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10-K 1 k92209e10vk.htm ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2004 e10vk

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549-1004

Form 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the year ended December 31, 2004
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to .

Commission File No. 001-31970

TRW Automotive 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)

12001 Tech Center Drive

Livonia, Michigan 48150

(734) 855-2600

(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 Registered

Common 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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ 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 þ

As of June 25, 2004, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s Common Stock, $0.01 par value per share, held by non-affiliates of the registrant was approximately $487,887,554. As of February 3, 2005, the number of shares outstanding of the registrant’s Common Stock was 98,971,479.

Documents Incorporated by Reference

Certain portions, as expressly described in this report, of the Registrant’s Proxy Statement for the 2005 Annual Meeting of the Stockholders, to be filed within 120 days of December 31, 2004, are incorporated by reference into Part III, Items 10-14.

Website Access to Company Reports and Other Information

TRW Automotive Holdings Corp. Internet website address is www.trwauto.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. Our Audit Committee Charter, Compensation Committee Charter, Corporate Governance and Nominating Committee Charter, Corporate Governance Guidelines and Standards of Conduct (our code of business conduct and ethics) are also available on our website and available in print to any shareholder who requests it.

TRW Automotive Holdings Corp.

Index


		Page

PART I
Item 1.	Business		1
Item 2.	Properties		11
Item 3.	Legal Proceedings		12
Item 4.	Submission of Matters to a Vote of Security Holders		13
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		13
Item 6.	Selected Historical Consolidated and Combined Financial Data		14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risks		44
Item 8.	Financial Statements and Supplementary Data		46
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		89
Item 9A.	Control and Procedures		89
Item 9B.	Other Information		89
PART III
Item 10.	Directors and Executive Officers of the Registrant		89
Item 11.	Executive Compensation		89
Item 12.	Security Ownership of Certain Beneficial Owners and Management		89
Item 13.	Certain Relationships and Related Transactions		89
Item 14.	Principal Accounting Fees and Services		90
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		90
Fourth Amended and Restated Credit Agreement, Dated as of December 17, 2004
Amended and Restated Transfer Agreement, Dated as of December 31, 2004
Amended and Restated Receivables Loan Agreement, Dated as of December 31, 2004
Amended and Restated Servicing Agreement, Dated as of December 31, 2004
Amended and Restated Performance Guaranty, Dated as of December 31, 2004
Amendment No. 6 to the Receivables Loan Agreement
Amendment dated as of December 16, 2004 to Employment Agreement of John C. Plant
Amendment dated as of December 16, 2004 to Employment Agreement of Steven Lunn
Second Amendment dated as of December 16, 2004 to Employment Agreement of Peter J. Lake
Second Amendment dated as of December 16, 2004 to Employment Agreement of David L. Bialosky
Second Amendment dated as of December 16, 2004 to Employment Agreement of Joseph S. Cantie
Amendment dated as of December 16, 2004 to Employment Agreement of Neil E. Marchuk
Second Amendment dated as of February , 2005 to Employment Agreement of John C. Plant
Director Offer Letter to J. Michael Losh, Dated November 7, 2003
Director Offer Letter to Francois J. Castaing, Dated March 31, 2004
Amendment No. 1 to the Amended and Restated Receivables Loan Agreement
Amendment No. 1 to Receivables Purchase Agreement
List of Subsidiaries
Consent of Ernst and Young LLP
Consent of Ernst and Young LLP
Consent of Ernst and Young LLP
Section 302 Certification
Section 302 Certification
Section 906 Certification
Section 906 Certification

PART I


ITEM 1.	*BUSINESS*

Company Description

TRW Automotive Holdings Corp. (the “Company”) is among the world’s largest and most diversified suppliers of automotive systems, modules and components to global automotive original equipment manufacturers, or OEMs, 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 safety electronics (electronic control units and crash and occupant weight sensors). The Company is primarily a “Tier 1” supplier, with over 85% of our sales in 2004 made directly to OEMs. The Company’s history in the automotive supply business dates back to the early 1900s.

Predecessor and Successor Company. As a result of the acquisition on February 28, 2003 (as defined and further discussed below), all references in this report to “TRW Automotive,” the “Company,” “we,” “our” and “us” mean, unless the context indicates otherwise, (i) our predecessor, which is the former TRW Automotive Inc. (which we did not acquire and was renamed Richmond TAI Corp.) and its subsidiaries and the other subsidiaries, divisions and affiliates of TRW Inc. (“Old TRW”) that together constituted the automotive business of Old TRW, for the periods prior to February 28, 2003, the date the Acquisition was consummated, and (ii) the successor and registrant, TRW Automotive Holdings Corp. and its subsidiaries, that own and operate the automotive business of Old TRW as a result of the Acquisition. 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. In addition, when the context so requires, we use the term “Predecessor” to refer to the historical operations of our predecessor prior to the Acquisition and “Successor” to refer to our historical operations following the Acquisition, and we use the terms “we,” “our” and “us” to refer to the Predecessor and the Successor collectively. The historical financial statements for the periods prior to the Acquisition and summaries thereof appearing in this report are those of our predecessor and represent the combined financial statements of Old TRW’s automotive business. Prior to the Acquisition, our predecessor operated as a segment of Old TRW, which was acquired by Northrop on December 11, 2002.

Change in Ownership. Old TRW entered into an Agreement and Plan of Merger with Northrop Grumman Corporation (“Northrop”), dated June 30, 2002, whereby Northrop would acquire all of the outstanding common stock of Old TRW, including Old TRW’s automotive business, in exchange for Northrop shares. The acquisition of Old TRW by Northrop was completed on December 11, 2002 (the “Merger”).

Additionally, on November 18, 2002, an entity controlled by affiliates of The Blackstone Group, L.P. (“Blackstone”), entered into a master purchase agreement, as amended, (the “Master Purchase Agreement”) pursuant to which the Company, a newly-formed entity, would cause its indirect wholly-owned subsidiary, TRW Automotive Acquisition Corp., to purchase the shares of the subsidiaries of Old TRW engaged in the automotive business from Northrop (the “Acquisition”). The 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”). As a result of the Acquisition, Automotive Investors L.L.C., or AIL, an affiliate of Blackstone, held approximately 78.4%, an affiliate of Northrop held approximately 19.6% and our management group held approximately 2.0% of our common stock.

Initial Public Offering. On February 6, 2004, we completed an initial public offering of 24,137,931 shares of our common stock. In connection with our initial public offering, we effected a 100 for one stock split of our outstanding shares of common stock on January 27, 2004. After our initial public offering, including the use of a portion of the net proceeds from our initial public offering to repurchase a portion of the shares held by AIL, AIL holds approximately 56.7%, an affiliate of Northrop holds approximately 17.2% and our management group holds approximately 1.7% of our common stock.

Financial and Operating Information

We conduct substantially all of our operations through our subsidiaries and along three operating segments: Chassis Systems, Occupant Safety Systems and Automotive Components. The geographic breakdown of our 2004 sales is 55% derived from Europe, 37% from North America and 8% from the rest of the world. The table below summarizes certain financial information for our operating segments.


			Successor						Predecessor

						Ten Months			Two Months
			Year Ended			Ended			Ended			Year Ended
			December 31,			December 31,			February 28,			December 31,
			2004			2003			2003			2002

			(Dollars in millions)
Sales to external customers:
	Chassis Systems		$	6,950		$	5,424		$	1,110		$	6,078
	Occupant Safety Systems			3,438			2,751			555			3,143
	Automotive Components			1,623			1,260			251			1,409

Total Sales			$	12,011		$	9,435		$	1,916		$	10,630

Segment profit before taxes:
	Chassis Systems		$	285		$	129		$	46		$	256
	Occupant Safety Systems			328			216			53			224
	Automotive Components			103			90			26			148

Segment profit before taxes				716			435			125			628
Corporate expense and other				(130	)		(81	)		(44	)		(189	)
Financing costs				(252	)		(312	)		(47	)		(316	)
Loss on retirement of debt				(167	)		(31	)		—			—
Net employee benefits income (expense)				(3	)		(14	)		16			179

		Earnings (losses) before income taxes	$	164		$	(3	)	$	50		$	302

See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 22 to the consolidated and combined financial statements for a discussion of segment profit before taxes.

Sales by product line. Our 2004 sales by product line are as follows:


Product Line	Percentage of Sales

Steering gears and systems		16.5	%
Air bags		13.9	%
Foundation brakes		13.3	%
ABS and other brake control		8.9	%
Seat belts		8.2	%
Aftermarket		7.2	%
Chassis modules		5.3	%
Linkage and suspension		5.2	%
Engine valves		4.8	%
Body controls		4.7	%
Crash sensors and other safety and security electronics		4.6	%
Engineered fasteners and plastic components		3.3	%
Steering wheels		2.8	%
Other		1.3	%

See Note 22 to our consolidated and combined financial statements included in this report for additional product sector and geographical information.

Business Developments, Industry Trends and Competition

Business Development and Strategy. We have become a leader in the global automotive parts industry by capitalizing on the strength of our products, technological capabilities and systems integration skills. Over the last decade, we have experienced sales growth in many of our product lines due to an increasing focus by both governments and consumers on safety and fuel efficiency. We believe that this trend is continuing as evidenced by ongoing regulatory activities and escalating fuel costs, and will enable us to experience growth in the most recent generation of advanced safety and fuel efficient products, such as vehicle stability control systems (“VSC”), curtain and side air bags, occupant sensing systems, electrically assisted power steering systems and tire pressure monitoring systems. Throughout our long history as a leading supplier to major OEMs, we have focused on products where we have a technological advantage. We have extensive technical experience in a broad range of product lines and strong systems integration skills, which enable us to provide comprehensive, systems-based solutions for our OEM customers. We have a broad and established global presence and sell to all major OEMs across the world’s major vehicle producing regions. We believe our diversified business limits our exposure to the risks of any one geographic economy, product line or major customer.

Industry Trends. The following key trends have been affecting the automotive parts industry over the past several years. (The statements regarding industry outlook, trends, the future development of certain automotive systems and other non-historical statements contained in this section are forward-looking statements):


	•	Consumer and Regulatory Focus on Safety. Consumers, and therefore OEMs, are increasingly focused on, and governments are increasingly requiring, improved safety in vehicles. For example, on December 4, 2003, the Alliance of Automobile Manufacturers and the Insurance Institute for Highway Safety announced a new voluntary industry safety commitment to meet new performance criteria designed to enhance occupant protection in front- and side-impact crashes. The announcement indicated that the new performance criteria would encompass a wide range of occupant protection technologies and designs, including enhanced matching of vehicle front structural components and enhanced side-impact protection through the use of features such as side air bags, air bag curtains and revised side-impact structures. By September 1, 2007, at least 50% of all vehicles offered in the United States by participating manufacturers are expected to meet the front-to-side performance criteria, and by September 2009, 100% of the vehicles of participating manufacturers are expected to meet the criteria.

More recently, in September 2004, the National Highway Safety Traffic Administration (“NHTSA”) released its latest proposal under the Tread Act that mandates the assembly onto vehicles of a direct tire pressure monitoring system, capable of detecting when one or more tires are significantly under-inflated. Under the present proposal, 50% of light vehicles are required to comply in the first year beginning September 2005, with 100% compliance by September 2007. In September 2004, NHTSA also released preliminary results of a study on the effectiveness of electronic stability control that indicated a dramatic reduction in single-vehicle crashes for vehicles equipped with these systems.

Advances in technology by us and others have led to a number of innovations in our product portfolio, which will allow us to benefit from this trend. Such innovations include electronic vehicle stability control systems, tire pressure monitoring systems, occupant sensing systems, rollover sensing and curtain air bag systems.


	•	Globalization of Suppliers. To serve multiple markets more cost effectively, many OEMs are manufacturing global vehicle platforms, which typically are designed in one location but are produced and sold in many different geographic markets around the world. Having operations in the geographic markets in which OEMs produce global platforms enables suppliers to meet OEMs’ needs more economically and efficiently. Few suppliers have this global coverage, and it is a source of significant competitive advantage for those suppliers that do.


	•	Shift of Engineering to Suppliers. Increasingly, OEMs are focusing their efforts on consumer brand development and overall vehicle design, as opposed to the design of individual vehicle systems. In order to simplify the vehicle design and assembly processes and reduce their costs, OEMs increasingly look to their suppliers to provide fully engineered, combinations of components in systems and modules rather than individual components. Systems and modules increase the importance of Tier 1 suppliers because they generally increase the Tier 1 suppliers’ percentage of vehicle content.

	•	Increased Electronic Content and Electronics Integration. The electronic content of vehicles has been increasing and, we believe, will continue to increase in the future. Consumer and regulatory requirements in Europe and the United States for improved automotive safety and environmental performance, as well as consumer demand for increased vehicle performance and functionality at lower cost largely drive the increase in electronic content. Electronics integration, which generally refers to replacing mechanical with electronic components and integration of mechanical and electrical functions within the vehicle, allows OEMs to achieve a reduction in the weight of vehicles and the number of mechanical parts, resulting in easier assembly, enhanced fuel economy, improved emissions control, increased safety and better vehicle performance. As consumers seek more competitively priced ride and handling performance, safety, security and convenience options in vehicles, such as electronic stability control, active cruise control, air bags, keyless entry and tire pressure monitoring, we believe that electronic content per vehicle will continue to increase.

	•	Increased Emphasis on Speed to Market. As OEMs are under increasing pressure to adjust to changing consumer preferences and to incorporate technological advances, they are shortening product development times. Shorter product development times also generally reduce product development costs. We believe suppliers that are able to deliver new products to OEMs in a timely fashion to accommodate the OEMs’ needs will be well positioned to succeed in this evolving marketplace.

	•	Escalating Pricing Pressures on Automotive Suppliers. Pricing pressure from customers has been a characteristic of the automotive supply industry in recent years. This pressure has been substantial and is likely to continue. Virtually all OEMs have policies of seeking price reductions each year. Suppliers have been forced to reduce prices in both the initial bidding process and during the terms of contractual arrangements. We have taken steps to reduce costs and resist price reductions; however, price reductions have impacted our sales and profit margins and are expected to do so in the future.

	•	Inflationary Pressures and Supply Base. The automotive supply industry has recently experienced significant inflationary pressures, primarily in the ferrous metals and resin/yarn markets. These inflationary pressures placed significant operational and financial burdens on suppliers, and are expected to continue in 2005. We continuously work with our raw material and purchased component suppliers, as well as our customers, to mitigate the impact of increasing costs of ferrous metals and other commodities. However, it is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases.

