e10vk

10-K 1 k02389e10vk.htm ANNUAL REPORT FOR FISCAL YEAR ENDED 12/31/2005 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 fiscal year ended December 31, 2005
		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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated file þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 1, 2005, 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 $805,875,822 based on the closing sale price of the registrant’s Common Stock as reported on the New York Stock Exchange on that date. As of February 8, 2006, the number of shares outstanding of the registrant’s Common Stock was 99,343,692.

Documents Incorporated by Reference

Certain portions, as expressly described in this report, of the Registrant’s Proxy Statement for the 2006 Annual Meeting of the Stockholders, to be filed within 120 days of December 31, 2005, 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 1A.	Risk Factors		12
Item 1B.	Unresolved Staff Comments		15
Item 2.	Properties		15
Item 3.	Legal Proceedings		16
Item 4.	Submission of Matters to a Vote of Security Holders		17
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		17
Item 6.	Selected Financial Data		19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 7A.	Quantitative and Qualitative Disclosures about Market Risks		45
Item 8.	Financial Statements and Supplementary Data		46
	Reports of Independent Registered Public Accounting Firm		89
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		92
Item 9A.	Control and Procedures		92
Item 9B.	Other Information		92
PART III
Item 10.	Directors and Executive Officers of the Registrant		92
Item 11.	Executive Compensation		93
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		93
Item 13.	Certain Relationships and Related Transactions		93
Item 14.	Principal Accounting Fees and Services		93
PART IV
Item 15.	Exhibits and Financial Statement Schedules		94
First Supplemental Trust Deed, dated February 1, 2006
Incremental Facility Amendment dated as of November 18, 2005
List of Subsidiaries
Consent of Ernst & Young LLP
Certification Pursuant to Rule 13a-14(a) to Section 302
Certification Pursuant to Rule 13a-14(a) to Section 302
Certification Pursuant to 18 U.S.C. to Section 906
Certification Pursuant to 18 U.S.C. to Section 906

PART I


ITEM 1.	*BUSINESS*

The Company

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. We conduct substantially all of our 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). 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). We are primarily a “Tier 1” supplier (a supplier which sells to OEMs). In 2005, approximately 85% of our end-customer sales were to major OEMs. Our 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 Grumman Corporation (“Northrop”) on December 11, 2002.

Change in Ownership. Old TRW entered into an Agreement and Plan of Merger with 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 (the “Common Stock”). In connection with our initial public offering, we effected a 100 for one stock split of the 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 held approximately 56.7%, an affiliate of

Northrop held approximately 17.2% and our management group held approximately 1.7% of our Common Stock.

Share Repurchases and Issuances in 2005. On March 11, 2005, we repurchased from an affiliate of Northrop 7,256,500 shares of Common Stock for approximately $143 million in cash. These shares were immediately retired following the repurchase. As a result of the repurchase and after considering the share issuance referenced below, the Northrop affiliate held 9.9% of the outstanding Common Stock, down from 17.2%.

Separately, on March 11, 2005, we sold to T. Rowe Price Group, Inc., as investment adviser to certain mutual funds and institutional accounts, 5,256,500 newly issued shares of Common Stock for approximately $103 million in cash. On March 11, 2005, we also sold to certain investment advisory clients of Wellington Management Company, llp., 2,000,000 newly issued shares of Common Stock for approximately $40 million in cash. We filed a registration statement with the Securities and Exchange Commission for the registration of the resale of these newly issued shares. Pursuant to the registration statement, the holders of those shares are able to sell their shares of Common Stock into the market from time to time.

We used the $143 million of proceeds we received from these share issuances initially to return cash and/or reduce liquidity line balances to the levels that existed immediately prior to the time the share purchase from an affiliate of Northrop referenced above took place. On May 3, 2005, a portion of the proceeds from these share issuances was then used to repurchase €48 million principal amount of the Company’s 10¹/8% Senior Notes.

Financial and Operating Information

Segment 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 table below summarizes certain financial information for our operating segments.


			Successor									Predecessor

			Years Ended						Ten Months			Two Months
			December 31,						Ended			Ended
									December 31,			February 28,
			2005			2004			2003			2003

			(Dollars in millions)
Sales to external customers:
	Chassis Systems		$	7,197		$	6,950		$	5,424		$	1,110
	Occupant Safety Systems			3,755			3,438			2,751			555
	Automotive Components			1,691			1,623			1,260			251

Total sales			$	12,643		$	12,011		$	9,435		$	1,916

Segment earnings before taxes:
	Chassis Systems		$	258		$	258		$	127		$	46
	Occupant Safety Systems			314			327			216			53
	Automotive Components			88			102			90			26

Segment earnings before taxes				660			687			433			125
Corporate expense and other				(94	)		(104	)		(93	)		(28	)
Financing costs				(231	)		(252	)		(312	)		(47	)
Loss on retirement of debt				(7	)		(167	)		(31	)		—

		Earnings (losses) before income taxes	$	328		$	164		$	(3	)	$	50

See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 21 to the consolidated and combined financial statements for a discussion of segment earnings before taxes.

Sales by Product Line. Our 2005 sales by product line are as follows:


Product Line	Percentage of Sales

Steering gears and systems		16.3	%
Air bags		14.2	%
Foundation brakes		14.1	%
ABS and other brake control		9.3	%
Seat belts		7.4	%
Aftermarket		7.2	%
Crash sensors and other safety and security electronics		5.8	%
Engine valves		4.9	%
Linkage and suspension		4.7	%
Body controls		4.4	%
Chassis modules		3.9	%
Engineered fasteners and plastic components		3.4	%
Steering wheels		3.2	%
Other		1.2	%

Sales by Geography. Our 2005 sales by geographic region are as follows:


Geographic Region	Percentage of Sales

Europe		55.1	%
North America		36.2	%
Rest of the World		8.7	%

See Note 21 to our consolidated and combined financial statements included in this report for additional product sector and geographical information.

Business Developments and Industry Trends

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, 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 focused range of safety-related product lines and strong systems integration skills. These traits enable us to provide comprehensive, systems-based solutions for our OEM customers. We have a broad and established global presence and sell to major OEMs across all of the world’s major vehicle producing regions. We believe our diversified business mitigates our exposure to the risks of any one geographic economy, product line or major customer concentration. It also enables us to extend our portfolio of products and new technologies across our customer base and geographic regions, and provides us the necessary scale to optimize our cost structure.

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.):


	•	Asian OEM Market Share. In recent years, Ford Motor Company, General Motors Corporation and, to a lesser extent, the Chrysler unit of DaimlerChrysler AG (the “Big Three”) have seen a steady

decline in their market share for vehicle sales in North America and Europe, with Asian OEMs increasing their share in such markets. Although we do have business with the Asian OEMs, our customer base is more heavily weighted toward the Big Three.

• Inflationary Pressures and Supply Base. Our industry continues to experience increases in costs of resins, yarns and other petroleum-based products, as well as higher energy costs. Costs of other commodities such as ferrous metals also remain a worry despite declines in costs from recent highs. Therefore, overall commodity inflation pressures remain a significant concern for our industry and business and have placed a considerable operational and financial burden on us and the industry. We expect such inflationary pressures to continue.


