
own. ArvinMeritor is seeking $18.3 million in damages plus legal fees,
administrative expenses and interest. We believe that we have meritorious
defenses and intend to defend vigorously the claims asserted against us, but
cannot predict the outcome of this lawsuit. 33




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ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  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. Recent Accounting Pronouncements See Note 2 for a discussion of recent accounting pronouncements. Outlook We expect full-year 2004 revenue in the range of $11.6 to $11.8 billion and
diluted earnings per share in the range of $1.22 to $1.32, including
year-to-date charges of 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. 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 $1,070 to $1,090 million,
which is based on expected operating income in the range of $570 to $590
million, adding back expected depreciation and amortization of approximately
$500 million. We expect an effective annual tax rate of approximately 54% for 2004, including
the negative impact of the previously mentioned debt repayment charges of $48
million, which are U.S. based and therefore carry zero tax benefit due to our
U.S. tax loss position and related valuation allowances. This 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 resins and textile yarns and other oil and gas based
commodities. 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 34




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ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  to mitigate the effects may be insufficient and the pressures may worsen, thus
potentially having a negative impact on our financial results. For the third quarter 2004, we expect revenue of approximately $2.7 billion and
diluted earnings per share in the range of $0.09 to $0.14, which includes
pre-tax restructuring charges of approximately $10 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 quarter ended March 26, 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; risks related to our ability to
operate on a stand-alone basis, separate from our former parent, TRW;
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. 35




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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 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 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 June 25, 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 $21
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 June 25, 2004, approximately 55% 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 June 25,
2004, a one-percentage-point increase in the average interest rate would
increase future interest expense by approximately $18 million per year. At June 25, 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% increase in foreign currency rates would increase future interest expense
by approximately $5 million per year. 36




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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 June 25, 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. 37




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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
quarter ended March 26, 2004. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  a)
    
    Exhibits: Exhibit Number
    
    Exhibit Name4.1
    
    8% $600,000,000 Pay-in-kind Note dated February 28, 2003, as amended and
restated on June 23, 2004 due February 28, 2018 issued by TRW Automotive
Intermediate Holdings Corp. to Richmond TASSI Inc. (formerly known as TRW
Automotive Safety Systems Inc.) and transferred to Northrop Grumman Space &
Mission Systems Corp.4.2
    
    Letter Agreement dated June 23, 2004 between Richmond TASSI Inc. (formerly
known as TRW Automotive Safety Systems Inc.), TRW Automotive Intermediate
Holdings Corp. and Northrop Grumman Space and Mission Systems Corp.10.1
    
    Amendment No. 1 dated as of May 6, 2004 to the Second Amended and Restated
Credit Agreement dated as of January 9, 2004, among TRW Automotive Holdings
Corp., TRW Automotive Intermediate Holdings Corp., TRW Automotive Inc.
(formerly known as TRW Automotive Acquisition Corp.), the Foreign Subsidiary
Borrowers party thereto, the Lenders party thereto, 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 Agent10.2
    
    Amendment No. 1 dated as of May 18, 2004 to Performance Guaranty dated as of
February 28, 2003 entered into by and among TRW Automotive Inc. (formerly
known as TRW Automotive Acquisition Corp.) and the other Performance
Guarantors party thereto, TRW Automotive Receivables LLC, TRW Automotive
Global Receivables LLC, the Conduit Lenders, Committed Lenders and Funding
Agents party thereto and JPMorgan Chase Bank, as administrative agent10.3
    
    Restricted Stock Unit Agreement with Francois J. Castaing dated June 18, 200431(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
  b)
    
    Reports on Form 8-K:During the quarter for which this report is filed, the following reports
on Form 8-K were filed:May 5, 2004 Form 8-K reporting under Item 12. Results of Operations and
Financial Condition, the filing of financial information for the first
quarter of 2004. 38




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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: July 28, 2004
    
    Executive Vice President and Chief Financial Officer
(On behalf of the Registrant and as Principal Financial Officer) 39




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EXHIBIT INDEX Exhibit Number
    
    Exhibit Name4.1
    
    8% $600,000,000 Pay-in-kind Note dated February 28, 2003, as amended and
restated on June 23, 2004 due February 28, 2018 issued by TRW Automotive
Intermediate Holdings Corp. to Richmond TASSI Inc. (formerly known as TRW
Automotive Safety Systems Inc.) and transferred to Northrop Grumman Space &
Mission Systems Corp.4.2
    
    Letter Agreement dated June 23, 2004 between Richmond TASSI Inc. (formerly
known as TRW Automotive Safety Systems Inc.), TRW Automotive Intermediate
Holdings Corp. and Northrop Grumman Space and Mission Systems Corp.10.1
    
    Amendment No. 1 dated as of May 6, 2004 to the Second Amended and Restated
Credit Agreement dated as of January 9, 2004, among TRW Automotive Holdings
Corp., TRW Automotive Intermediate Holdings Corp., TRW Automotive Inc.
(formerly known as TRW Automotive Acquisition Corp.), the Foreign Subsidiary
Borrowers party thereto, the Lenders party thereto, 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 Agent10.2
    
    Amendment No. 1 dated as of May 18, 2004 to Performance Guaranty dated as of
February 28, 2003 entered into by and among TRW Automotive Inc. (formerly
known as TRW Automotive Acquisition Corp.) and the other Performance
Guarantors party thereto, TRW Automotive Receivables LLC, TRW Automotive
Global Receivables LLC, the Conduit Lenders, Committed Lenders and Funding
Agents party thereto and JPMorgan Chase Bank, as administrative agent10.3
    
    Restricted Stock Unit Agreement with Francois J. Castaing dated June 18, 200431(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