The inflationary environment surrounding ferrous metals and certain other commodities has resulted in concern about the viability of the Tier 2 and Tier 3 supply base as they face these inflationary pressures. Because we purchase various types of equipment, raw materials and component parts from suppliers, we may be materially and adversely affected by the failure of those suppliers to perform as expected. This non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products. The risk of non- performance may also result from the insolvency or bankruptcy of one or more of our suppliers. We have seen the number of these bankruptcies or insolvencies increase, due in part to the recent inflationary pressures in the ferrous metals markets. Consequently, our efforts to continue to mitigate the effects of this inflationary pressure may be insufficient and the pressures may worsen, thus potentially having a negative impact on our financial results.


	•	Declining Big Three Market Share. In recent years, the Big Three (Ford Motor Company, General Motors Corporation and the Chrysler unit of DaimlerChrysler AG) have seen a decline in their market share for vehicle sales in North America and Europe, with Asian OEMs especially increasing their

share in such markets. Although we do have business with the Asian OEMs, our customer base is more heavily weighted towards the Big Three. We believe that suppliers currently serving Asian OEMs and those suppliers that are able to increase their sales with such customers will be well positioned in the North American and European markets.

• Recalls. Based on tighter federal requirements for reporting defects, as well as the growing re-use of parts across platforms, OEMs have experienced increasing recall campaigns in recent years, including a record number of such recalls in 2004. OEMs often require suppliers to share in the cost of recalls. Suppliers able to minimize recall expenses through the delivery of high quality products should be well positioned in the marketplace. Therefore, we utilize Six Sigma and Operational Excellence as leading quality improvement programs throughout our operations.

Competition

The automotive parts industry is extremely competitive. OEMs rigorously evaluate us and other suppliers based on many criteria such as quality, price/cost competitiveness, system and product performance, reliability and timeliness of delivery, new product and technology development capability, excellence and flexibility in operations, degree of global and local presence, effectiveness of customer service and overall management capability. We believe we compete effectively with leading automotive suppliers on all of these criteria. For example, we generally follow manufacturing practices designed to improve efficiency, including but not limited to, one-piece-flow machining and assembly, and just-in-time scheduling of our manufacturing plants, all of which enable us to manage inventory so that we can deliver components and systems to our customers in the quantities and at the times ordered. Our resulting delivery performance, as measured by our customers, generally meets or exceeds our customers’ expectations.

Within each of our product segments, we face significant competition. Our principal competitors include Delphi, Bosch, Continental-Teves, Visteon, Koyo Seiko, ZF, and Advics in the Chassis Systems segment; Autoliv, Delphi, Takata, Key Safety, and Bosch in the Occupant Safety Systems segment; and ITW, Raymond, Nifco, Textron, Kostal, Delphi, Valeo, Tokai Rika and Eaton in the Automotive Components segment.

Sales and Products by Segment

Sales. The following table provides sales for each of our operating segments:


		Year Ended December 31,

		2004					2003(1)

		Sales		%			Sales		%

		(Dollars in millions)
Chassis Systems		$	6,950		57.9	%	$	6,534		57.6	%
Occupant Safety Systems			3,438		28.6	%		3,306		29.1	%
Automotive Components			1,623		13.5	%		1,511		13.3	%

	Total Sales	$	12,011		100.0	%	$	11,351		100.0	%


(1)	Sales of our predecessor for the two months ended February 28, 2003 prior to the Acquisition, and our results of operations for the ten months ended December 31, 2003, have been combined for convenience of discussion and are collectively referred to as “year ended December 31, 2003.”

Products. The following tables describe the principal product lines by segment in order of 2004 sales:


	*Chassis Systems*


Product Line		Description

Steering		Electrically assisted power steering systems (column-drive, rack-drive type), electrically powered hydraulic steering systems, hydraulic power and manual rack and pinion steering gears, hydraulic steering pumps, fully integral commercial steering systems, commercial steering columns and pumps
Foundation brakes		Front and rear disc brake calipers, drum brake and drum-in-hat parking brake assemblies, rotors, drums and electric park brake
Brake control		Two-wheel and four-wheel ABS, electronic vehicle stability control systems, active cruise control systems, actuation boosters and master cylinders, electronically controlled actuation
Modules		Brake modules, corner modules, pedal box modules, strut modules, front cross-member modules, rear axle modules
Suspension		Forged steel and aluminum control arms, suspension ball joints, rack and pinion linkage assemblies, conventional linkages, commercial steering linkages and suspension ball joints, active roll control systems


	*Occupant Safety Systems*


Product Line		Description

Air Bags		Driver air bag modules, passenger air bag modules, side air bag modules, curtain air bag modules, single-and dual-stage air bag inflators
Seatbelts		Retractor and buckle assemblies, pretensioning systems, height adjusters, active control retractor systems
Safety electronics		Front and side crash sensors, vehicle rollover sensors, air bag diagnostic modules, weight sensing and vision systems for occupant detection
Steering wheels		Full range of steering wheels from base designs to leather, wood, heated designs, including multifunctional switches and integral air bag modules
Security electronics		Remote keyless entry systems, advanced theft deterrent systems, direct tire pressure monitoring systems


	*Automotive Components*


Product Line		Description

Body controls		Display and heating, ventilating and air conditioning electronics, controls and actuators; motors, power management controls; man/machine interface controls and switches, including a wide array of automotive ergonomic applications such as steering column and wheel switches, rotary connectors, climate controls, seat controls, window lift switches, air bag disable switches; and rain sensors
Engine valves		Engine valves, valve train components, electro-magnetic valve actuation
Engineered fasteners and components		Engineered and plastic fasteners and precision plastic moldings and assemblies

Chassis Systems. Our Chassis Systems segment focuses on the design, manufacture and sale of product lines relating to steering, foundation brakes, brake control, modules and suspension. We sell our Chassis Systems products primarily to OEMs and other Tier 1 suppliers. We also sell these products to OEM service organizations and in the independent aftermarket, through a licensee in North America, and in the rest of the world, to independent distributors. We believe our Chassis Systems segment is well positioned to capitalize on growth trends towards increasing active safety systems, particularly in the areas of electric steering, electronic vehicle stability control and other advanced braking systems and integrated vehicle control systems.

Occupant Safety Systems. Our Occupant Safety Systems segment focuses on the design, manufacture and sale of air bags, seat belts, safety electronics, steering wheels and security electronic systems. We sell our Occupant Safety Systems products primarily to OEMs and also to other Tier 1 suppliers. We also sell these products to OEM service organizations for service parts. We believe our Occupant Safety Systems segment is well positioned to capitalize on growth trends toward increasing passive safety systems, particularly in the areas of side and curtain air bag systems, occupant sensing systems, active seat belt pretensioning and retractor systems, and tire pressure monitoring systems.

Automotive Components. Our Automotive Components segment focuses on the design, manufacture and sale of body controls, engine valves and engineered fasteners and components. We sell our Automotive Components products primarily to OEMs and also to other Tier 1 suppliers. We also sell these products to OEM service organizations. In addition, we sell some engine valve and body control products to independent distributors for the automotive aftermarket. We believe our Automotive Components segment is well positioned to capitalize on growth trends toward multi-valve engines and increasing electronic content per vehicle.

Customers

We sell to all the major OEM customers across the world’s entire major vehicle producing regions. Our long-standing relationships with our customers have enabled us to understand global customers’ needs and business opportunities. We believe that we will continue to be able to compete effectively for our customers’ business because of the high quality of our products, our ongoing cost reduction efforts, our strong global presence and our product and technology innovations. Although business with any given customer is typically split among numerous contracts, the loss of or a significant reduction in purchases by, one or more of those major customers could materially and adversely affect our business, results of operations and financial condition.

Customers (by OEM group) that constitute 10% or more of our sales for the years ended December 31, 2004 and 2003 were:


		Percentage of Sales

OEM Group	OEMs	2004			2003

Ford	Ford, Land Rover, Jaguar, Aston-Martin, Volvo, Mazda		17.2	%		18.4	%
DaimlerChrysler	Chrysler, Mercedes, Smart, Mitsubishi		15.3	%		16.3	%
Volkswagen	Volkswagen, Audi, Seat, Skoda, Bentley		14.2	%		15.0	%
General Motors	General Motors, Opel, Saab, Isuzu, Subaru		11.1	%		13.2	%
All Other			42.2	%		37.1	%

We also sell products to the global aftermarket as replacement parts for current production and older vehicles. For the years ended December 31, 2004 and 2003, our sales to the aftermarket represented approximately 7% of our total sales in each year. We sell these products through both OEM service organizations and independent distribution networks.

Sales and Marketing

We have a sales and marketing organization of dedicated customer teams that provide a consistent interface with our key customers. These teams are located in all major vehicle-producing regions to best

represent their respective customers’ interests within our organization, to promote customer programs and to coordinate global customer strategies with the goal of enhancing overall customer service and satisfaction. Our ability to support our customers globally is further enhanced by our broad global presence in terms of sales offices, manufacturing facilities, engineering/technical centers and joint ventures.

Our sales and marketing organization and activities are designed to create overall awareness and consideration of, and to increase purchases of, our systems, modules and components. To further this objective, we participate in international trade shows in Paris, Frankfurt and Detroit. We also provide on-site technology demonstrations at our major OEM customers on a regular basis.

Customer Support

Our engineering, sales and production facilities are located in 24 countries. With hundreds of dedicated sales/customer development employees, we provide effective customer solutions, products and service in any region in which these facilities operate or manufacture.

Joint Ventures

Joint ventures represent an important part of our business, both operationally and strategically. We have often used joint ventures to enter into new geographic markets such as China and India, or to acquire new customers or to develop new technologies such as direct tire pressure monitoring systems.

In the case of entering new geographic markets, where we have not previously established substantial local experience and infrastructure, teaming with a local partner can reduce capital investment by leveraging pre-existing infrastructure. In addition, local partners in these markets can provide knowledge and insight into local customs and practices and access to local suppliers of raw materials and components. All of these advantages can reduce the risk, and thereby enhance the prospects for the success, of an entry into a new geographic market.

Joint ventures can also be an effective means to acquire new customers. Joint venture arrangements can allow partners access to technology they would otherwise have to develop independently, thereby reducing the time and cost of development. More importantly, they can provide the opportunity to create synergies and applications of the technology that would not otherwise be possible.

The following table shows our unconsolidated joint ventures in which we have a 49% or greater interest that are accounted for under the equity method:


		Our %
Country	Name	Ownership			Products	2004 Sales

						(Dollars in millions)
Brazil	SM-Sistemas Modulares Ltd.		50	%	Brake modules	$	28
China	Shanghai TRW Automotive Safety Systems Co., Ltd.		50	%	Seat belt systems, air bags and steering wheels		33
India	Brakes India Limited		49	%	Foundation brakes, actuation brakes, valves and hoses		196
	Rane TRW Steering Systems Limited		50	%	Steering gears, systems and components and seat belt systems		71
United States	Methode Lucas Controls, Inc.		50	%	Multi-functional column-mounted controls (pressed parts and key moldings for column switchgear)		21
	EnTire Solutions, LLC		50	%	Direct tire pressure monitoring systems		18

Intellectual Property

We own significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets, and are involved in numerous licensing arrangements. Although our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve, no single patent, copyright, trade secret or license, or group of related patents, copyrights, trade secrets or licenses, is, in our opinion, of such value to us that our business would be materially affected by the expiration or termination thereof. However, we view the name TRW Automotive and primary mark “TRW” (which has been transferred to us as part of the Acquisition) as material to our business as a whole. Our general policy is to apply for patents on an ongoing basis in the United States, Germany and appropriate other countries to protect our patentable developments.

Our patent portfolio of over 10,000 patents and pending patent applications reflects our commitment to invest in technology and covers many aspects of our products and the processes for making those products. In addition, we have developed a substantial body of manufacturing know-how that we believe provides a significant competitive advantage in the marketplace.

We have entered into several hundred technology license agreements that either strategically exploit our intellectual property rights or provide a conduit for us into third party intellectual property rights useful in our businesses. In many of these agreements, we license technology to our suppliers, joint venture companies and other local manufacturers in support of product production for our customers and us. In other agreements, we license the technology to other companies to obtain royalty income.

We own a number of secondary trade names and marks applicable to certain of our businesses and products that we view as important to such businesses and products as well.

As part of the Acquisition, we have entered into intellectual property license agreements with Old TRW.

Seasonality

Our business is moderately seasonal because our largest North American customers typically halt operations for approximately two weeks in July and one week in December. Additionally, customers in Europe historically shut down vehicle production during portions of August and one week in December. In addition, third quarter automotive production traditionally is lower as new models are introduced. Accordingly, our third and fourth quarter results may reflect these trends.

Research, Development and Engineering

We operate a global network of technical centers worldwide where we employ approximately 4,800 engineers, researchers, designers, technicians and their supporting functions. This global network allows us to develop automotive active and passive technologies while improving existing products and systems. We utilize sophisticated testing and computer simulation equipment, including computer-aided engineering, noise-vibration-harshness, crash sled, math modeling and vehicle simulations. We have advanced engineering and research and development programs for next-generation components and systems in our chassis, occupant safety and automotive component product areas. We are disciplined in our approach to research and development, employing various tools to improve efficiency and reduce cost, such as Six Sigma, “follow-the-sun,” a 24-hour a day engineering program that utilizes our global network, and other e-Engineering programs, and outsourcing non-core activities.

Company-funded research, development and engineering costs totaled:


		Successor				Predecessor

				Ten Months		Two Months
		Year Ended		Ended		Ended		Year Ended
		December 31,		December 31,		February 28,		December 31,
		2004		2003		2003		2002

		(Dollars in millions)
Research and Development		$	174	$	137	$	27	$	151
Engineering			474		365		71		388

	Total	$	648	$	502	$	98	$	539

We believe that continued research, development and engineering activities are critical to maintaining our leadership position in the industry and will provide us with a competitive advantage as we seek additional business with new and existing customers.

Manufactured Components and Raw Materials

We purchase various manufactured components and raw materials for use in our manufacturing processes. The principal components and raw materials we purchase include castings, electronic parts, molded plastic parts, finished subcomponents, fabricated metal, aluminum, steel, resins, textiles, leather and wood. All of these components and raw materials are available from numerous sources. We have recently seen significant inflationary pressures in the ferrous metals and resin/yarn markets. At this time, we are working with our suppliers and customers to attempt to mitigate the impact that this inflation may have on our financial results, but there can be no assurance that this will not have a material adverse effect. We have not, in recent years, experienced any significant shortages of manufactured components or raw materials and normally do not carry inventories of these items in excess of those reasonably required to meet our production and shipping schedule.

Employees

As of December 31, 2004, we had approximately 59,900 employees (including employees of our majority-owned joint ventures but excluding temporary employees and employees who are on approved forms of leave), of whom approximately 20,200 were employed in North America, approximately 32,200 were employed in Europe, approximately 4,200 were employed in South America and approximately 3,300 were employed in Asia. Approximately 16,000 of our employees are salaried and approximately 43,900 are hourly.