	In addition, the inflationary environment surrounding resins, yarns, petroleum-based products and ferrous metals has resulted in concern about the viability of the Tier 2 and Tier 3 supply base as they face these inflationary pressures.


	•	Restructuring Initiatives. As a result of the market share losses and inflationary pressures discussed above, most major OEMs and Tier 1 suppliers have embarked upon multi-year restructuring programs in order to realign their cost structures in the face of these issues. Some of these restructuring programs have involved reorganizations in bankruptcy.

	•	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. We and other suppliers have been forced to reduce prices in both the initial bidding process and throughout long-term supply 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.

	•	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, the Alliance of Automobile Manufacturers and the Insurance Institute for Highway Safety announced voluntary performance criteria which 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.


	In October 2005, the National Highway Safety Traffic Administration (“NHTSA”) updated its mandate for the assembly onto vehicles of a direct tire pressure monitoring system, capable of detecting when one or more tires are significantly under-inflated. The phase-in period for compliance is as follows: 20% of light vehicles are required to comply with the standard during the period from October 5, 2005 to August 31, 2006; 70% during the period from September 1, 2006 to August 21, 2007; and all light vehicles thereafter. In September 2004, NHTSA 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.


	We have also seen certain vehicle manufacturers shift away from their funding of development contracts for new technology. We expect this trend to continue in 2006, thereby causing our engineering and research and development expenses to increase.


	•	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 generally refers to replacing mechanical with electronic components and integration of mechanical and electrical functions within the vehicle. This 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.

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 Advics, Bosch, Continental-Teves, Delphi, Koyo Seiko, Visteon, and ZF in the Chassis Systems segment; Autoliv, Bosch, Delphi, Key Safety, and Takata, in the Occupant Safety Systems segment; and Delphi, Eaton, ITW, Kostal, Nifco, Raymond, Textron, Tokai Rika, and Valeo in the Automotive Components segment.

Sales and Products by Segment

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


		Years Ended December 31,

		2005					2004					2003(1)

		Sales		%			Sales		%			Sales		%

		(Dollars in millions)
Chassis Systems		$	7,197		57.0	%	$	6,950		57.9	%	$	6,534		57.6	%
Occupant Safety Systems			3,755		29.7	%		3,438		28.6	%		3,306		29.1	%
Automotive Components			1,691		13.3	%		1,623		13.5	%		1,511		13.3	%

	Total Sales	$	12,643		100.0	%	$	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 2005 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		Four-wheel ABS, electronic vehicle stability control systems, active cruise control systems, actuation boosters and master cylinders, electronically controlled actuation
Linkage and 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
Modules		Brake modules, corner modules, pedal box modules, strut modules, front cross-member modules, rear axle modules


	*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

Engine Valves		Engine Valves, valve train components, electro-magnetic valve actuation
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
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, linkage and suspension, and modules. 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 (1) 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; and (2) integration of active and passive safety 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 towards (1) 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; and (2) integration of active and passive safety systems.

Automotive Components. Our Automotive Components segment focuses on the design, manufacture and sale of engine valves, body controls, 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 all of the world’s 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.

End-customer sales (by OEM group) that constitute 10% or more of our sales for the years ended December 31, 2005 and 2004 were:


		Percentage of Sales

OEM Group	OEMs	2005			2004

Ford	Ford, Land Rover, Jaguar, Aston-Martin, Volvo, Mazda		16.1	%		17.2	%
DaimlerChrysler	Chrysler, Mercedes, Smart, Mitsubishi		14.4	%		15.3	%
Volkswagen	Volkswagen, Audi, Seat, Skoda, Bentley		14.3	%		14.2	%
General Motors	General Motors, Opel, Saab, Isuzu, Subaru		11.3	%		11.1	%
All Other			43.9	%		42.2	%

We also sell products to the global aftermarket as replacement parts for current production and older vehicles. For each of the years ended December 31, 2005 and 2004, our sales to the aftermarket represented approximately 7% of our total sales. 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, joint ventures and licensees.

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 an international trade show in Frankfurt. 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 25 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

Ownership

Country

Name

Percentage

Products

2005 Sales

(Dollars in millions)

Brazil

SM-Sistemas Modulares Ltda.

50%

Brake modules

16.6

China

Shanghai TRW Automotive Safety Systems Co., Ltd.

50%

Seat belt systems, air bags and steering wheels

24.1

CSG TRW Chassis Systems Co., Ltd.

50%

Foundation brakes

19.4

India

Brakes India Limited

49%

Foundation brakes, actuation brakes, valves and hoses

236.2

Rane TRW Steering Systems Limited

50%

Steering gears, systems and components and seat belt systems

78.2

Spain

Mediterranea de Volantes SL

50%

Steering wheels

0.2

(1)

United States

Methode Lucas Controls, Inc.

50%

Multi-functional column-mounted controls (pressed parts and key moldings for column switchgear)

15.2

EnTire Solutions, LLC

50%

Direct tire pressure monitoring systems

42.6


(1)	Sales for Mediterranea de Volantes SL are for the two months following our recently completed acquisition of Dalphi Metal Espana, S.A.

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” 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 portfolio of 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 numerous 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 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. As new models are typically introduced during the third quarter, automotive production traditionally is lower during that period. 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 5,000 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 and innovative 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:


		Years Ended
		December 31,

		2005		2004

		(Dollars in
		millions)
Research and development		$	203	$	174
Engineering			576		540

	Total	$	779	$	714

Total research, development and engineering costs as a percentage of sales were 6.2% for the year ended December 31, 2005 as compared to 5.9% for the year ended December 31, 2004.

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. Recently, we have seen certain vehicle manufacturers shift away from their funding of development contracts for new technology. We expect this trend to continue, thereby causing our engineering and research and development expenses to increase.

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 continue to see significant inflationary pressures in the cost of ferrous metals, resin/yarn and other petroleum-based products, as well as higher energy costs. 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 such continued inflation will not have a material adverse effect. Although 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, the possibility of shortages exist especially in light of the weakened state of the supply base described above.

Employees

As of December 31, 2005, we had approximately 63,100 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 21,300 were employed in North America, approximately 33,800 were employed in Europe, approximately 4,400 were employed in South America and approximately 3,600 were employed in Asia. Approximately 16,900 of our employees are salaried and approximately 46,200 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, 2005, we had reserves for environmental matters of $64 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 2005, we received approximately $4 million under such environmental 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 2006 and 2007 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 1A.	*RISK FACTORS*


	*Deteriorating financial condition of certain of our customers may adversely affect our business.*

Certain of our customers are facing structural issues and negative industry trends resulting in deteriorating financial conditions. Some of these customers are addressing these problems through restructuring their businesses. In some cases, this restructuring includes significant capacity reductions and/or reorganization under bankruptcy laws. Substantial restructuring initiatives by our major customers could have a ripple effect throughout our industry and may impact our business and our common suppliers.


	*Loss of market share by the Big Three may adversely affect our results in the future.*

Recently, the Big Three have been losing market share for vehicle sales in North America and Europe. At the same time, Asian vehicle manufacturers have increased their share in such markets. Although we do have business with the Asian vehicle manufacturers, our customer base is more heavily weighted towards the Big Three. Accordingly, if this trend of Big Three loss in market share continues and our share of business with other vehicle manufacturers does not increase, our results could be adversely affected.