Environmental Matters

Governmental requirements relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had, and will continue to have, an effect on our operations and us. We have made and continue to make expenditures for projects relating to the environment, including pollution control devices for new and existing facilities. We are conducting a number of environmental investigations and remedial actions at current and former locations to comply with applicable requirements and, along with other companies, have been named a potentially responsible party for certain waste management sites. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably to us.

A reserve estimate for each 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. As of December 31, 2004, we had reserves for environmental matters of $72 million. In addition, the Company has established a receivable from Northrop for a portion of this environmental liability as a result of the indemnification provided for in the Master Purchase Agreement under which Northrop has agreed to indemnify us for 50% of any environmental liabilities associated with the operation or ownership of Old TRW’s automotive business existing at or prior to the

Acquisition, subject to certain exceptions. During 2004, we received approximately $2 million under such indemnification from Northrop.

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 2005 and 2006 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.


ITEM 2.	*PROPERTIES*

Our principal executive offices are located in Livonia, Michigan. Our operations include numerous manufacturing, research and development, warehousing facilities and offices. We own or lease principal facilities located in 14 states in the United States and in 23 other countries as follows: Austria, Brazil, Canada, China, the Czech Republic, France, Germany, Italy, Japan, Malaysia, Mexico, Poland, Portugal, Romania, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, and the United Kingdom. Approximately 56% of our principal facilities are used by the Chassis Systems segment, 19% are used by the Occupant Safety Systems segment and 25% are used by the Automotive Components segment. Our corporate headquarters are contained within the Chassis Systems numbers below.

Of the total number of principal facilities operated by us, approximately 56% of such facilities are owned, 40% are leased, and 4% are held by joint ventures in which we have a majority interest.

A summary of our principal facilities, by segment, type of facility and geographic region, as of February 3, 2005 is set forth in the following tables. Additionally, where more than one segment utilizes a single facility, that facility is categorized by the purposes for which it is primarily used.

Chassis Systems


Principal Use of Facility	North America		Europe		Asia Pacific(2)		Other		Total

Research and Development		4		4		2		1		11
Manufacturing(1)		23		34		12		5		74
Warehouse		1		6		1		1		9
Office		5		8		8		—		21

Total		33		52		23		7		115

Occupant Safety Systems


Principal Use of Facility	North America		Europe		Asia Pacific(2)		Other		Total

Research and Development		3		2		—		—		5
Manufacturing(1)		8		17		—		3		28
Warehouse		1		3		—		—		4
Office		2		—		—		—		2

Total		14		22		—		3		39

Automotive Components


Principal Use of Facility	North America		Europe		Asia Pacific		Other		Total

Research and Development		1		—		—		—		1
Manufacturing(1)		8		25		8		3		44
Warehouse		2		1		—		—		3
Office		2		—		—		—		2

Total		13		26		8		3		50


(1)	Although primarily classified as Manufacturing locations, several Occupant Safety Systems — Europe sites, amongst others, maintain a large Research and Development presence located within the same facility as well.

(2)	For management reporting purposes Chassis Systems — Asia Pacific contains several primarily Occupant Safety Systems facilities including a Research and Development Technical Center and three Manufacturing locations.


ITEM 3.	*LEGAL PROCEEDINGS*

Various claims, lawsuits and administrative proceedings are pending or threatened against us or our subsidiaries, covering a wide range of matters that arise in the ordinary course of our business activities with respect to commercial, patent, product liability and environmental matters.

In October 2000, Kelsey-Hayes Company (formerly known as Fruehauf Corporation) was served with a grand jury subpoena relating to a criminal investigation being conducted by the U.S. Attorney for the Southern District of Illinois. The U.S. Attorney has informed us that the investigation relates to possible wrongdoing by Kelsey-Hayes Company and others involving certain loans made by Kelsey-Hayes Company’s then-parent corporation to Fruehauf Trailer Corporation, the handling of the trailing liabilities of Fruehauf Corporation and actions in connection with the 1996 bankruptcy of Fruehauf Trailer Corporation. Kelsey-Hayes Company became a wholly-owned subsidiary of Old TRW upon Old TRW’s acquisition of Lucas Varity in 1999 and became our wholly-owned subsidiary in connection with the Acquisition. We have cooperated with the investigation and are unable to predict the outcome of the investigation at this time.

On May 6, 2002, ArvinMeritor Inc. filed suit against Old TRW in the United States District Court for the Eastern District of Michigan, claiming breach of contract and breach of warranty in connection with certain tie rod ends that Old TRW supplied to ArvinMeritor and the voluntary recall of some of these tie rod ends. ArvinMeritor subsequently recalled all of the tie rod ends, claiming that it was entitled to reimbursement from Old TRW for the costs associated with both the products recalled by Old TRW and those recalled by ArvinMeritor on its own. On December 15, 2004, the parties reached an agreement to settle this dispute with no material effect on our financial condition, results of operations or cash flows.

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.

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.


ITEM 4.	*SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*

During the fourth quarter of the year covered by this report, no matters were submitted to a vote of security holders.

PART II


ITEM 5.	*MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS*

Our common stock is listed on the New York Stock Exchange under the symbol “TRW”. As of February 3, 2005, we had 98,971,479 shares of common stock, $.01 par value, outstanding (98,976,147 shares issued less 4,668 shares held as treasury stock) and 257 holders of record of such common stock. The transfer agent and registrar for our common stock is National City Bank.

The table below shows the high and low sales prices for our common stock as reported by the New York Stock Exchange, for each quarter in 2004 since our shares began trading on February 3, 2004.


	Price Range of
	Common Stock

Year Ended December 31, 2004	High		Low

4^thQuarter	$	21.57	$	16.65
3^rdQuarter	$	21.35	$	18.50
2^ndQuarter	$	22.60	$	17.52
1^stQuarter	$	27.58	$	20.29

Issuer Purchases of Equity Securities

The independent trustee of our 401(k) plans does purchase shares in the open market to fund investments by employees in our common stock, one of the investment options available under such plans, and matching contributions in Company stock to employee investments. In addition, our stock incentive plan permits payment of an option exercise price by means of cashless exercise through a broker and for the satisfaction of tax obligations through stock withholding. However, the Company does not believe such purchases or transactions are issuer repurchases for the purposes of this Item 5 of this Report on Form 10-K.

Dividend Policy

We do not currently pay any cash dividends on our common stock, and instead intend to retain any earnings for debt repayment, future operations and expansion. The amounts available to us to pay cash dividends are restricted by our debt agreements. Under TRW Automotive Inc.’s senior credit facilities, we have a limited ability to pay dividends on our common stock pursuant to a formula based on our consolidated net income after January 1, 2005 and our leverage ratio as specified in the amended and restated credit agreement. The indentures governing the notes also limit our ability to pay dividends, except that payment of dividends up to 6.0% per annum of the net proceeds received by TRW Automotive Inc. from any public offering of common stock or contributed to TRW Automotive Inc. by us or TRW Automotive Intermediate Holdings from any public offering of common stock is allowed. Any decision to declare and pay dividends in

the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

Equity Compensation Plan Information

The following table provides information about our equity compensation plans as of December 31, 2004.

Number of

Number of Securities

Securities to be

Weighted-Average

Remaining

Issued upon Exercise

Exercise Price

Available for

of Outstanding

Future Issuance

Options, Warrants

under Equity

Plan Category

and Rights

Compensation Plans(1)

Equity compensation plans approved by security holders(2)

9,533,950

16.05

7,174,469

Equity compensation plans not approved by security holders

N/A

Total

9,533,950

16.05

7,174,469


(1)	Excludes securities reflected in the first column, “Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights.”

(2)	The TRW Automotive Holdings Corp. 2003 Stock Incentive Plan was approved by our stockholders prior to our initial public offering.


ITEM 6.	*SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA*

The selected historical consolidated financial data of the Successor as of and for the year ended December 31, 2004, as of December 31, 2003 and for the ten months ended December 31, 2003 have been derived from our audited consolidated financial statements, and have been prepared on a different basis of accounting than the Predecessor’s annual combined financial statements as a result of the consummation of the Acquisition on February 28, 2003. The selected historical combined financial data of the Predecessor for the two months ended February 28, 2003, and as of December 31, 2002, 2001 and 2000 and for each of the three years in the period ended December 31, 2002 have been derived from the audited combined financial statements of our Predecessor company. Comparisons of items below are also affected by divestitures during the two-year period ended December 31, 2001.

The table should be read in conjunction with “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements included elsewhere in this report and the combined financial statements of our predecessor company for discussion of items affecting the comparability of results of operations. The following financial information for the periods prior to the Acquisition may not reflect what our results of operations, financial position and cash flows would have been had we operated as a separate, stand-alone entity during the periods presented, or what our results of operations, financial position and cash flows will be in the future.


							Predecessor
		Successor
							Two
				Ten Months			Months
		Year Ended		Ended			Ended
		December 31,		December 31,			February 28,		Years Ended December 31,
		2004		2003			2003		2002		2001			2000

		(In millions, except per share amounts)
Statements of Operations Data:
Sales		$	12,011	$	9,435		$	1,916	$	10,630	$	10,091		$	10,920
Earnings (losses) from continuing operations(1)			29		(101	)		31		164		(36	)		94
Discontinued operations, net of income taxes			—		—			—		—		11			3
Net earnings (losses)		$	29	$	(101	)	$	31	$	164	$	(25	)	$	97
Earnings (Losses) Per Share(2):
Basic earnings (losses) per share:
	Earnings (losses) per share	$	0.30	$	(1.16	)
	Weighted average shares		97.8		86.8
Diluted earnings (losses) per share:
	Earnings (losses) per share	$	0.29	$	(1.16	)
	Weighted average shares		100.5		86.8


	Successor				Predecessor

	As of December 31,
	2004		2003		2002		2001		2000

	(Dollars in millions)
Balance sheet data:
Total assets	$	10,114	$	9,907	$	10,948	$	10,287	$	11,293
Total liabilities		8,944		9,129		8,476		8,712		9,457
Total debt (including short-term debt and current portion of long-term debt)(3)		3,181		3,808		3,925		4,597		5,053
Off-balance sheet borrowings under receivables facility(4)		—		—		—		327		—


(1)	See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of items affecting the comparability of results of operations.

(2)	Earnings per share are calculated by dividing net earnings (losses) by the weighted average shares outstanding. Earnings per share are not applicable for the historical Predecessor periods as there were no shares outstanding during those periods. Basic and diluted earnings per share for the ten months ended December 31, 2003 have been calculated based on the weighted average shares outstanding for the period adjusted to give effect to the 100 for 1 stock split effected on January 27, 2004. Shares issuable pursuant to outstanding common stock options under our 2003 Stock Incentive Plan have been excluded from the

computation of 2003 diluted earnings per share because their effect is antidilutive due to the net loss reflected for such period.

(3) Total debt excludes any off-balance sheet borrowings under receivables facilities. As of December 31, 2004 and 2003, we had no advances outstanding under our receivables facilities.

(4) The Predecessor’s receivables facility was an off-balance sheet arrangement. Our receivables facility can be treated as a general financing agreement or as an off-balance sheet arrangement depending on the level of loans to the borrower as further described in “ITEM 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-balance Sheet Arrangements.”


ITEM 7.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

Basis of Presentation

Prior to February 28, 2003, we did not historically operate as a stand-alone business, but as part of Old TRW, which became a subsidiary of Northrop on December 11, 2002. TRW Automotive Acquisition Corp. acquired the shares of the subsidiaries of Old TRW engaged in the automotive business upon consummation of 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, 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 financial statements and our post-Acquisition financial statements have been prepared on different bases of accounting that do not straddle the Acquisition date, and therefore 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 ten months ended December 31, 2003, have been combined for convenience of discussion and are collectively referred to as “year ended December 31, 2003.”

Executive Overview

Our Business. We are among the world’s largest and most diversified suppliers of automotive systems, modules and components to global OEMs and related aftermarkets. We are primarily a “Tier 1” supplier (a supplier which sells directly to OEMs), with over 85% of our sales in 2004 made directly to OEMs. We operate our business along three operating segments: Chassis Systems, Occupant Safety Systems and Automotive Components.

We achieved strong 2004 results, with net sales of approximately $12 billion, up $660 million or approximately 6% from 2003. The increase resulted primarily from a higher level of sales from new product areas and foreign currency translation, partially offset by pricing provided to customers and a reduction in sales due to a first quarter 2004 divestiture. Operating income for 2004 was $583 million, an increase of $146 million compared to the prior year operating income. The increase in operating income resulted from the absence in the current year of Acquisition-related write-offs of in-process research and development of $85 million and fair value adjustments to inventory of $43 million. This increase also resulted from an increased level of sales and a higher level of cost savings, partially offset by pricing provided to customers and inflation (primarily in the area of ferrous metals and other commodities) among other matters. Net earnings for 2004 were $29 million compared with net losses of $70 million in 2003. Results for 2004 included losses on retirement of debt of $167 million incurred in conjunction with various debt refinancing transactions, compared to $31 million in 2003.

Recent Trends. We achieved our 2004 results despite certain unfavorable trends including a decline in market share for vehicle sales among some of our largest customers, pricing pressure from OEMs, the continued rise in inflationary pressures impacting ferrous metals (and most recently other commodities) and the growing concerns over the economic viability of our Tier 2 and Tier 3 supply base as they face inflationary pressures. During 2004, the effect of these unfavorable trends was mitigated by favorable trends including our

sales growth, foreign currency translation and a high level of cost reductions in our businesses. While we continue our efforts to mitigate the risk described above, we cannot assure you that the favorable trends that occurred in 2004 will continue in the future or that we will not experience a decline in sales, increased costs or disruptions in supply, or that these items will not adversely impact our future earnings.

In recent years, the Big Three (Ford Motor Company, General Motors Corporation and the Chrysler unit of DaimlerChrysler AG) have seen a decline in their market share for vehicle sales in North America and Europe, with Asian OEMs especially increasing their share in such markets. Although we do have business with the Asian OEMs, our customer base is more heavily weighted towards the Big Three. Additionally, pricing pressure from the Big Three and other customers is characteristic of the automotive parts industry. This pressure is substantial and continuing. Virtually all OEMs have policies of seeking price reductions each year. Consequently, we have been forced to reduce our prices in both the initial bidding process and during the terms of contractual arrangements. We have taken steps to reduce costs and resist price reductions; however, price reductions have impacted our sales and profit margins and are expected to do so in the future.

We continue to work with our suppliers and customers to mitigate the impact of increasing costs of ferrous metals and other commodities. However, it is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases. These inflationary pressures have placed a significant operational and financial burden on the Company this year and are expected to continue into 2005. Furthermore, because we purchase various types of equipment, raw materials and component parts from our suppliers, we may be adversely affected by their failure to perform as expected as a result of being unable to adequately mitigate these inflationary pressures. These pressures have proven to be insurmountable to some of our suppliers and we have seen the number of bankruptcies or insolvencies increase due in part to the recent inflationary pressures. While this has not led to any significant issues thus far, it could lead to delivery delays, production issues or delivery of non-conforming products by our suppliers in the future. As such, we continue to monitor our supply base for the best source of supply.

Our Debt and Capital Structure. On an ongoing basis we monitor, and may modify, our debt and capital structure to reduce associated costs and provide greater financial flexibility. During 2004, we continued to reduce our debt levels in addition to amending and restating our credit agreements.

On November 2, 2004, the Company amended and restated its then existing credit agreement to provide for a new $300 million tranche E term loan, the proceeds of which were used, along with available cash to repurchase its subsidiary’s acquisition-related 8% pay-in-kind seller note (“Seller Note”) with a face value, including accrued interest, of $685 million, from a subsidiary of Northrop. In conjunction with the repurchase of the Seller Note on November 12, 2004, the Company recorded a pre-tax charge of $112 million for loss on retirement of debt resulting from the difference between the purchase price ascribed to the Seller Note and the book value of the Seller Note on the Company’s balance sheet on the repurchase date.

On December 21, 2004, the Company amended and restated its existing credit agreement to, among other things, provide for $1.9 billion in senior secured credit facilities, consisting of (i) a 5-year $900 million revolving credit facility, (ii) a 5-year $400 million term loan A facility and (iii) a 7.5-year $600 million term loan B facility. The initial draw under the new senior secured facilities occurred on January 10, 2005 as provided for under the amendment. Proceeds from the new senior secured facilities were used to refinance the senior secured credit facilities existing as of December 31, 2004 (with the exception of the term E loan discussed below), and pay fees and expenses related to the refinancing. In December 2004, the Company recorded a loss on retirement of debt of $7 million related to the write-off of debt issuance costs associated with the previously existing revolving facility and certain of the prior syndicated term loans. Additionally, the Company recognized accelerated amortization expense of $3 million on debt issuance costs related to certain of the syndicated term loans not extinguished until the funding date. In 2005, the Company will recognize additional accelerated amortization expense of $3 million on the remaining debt issuance costs related to those certain syndicated term loans not extinguished until the funding date.

Changes in our debt and capital structure, among other items, may impact our effective tax rate. Our overall effective tax rate is equal to consolidated tax expense as a percentage of consolidated earnings before tax. However, tax expense and benefits are not recognized on a global basis but rather on a jurisdictional basis.

We are in a position whereby losses incurred in certain tax jurisdictions provide no current financial statement benefit. In addition, certain jurisdictions have statutory rates greater than or less than the United States statutory rate. As such, changes in the mix of earnings between jurisdictions could have a significant impact on our overall effective tax rate in future periods. Changes in tax law and rates could also have a significant impact on the effective rate in future periods.

Automotive Environment

Our business is greatly affected by the automotive build rates, primarily in North America and Europe. The automobile industry is characterized by short-term volatility, but long-term growth of, light vehicle sales and production. New vehicle demand is driven by macro-economic and other factors such as interest rates, manufacturer and dealer sales incentives, fuel prices, consumer confidence and employment and income growth trends. These factors ultimately determine longer-term vehicle production and sales rates.

One of the current trends in the automotive industry is for OEMs to shift research and development, design and testing responsibility to suppliers. We operate in a difficult pricing environment and our goal is to mitigate the pricing pressure imposed by OEMs by continuing cost reduction efforts and restructuring our business. We also have recently seen significant inflationary pressures in the ferrous metals markets, which has extended into other commodities. We are fully engaged in supply chain management and utilizing Six Sigma and Operational Excellence as leading quality improvement programs throughout our operations and functions.

Restructuring

In 2004, the Company recorded charges of $38 million for actions that resulted in the closing of two plants and employee reductions of approximately 770. For the year ended December 31, 2004, the cash charges were $37 million for severance and costs related to the consolidation of certain facilities and the non-cash charges were $1 million.

For the ten months ended December 31, 2003, we recorded cash charges of $29 million for severance and costs related to the consolidation of certain facilities. Additionally, we recorded a $37 million reserve through purchase accounting primarily for severance related to strategic restructurings, plant closings and involuntary employee termination arrangements outside of the United States to be paid over the next several years in accordance with local laws. In connection with the Acquisition, we 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.

During the two months ended February 28, 2003, the Predecessor recorded cash charges of $3 million for severance and costs related to the consolidation of certain facilities. In 2002, the Predecessor recorded charges of $59 million for actions that resulted in the closing of three plants and employee reductions of approximately 950. For the year ended December 31, 2002, the cash charges were $27 million, and the non-cash charges were $32 million.

The following table sets forth a summary of the activity in the balance sheet accounts related to the restructuring reserves:


			Provision

			Administrative		Cost		Purchase		Used for
	Beginning		and		of		Price		Purposes			Ending
	Balance		Selling		Sales		Allocation		Intended			Balance

	(Dollars in millions)
Year ended December 31, 2004	$	79	$	9	$	29	$	2	$	(70	)	$	49
Ten months ended December 31, 2003		51		13		16		37		(38	)		79
Two months ended February 28, 2003		61		1		2		—		(13	)		51
Year ended December 31, 2002		145		17		42		—		(143	)		61

Of the $49 million restructuring reserve accrued at December 31, 2004, approximately $19 million is expected to be paid in 2005 and approximately $30 million is expected to be paid in 2006 through 2010. Of the total, approximately $20 million relates to involuntary employee termination arrangements outside the United States which will be paid over the next several years in accordance with local law.

Critical Accounting Estimates

The critical accounting estimates that affect our financial statements and that use judgments and assumptions are listed below. In addition, the likelihood that materially different amounts could be reported under varied conditions and assumptions is noted.

Product Recalls. We are at risk for product recall costs. Recall costs are costs incurred when the customer or we decide to recall a product through a formal campaign, soliciting the return of specific products due to a known or suspected safety concern. In addition, the NHTSA has the authority, under certain circumstances, to require recalls to remedy safety concerns. Product recall costs typically include the cost of the product being replaced, customer cost of the recall and labor to remove and replace the defective part.

During the Predecessor periods, when a decision to recall a product had been made for which we bore some responsibility, we recorded the estimated cost to us of the recall as a charge to net earnings in that period, in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies” (“SFAS 5”). In making estimates relating to product recalls, judgment was required as to the number of units to be returned, the total cost of the recall campaign, the ultimate negotiated sharing of the cost between us and the customer and, in some cases, the extent to which our supplier would share in the recall cost. As a result, our actual recall costs could be significantly different from our estimated costs.

Effective as of the Acquisition date, we implemented a new methodology for actuarially estimating our recall obligations that differs from that of the Predecessor. We engage independent third-party actuaries to run loss histories for the purpose of establishing loss projections. Under the actuarial estimation methodology, we accrue for recalls when revenues are recognized upon shipment of product. Using an actuarial based estimation will have the effect of better matching revenues and expenses as relative to the methodology employed by the Predecessor. Compared with the Predecessor, we will record higher expenses in a period of minor or no recalls and lower expenses in a period of significant recall since the obligation will have already been accrued as the revenue was recognized. However, due to uncertainties related to the nature of recall claims, if future claims exceed actuarial projections which are based on historical performance, there could be a material effect on the accrual for recalls in future periods.

Impairment of Long-Lived Assets and Intangibles. We evaluate long-lived assets and definite-lived intangible assets for impairment when events and circumstances indicate that the assets may be impaired and the undiscounted cash flows to be generated by those assets are less than their carrying value. If the undiscounted cash flows are less than the carrying value of the assets, the assets are written down to their fair value. We also evaluate the useful lives of intangible assets each reporting period.

The determination of undiscounted cash flows is based on the businesses’ strategic plans and long-range planning forecasts. The revenue growth rates included in the plans are based on industry specific data. We use external vehicle build assumptions published by widely used external sources and market share data by customer based on known and targeted awards over a five-year period. The projected profit margin assumptions included in the plans are based on the current cost structure and anticipated cost reductions. If different assumptions were used in these plans, the related undiscounted cash flows used in measuring impairment could be different and additional impairment of assets might be required to be recorded.

We test indefinite-lived intangible assets, other than goodwill, for impairment on an annual basis by comparing the estimated fair values to the carrying values. If the carrying value exceeds the estimated fair value, the asset is written down to its estimated fair value. Estimated fair value is based on cash flows, discussed above, discounted at a risk-adjusted rate of return.

We are subject to financial statement risk in the event that intangible assets become impaired.

Goodwill. Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” In connection with the Acquisition, we have applied the provisions of SFAS No. 141, “Business Combinations” (“SFAS 141”). Goodwill, which represents the excess of cost over the fair value of the net assets of the businesses acquired, was approximately $2,357 million as of December 31, 2004, or 23% of our total assets.

In accordance with SFAS 142, we perform annual impairment testing at a reporting unit level. To test goodwill for impairment, we estimate the fair value of each reporting unit and compare the estimated fair value to the carrying value. If the carrying value exceeds the estimated fair value, then a possible impairment of goodwill exists and requires further evaluation. Estimated fair values are based on the cash flows projected in the reporting units’ strategic plans and long-range planning forecasts (see “— Impairment of Long-Lived Assets and Intangibles”), discounted at a risk-adjusted rate of return.

As the estimated fair values of our reporting units exceeded their carrying values at each testing date since adoption, we have recorded no goodwill impairment. While we believe our estimates of fair value are reasonable based upon current information and assumptions about future results, changes in our businesses, the markets for our products, the economic environment and numerous other factors could significantly alter our fair value estimates and result in future impairment of recorded goodwill. We are subject to financial statement risk in the event that goodwill becomes impaired.

Pensions. We account for our defined benefit pension plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS 87”), which requires that amounts recognized in financial statements be determined on an actuarial basis. This determination involves the selection of an expected rate of return on plan assets and a discount rate.

The weighted-average assumptions used to calculate the benefit obligations as of the end of the year, and the net periodic benefit cost for the following year are as follows:


	2004									2003

							Rest of									Rest of
	U.S.			U.K.			World			U.S.			U.K.			World

Discount rate		5.75	%		5.50	%		5.34	%		6.25	%		5.50	%		5.61	%
Rate of increase in compensation levels		4.00	%		3.75	%		2.98	%		4.00	%		3.75	%		3.14	%

The weighted-average assumptions used to determine net periodic benefit cost for the year ended December 31, 2004 and for the ten month period ended December 31, 2003 are shown in the following table:


	Year Ended									Ten Months Ended
	December 31, 2004									December 31, 2003

							Rest of									Rest of
	U.S.			U.K.			World			U.S.			U.K.			World

Discount rate		6.25	%		5.50	%		5.61	%		6.25	%		5.50	%		5.87	%
Expected long-term return on plan assets		8.50	%		7.75	%		7.22	%		8.50	%		7.75	%		7.74	%
Rate of increase in compensation levels		4.00	%		3.75	%		3.14	%		4.00	%		4.00	%		3.40	%

Based on our assumptions as of October 31, 2004, as discussed below, a change in these assumptions, holding all other assumptions constant, would have the following effect on our pension costs and obligations on an annual basis:


	Impact on Net Periodic Benefit Cost

	Increase									Decrease

	U.S.			U.K.			All Other			U.S.		U.K.			All Other

	(Dollars in millions)
.25% change in discount rate	$	(0.9	)	$	0.9		$	(1.3	)	$	0.9	$	(1.1	)	$	1.6
.25% change in expected long-term rate of return		(1.7	)		(11.3	)		(0.4	)		1.7		11.5			0.4


	Impact on Obligations

	Increase									Decrease

	U.S.			U.K.			All Other			U.S.		U.K.		All Other

	(Dollars in millions)
.25% change in discount rate	$	(37.8	)	$	(164.0	)	$	(27.6	)	$	39.6	$	167.8	$	29.0

SFAS 87 and the policies we have used, (most notably the use of a calculated value of plan assets for pensions as further described below), generally reduce the volatility of pension income and expense that would otherwise result from changes in the value of the pension plan assets and pension liability discount rates. A substantial portion of our pension benefits relate to our plans in the United States and the United Kingdom. For the year ended December 31, 2004, and the ten months ended December 31, 2003, our net pension expense reflects a combination of a decreased long-term rate of return assumption on the assets, decreased discount rate and use of fair value of plan assets as of March 1, 2003 in our purchase accounting, as opposed to the five-year market related value used historically. The Predecessor’s results of operations for the periods presented through February 28, 2003 reflect net pension income due to the over-funded status of our U.K. plan, net of pension expense for our U.S. and other plans.

A key assumption in determining our net pension (income) expense in accordance with SFAS 87 is the expected long-term rate of return on plan assets. We review our long-term rate of return assumptions annually through comparison of our historical actual rates of return with our expectations, and consultation with our actuaries and investment advisors regarding their expectations for future returns. While we believe our assumptions of future returns are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligations and our future pension (income) expense.

The expected return on plan assets that is included in pension (income) expense is determined by applying the expected long-term rate of return on assets to a calculated market-related value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. In computing the expected return on plan assets that was included in the pension expense of the Successor for the ten month period ended December 31, 2003 and for the year ended December 31, 2004, the market-related value of assets was reset at March 1, 2003 to equal the fair value of assets; in subsequent years, asset gains and losses will be amortized over five years in determining the market-related value of assets used to calculate the expected return component of pension income. The Predecessor used this same methodology to calculate the expected return.

Another key assumption in determining our net pension (income) expense is the assumed discount rate to be used to discount plan liabilities. The discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we look to rates of return on high quality, fixed-income investments that receive one of the two highest ratings given by a recognized ratings agency, and that have cash flows similar to those of the underlying benefit obligation. Changes in discount rates over the past three years have not materially affected pension income (expense), and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, are recognized in expense on a deferred basis as allowed by SFAS 87. As a result of the Acquisition and the application of purchase accounting, all unamortized effects of historical changes were immediately recognized in the opening balance sheet.

Our 2005 pension expense (income) is estimated to be approximately $37 million in the U.S., $(58) million in the U.K. and $43 million for the rest of the world (based on December 31, 2004 exchange rates). We expect to contribute approximately $90 million to our U.S. pension plans and approximately $50 million to our non-U.S. pension plans in 2005.