	*Escalating pricing pressures from our customers may adversely affect our business.*

Pricing pressure in the automotive supply industry has been substantial and is likely to continue. Virtually all vehicle manufacturers seek price reductions in both the initial bidding process and during the term of the contract. 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. 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.


	*Commodity inflationary pressures may adversely affect our profitability and the viability of our Tier 2 and Tier 3 supply base.*

The cost of some of the commodities we use in our business has increased. Ferrous metals, resins, yarns and other petroleum-based products have become more expensive. This put significant operational and financial burdens on us and our suppliers in both 2004 and 2005. We expect this pressure to continue in 2006. We are working with our suppliers and customers to lessen the impact of increasing commodity costs. However, it is usually difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases. Furthermore, our suppliers may not be able to handle the commodity cost increases and still perform as we expect. In fact, we have seen the number of bankruptcies or insolvencies increase due in part to the recent inflationary pressures. While the unstable condition of some of our suppliers has not led to any significant disruptions so far, it could lead to delivery delays, production issues or delivery of non-conforming products by our suppliers in the future.


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

For the year ended December 31, 2005, sales to our four largest customers on a worldwide basis were approximately 56% of our total sales. Although business with each customer is typically split among numerous contracts, if we lost a major customer or that customer significantly reduced its purchases of our products, there could be a material adverse affect on our business, results of operations and financial condition.


	*Work stoppages or other labor issues at the facilities of our customers or other suppliers could adversely affect our operations.*

The turbulence in the automotive industry and actions taken by our customers and other suppliers to address negative industry trends may have the side effect of exacerbating labor relations problems at those companies. If any of our customers experience a material work stoppage, that customer may halt or limit the purchase of our products. Similarly, a work stoppage at another supplier could interrupt production at our customer which would have the same effect. This could cause us to shut down production facilities relating to

those products, which could have a material adverse effect on our business, results of operations and financial condition.


	*Our variable rate indebtedness exposes us to interest rate risk, which could cause our debt costs to increase significantly.*

A majority of our borrowings, including borrowings under TRW Automotive Inc.’s senior credit facilities, are at variable rates of interest and expose us to interest rate risk. As of December 31, 2005, approximately 60% of our total debt was at variable interest rates. If interest rates increase, the amount we are required to pay on our variable rate indebtedness would increase even though the amount borrowed remained the same.


	*Continued strengthening of the U.S. dollar could materially impact our results of operations.*

In 2005, over half of our sales originated outside the United States. We translate sales and other results denominated in foreign currencies into U.S. dollars for our consolidated financial statements. This translation is based on average exchange rates during a reporting period. During times of a strengthening U.S. dollar, our reported international sales and earnings would be reduced because foreign currencies may translate into fewer U.S. dollars.


	*Our available cash and access to additional capital may be limited by our substantial debt.*

We have a significant amount of debt. This amount of debt may limit our ability to obtain additional financing for our business. It may also limit our ability to adjust to changing market conditions because of the covenants and restrictions in the debt. In addition, we have to devote substantial cash to the payment of interest and principal on the debt, which means that cash may not be used for other of our business needs. We may be more vulnerable to an economic or industry downturn than a company with less debt.


	*The cyclicality of automotive production and sales could adversely affect our business.*

Automotive production and sales are highly cyclical and depend on general economic conditions, consumer spending and preferences, labor relations issues, regulatory requirements, trade agreements and other factors. The volume of automotive production has fluctuated from year to year, which leads to fluctuations in the demand for our products. Any significant economic decline that results in a reduction in automotive production and sales by vehicle manufacturers could have a material adverse effect on our results of operations.


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

In our business, we are exposed to product liability and warranty claims. In addition, we may be required to participate in a recall of a product. Vehicle manufacturers are increasingly looking to their suppliers for contribution when faced with product liability, warranty and recall claims. In addition, vehicle manufacturers have experienced increasing recall campaigns in recent years. Product liability, warranty and recall costs may have a material adverse effect on our financial condition.


	*Our pension and other post-retirement benefits expense and the funding requirements of our pension plans could materially increase.*

Most of our employees participate in defined benefit pension plans or retirement/termination indemnity plans. The rate at which we are required to fund these plans depends on certain assumptions which depend in part on market conditions. As market conditions change, these assumptions may change, resulting in a decline in pension asset values. Future declines could materially increase the necessary funding status of our plans, and may require us to contribute more to these plans earlier than we anticipated. Also, this could significantly increase our pension expenses and reduce our profitability.

We also sponsor other post-retirement benefit (“OPEB”) plans for most of our U.S. and some of our non-U.S. employees. We fund our OPEB obligations on a pay-as-you-go basis and have no plan assets. If health care costs in the future increase more than we anticipated, our actuarially determined liability and our related OPEB expense could increase along with future cash outlays.


	*We are subject to risks associated with our non-U.S. operations.*

We have significant manufacturing operations outside the United States, including joint ventures and other alliances. International operations involve risks, including exchange controls and currency restrictions, currency fluctuations and devaluations, changes in local economic conditions, changes in laws and regulations and unsettled political conditions and possible terrorist attacks against United States’ or other interests.

These and other factors may have a material adverse effect on our international operations or on our business, results of operations and financial condition.


	*We have recorded a significant amount of goodwill and other identifiable intangible assets, which may become impaired in the future.*

We have recorded a significant amount of goodwill and other identifiable intangible assets, including customer relationships, trademarks and developed technologies. Goodwill and other net identifiable intangible assets were approximately $3.1 billion as of December 31, 2005, or 30% of our total assets. Goodwill, which represents the excess of cost over the fair value of the net assets of the businesses acquired, was approximately $2.3 billion as of December 31, 2005, or 22% of our total assets.

Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products sold by our business, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge that is included in operating income. We are subject to financial statement risk in the event that goodwill or other identifiable intangible assets become impaired.


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

The overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax. However, tax expense and benefits are not recognized on a global basis but rather on a jurisdictional or legal entity basis. Losses in certain jurisdictions provide no current financial statement tax benefit. In addition, certain taxing jurisdictions have statutory rates greater than or less than the United States. As a result, changes in the mix of projected earnings between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.


	*We may be adversely affected by environmental and safety regulations or concerns.*

Laws and regulations governing environmental and occupational safety and health are complicated, change frequently and have tended to become stricter over time. As a manufacturing company, we are subject to these laws and regulations both inside and outside the United States. We may not be in complete compliance with such laws and regulations at all times. Our costs or liabilities relating to them may be more than the amount we have reserved, which difference may be material. We have spent money to comply with environmental requirements. In addition, certain of our subsidiaries are subject to pending litigation raising various environmental and human health and safety claims, including certain asbestos-related claims. While our annual 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.


	*Developments or assertions by or against us relating to intellectual property rights could materially impact our business.*


	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.

Currently an affiliate of Blackstone beneficially owns approximately 57% of our outstanding shares of common stock and has reached an agreement with Northrop pursuant to which Northrop will vote its 9.9% interest in us in accordance with Blackstone’s instructions. 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 has 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.


ITEM 1B.	*UNRESOLVED STAFF COMMENTS*

None.