Other Post-Retirement Benefits. We account for our Other Post-Retirement Benefits (“OPEB”) in accordance with SFAS No. 106, “Employers’ Accounting for Post-Retirement Benefits Other Than Pensions”, which requires that amounts recognized in financial statements be determined on an actuarial basis. This determination requires the selection of a discount rate and health care cost trend rates used to value benefit obligations. The following are the significant assumptions used in the measurement of the accumulated projected benefit obligations (“APBO”) as of the October 31 measurement date:


	2004						2003

	U.S.			Canada			U.S.			Canada

Discount rate		5.75	%		6.00	%		6.25	%		6.25	%
Initial health care cost trend rate at end of year		10.50	%		9.00	%		10.00	%		8.00	%
Ultimate health care cost trend rate		5.00	%		5.00	%		5.00	%		4.50	%
Year in which ultimate rate is reached		2011			2013			2009			2010

The discount rate reflects the current rate at which the OPEB liabilities could be effectively settled at the end of the year. In estimating this rate, we look to rates of return on high quality, fixed-income investments that receive one of the two highest ratings given by a recognized ratings agency and that have cash flows similar to those of the underlying benefit obligation. We develop our estimate of the health care cost trend rates used to value benefit obligations through review of our recent health care cost trend experience and through discussions with our actuary regarding the experience of similar companies. Changes in the assumed discount rate or health care cost trend rate can have a significant impact on our actuarially determined liability and related OPEB expense.

A one-percentage-point change in the assumed health care cost trend rate would have the following effects:


	One Percentage
	Point

	Increase		Decrease

	(Dollars in millions)
Effect on total of service and interest cost components for the year ended December 31, 2004	$	10	$	(8	)
Effect on post-retirement benefit obligations as of October 31, 2004	$	95	$	(79	)

Our 2005 OPEB expense is estimated to be approximately $48 million. We fund our OPEB obligation on a pay-as-you-go basis. We expect to contribute approximately $60 million on a pay-as-you-go basis in 2005.

Valuation Allowances on Deferred Income Tax Assets. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers historical losses, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. We determined that we could not conclude that it was more likely than not that the benefits of certain deferred income tax assets would be realized. The valuation allowance we recorded reduced to zero the net carrying value of all United States and certain foreign net deferred tax assets. We expect the deferred tax assets, net of the valuation allowance, to be realized as a result of the reversal of existing taxable temporary differences in the United States and as a result of projected future taxable income and the reversal of existing taxable temporary differences in certain foreign jurisdictions.

Environmental. Governmental regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had, and will continue to have, an effect on our operations. We have made and continue to make expenditures for projects relating to the environment, including pollution control devices for new and existing facilities. We are conducting a number of environmental investigations and remedial actions at current and former locations to comply with applicable requirements and along with other companies, have been named a potentially responsible party for certain waste management sites.

A reserve estimate for each 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. Each of the environmental matters is subject to various uncertainties, and some of these matters may be resolved unfavorably to us. We believe that any liability, in excess of amounts accrued in our consolidated and combined financial statements, that may result from the resolution of these matters for which sufficient information is available to support cost estimates, will not have a material adverse affect on our financial position, results of operations or cash flows. However, we cannot predict the effect on our financial position, results of operations or cash flows 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.

RESULTS OF OPERATIONS

The following consolidated and combined statements of operations compare the results of operations for the years ended December 31, 2004, 2003 and 2002. Due to the change in ownership, and the resultant application of purchase accounting, our predecessor’s pre-Acquisition financial statements and our post-Acquisition financial statements have been prepared on different bases of accounting that do not straddle the Acquisition date, and therefore are not comparable. For purposes of the periods presented in this section, 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 ten months ended December 31, 2003, have been combined for convenience of discussion and are collectively referred to as “year ended December 31, 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 AND COMBINED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2004 and 2003


		Years Ended
		December 31,						Variance Increase (Decrease)

		2004			2003			Transactions			Operations			Total

		(Dollars in millions)
Sales		$	12,011		$	11,351		$	(43	)(a)	$	703		$	660
Cost of sales			10,710			10,142			(100	)(b)		668			568

	Gross profit		1,301			1,209			57			35			92
Administrative and selling expenses			522			546			(2	)(c)		(22	)		(24	)
Research and development expenses			174			164			—			10			10
Purchase in-process research and development			—			85			(85	)(d)		—			(85	)
Amortization of intangible assets			33			29			3	(e)		1			4
Other (income) expense — net			(11	)		(52	)		(1	)(f)		42			41

	Operating income		583			437			142			4			146
Interest expense — net			252			334			(15	)(g)		(67	)		(82	)
Loss on retirement of debt			167			31			(31	)(g)		167			136
Loss on sales of receivables			—			25			(17	)(g)		(8	)		(25	)

Earnings (losses) before income taxes			164			47			205			(88	)		117
Income tax expense			135			117			42	(h)		(24	)		18

	Net earnings (losses)	$	29		$	(70	)	$	163		$	(64	)	$	99


(a)		Reflects the sales of TKS, which was not transferred to us as part of the Acquisition.

(b)		Reflects $40 million in cost of sales of TKS, $12 million in pension and OPEB adjustments as a result of purchase accounting, the effects of a $43 million inventory write-up recorded as a result of the Acquisition and $5 million net decrease in depreciation and amortization expense resulting from fair value adjustments to fixed assets and certain intangibles.

(c)		Reflects the elimination of $1 million of administrative and selling expense in respect of TKS, the addition of $1 million in the annual monitoring fee payable to an affiliate of Blackstone and $2 million decrease in depreciation and amortization expense resulting from fair value adjustments to fixed assets and capital software.

(d)		Reflects the fair value of purchased in-process research and development expensed as a result of purchase accounting.

(e)		Reflects the incremental increase in amortization resulting from assignment of fair value to certain intangibles.

(f)		Reflects $1 million of other expense related to TKS.

(g)		Reflects net financing costs based upon our new capital structure and the initiation of our receivables facility.

(h)		Reflects the tax effect of the above variances at the applicable tax rates.

The results of operations reflect the impact of various items during the periods discussed. Pretax earnings for the years ended December 31, 2004 and 2003, were negatively impacted by the effects of these items as presented in the following table:


	Years Ended
	December 31,

	2004		2003

	(Dollars in
	millions)
Restructuring charges — Severance and other (cash)	$	38	$	32
Loss on retirement of debt		167		31
Northrop/ Old TRW merger-related transaction costs		—		6
Other charges		—		1

	$	205	$	70

These items are classified in the statements of operations as follows:


	Years Ended
	December 31,

	2004		2003

	(Dollars in
	millions)
Cost of sales	$	29	$	20
Administrative and selling expenses		9		18
Other expense — net		—		1
Loss on retirement of debt		167		31

	$	205	$	70


	*Year Ended December 31, 2004 Compared to Year Ended December 31, 2003*

Sales for the year ended December 31, 2004 of $12.0 billion increased $660 million from $11.4 billion for the year ended December 31, 2003. The increase primarily resulted from the favorable effect of foreign currency exchange of $634 million and sales of new products in excess of price reductions provided to customers of $171 million, partially offset by a net reduction in sales due to lower industry builds and

divestitures of $102 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 profit for the year ended December 31, 2004 of $1,301 million increased $92 million from $1,209 million for the year ended December 31, 2003. The increase resulted primarily from higher net costs incurred in 2003 due to the Transactions of $57 million (which included $12 million of net pension and OPEB income), the favorable effect of foreign currency exchange of $54 million, the positive impact of higher volume in excess of adverse product mix of $53 million and cost savings in excess of price reductions to customers and inflation (which included the effects of increased costs for ferrous metals) of $11 million. These increases were partially offset by an increase in net pension and OPEB expense of $38 million, higher warranty expenses of $12 million, the unfavorable impact of divestitures of $9 million and $24 million of higher expenses primarily related to a combination of litigation reserves, restructuring and charges related to one of our Mexican plants including an inventory obsolescence adjustment and operational issues. Gross profit for the year ended December 31, 2004 included restructuring charges of $29 million, primarily for severance and costs to consolidate facilities, compared to $20 million of restructuring and merger-related transaction costs for the year ended December 31, 2003. Gross profit as a percentage of sales for the year ended December 31, 2004 was 10.8% compared to 10.7% for the year ended December 31, 2003.

Administrative and selling expenses for the year ended December 31, 2004 were $522 million compared to $546 million for the year ended December 31, 2003. Lower expenses resulted primarily from net cost savings of $24 million, lower costs due to divested operations of $12 million and a reduction in restructuring and other charges of $8 million, partially offset by the unfavorable effect of foreign currency exchange of $24 million. Administrative and selling expenses for the year ended December 31, 2004 included restructuring charges primarily related to severance of $9 million compared to $18 million of restructuring and merger-related transaction costs for the year ended December 31, 2003. Administrative and selling expenses as a percentage of sales for the year ended December 31, 2004, were 4.3% compared to 4.8% for the year ended December 31, 2003.

Research and development expenses for the year ended December 31, 2004 were $174 million compared to $164 million for the year ended December 31, 2003. The increase in expenses primarily reflected the unfavorable effect of foreign currency exchange partially offset by cost savings. Research and development expenses as a percentage of sales were 1.4% for the years ended December 31, 2004 and December 31, 2003.

Purchased in-process research and development for the year ended December 31, 2003 was $85 million. This reflected a write-off of the fair value of purchased in-process research and development expenses related to the Acquisition.

Amortization of intangible assets was $33 million for the year ended December 31, 2004 compared to $29 million for the year ended December 31, 2003. This increase was primarily reflective of twelve months of amortization expense in 2004 on intangible assets recorded under purchase accounting as compared with only ten months of amortization expense in the prior period.

Other (income) expense — net for the year ended December 31, 2004 was income of $11 million compared to income of $52 million for the year ended December 31, 2003. The decrease primarily resulted from lower foreign currency exchange gains partially offset by an increase in earnings from affiliates. The prior period included approximately $32 million in unrealized foreign exchange gains. In 2004, the Company has implemented hedging programs which mitigate foreign currency exposure.

Interest expense- net for the year ended December 31, 2004 was $252 million compared to $334 million for the year ended December 31, 2003. The decline in interest expense resulted primarily from the January 2004 refinancing, the use of interest rate swaps, and the March 2004 pay down of debt with the proceeds from our initial public offering and available cash. Included in interest expense for the year ended December 31, 2004 is $3 million of financing expenses related to credit agreement refinancing, as well as an additional $3 million of accelerated amortization of debt issuance costs as a result of the December 21, 2004 amendment and restatement of our credit facilities.

Loss on retirement of debt for the year ended December 31, 2004 totaled $167 million compared to $31 million for the year ended December 31, 2003. The current year losses and related refinancing transactions were as follows:


	•	$11 million write-off of unamortized debt issuance costs in conjunction with our January 2004 refinancing of the then-existing term loan facilities;

	•	$30 million of redemption fees and $6 million write-off of unamortized debt issuance costs associated with our dollar and euro-denominated senior notes and senior-subordinated notes which were partially redeemed in March 2004;

	•	$1 million write-off of unamortized debt issuance costs in conjunction with our April 2004 pre-payment of certain of our term loan facilities;

	•	$7 million write-off of unamortized debt issuance costs in connection with our December 21, 2004 refinancing of the then-existing credit facilities; and

	•	a charge of $112 million due to the November 12, 2004 repurchase of the Seller Note resulting from the difference between the purchase price ascribed to the Seller Note and its book value on our balance sheet at the repurchase date.

In 2003, we expensed $31 million of unamortized deferred debt issuance costs in association with our July 2003 refinancing of the then-existing term loan facilities.

Income tax expense for the year ended December 31, 2004 was $135 million on pre-tax income of $164 million as compared to income tax expense of $117 million on pre-tax earnings of $47 million for the year ended December 31, 2003. The income tax rate varies from the United States statutory income tax rate due primarily to losses in the United States and certain foreign jurisdictions, where the tax benefit for net operating losses are being fully reserved, as well as non-deductible interest expense 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 year ended December 31, 2004 was $1,080 million compared to $928 million for the year ended December 31, 2003.

EBITDA, a measure used by management to measure performance, is reconciled to net earnings (losses) in the following table. Our management believes EBITDA is useful to the investors because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net earnings (losses) as an indicator of operating performance or to cash flows from operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly titled measures of other companies. Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The amounts shown for EBITDA, as presented herein, differ from the amounts calculated under the definition of EBITDA used in our debt instruments. The definition of EBITDA used in our debt instruments is further adjusted for certain cash and non-cash charges and is used to determine compliance with financial covenants and our ability to engage in certain activities such as incurring additional debt and making certain payments.

The following table provides a reconciliation of net earnings (losses) to EBITDA:


	Years Ended
	December 31,

	2004		2003

	(Dollars in
	millions)
Net earnings (losses)	$	29	$	(70	)
Depreciation and amortization		497		491
Interest expense — net		252		334
Loss on retirement of debt		167		31
Loss on sales of receivables		—		25
Income tax expense		135		117

EBITDA	$	1,080	$	928

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2003 and 2002


		Years Ended
		December 31,						Variance Increase (Decrease)

		2003			2002			Transactions			Operations			Total

		(Dollars in millions)
Sales		$	11,351		$	10,630		$	(203	)(a)	$	924		$	721
Cost of sales			10,142			9,315			(167	)(b)		994			827

	Gross profit		1,209			1,315			(36	)		(70	)		(106	)
Administrative and selling expenses			546			541			(38	)(c)		43			5
Research and development expenses			164			151			—			13			13
Purchase in-process research and development			85			—			85	(d)		—			85
Amortization of intangible assets			29			15			15	(e)		(1	)		14
Other (income) expense — net			(52	)		(6	)		(7	)(f)		(39	)		(46	)

	Operating income		437			614			(91	)		(86	)		(177	)
Interest expense — net			334			309			10	(g)		15			25
Loss (gain) on retirement of debt			31			(4	)		35	(g)		—			35
Loss on sales of receivables			25			7			15	(g)		3			18

Earnings (losses) before income taxes			47			302			(151	)		(104	)		(255	)
Income tax expense			117			138			(25	)(h)		4			(21	)

	Net (losses) earnings	$	(70	)	$	164		$	(126	)	$	(108	)	$	(234	)


(a)		Reflects the changes in sales of TKS, which was not transferred to us as part of the Acquisition.

(b)		Reflects changes of $188 million from TKS cost of sales, $2 million increase in pension and OPEB adjustments as a result of purchase accounting, the effects of a $43 million increase in inventory write-up recorded as a result of the Acquisition and $24 million net increase in depreciation and amortization expense resulting from fair value adjustments to fixed assets and certain intangibles.

(c)		Reflects a decrease in the elimination of $2 million of administrative and selling expense in respect of TKS, a decrease of $29 million in the corporate allocation from Old TRW and annual monitoring fee payable to an affiliate of Blackstone and $7 million decrease in depreciation and amortization expense elimination resulting from fair value adjustments to fixed assets and capital software.