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 24 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, Tunisia, Turkey, and the United Kingdom. Approximately 50% of our principal facilities are used by the Chassis Systems segment, 26% are used by the Occupant Safety Systems segment and 24% 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 57% of such facilities are owned, 38% are leased, and 5% 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 January 31, 2006 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. This chart includes facilities related to our recently completed acquisition of Dalphi Metal Espana, S.A. (“Dalphimetal”).

Chassis Systems


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

Research and Development		4		4		2		1		11
Manufacturing(1)		21		31		12		3		67
Warehouse		1		6		1		1		9
Office		3		8		7		—		18

Total		29		49		22		5		105

Occupant Safety Systems


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

Research and Development		3		5		—		—		8
Manufacturing(1)		10		23		—		2		35
Warehouse		1		5		—		—		6
Office		1		5		—		—		6

Total		15		38		—		2		55

Automotive Components


Principal Use of Facility	North America		Europe		Asia Pacific		Other		Total

Research and Development		1		—		—		—		1
Manufacturing(1)		9		23		8		3		43
Warehouse		2		1		—		—		3
Office		2		—		—		—		2

Total		14		24		8		3		49


(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 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. The Company has cooperated with this investigation, but is not aware of any activity on this investigation since the fall of 2002. Due to this inactivity, the Company no longer believes that this investigation is ongoing or will have a financial impact on the Company.

TRW Safety Systems Inc., a subsidiary of the Company (“TSSI”), received a letter from the Federal Aviation Administration (the “FAA”) dated June 28, 2005 alleging that it violated the federal Hazardous Material Regulations and/or the International Civil Aviation Organization Technical Instructions by allegedly offering undeclared hazardous materials for shipment on May 5, 2005, from its El Paso, Texas warehouse to the TSSI facility in Romeo, Michigan. The Company received a letter from the FAA dated September 30,

2005 proposing a civil penalty of an aggregate of $20,000 in total for these alleged violations. This matter was settled with a total payment from the Company of $8,500 on January 9, 2006.

While certain of our subsidiaries have been subject in recent years to asbestos-related claims, we believe that such claims will not have a material adverse effect on our financial condition or results of operations. In general, these claims seek damages for illnesses alleged to have resulted from exposure to asbestos used in certain components sold by our subsidiaries. We believe that the majority of the claimants were assembly workers at the major U.S. automobile manufacturers. The vast majority of these claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. We believe that, to the extent any of the products sold by our subsidiaries and at issue in these cases contained asbestos, the asbestos was encapsulated. Based upon several years of experience with such claims, we believe that only a small proportion of the claimants has or will ever develop any asbestos-related impairment.

Neither our settlement costs in connection with asbestos claims nor our 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.


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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES*

Our common stock is listed on the New York Stock Exchange under the symbol “TRW”. As of February 8, 2006, we had 99,343,692 shares of common stock, $.01 par value, outstanding (99,348,360 shares issued less 4,668 shares held as treasury stock) and 226 holders of record of such common stock. The transfer agent and registrar for our common stock is National City Bank.

The tables below show the high and low sales prices for our common stock as reported by the New York Stock Exchange, for each quarter in 2005 and 2004.


	Price Range of
	Common Stock

Year Ended December 31, 2005	High		Low

4^thQuarter	$	29.49	$	23.52
3^rdQuarter	$	30.00	$	24.14
2^ndQuarter	$	24.74	$	17.64
1^stQuarter	$	21.70	$	18.75


	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

We have no programs to repurchase shares of our common stock. The independent trustee of our 401(k) plans does purchase shares in the open market to fund investments by employees in our common stock, one of the investment options available under such plans, and matching contributions in Company stock to employee investments. In addition, our stock incentive plan permits payment of an option exercise price by means of cashless exercise through a broker and for the satisfaction of tax obligations through stock withholding. However, the Company does not believe such purchases or transactions are issuer repurchases for the purposes of this Item 5 of this Report on Form 10-K. In addition, although our stock incentive plan also permits the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding, there was no such withholding in the fourth quarter of 2005.

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, 2005.

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)

10,899,110

16.49

5,865,059

Equity compensation plans not approved by security holders

N/A

Total

10,899,110

16.49

5,865,059


(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 FINANCIAL DATA*

The selected financial data of the Successor as of and for the years ended December 31, 2005, December 31, 2004, 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 financial data of the Predecessor for the two months ended February 28, 2003, and as of December 31, 2002 and 2001 and for each of the two 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 period ended December 31, 2001.

The tables 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.


		Successor							Predecessor

		Years Ended				Ten Months			Two Months		Years Ended
		December 31,				Ended			Ended		December 31,
						December 31,			February 28,
		2005		2004		2003			2003		2002		2001

		(In millions, except per share amounts)
Statements of Operations Data:
Sales		$	12,643	$	12,011	$	9,435		$	1,916	$	10,630	$	10,091
Earnings (losses) from continuing operations(1)			204		29		(101	)		31		164		(36	)
Discontinued operations, net of income taxes			—		—		—			—		—		11
Net earnings (losses)		$	204	$	29	$	(101	)	$	31	$	164	$	(25	)
Earnings (Losses) Per Share(2):
Basic earnings (losses) per share:
	Earnings (losses) per share	$	2.06	$	0.30	$	(1.16	)
	Weighted average shares		99.1		97.8		86.8
Diluted earnings (losses) per share:
	Earnings (losses) per share	$	1.99	$	0.29	$	(1.16	)
	Weighted average shares		102.3		100.5		86.8


	Successor						Predecessor

	As of December 31,

	2005		2004		2003		2002		2001

	(Dollars in millions)
Balance sheet data:
Total assets	$	10,230	$	10,114	$	9,907	$	10,948	$	10,287
Total liabilities		8,916		8,944		9,129		8,476		8,712
Total debt (including short-term debt and current portion of long-term debt)(3)		3,236		3,181		3,808		3,925		4,597
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 anti-dilutive 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, 2005, 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.”

On October 27, 2005, we completed our purchase of a 68.4% interest in Dalphi Metal Espana, S.A. (“Dalphimetal”), a European-based manufacturer of airbags and steering wheels. Results of Dalphimetal’s operations have been consolidated into our results since the date of the acquisition.

Executive Overview

Our Business. We are 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. We conduct substantially all of our 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). We are primarily a “Tier 1” supplier, with over 85% of our end-customer sales in 2005 made to major OEMs. We operate our business along three operating segments: Chassis Systems, Occupant Safety Systems and Automotive Components.

During 2005, we achieved net sales growth of 5.3%, to $12.6 billion in 2005 from $12.0 billion in 2004. The increase resulted primarily from a higher level of sales from new product areas and higher volumes on certain platforms, the consolidation of Dalphimetal into our operations during the fourth quarter, and foreign currency translation, partially offset by pricing provided to customers and lower industry production volumes. Operating income for 2005 was $553 million, a decrease of $27 million compared to the prior year operating income. The decrease in operating income resulted from the continued impact of commodity inflation above prior year levels, markedly higher restructuring and asset impairment costs, and rising research and development costs. The decrease in operating income was partially offset by a reduction in administrative and selling expenses due primarily to a reduction in litigation-related reserves, and the benefit of higher sales and cost reduction programs in excess of pricing provided to our customers. Net earnings for 2005 were $204 million as compared to $29 million in 2004. Results for 2005 included a loss on retirement of debt of $7 million compared to losses on retirement of debt totaling $167 million incurred in conjunction with various debt refinancing transactions during 2004.