(d)		Reflects changes in the fair value of purchased in-process research and development expensed as a result of purchase accounting.

(e)		Reflects changes of the incremental increase in amortization resulting from assignment of fair value to certain intangibles.

(f)		Reflects changes of $7 million of other income related to TKS.

(g)		Reflects changes in net financing costs based upon our new capital structure and the initiation of our receivables facility.

(h)		Reflects changes in the tax effect of the above variances at the applicable tax rates.

The results of operations reflect the impact of various items during the periods discussed for the years ended December 31, 2003 and 2002 as presented in the following table:


	Years Ended
	December 31,

	2003		2002

	(Dollars in
	millions)
Restructuring charges — Severance and other (cash)	$	32	$	27
Restructuring charges — Asset impairments (non-cash)		—		32
Asset impairment charges other than restructuring		—		17
Loss (gain) on retirement of debt		31		(4	)
Northrop/ Old TRW merger-related transaction costs		6		23
Other charges		1		(10	)

	$	70	$	85

These items are classified in the statements of operations as follows:


	Years Ended
	December 31,

	2003		2002

	(Dollars in
	millions)
Cost of sales	$	20	$	61
Administrative and selling expenses		18		35
Amortization of intangible assets		—		1
Other expense (income) — net		1		(8	)
Loss (gain) on retirement of debt		31		(4	)

	$	70	$	85


	*Year Ended December 31, 2003 Compared to Year Ended December 31, 2002*

Sales for the year ended December 31, 2003 of $11.4 billion increased $721 million from $10.6 billion for the year ended December 31, 2002. Increased sales resulted primarily from the favorable impact of foreign currency exchange of $967 million and the impact of higher volume and product growth in excess of unfavorable pricing of $17 million partially offset by the unfavorable effect of business divestitures completed in 2003 of $60 million and a reduction in TKS sales of $203 million.

Gross profit for the year ended December 31, 2003 of $1,209 million decreased $106 million from $1,315 million for the year ended December 31, 2002. Gross profit for the year ended December 31, 2003 was reduced by net expenses related to the Transactions of $36 million. These expenses consisted of the reversal of an inventory fair value write-up of $43 million, a reduction in TKS gross profit of $15 million, and higher net pension and OPEB expenses of $2 million partially offset by lower depreciation and amortization expenses of $24 million. In addition, the decrease resulted from a decline in net pension and OPEB income of

$219 million, and the net unfavorable impact of negative product mix in excess of the positive effect of higher volume of $72 million, partially offset by the favorable impact of foreign currency exchange of $101 million, cost reduction savings in excess of inflation and lower pricing of $80 million, and a decrease in restructuring and other charges of $41 million. Gross profit for the year ended December 31, 2003 included restructuring and merger-related transaction costs primarily for severance of $20 million. Gross profit for the year ended December 31, 2002 included restructuring charges primarily for severance and asset impairments of $43 million, asset impairment charges other than restructuring of $14 million and other charges related to employee compensation arising from the Northrop Grumman acquisition of Old TRW of $4 million. Gross profit as a percentage of sales for the year ended December 31, 2003 was 10.7% compared to 12.4% for the year ended December 31, 2002.

Administrative and selling expenses for the year ended December 31, 2003 were $546 million compared to $541 million for the year ended December 31, 2002. The increase in expenses primarily resulted from the unfavorable impact of foreign currency exchange of $31 million, an increase in net pension and OPEB expense of $5 million, and increases in inflation, advertising costs, professional fees and other net costs of $24 million, partially offset by lower restructuring and other charges of $17 million and a net reduction in costs due to the Transactions of $38 million. Lower costs resulting from the Transactions included a net reduction in corporate costs allocated from Old TRW of $28 million and lower depreciation and amortization expenses and other costs of $10 million. Administrative and selling expenses for the year ended December 31, 2003 included restructuring charges primarily for severance of $13 million and charges of $5 million for costs associated with our separation from Northrop Grumman. Administrative and selling expenses for the year ended December 31, 2002 included restructuring charges primarily for severance of $16 million and other charges of $19 million related to employee compensation arising from the Northrop Grumman acquisition of Old TRW. Administrative and selling expenses as a percentage of sales for the year ended December 31, 2003 was 4.8% compared to 5.1% for the year ended December 31, 2002.

Research and development expenses were $164 million for the year ended December 31, 2003 and $151 million for the year ended December 31, 2002. Expenses increased primarily due to the unfavorable impact of foreign currency exchange of $14 million. Research and development expenses as a percentage of sales for both the years ended December 31, 2004 and 2003 were 1.4%.

Other (income) expense — net for the year ended December 31, 2003 was income of $52 million compared to income of $6 million for the year ended December 31, 2002. The increase primarily resulted from an increase in foreign currency exchange gains of $32 million.

Interest expense — net for the year ended December 31, 2003 was $334 million compared to $309 million for the year ended December 31, 2002.

Amortization of intangible assets was $29 million for the year ended December 31, 2003 compared to $15 million for the year ended December 31, 2002. The increase in expense primarily resulted from the implementation of purchase accounting.

Income tax expense for the year ended December 31, 2003 was $117 million on pre-tax income of $47 million as compared to income tax expense of $138 million on pre-tax earnings of $302 million for the year ended December 31, 2002. The income tax rate varies from the United States statutory income tax rate due primarily to losses in the United States and certain foreign jurisdictions, where the tax benefit for net operating losses are being fully reserved, and tax rates in certain foreign jurisdictions that are higher than the United States statutory tax rate.

Earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA for the year ended December 31, 2003 was $928 million compared to $1,123 million for the year ended December 31, 2002.

The following table provides a reconciliation of net earnings (losses) to EBITDA:


	Years Ended
	December 31,

	2003			2002

	(Dollars in
	millions)
Net earnings (losses)	$	(70	)	$	164
Depreciation and amortization		491			509
Interest expense — net		334			309
Loss on retirement of debt		31			(4	)
Loss on sales of receivables		25			7
Income tax expense		117			138

EBITDA	$	928		$	1,123

SEGMENT RESULTS OF OPERATIONS

The following table reconciles segment sales and profit before taxes to consolidated sales and profit before taxes for 2004, 2003 and 2002. See Note 22 to the consolidated and combined financial statements for the reconciliation of segment sales and profit before taxes to consolidated amounts and a description of segment profit before taxes for the periods presented.


			Years Ended December 31,

			2004			2003			2002

			(Dollars in millions)
Sales:
Chassis Systems			$	6,950		$	6,534		$	6,078
Occupant Safety Systems				3,438			3,306			3,143
Automotive Components				1,623			1,511			1,409

			$	12,011		$	11,351		$	10,630

Profit before taxes:
	Chassis Systems		$	285		$	175		$	256
	Occupant Safety Systems			328			269			224
	Automotive Components			103			116			148

		Segment profit before taxes		716			560			628
Corporate expense and other				(130	)		(125	)		(189	)
Financing costs				(252	)		(359	)		(316	)
Loss on retirement of debt				(167	)		(31	)		—
Net employee benefits income (expense)				(3	)		2			179

		Profit before taxes	$	164		$	47		$	302

CHASSIS SYSTEMS


	*Year Ended December 31, 2004 Compared to Year Ended December 31, 2003*


	Years Ended
	December 31,						Variance Increase (Decrease)

	2004			2003			Transactions			Operations		Total

				(Dollars in millions)
Sales	$	6,950		$	6,534		$	(43	)	$	459	$	416
Profit before taxes		285			175			90			20		110
Restructuring		(25	)		(28	)		—			3		3

Sales for the Chassis Systems segment for the year ended December 31, 2004 of $6,950 million increased $416 million from $6,534 million for the year ended December 31, 2003. The increase primarily resulted from the favorable impact of foreign currency exchange of $347 million and higher volume and sales of new products, net of price reductions provided to customers, of $153 million, partially offset by a net reduction of sales due to divested operations of $41 million and the absence of $43 million of TKS sales.

Profit before taxes for the Chassis Systems segment for the year ended December 31, 2004 of $285 million increased $110 million from $175 million for the year ended December 31, 2003. Profit before taxes for the year ended December 31, 2003 included net expenses related to the Transactions totaling $90 million. These expenses consisted of a write-off of the fair value of purchased in-process research and development of $59 million, the reversal of an inventory fair value write-up of $27 million, higher depreciation and amortization expenses of $5 million and TKS profit before taxes of $1 million. In addition, the increase resulted primarily from the favorable impact of higher volume in excess of adverse product mix of $33 million and the positive impact of divestitures of $6 million. Savings from cost reductions exceeded the unfavorable effect of price reductions provided to customers and inflation (which included the effects of higher costs for ferrous metals). These increases were partially offset by increased warranty expenses of $7 million, higher net pension and OPEB expenses of $7 million and the unfavorable impact of foreign currency exchange of $6 million. Profit before taxes for the year ended December 31, 2004 included restructuring charges primarily for severance and costs to consolidate certain facilities of $25 million compared to $28 million of restructuring charges primarily for severance for the year ended December 31, 2003.


	*Year Ended December 31, 2003 Compared to Year Ended December 31, 2002*


	Years Ended
	December 31,

	2003			2002

	(Dollars in
	millions)
Sales	$	6,534		$	6,078
Profit before taxes		175			256
Restructuring		(28	)		(20	)
Asset impairment charges — other		—			(6	)

Sales for the Chassis Systems segment for the year ended December 31, 2003 of $6,534 million increased $456 million from $6,078 million for the year ended December 31, 2002. The increase resulted from the favorable impact of foreign currency exchange of $529 million and $130 million due to the net combined favorable impact of higher customer volume and new product growth, net of pricing. Higher volume was achieved despite a lower level of underlying industry volume in both North America and Europe. The increase was partially offset by a reduction in TKS sales of $203 million.

Profit before taxes for the Chassis Systems segment for the year ended December 31, 2003 of $175 million decreased $81 million from $256 million for the year ended December 31, 2002. Profit before taxes for the year ended December 31, 2003 included a net increase in costs resulting from the Transactions totaling $63 million. The net increase in costs consisted of a write-off of the fair value of purchased in-process research and development of $59 million, the reversal of an inventory fair value write-up of $27 million, and a

reduction in TKS profit before taxes of $8 million partially offset by lower depreciation and amortization expenses of $31 million. In addition, the decrease resulted primarily from the impact of adverse product mix in excess of the positive effect of higher volume of $49 million and an increase in net pension and OPEB expense of approximately $33 million. The decrease was partially offset by savings from cost reduction activities, net of price reductions to customers and inflation, of $59 million and the favorable impact of foreign currency exchange of $9 million. Profit before taxes for the year ended December 31, 2003 included restructuring charges primarily for severance of $28 million compared to $20 million of restructuring charges primarily for severance and $6 million of asset impairment charges other than restructuring for the year ended December 31, 2002.

OCCUPANT SAFETY SYSTEMS


	*Year Ended December 31, 2004 Compared to Year Ended December 31, 2003*


	Years Ended
	December 31,						Variance Increase (Decrease)

	2004			2003			Transactions		Operations			Total

	(Dollars in millions)
Sales	$	3,438		$	3,306		$	—	$	132		$	132
Profit before taxes		328			269			32		27			59
Restructuring		(8	)		(2	)		—		(6	)		(6	)

Sales for the Occupant Safety Systems segment for the year ended December 31, 2004 of $3,438 million increased $132 million from $3,306 million for the year ended December 31, 2003. The increase resulted primarily from the favorable impact of foreign currency exchange of $194 million, partially offset by a reduction in sales of $61 million due to the divestiture of our interest in a joint venture in 2003.

Profit before taxes for the Occupant Safety Systems segment for the year ended December 31, 2004 of $328 million increased $59 million from $269 million for the year ended December 31, 2003. Profit before taxes for the year ended December 31, 2003 included net charges related to the Transactions of $32 million. Charges related to the Transactions consisted of a write-off of the fair value of purchased in-process research and development of $26 million and the reversal of an inventory fair value write-up of $9 million partially offset by lower depreciation and amortization expenses of $3 million. In addition, the increase resulted primarily from cost reduction savings, net of price reductions and inflation (which included the effects of higher costs for ferrous metals), of $18 million, the positive effect of higher volume in excess of adverse mix of $15 million and the favorable impact of foreign currency exchange of $8 million. These increases were partially offset by a net increase, in expenses primarily for litigation reserves, restructuring charges and net pension and OPEB. Profit before taxes for the years ended December 31, 2004 and December 31, 2003 included restructuring charges primarily for severance of $8 million and $2 million, respectively.


	*Year Ended December 31, 2003 Compared to Year Ended December 31, 2002*


	Years Ended
	December 31,

	2003			2002

	(Dollars in
	millions)
Sales	$	3,306		$	3,143
Profit before taxes		269			224
Restructuring		(2	)		(14	)
Asset impairment charges — restructuring		—			(21	)
Asset impairment charges — other		—			(12	)

Sales for the Occupant Safety Systems segment for the year ended December 31, 2003 of $3,306 million increased $163 million from $3,143 million for the year ended December 31, 2002. The increase resulted from the favorable impact of foreign currency exchange of $298 million that was partially offset by the unfavorable

impact of price reductions in excess of higher volume totaling $75 million and the effect of a business divestiture completed in 2003 of $60 million.

Profit before taxes for the Occupant Safety Systems segment for the year ended December 31, 2003 of $269 million increased $45 million from $224 million for the year ended December 31, 2002. The increase reflected a reduction in unusual charges of $45 million, the favorable impact of foreign currency exchange of $35 million and savings from cost reduction activities in excess of inflation and pricing givebacks of $23 million, partially offset by a net increase in expenses related to the Transactions totaling $44 million and the net combined unfavorable impact of negative product mix and higher volume of $11 million. Net charges related to the Transactions consisted of a write-off of the fair value of purchased in-process research and development of $26 million, the reversal of an inventory fair value write-up of $9 million and an increase in depreciation and amortization expenses of $9 million. Profit before taxes for the year ended December 31, 2003 included restructuring charges of $2 million, primarily for severance. Profit before taxes for the year ended December 31, 2002 included restructuring charges for asset impairments of $21 million, restructuring charges primarily for severance of $14 million, and asset impairment charges other than restructuring of $12 million.

AUTOMOTIVE COMPONENTS


	*Year Ended December 31, 2004 Compared to Year Ended December 31, 2003*


	Years Ended
	December 31,						Variance Increase (Decrease)

	2004			2003			Transactions		Operations			Total

	(Dollars in millions)
Sales	$	1,623		$	1,511		$	—	$	112		$	112
Profit before taxes		103			116			4		(17	)		(13	)
Restructuring		(5	)		(2	)		—		(3	)		(3	)

Sales for the Automotive Components segment for the year ended December 31, 2004 of $1,623 million increased $112 million from $1,511 million for the year ended December 31, 2003. The increase resulted primarily from the favorable effect of foreign currency exchange of $93 million and higher volume in excess of price reductions provided to customers of $19 million.

Profit before taxes for the Automotive Components segment for the year ended December 31, 2004 of $103 million decreased $13 million from $116 million for the year ended December 31, 2003. The decrease resulted primarily from a higher level of warranty and net pension and OPEB costs, an increase in restructuring charges and charges related to one of our Mexican plants including an inventory obsolescence adjustment and operational issues partially offset by the favorable impact of foreign currency exchange and the absence of costs related to the Transactions. Profit before taxes for the year ended December 31, 2004 included restructuring charges of $5 million primarily for severance and costs to consolidate certain facilities compared to restructuring charges primarily for severance of $2 million for the year ended December 31, 2003.


	*Year Ended December 31, 2003 Compared to Year Ended December 31, 2002*


	Years Ended
	December 31,

	2003			2002

	(Dollars in
	millions)
Sales	$	1,511		$	1,409
Profit before taxes		116			148
Restructuring		(2	)		(4	)
Asset impairment charges — other		—			(6	)
Other income		—			12

Sales for the Automotive Components segment for the year ended December 31, 2003 of $1,511 million increased $102 million from $1,409 million for the year ended December 31, 2002. The increase resulted primarily from the favorable impact of foreign currency exchange of $140 million, which was partially offset by lower volume and price reductions of $38 million.

Profit before taxes for the Automotive Components segment for the year ended December 31, 2003 of $116 million decreased $32 million from $148 million for the year ended December 31, 2002. Profit before taxes for the year ended included a net increase in costs resulting from the Transactions of $22 million. These costs consisted of higher depreciation and amortization expenses of $15 million and the reversal of an inventory fair value write-up of $7 million. In addition, the decrease resulted from the combined unfavorable impact of lower volume and adverse product mix of $12 million, an increase in net pension and OPEB expense of $5 million, and an increase in restructuring and other charges of $4 million, partially offset by the favorable impact of foreign currency exchange of $11 million. Profit before taxes for the year ended December 31, 2003 included restructuring charges primarily for severance of $2 million. Profit before taxes for the year ended December 31, 2002 included restructuring charges primarily for severance of $4 million and other charges consisting of a gain on asset sales of $7 million, other income of $5 million and asset impairment charges of $6 million.

LIQUIDITY AND CAPITAL RESOURCES


	*Cash Flows*

Operating activities. Cash provided by operating activities for the year ended December 31, 2004 was $787 million as compared to $772 million for the year ended December 31, 2003. The change of approximately $15 million resulted primarily from higher earnings and changes in working capital.

Investing activities. Cash used in investing activities for the year 2004 decreased by approximately $3,394 million over the comparable period in 2003. Cash used to fund the Acquisition, including related fees, in 2003 accounts for the majority of the change. Proceeds from asset sales and divestitures totaled approximately $89 million for the year ended December 31, 2004, compared to $57 million in the prior year.

In 2004, we spent $493 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 $500 million, or approximately 4% of sales, in such capital expenditures during 2005.

Financing activities. Cash used in financing activities was $489 million in the year 2004 compared to cash provided by financing activities of approximately $3,895 million in the comparable period of 2003. During the year ended December 31, 2004, we sold shares in an initial public offering for approximately $635 million, net of fees and expenses and repurchased shares from Blackstone for approximately $319 million. We also borrowed approximately $1,578 million of long-term debt, net of debt issue costs, and repaid approximately $1,867 million of long-term debt during 2004. Additionally, we borrowed approximately $18 million of short-term debt. On November 12, 2004, TRW Intermediate made a net cash payment of approximately $494 million to Northrop in respect of the purchase of the Seller Note. The cash payment of approximately $494 million for the Seller Note is net of a credit of approximately $40 million ascribed to Released Claims.

In 2003, we received approximately $500 million in net transfers from our former parent company associated with participation in their cash management system. In addition, for the year ended December 31, 2003, we issued shares for approximately $699 million and borrowed approximately $4,263 million, net of debt issue costs and redeemed $1,360 million of long-term debt. Additionally, we repaid approximately $289 million of short-term debt.

Debt and Commitments

Sources of Liquidity. Our primary source of liquidity is cash flow generated from operations. We also have availability under our revolving credit facility and receivables facilities described below, subject to certain

conditions. See “Off-Balance Sheet Arrangements.” Our primary liquidity requirements, which are significant, are expected to be for debt service, working capital, capital expenditures and research and development costs.

We intend to draw down on, and use proceeds from, the revolving credit facility under our senior secured credit facilities and the Company’s United States and European accounts receivables facilities (collectively, the “Liquidity Facilities”) to fund normal working capital needs from month to month in conjunction with available cash on hand. As of January 10, 2005, after giving effect to the December 17, 2004 amendment and restatement to the credit agreement as discussed above, we had approximately $834 million of availability under our revolving credit facility, approximately €148 million and £40 million under our European accounts receivable facilities and approximately $218 million of availability under our U.S. accounts receivable facility as further discussed below. During any given month, we anticipate that we will draw as much as an aggregate of $400 million from the Liquidity Facilities. The amounts drawn under the Liquidity Facilities typically will be paid back throughout the month as cash from customers is received. We may then draw upon such facilities again for working capital purposes in the same or succeeding months. These borrowings reflect normal working capital utilization of liquidity.

In connection with the Acquisition, TRW Automotive issued the senior notes and the senior subordinated notes, entered into senior credit facilities, consisting of a revolving credit facility and term loan facilities, and initiated a trade accounts receivable securitization program, or the receivables facility. As of December 31, 2004, we had outstanding $3,181 million in aggregate indebtedness, with an additional $434 million of borrowing capacity available under our revolving credit facility, after giving effect to $66 million in outstanding letters of credit and guarantees, which reduced the amount available. As of December 31, 2004, approximately $287 million of our total reported accounts receivable balance was considered eligible for borrowings under our United States receivables facility, of which approximately $218 million would have been available for funding. We had no outstanding borrowings under this receivables facility as of December 31, 2004. See “Off-Balance Sheet Arrangements” for further discussion of our European facilities, which have approximately €148 million and £40 million of funding availability and no outstanding borrowings as of December 31, 2004.

Funding Our Requirements. While we are highly leveraged, we believe that funds generated from operations and planned borrowing capacity will be adequate to fund debt service requirements, capital expenditures, working capital requirements and company-sponsored research and development programs. In addition, we believe that our current financial position and financing plans will provide flexibility in worldwide financing activities and permit us to respond to changing conditions in credit markets. However, 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. Therefore, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our revolving credit facility or receivables facilities in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

Credit Ratings. Set forth below are our credit ratings for Standard & Poor’s and Moody’s as of February 3, 2005.


	S & P		Moody’s

Corporate & Bank Debt Rating		BB+		Ba2
Senior Note Rating		BB-		Ba3
Senior Subordinated Note Rating		BB-		B1

In the event of a downgrade, we believe we would continue to have access to sufficient liquidity; however, the cost of borrowing would increase and our ability to access certain financial markets could be limited.

Senior Secured Credit Facilities. The senior secured credit facilities consist of a secured revolving credit facility and various senior secured term loan facilities. As of December 31, 2004, the term loan facilities, with maturities ranging from 2009 to 2011, consisted of an aggregate of $1.44 billion dollar-denominated term loans and €50 million euro-denominated term loan, and the revolving credit facility provided for borrowing of up to $500 million. On November 2, 2004, we entered into an amended and restated credit agreement with JP

Morgan Chase Bank as agent and the other banks and financial institutions party thereto, which was again amended and restated on December 17, 2004. The November amended and restated credit agreement provides for a new term loan E facility, the proceeds of which were used towards the purchase of the Seller Note. The new term loan E facility in the amount of $300 million will amortize in equal quarterly installments in an amount equal to one percent per annum during the first five years and nine months and in one final installment on the maturity date. The tranche E term loan is guaranteed and secured on the same basis as the existing senior credit facilities, as described below. The December amended and restated credit agreement retained the tranche E term loan, but also provided for a five year $400 million term loan A facility, a 7.5 year $600 million term loan B facility and a five year revolving credit facility providing for borrowings up to $900 million. The senior credit facilities, as used herein, means the senior credit facilities as amended to give effect to the November 2, 2004 and the December 17, 2004 amendments and restatements of the credit agreement. After giving effect to the January 10, 2005 funding of the December 17, 2004 amendment, the outstanding balance on the term loan facilities consist of an aggregate of $1,300 million dollar-denominated term loans.

Guarantees and Security of Term Loan Facilities. The senior credit facilities are unconditionally guaranteed on a senior secured basis, in each case, by us, substantially all our existing and future wholly owned domestic subsidiaries, including Intermediate, and by TRW Automotive Finance (Luxembourg), S.à.r.l. In addition, all obligations under the senior credit facilities, and the guarantees of those obligations, are secured by substantially all of our assets and all the assets of TRW Automotive and each U.S. guarantor, subject to certain exceptions. The obligations of the foreign subsidiary borrowers under the senior credit facilities, and foreign guarantees of such obligations are, subject to certain exceptions and only to the extent permitted by applicable legal and contractual provisions and to the extent that it does not result in adverse tax consequences, secured by substantially all of the assets of the foreign subsidiary borrowers and foreign subsidiary guarantors.

Interest payments. Borrowings under the senior credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) JPMorgan Chase Bank’s prime rate and (2) the federal funds rate plus 1/2 of 1% or (b) a LIBOR or a eurocurrency rate determined by reference to the costs of funds for deposits in the currency of such borrowing for the interest period relevant to such borrowing adjusted for certain additional costs. As of December 31, 2004, the applicable margins with respect to the base rate borrowings were 0.75%, 1.25%, and 0.50% for the term loans A-1, D-1/ D-2, and E, respectively. The applicable margins with respect to the Eurocurrency borrowings were 1.75%, 2.25%, and 1.50% for the A-1, D-1/ D-2, and E, respectively. 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). The commitment fee on the revolving credit facility and the applicable margin on both the revolving credit facility and the term loans will be subject to a leverage based grid. We also pay customary letter of credit fees. Variable rate indebtedness exposes us to the risk of rising interest rates. If interest rates increase, our debt service obligation on variable rate indebtedness would increase, even though amounts borrowed would remain unchanged.

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 9³/8% to 11³/4%.

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 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), pay dividends and distributions or repurchase capital stock, create liens on assets, make investments, loans or advances, make certain acquisitions, engage in mergers or consolidations, enter into sale and leaseback transactions, engage in certain transactions with affiliates, amend certain material agreements governing our indebtedness (including, in the case of the senior credit facilities, the senior notes, senior subordinated notes and the receivables facility) and change the business conducted by us and our subsidiaries. In addition, the senior credit facilities

contain financial covenants relating to a maximum total leverage and a minimum interest coverage ratio, 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.

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 December 31, 2004, the mark-to-market adjustment for interest rate swaps reduced debt by approximately $6 million as a result of reflecting a $6 million obligation.

Settlement with Northrop and Purchase of Seller Note. On October 10, 2004, the Company entered into a note purchase and settlement agreement (the “Note Purchase and Settlement Agreement”) with Northrop, a subsidiary of Northrop, Intermediate and Automotive Investors L.L.C. (“AI LLC”), an affiliate of Blackstone. The Note Purchase and Settlement Agreement provides for (i) mutual releases by Northrop and the Company from certain potential indemnification claims under certain agreements entered into in connection with the Acquisition (the “Released Claims”) and (ii) Intermediate to make a net cash payment of approximately $494 million to Northrop in respect of the purchase of the Seller Note. The cash payment of approximately $494 million for the Seller Note is net of a credit of approximately $40 million ascribed to the Released Claims. The proceeds of the new term loan E described above, together with cash on hand, were used by Intermediate to purchase the Seller Note pursuant to the Note Purchase and Settlement Agreement on November 12, 2004. See “Other Matters — Additional Provisions of the Note Purchase and Settlement Agreement” for a description of other provisions of the settlement with Northrop.

At the time of the Acquisition, the Company valued the Seller Note based on a 15 year life and 8% pay-in-kind interest, and determined that the fair value of the Seller Note, and corresponding book value at March 1, 2003, was $348 million using a 12% discount rate. As of the November 12, 2004 repurchase date, the Seller Note had a book value, including accrued interest, of $422 million and a face value, including accrued interest, of $685 million. The Company recorded a fourth quarter pre-tax charge of $112 million for loss on retirement of debt resulting primarily from the difference between the purchase price ascribed to the Seller Note and the book value of the Seller Note on the Company’s balance sheet at the time the transaction was completed. This loss is U.S. based and therefore carries no current financial statement tax benefit due to the Company’s tax loss position in this jurisdiction.

Contractual Obligations and Commitments

The following table reflects our significant contractual obligations as of December 31, 2004:


								More
		Less Than						Than
		1 Year		1-3 Years		3-5 Years		5 Years		Total

		(Dollars in millions)
Short-term borrowings		$	40	$	—	$	—	$	—	$	40
Long-term debt obligations(1)			14		78		313		2,485		2,890
Capital lease obligations			3		7		6		23		39
Operating lease obligations			50		77		55		30		212

	Total	$	107	$	162	$	374	$	2,538	$	3,181


(1)	Long-term debt obligations give effect to refinancing of our term loan facilities as completed on January 10, 2005.

In addition to the obligations in the table above, we sponsor defined benefit pension plans that cover most of our U.S. employees and certain non-U.S. employees. Our funding practice provides that annual contributions to the pension plans will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries. We expect to contribute approximately $90 million to our U.S. pension plans and approximately $50 million to our non-U.S. pension plans in 2005.

We also sponsor other post-retirement benefit (“OPEB”) plans that cover the majority of our U.S. and certain non-U.S. employees and provide for benefits to eligible employees and dependents upon retirement. We are subject to increased OPEB cash costs due to, among other factors, rising health care costs. We fund our OPEB obligations on a pay-as-you-go basis. We expect to contribute approximately $60 million on a pay-as-you-go basis in 2005.

We also have liabilities recorded for various environmental matters. As of December 31, 2004, we had reserves for environmental matters of $72 million. Of this amount, we expect to pay approximately $10 million in 2005.

In addition to the contractual obligations and commitments noted above, we have contingent obligations in the form of severance and bonus payments for our executive officers. Additionally, we have no unconditional purchase obligations other than those related to inventory, services, tooling and property, plant and equipment in the ordinary course of business.

Other Commitments. Escalating pricing pressure from customers has been a characteristic of the automotive parts industry in recent years. Virtually all OEMs 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 pertaining to pre-Acquisition periods. This indemnification obligation is capped at $67 million. Initial payments of approximately $30 million were made in 2004. Our remaining obligation under this indemnity is $37 million, of which $28 million is expected to be paid in 2005.