The Unfavorable Automotive Climate. We achieved our solid 2005 results despite continued unfavorable developments and trends in the automotive and automotive supply industries. These developments and trends include:


	•	a decline in market share for vehicle sales among some of our largest customers, including The Big Three;

	•	the deteriorating financial condition of certain of our customers and the resulting uncertainty as they undergo (or contemplate undergoing) restructuring initiatives, including in certain cases, possible significant capacity reductions and/or reorganization under bankruptcy laws;

	•	continuing pricing pressure from OEMs;

	•	the continued rise in inflationary pressures impacting certain commodities such as resins, chemicals and yarns, despite declines in the cost of ferrous metals from recent all-time highs;

	•	the growing concerns over the economic viability of our Tier 2 and Tier 3 supply base as they face inflationary pressures and financial instability in certain of their customers; and

	•	reduced customer funding of research and development projects.

The effect of these unfavorable trends and developments was mitigated by, among other things, our customer, product and geographic diversity. We also benefited from sales growth, favorable foreign currency translation year over year and a continued emphasis on a high level of restructuring actions and targeted cost reductions throughout our businesses.

In recent years and throughout 2005, the Big Three have seen a steady decline in their market share for vehicle sales in North America and Europe, with Asian OEMs increasing their share in such markets. Although we do have business with the Asian OEMs, our customer base is more heavily weighted toward the Big Three. Further, certain of our customers are undergoing various forms of restructuring initiatives, including reorganization under bankruptcy laws in certain cases, to address certain structural issues specific to their companies and the same negative industry trends that we are experiencing. Substantial restructuring initiatives undertaken by our major customers, such as those recently announced by Ford and GM, could have a ripple effect throughout our industry and may have an impact on our business and our common suppliers. Also, work stoppages or other labor issues that may potentially occur at these customers’ facilities may negatively affect us.

Pricing pressure from our customers is characteristic of the automotive parts industry. This pressure is substantial and will continue. 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 negatively impacted our sales and profit margins and are expected to do so in the future.

During 2005, we saw continued increases in costs of resins, yarns and other petroleum-based products, as well as higher energy costs. Costs of other commodities such as ferrous metals also remain a worry despite declines in costs from recent highs. Therefore, overall commodity inflation pressures remain a significant concern for our business and have placed a considerable operational and financial burden on the Company. We expect such inflationary pressures to continue into the foreseeable future. Accordingly, we continue to work with our suppliers and customers to mitigate the impact of increasing commodity costs. 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. 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 the unstable condition of some of our suppliers has not led to any significant disruptions 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.

We have also seen certain vehicle manufacturers shift away from their funding of development contracts for new technology. We expect this trend to continue in 2006, thereby causing our engineering and research and development expenses to increase.

While we continue our efforts to mitigate the risks described above, there can be no assurances that the results of these efforts in both 2004 and 2005 will continue in the future or that we will not experience a decline in sales, significant strengthening of the U.S. dollar compared to other currencies or increased costs or disruptions in supply, or that these items will not adversely impact our future earnings. In particular, during 2006, we will continue to evaluate the negative industry trends referred to above, including the deteriorating financial condition of certain of our customers and suppliers, and whether additional actions may be required to mitigate those trends. Such actions may include further plant rationalization and global capacity optimization efforts across our businesses.

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 and covenant flexibility. During 2005 and into 2006, we made the following enhancements to our debt and capital structure:


	•	On February 2, 2006, we repurchased all of our subsidiary Lucas Industries Limited’s £94.6 million 10⁷/8% bonds due 2020, for approximately £137 million, or approximately $243 million. We funded the repurchase from cash on hand. The repayment of debt resulted in a pretax charge of approximately £32 million, or approximately $57 million, for loss on retirement of debt, which will be recognized in our first quarter 2006 results.

	•	On January 24, 2006, we reduced the committed amount of our U.S. receivables facility from $400 million to $250 million due to decreased availability under the facility as a result of certain customer credit rating downgrades below investment grade. This reduction in the funding amount reduces the fees on the unused portion of the facility.

	•	On November 18, 2005, we completed the borrowing under the credit facility of an additional $300 million through a term loan B-2. We used the proceeds from this borrowing for general corporate purposes.

	•	On May 3, 2005, we repurchased approximately €48 million principal amount of our 10¹/8% Senior Notes with a portion of the proceeds from the issuance of shares of our Common Stock in the first quarter of 2005. We recorded a loss on retirement of debt of approximately $6 million for the related redemption premium on the 10¹/8% Senior Notes, and approximately $1 million for the write-off of deferred debt issue costs.

We may make further repurchases of notes or other debt securities from time to time as conditions warrant.

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 or legal entity 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.

Restructuring

In 2005, we closed five manufacturing facilities, resulting in the outplacement of approximately 1,400 employees, and announced the closure of five additional manufacturing facilities (to be closed in 2006 and 2007). As a result of these actions, we recorded restructuring charges of $94 million. Such expenses included cash charges of $86 million for severance and other costs and $13 million of non-cash asset impairments related to restructuring actions, offset by $5 million of net curtailment gains.

For the year ended December 31, 2004, we 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.

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 has 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 materially differ from actuarial projections which are based on historical performance, there could be a material effect on the accrual for recalls in future periods.

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 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.

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:


	2005						2004

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

Discount rate		5.50%		5.00%		4.51%		5.75%		5.50%		5.34%
Expected long-term return on plan assets		8.50%		6.75%		6.67%		8.50%		7.50%		7.13%
Rate of increase in compensation levels		4.00%		3.75%		3.09%		4.00%		3.75%		2.98%

The weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2005 and 2004 are shown in the following table:


	Years Ended December 31,

	2005									2004

							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	%
Expected long-term return on plan assets		8.50	%		7.50	%		7.13	%		8.50	%		7.75	%		7.22	%
Rate of increase in compensation levels		4.00	%		3.75	%		2.98	%		4.00	%		3.75	%		3.14	%

Based on our assumptions as of October 31, 2005, the measurement date, 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	$	(1	)	$	2		$	(2	)	$	1	$	(1	)	$	2
.25% change in expected long-term rate of return		(2	)		(12	)		(1	)		2		12			1


	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	$	(39	)	$	(157	)	$	(31	)	$	41	$	162	$	32

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 years ended December 31, 2005 and 2004, 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.

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 years ended December 31, 2005 and 2004, and the ten month period ended December 31, 2003, 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.

Our 2006 pension expense (income) is estimated to be approximately $24 million in the U.S., $(34) million in the U.K. and $46 million for the rest of the world (based on December 31, 2005 exchange rates). During 2005, certain amendments reducing future benefits for nonunion participants were adopted that will reduce future service costs. We expect to contribute approximately $108 million to our U.S. pension plans and approximately $42 million to our non-U.S. pension plans in 2006.

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:


	2005						2004

	U.S.			Canada			U.S.			Canada

Discount rate		5.50	%		5.25	%		5.75	%		6.00	%
Initial health care cost trend rate at end of year		10.00	%		9.00	%		10.50	%		9.00	%
Ultimate health care cost trend rate		5.00	%		5.00	%		5.00	%		5.00	%
Year in which ultimate rate is reached		2011			2014			2011			2013

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, 2005	$	8	$	(6	)
Effect on post-retirement benefit obligations as of October 31, 2005	$	93	$	(73	)

Our 2006 OPEB expense is estimated to be approximately $36 million. During 2005, certain amendments reducing future benefits for nonunion participants were adopted that will reduce future service costs. We fund our OPEB obligation on a pay-as-you-go basis. We expect to contribute approximately $54 million on a pay-as-you-go basis in 2006.