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. Such facility was amended on December 31, 2004, to among other things, extend the term of the facility to December 2009, re-price the program to reflect current market rates, improve the availability of the facility, allow for daily borrowings and make other administrative changes.

Certain of our subsidiaries (the “sellers”) sell trade accounts receivables (the “receivables”) originated by them in the United States through the receivables facility. Receivables are sold to TRW Automotive Receivables LLC (the “transferor”) at a discount. The transferor is a bankruptcy-remote special purpose limited liability company that is our wholly owned consolidated subsidiary. The transferor’s purchase of receivables is financed through a transfer agreement with TRW Automotive Global Receivables LLC (the “borrower”). Under the terms of the transfer agreement, the borrower purchases all receivables sold to the transferor. The borrower is a bankruptcy-remote qualifying special purpose limited liability company that is wholly owned by the transferor and is not consolidated when certain requirements are met as further described below.

Generally, multi-seller commercial paper conduits supported by committed liquidity facilities are available to provide cash funding for the borrowers’ purchase of receivables through secured loans/tranches to the extent desired and permitted under the receivables loan agreement. The borrower issues a note to the transferor for the difference between the purchase price the receivables 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 0.85% of outstanding borrowings. In addition, we are required to pay a fee of 0.40% 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). We had no outstanding borrowings under this facility as of December 31, 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 December 31, 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 December 31, 2004.

In addition to the receivables facility described above as amended, certain of our European subsidiaries entered into receivables financing arrangements in December 2003, January 2004 and December 2004. We have approximately €78 million available for a term of one year through factoring arrangements in which customers send bills of exchange directly to the bank. We also have two receivable financing arrangements with availabilities of €75 million and £40 million, respectively. Each of these arrangements is available for a term of one year and each involves a separate wholly-owned special purpose vehicle which purchases trade receivables from its domestic affiliates and sells those trade receivables to a domestic bank. These financing arrangements provide short-term financing to meet our liquidity needs.

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, patent, product liability, environmental and occupational safety and health law matters. We face an inherent business risk of exposure to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future. In addition, our costs to defend the product liability claims have increased over time.

In October 2000, Kelsey-Hayes Company (formerly known as Fruehauf Corporation) was served with a grand jury subpoena relating to a criminal investigation being conducted by the U.S. Attorney for the Southern District of Illinois. The U.S. Attorney has informed us that the investigation relates to possible wrongdoing by Kelsey-Hayes Company and others involving certain loans made by Kelsey- Hayes Company’s then-parent corporation to Fruehauf Trailer Corporation, the handling of the trailing liabilities of Fruehauf Corporation and actions in connection with the 1996 bankruptcy of Fruehauf Trailer Corporation. Kelsey-Hayes Company became a wholly owned subsidiary of Old TRW upon Old TRW’s acquisition of Lucas Varity in 1999 and became our wholly owned subsidiary in connection with the Acquisition. We have cooperated with the investigation and are unable to predict the outcome of the investigation at this time.

In 2001, Ford Motor Company recalled approximately 1.4 million Ford light- and heavy-duty trucks, SUVs, minivans and large passenger vehicles to inspect and, if necessary, to replace certain front seat belt buckle assemblies. Subsequent to the recall, the National Highway Traffic Safety Administration (“NHTSA”) and Ford received complaints and warranty claims alleging seat belt buckle failure after passing the original recall inspection service. On or about February 18, 2005, NHTSA notified Ford that it had opened an Engineering Analysis to analyze field performance of those vehicles that Ford dealers passed (determined to be functioning properly) using the recall inspection test. A subsidiary of the Company supplied the front seat belt assemblies that were involved in the recall and is assisting Ford in responding to the Engineering Analysis. At this time, the Company is unable to predict the outcome of this investigation, or the impact on its results of operations or financial condition, if any.

certain components sold by our subsidiaries. We believe that the majority of the claimants were assembly workers at the major U.S. automobile manufacturers. The vast majority of these claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. We believe that, to the extent any of the products sold by our subsidiaries and at issue in these cases contained asbestos, the asbestos was encapsulated. Based upon several years of experience with such claims, we believe that only a small proportion of the claimants has or will ever develop any asbestos-related impairment.

Neither our settlement costs in connection with asbestos claims nor our average annual legal fees to defend these claims have been material in the past. These claims are strongly disputed by us and it has been our policy to defend against them aggressively. We have been successful in obtaining the dismissal of many cases without any payment whatsoever. Moreover, there is significant insurance coverage with solvent carriers with respect to these claims. However, while our costs to defend and settle these claims in the past have not been material, we cannot assure you that this will remain so in the future.

We believe that the ultimate resolution of the foregoing matters will not have a material effect on our financial condition or results of operations.

Other Matters

Additional Provisions of the Note Purchase and Settlement Agreement. Northrop agreed to pay directly to AI LLC (for the benefit of AI LLC and certain other stockholders) an aggregate of approximately $53 million in respect of a contractual indemnification obligation relating to the settlement of certain cash OPEB payments. Under the terms of the Master Purchase Agreement, Northrop was required to make such payments, following the Company’s initial public offering, to the Company’s non-employee stockholders as of the date of the closing of the Acquisition who remain stockholders as of the date of such payment, in proportion to their beneficial ownership of the Company’s voting securities as of such date of payment. AI LLC in turn had agreed to share such payments with certain other pre-initial public offering stockholders. Of the $53 million payment from Northrop to AI LLC, an aggregate of $1.2 million was paid by AI LLC to certain pre-initial public offering stockholders (including employees and executive officers) in proportion to their share ownership as a return of their initial capital investment.

In addition, pursuant to the Note Purchase and Settlement Agreement, (i) the Company caused its salaried pension plan to pay approximately $21 million (plus associated earnings since the Acquisition) to the salaried pension plan of a subsidiary of Northrop in connection with the original agreement (at the time of the Acquisition) regarding the split of pension assets at the time of the Acquisition and (ii) the Company’s salaried pension plan reimbursed such Northrop subsidiary’s salaried pension plan for approximately $5 million in benefits which it paid to the Company’s plan participants. Such payments had no impact on the Company’s financial statements as the payments were trust-to-trust transfers.

The Note Purchase and Settlement Agreement also clarifies certain ongoing indemnification matters under the Master Purchase Agreement entered into in connection with the Acquisition, amends certain terms under the related employee matters agreement to clarify the intent of the parties and settles certain matters relating to such agreement. The settlement of the matters relating to the employee matters agreement resulted in the reduction in short-term debt as of December 31, 2004 referenced below.

The Company reduced goodwill by $128 million as of December 31, 2004 related to settlement of the foregoing matters. The $128 million consisted of $35 million in short-term debt for settlement of certain matters relating to the employee matters agreement, net of other receivables for contractual matters recorded at the Acquisition, $40 million ascribed to the Released Claims and $53 million for the cash OPEB payments.

The Note Purchase and Settlement Agreement contains such other releases and terms as are customary for agreements of this kind.

Significant Shareholder. Blackstone beneficially owns approximately 57% of our common stock. As a result, Blackstone has the power to control all matters submitted to our stockholders, elect our directors and exercise control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders regardless of whether or not other stockholders believe

that any such transactions are in their own best interests. For example, Blackstone could cause us to make acquisitions that increase the amount of our indebtedness or sell revenue-generating assets. Additionally, Blackstone is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Blackstone may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Blackstone continues to own a significant amount of the outstanding shares of our common stock, it will continue to be able to strongly influence or effectively control our decisions.

Recent Accounting Pronouncements

See Note 2 to the accompanying Consolidated and Combined Financial Statements for a discussion of recent accounting pronouncements.

Outlook

For full-year 2005, the Company expects revenue in the range $12.3 to $12.7 billion and earnings per diluted share in the range of $1.50 to $1.75, reflecting a less favorable production environment and the impact of higher raw material prices as compared to a year ago. This guidance range includes approximately $3 million of expenses related to refinancing transactions initiated in the fourth quarter of 2004. This guidance also includes net charges of approximately $35 million related to various restructuring actions which are partially offset by pension plan curtailment gains recognized as a result of certain restructuring actions. Additionally, the Company expects capital expenditures to total approximately 4% of sales for the year.

We expect an annual effective tax rate of approximately 45% to 50% for 2005. This effective tax rate guidance is dependent on several assumptions, including the level and mix of future income by taxing jurisdiction, current enacted global corporate tax rates and global corporate tax laws remaining constant. Changes in tax law and rates could have a significant impact on the effective rate. The overall effective tax rate is equal to consolidated tax expense as a percentage of consolidated earnings before tax. However, tax expense and benefits are not recognized on a global basis but rather on a jurisdictional basis. We are in a position whereby losses incurred in certain jurisdictions provide no current financial statement benefit. In addition, certain taxing jurisdictions have statutory rates greater than or less than the Unites States statutory rate. As such, changes in the mix of projected earnings between jurisdictions could have a significant impact on our overall effective tax rate.

Annually, we purchase large quantities of ferrous metals, resins and textiles 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 and resin/yarn markets on a worldwide basis. In addition, and to a much lesser extent, inflationary pressure is now extending into other commodities. We are also concerned about the viability of the Tier 2 and Tier 3 supply base as they face these inflationary pressures. We are monitoring the situation closely and where applicable are working with suppliers and customers to mitigate the potential effect on our financial results. However, our efforts to mitigate the effects may be insufficient and the pressures may worsen, thus potentially having a negative impact on our financial results.

For the first quarter of 2005, the Company expects revenue of approximately $3.1 billion and earnings per diluted share in the range of $0.24 to $0.38. This guidance range includes approximately $3 million of expenses related to refinancing transactions initiated in the fourth quarter of 2004. Additionally, first quarter guidance includes restructuring costs of approximately $30 million, which constitutes a major share of the Company’s planned restructuring for the year.

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 below.

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 and in our other filings with the Securities and Exchange Commission (“SEC”). We undertake no obligation to update or revise forward-looking statements which have been made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

Risk Factors

Important factors that could cause actual results to differ materially from the Company’s expectations are disclosed in this report, including, but not limited to, the following:


	•	Escalating pricing pressures from our customers may adversely affect our business;

	•	Severe inflationary pressures impacting the ferrous metal markets and extending to other commodities may adversely affect our profitability;

	•	Our available cash and access to additional capital may be limited by our substantial leverage;

	•	Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly;

	•	The cyclicality of automotive production and sales could adversely affect our business;

	•	Our business would be materially and adversely affected if we lost any of our largest customers;

	•	Loss of market share by domestic vehicle manufacturers may adversely affect our results in the future;

	•	We may incur material losses and costs as a result of product liability and warranty and recall claims that may be brought against us;

	•	Our pension and other post-retirement benefits expense and underfunding levels of our pension plans could materially increase;

	•	Significant strengthening of the U.S. dollar could materially impact our results of operations;

	•	We are subject to other risks associated with our non-U.S. operations including expropriation and terrorism;

	•	Deterioration of our supply base could have an adverse effect on our ability to supply products to our customers;

	•	Work stoppages or other labor issues at our customers’ facilities or at our facilities could adversely affect our operations;

	•	We have recorded a significant amount of goodwill and other identifiable intangible assets, which may be impaired in the future;

	•	Our expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors;


	•	We may be adversely affected by environmental and safety regulations or concerns;

	•	Developments or assertions by or against us relating to intellectual property rights and intellectual property licenses could materially impact our business;

	•	Our ability to operate our company effectively could be impaired if we fail to attract and retain key personnel; and

	•	Because Blackstone controls us, the influence of our public shareholders over significant corporate actions will be limited, and conflicts of interest between Blackstone and us or our public shareholders could arise in the future.


ITEM 7A.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS*

Our primary market risk arises from fluctuations in foreign currency exchange rates, interest rates and commodity prices. We manage foreign currency exchange rate risk, interest rate risk, and to a lesser extent commodity price risk, by utilizing various derivative instruments and limit the use of such instruments to hedging activities. We do not use such instruments for speculative or trading purposes. If we did not use derivative instruments, our exposure to such risk would be higher. We are exposed to credit loss in the event of nonperformance by the counterparty 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 fully satisfy their obligations under the contracts.

Foreign Currency Exchange Rate Risk. We utilize derivative financial instruments to manage foreign currency exchange rate risks. Forward contracts and, to a lesser extent, options are utilized to protect our cash flow from adverse movements in exchange rates. These derivative instruments are only used to hedge transactional exposures. 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. As of December 31, 2004, approximately 23% of our total debt was in foreign currencies compared to 21% at December 31, 2003.

Interest Rate Risk. We are subject to interest rate risk in connection with the issuance of variable- and fixed-rate debt. In order to manage interest costs, we utilize interest rate swap agreements to exchange fixed- and variable-rate interest payment obligations over the life of the agreements. Our exposure to interest rate risk arises primarily from changes in London Inter-Bank Offered Rates (LIBOR). 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. As of December 31, 2004, approximately 64% of our total debt was at variable interest rates compared to 40% at December 31, 2003.

Sensitivity Analysis. We utilize a sensitivity analysis model to calculate the fair value, cash flows or income statement impact that a hypothetical 10% change in market rates would have on our debt and derivative instruments. For derivative instruments, we utilized applicable forward rates in effect as of December 31, 2004 to calculate the fair value or cash flow impact resulting from this hypothetical change in market rates. The results of the sensitivity model calculations follow:

Assuming a 10%

Favorable

Increase

Decrease

(Unfavorable)

in Prices/Rates

Change in

(Dollars in millions)

Market Risk


		share in such markets. Although we do have business with the Asian OEMs, our customer base is more heavily weighted towards the Big Three. We believe that suppliers currently serving Asian OEMs and those suppliers that are able to increase their sales with such customers will be well positioned in the North American and European markets.

	•	Recalls. Based on tighter federal requirements for reporting defects, as well as the growing re-use of parts across platforms, OEMs have experienced increasing recall campaigns in recent years, including a record number of such recalls in 2004. OEMs often require suppliers to share in the cost of recalls. Suppliers able to minimize recall expenses through the delivery of high quality products should be well positioned in the marketplace. Therefore, we utilize Six Sigma and Operational Excellence as leading quality improvement programs throughout our operations.


	computation of 2003 diluted earnings per share because their effect is antidilutive due to the net loss reflected for such period.

(3)	Total debt excludes any off-balance sheet borrowings under receivables facilities. As of December 31, 2004 and 2003, we had no advances outstanding under our receivables facilities.

(4)	The Predecessor’s receivables facility was an off-balance sheet arrangement. Our receivables facility can be treated as a general financing agreement or as an off-balance sheet arrangement depending on the level of loans to the borrower as further described in “ITEM 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-balance Sheet Arrangements.”