Goodwill. In connection with the Acquisition, we 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 $2.3 billion as of December 31, 2005, or 22% of our total assets.

In accordance with SFAS 142, “Goodwill and Other Intangible Assets” (“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 have exceeded their carrying values at each testing date since adoption of SFAS 142 in 2002, 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.

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 as 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.

RESULTS OF OPERATIONS

The following consolidated and combined statements of operations compare the results of operations for the years ended December 31, 2005, 2004 and 2003. 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 variances related to the year ended December 31, 2004 as compared to the year ended December 31, 2003 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, 2003, refinancing of our senior secured credit facilities as if they had occurred on January 1, 2003.

On October 27, 2005, we completed our purchase of a 68.4% interest in Dalphimetal, a European-based manufacturer of airbags and steering wheels. Results of Dalphimetal’s operations have been consolidated into our results since the date of the acquisition.

TOTAL COMPANY RESULTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2005 and 2004


		Years Ended
		December 31,
								Variance
		2005			2004			Increase (Decrease)

		(Dollars in millions)
Sales		$	12,643		$	12,011		$	632
Cost of sales			11,249			10,681			568

	Gross profit		1,394			1,330			64
Administrative and selling expenses			490			513			(23	)
Research and development expenses			203			174			29
Amortization of intangible assets			33			33			—
Restructuring charges and asset impairments			107			38			69
Other expense (income) — net			8			(8	)		16

	Operating income		553			580			(27	)
Interest expense — net			228			250			(22	)
Loss on retirement of debt			7			167			(160	)
Accounts receivable securitization costs			3			2			1
Equity in earnings of affiliates			(20	)		(15	)		(5	)
Minority interest			7			12			(5	)

Earnings (losses) before income taxes			328			164			164
Income tax expense			124			135			(11	)

	Net earnings (losses)	$	204		$	29		$	175


	*Year Ended December 31, 2005 Compared to Year Ended December 31, 2004*

Sales for the year ended December 31, 2005 of $12.6 billion increased $632 million from $12.0 billion for the year ended December 31, 2004. The increase resulted primarily from higher volume and sales of new products (net of price reductions provided to customers) of $431 million, the favorable effect of foreign currency exchange of $137 million, and the two-month impact of consolidating Dalphimetal in the fourth quarter of 2005 of $64 million. Sales volumes increased despite lower Big Three production in North America and flat industry production in Europe.

Gross profit for the year ended December 31, 2005 of $1,394 million increased $64 million from $1,330 million for the year ended December 31, 2004. The increase resulted primarily from the positive impact of higher sales volume, net of adverse product mix, of $90 million, a reduction in net pension and OPEB expense of $23 million, and lower product warranty cost primarily in Europe of $16 million. The net increase was partially offset by the unfavorable impact of inflation (which included higher commodity prices) and price reductions to our customers (net of savings from cost reductions) of $35 million, and the unfavorable impact of foreign currency exchange of $30 million. Gross profit as a percentage of sales for the year ended December 31, 2005 was 11.0% compared to 11.1% for the year ended December 31, 2004.

Administrative and selling expenses for the year ended December 31, 2005 of $490 million decreased $23 million from $513 million for the year ended December 31, 2004. The decrease primarily reflected a reduction in litigation-related reserves of approximately $18 million, and a reduction in net pension and OPEB expense related to retiree medical buyouts, and savings from cost reductions, totaling $9 million, partially offset by the unfavorable impact on foreign currency exchange, of $5 million. Administrative and selling

expenses as a percentage of sales for the year ended December 31, 2005, were 3.9% compared to 4.3% for the year ended December 31, 2004.

Research and development expenses for the year ended December 31, 2005 were $203 million compared to $174 million for the year ended December 31, 2004. The increase primarily reflected additional engineering cost to support new programs and growth in emerging markets, lower cost recovery from our customers for prototypes and engineering charges, totaling $29 million, and the unfavorable impact of foreign currency exchange, of $1 million. Research and development expenses as a percentage of sales were 1.6% for the year ended December 31, 2005 compared to 1.4% for the year ended December 31, 2004.

Amortization of intangible assets was $33 million for the years ended December 31, 2005 and 2004.

Restructuring charges and asset impairments were $107 million for the year ended December 31, 2005 compared to $38 million for the year ended December 31, 2004. Charges for the year ended December 31, 2005 consisted of $86 million for severance costs and expenses to consolidate certain facilities, $13 million of asset impairments related to restructuring, $13 million for other asset impairments and $6 million of pension curtailment loss at closing facilities, partially offset by $11 million of post-retirement benefit curtailment gains at closed facilities. Charges for the year ended December 31, 2004 of $38 million were primarily costs related to severance and consolidation of certain facilities.

Other expense(income) — net for the year ended December 31, 2005 was expense of $8 million compared to income of $(8) million for the year ended December 31, 2004. The change primarily resulted from a reduction in gains from asset sales of $8 million, an increase in foreign currency exchange loss of $6 million, and higher expense in connection with the bankruptcy and administration proceedings of certain customers of $5 million.

Interest expense — net for the year ended December 31, 2005 was $228 million as compared to $250 million for the year ended December 31, 2004. The decrease in interest expense primarily resulted from lower average debt balances and various refinancing activities including the purchase of the seller note from Northrop, partially offset by the unfavorable effect of higher interest rates on variable rate debt.

Loss on retirement of debt for the year ended December 31, 2005 totaled $7 million as compared to $167 million for the year ended December 31, 2004. On May 3, 2005, the Company repurchased approximately €48 million principal amount of its 10¹/8% Senior Notes with a portion of the proceeds from the issuance of common stock. The Company recorded a loss on retirement of debt of approximately $6 million for the related redemption premium on the 10¹/8% Senior Notes, and approximately $1 million for the write-off of deferred issue costs.

During 2004, we incurred the following losses on various refinancing transactions:


	•	$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.

Accounts receivable securitization costs were $3 million for the year ended December 31, 2005 as compared to $2 million for the year ended December 31, 2004.

Equity in earnings of affiliates was $20 million for the year ended December 31, 2005 as compared to $15 million for the year ended December 31, 2004.

Minority interest was $7 million for the year ended December 31, 2005 as compared to $12 million for the year ended December 31, 2004.

Income tax expense for the year ended December 31, 2005 was $124 million on pre-tax income of $328 million as compared to income tax expense of $135 million on pre-tax earnings of $164 million for the year ended December 31, 2004. The income tax rate varies from the United States statutory income tax rate due primarily to the impact of non-deductible interest expense in certain foreign jurisdictions partially offset by favorable foreign tax rates, holidays, and credits.

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2004 and December 31, 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			10,681			10,124			(100	)(b)		657			557

	Gross profit		1,330			1,227			57			46			103
Administrative and selling expenses			513			532			(2	)(c)		(17	)		(19	)
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
Restructuring charges and asset impairments			38			33			—			5			5
Other income — net			(8	)		(59	)		(1	)(f)		52			51

	Operating income		580			443			142			(5	)		137
Interest expense — net			250			331			(15	)(g)		(66	)		(81	)
Loss on retirement of debt			167			31			(31	)(g)		167			136
Accounts receivable securitization costs			2			28			(17	)(g)		(9	)		(26	)
Equity in earnings of affiliates			(15	)		(9	)		—			(6	)		(6	)
Minority interest			12			15			—			(3	)		(3	)

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. Earnings before income taxes 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)
Loss on retirement of debt	$	167	$	31
Northrop/ Old TRW merger-related transaction costs		—		6
Other charges		—		1

	$	167	$	38

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


	Years Ended
	December 31,

	2004		2003

	(Dollars in
	millions)
Administrative and selling expenses	$	—	$	6
Other expense — net		—		1
Loss on retirement of debt		167		31

	$	167	$	38


	*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 $1,330 million increased $103 million from $1,227 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 a combination of higher expenses primarily for litigation reserves and charges related to one of our Mexican plants including an

inventory obsolescence adjustment and operational issues. Gross profit as a percentage of sales for the year ended December 31, 2004 was 11.1% compared to 10.8% for the year ended December 31, 2003.

Administrative and selling expenses for the year ended December 31, 2004 were $513 million compared to $532 million for the year ended December 31, 2003. Lower expenses resulted primarily from net cost savings of $24 million, $6 million of merger-related transaction costs incurred in 2003 that did not recur, and lower costs due to divested operations of $12 million, partially offset by the unfavorable effect of foreign currency exchange of $24 million. Administrative and selling expenses as a percentage of sales for the year ended December 31, 2004, were 4.3% compared to 4.7% 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.

Restructuring charges and asset impairments for the year ended December 31, 2004 of $38 million related primarily to severance and costs to consolidate certain facilities, as compared to $33 million for the year ended December 31, 2003.

Other income — net for the year ended December 31, 2004 was income of $8 million compared to income of $59 million for the year ended December 31, 2003. The decrease primarily resulted from lower foreign currency exchange gains. The prior period included approximately $32 million in unrealized foreign exchange gains. In 2004, the Company implemented hedging programs which mitigate foreign currency exposure.

Interest expense — net for the year ended December 31, 2004 was $250 million compared to $331 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 as previously detailed, compared to $31 million for the year ended December 31, 2003. 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.

Accounts receivable securitization costs for the year ended December 31, 2004 were $2 million as compared to $28 million for the year ended December 31, 2003. The decrease was primarily from losses incurred on the sale of receivables of $25 million in 2003 not recurring in 2004.

Equity in earnings of affiliates was $15 million for the year ended December 31, 2004 as compared to $9 million for the year ended December 31, 2003.

Minority interest was $12 million for the year ended December 31, 2004 as compared to $15 million for the year ended December 31, 2003.

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.

SEGMENT RESULTS OF OPERATIONS

The following table reconciles segment sales and earnings before taxes to consolidated sales and earnings before taxes for 2005, 2004 and 2003. See Note 21 to the consolidated and combined financial statements for the reconciliation of segment sales and earnings before taxes to consolidated amounts and a description of segment earnings before taxes for the periods presented.


			Years Ended December 31,

			2005			2004			2003

			(Dollars in millions)
Sales:
Chassis Systems			$	7,197		$	6,950		$	6,534
Occupant Safety Systems				3,755			3,438			3,306
Automotive Components				1,691			1,623			1,511

			$	12,643		$	12,011		$	11,351

Earnings before taxes:
	Chassis Systems		$	258		$	258		$	173
	Occupant Safety Systems			314			327			269
	Automotive Components			88			102			116

		Segment earnings before taxes		660			687			558
Corporate expense and other				(94	)		(104	)		(121	)
Financing costs				(231	)		(252	)		(359	)
Loss on retirement of debt				(7	)		(167	)		(31	)

		Earnings before taxes	$	328		$	164		$	47

CHASSIS SYSTEMS


	*Year Ended December 31, 2005 Compared to Year Ended December 31, 2004*


	Years Ended
	December 31,
							Variance
	2005			2004			Increase (Decrease)

	(Dollars in millions)
Sales	$	7,197		$	6,950		$	247
Earnings before taxes		258			258			—
Restructuring charges included in earnings before taxes		(33	)		(25	)		8

Sales for the Chassis Systems segment for the year ended December 31, 2005 of $7,197 million increased $247 million from $6,950 million for the year ended December 31, 2004. The increase resulted primarily from higher volume (net of price reductions to customers) of $150 million, as well as the favorable effect of foreign currency exchange of $97 million.

Earnings before taxes for the Chassis Systems segment for the year ended December 31, 2005 of $258 million were unchanged from the prior year. Earnings were negatively impacted by the increase in bad debt expense and other costs related to the bankruptcy and administration proceedings of certain customers totaling $15 million, the unfavorable effect of foreign currency exchange of $10 million, and an increase in restructuring charges of $8 million. The decreases were offset by lower product warranty costs primarily in Europe of $14 million, the positive impact of higher volume, net of adverse product mix, of $12 million, and savings from cost reductions, net of inflation and pricing, of $7 million. For the year ended December 31, 2005, Chassis

Systems recorded net restructuring charges of $33 million in connection with severance and costs related to the consolidation of certain facilities, which were partially offset by post-retirement benefit curtailment gains. Chassis Systems recorded restructuring expense of $25 million for the year ended December 31, 2004 related to severance and consolidation of certain facilities.


	*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
Earnings before taxes		258			173			90			(5	)		85
Restructuring charges included in earnings before taxes		(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.

Earnings before taxes for the Chassis Systems segment for the year ended December 31, 2004 of $258 million increased $85 million from $173 million for the year ended December 31, 2003. Earnings 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 earnings 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 $34 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. Earnings 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.

OCCUPANT SAFETY SYSTEMS


	*Year Ended December 31, 2005 Compared to Year Ended December 31, 2004*


	Years Ended
	December 31,
							Variance Increase
	2005			2004			(Decrease)

	(Dollars in millions)
Sales	$	3,755		$	3,438		$	317
Earnings before taxes		314			327			(13	)
Restructuring charges included in earnings before taxes		(41	)		(8	)		33

Sales for the Occupant Safety Systems segment for the year ended December 31, 2005 of $3,755 million increased $317 million from $3,438 million for the year ended December 31, 2004. The increase primarily reflected higher customer volume and growth in the new product areas, (net of price reductions to our customers) of $246 million, the consolidation of Dalphimetal for two months during the fourth quarter of 2005 of $64 million, and the favorable impact of foreign currency exchange of $7 million.

Earnings before taxes for the Occupant Safety Systems segment for the year ended December 31, 2005 of $314 million decreased $13 million from $327 million for the year ended December 31, 2004. The decrease

resulted primarily from price reductions to customers and inflation that exceeded savings from cost reductions of $53 million, higher restructuring charges and asset impairments of $33 million, and the unfavorable impact of foreign currency exchange of $19 million. These changes were partially offset by higher volume of $77 million and a reduction in pension and litigation expenses of $17 million. For the year ended December 31, 2005, Occupant Safety Systems recorded restructuring charges of $41 million in connection with severance and costs related to the consolidation of certain facilities, primarily the Burgos, Spain facility, and asset impairment charges of $2 million, as compared to $8 million of restructuring charges for the year ended December 31, 2004.


	*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
Earnings before taxes		327			269			32		26		58
Restructuring charges included in earnings before taxes		(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.

Earnings before taxes for the Occupant Safety Systems segment for the year ended December 31, 2004 of $327 million increased $58 million from $269 million for the year ended December 31, 2003. Earnings 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. Earnings 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.

AUTOMOTIVE COMPONENTS


	*Year Ended December 31, 2005 Compared to Year Ended December 31, 2004*


	Years Ended
	December 31,
							Variance
	2005			2004			Increase (Decrease)

	(Dollars in millions)
Sales	$	1,691		$	1,623		$	68
Earnings before taxes		88			102			(14	)
Restructuring charges included in earnings before taxes		(20	)		(5	)		15

Sales for the Automotive Components segment for the year ended December 31, 2005 of $1,691 million increased $68 million from $1,623 million for the year ended December 31, 2004. The increase primarily reflected the favorable impact of foreign currency exchange of $33 million and higher customer volume (net of price reductions to our customers) of $36 million.

Earnings before taxes for the Automotive Components segment for the year ended December 31, 2005 of $88 million decreased $14 million from $102 million for the year ended December 31, 2004. The decrease

resulted primarily from an increase in restructuring and asset impairment charges related to restructuring actions totaling $15 million, other asset impairments not related to restructuring of $12 million, unfavorable price reductions, net of higher volume, of $13 million, and the unfavorable impact of foreign currency exchange of $2 million, offset by savings from cost reductions of $20 million, the reduction of warranty expenses of $7 million and a reduction of pension and OPEB costs of $3 million. For the year ended December 31, 2005, Automotive Components recorded restructuring charges of $20 million which consisted primarily of $20 million in severance costs and expenses to consolidate certain facilities and $2 million of asset impairments, partly offset by $2 million of post-retirement benefit curtailment gains. Restructuring charges for the year ended December 31, 2004 totaled $5 million.


	*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
Earnings before taxes		102			116			4		(18	)		(14	)
Restructuring charges included in earnings before taxes		(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.

Earnings before taxes for the Automotive Components segment for the year ended December 31, 2004 of $102 million decreased $14 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. Earnings 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.

LIQUIDITY AND CAPITAL RESOURCES


	*Cash Flows*

Operating Activities. Cash provided by operating activities for the year ended December 31, 2005 was $502 million as compared to $787 million for the year ended December 31, 2004. The decrease of $285 million was primarily driven by changes in the timing of customer receipts and vendor payments, which negatively impacted working capital, and increased pension/ OPEB funding.

Investing Activities. Cash used in investing activities for the year ended December 31, 2005 was $639 million compared to $370 million for the year ended December 31, 2004. The increase related primarily to our acquisition of 68.4% of Dalphimetal, as well as other subsidiaries, for approximately $134 million, net of cash acquired, and investment in affiliates of approximately $8 million, as well as asset sales and acquisition-related settlements totaling $124 million in 2004 that did not recur in 2005.

In 2005, we spent $503 million in capital expenditures, primarily in connection with the continuation of new product launches started in 2004, upgrading existing products, additional new product launches in 2005 and providing for incremental capacity, infrastructure and equipment at our facilities to support our manufacturing and cost reduction efforts. We expect to spend approximately $540 million, or approximately 4% of sales, in such capital expenditures during 2006.

Financing Activities. Cash provided by financing activities was $38 million for the year ended December 31, 2005, compared to cash used in financing activities of $489 million in the year ended December 31, 2004. In 2005, we borrowed approximately $1,638 million, net of debt issue costs, and used approximately $1,603 million to pay down long-term debt, primarily in conjunction with the initial draw down of the credit facilities under our December 2004 amendment and restatement of our credit agreement.

On March 11, 2005, we completed the purchase of an aggregate 7,256,500 shares of our Common Stock from Northrop for aggregate consideration of approximately $143 million. Such shares were immediately retired. Separately, on March 11, 2005, we completed the sale of an aggregate 7,256,500 newly issued shares of Common Stock to certain institutional investors for aggregate proceeds of approximately $143 million. On May 3, 2005, we repurchased approximately €48 million principal amount (approximating $63 million) of our 10¹/8% Senior Notes with a portion of the proceeds from this issuance.

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” and “Other Receivables Facilities.” Our primary liquidity requirements, which are significant, are expected to be for debt service, working capital, capital expenditures, research and development costs and other general corporate purposes.

We intend to draw down on, and use proceeds from, the revolving credit facility under our senior secured credit facilities and our 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 December 31, 2005, we had approximately $839 million of availability under our revolving credit facility, approximately €153 million and £30 million under our European accounts receivable facilities and approximately $109 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 addition, Dalphimetal and its subsidiaries have approximately €64 million of credit facilities, of which €24 million was available as of December 31, 2005. We expect that these facilities will be fully drawn from time to time for normal working capital purposes.

In connection with the Acquisition by an affiliate of Blackstone of the shares of the subsidiaries of Old TRW engaged in the automotive business from Northrop, our wholly-owned subsidiary 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, 2005, we had outstanding $3,236 million in aggregate indebtedness, with an additional $839 million of borrowing capacity available under our revolving credit facility, after giving effect to $61 million in outstanding letters of credit and guarantees, which reduced the amount available. As of December 31, 2005, approximately $190 million of our total reported accounts receivable balance was considered eligible for borrowings under our United States receivables facility, of which approximately $109 million would have been available for funding. As of February 10, 2006, approximately $136 million would have been available for funding. We had no outstanding borrowings under this receivables facility as of December 31, 2005. See “Other Receivables Facilities” for further discussion of our European facilities, which have approximately €153 million and £30 million of funding availability and no outstanding borrowings as of December 31, 2005.

On February 2, 2006, we repurchased all of our subsidiary Lucas Industries Limited’s £94.6 million 10⁷/8% bonds due 2020 for approximately £137 million, or approximately $243 million. The repayment of debt resulted in a pretax charge of approximately £32 million, or approximately $57 million, for loss on retirement of debt, which will be recognized in our first quarter 2006 results. We funded the repurchase from cash on hand.

On November 18, 2005, we completed the borrowing under the credit facility of an additional $300 million through a term loan B-2. We used the proceeds from this borrowing for general corporate purposes.

On May 3, 2005, we repurchased approximately €48 million principal amount of our 10¹/8% Senior Notes with a portion of the proceeds from the issuance of new shares of Common Stock in the first quarter. In the second quarter of 2005, we recorded a loss on retirement of debt of approximately $6 million for the related redemption premium on the 10¹/8% Senior Notes, and approximately $1 million for the write-off of deferred debt issue costs.

We continuously evaluate our capital structure in order to ensure the most appropriate and optimal structure and may, from time to time, repurchase senior notes, senior subordinated notes or any other of our bonds in the open market or through redemption or retirement, if conditions warrant.

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 to reduce debt may be affected by general economic (including difficulties in the automotive industry), 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, Moody’s and Fitch as of December 31, 2005.

S & P

Moody’s

Fitch

Corporate & Bank Debt Rating

BB+

Ba2

BB+

Senior Note Rating

BB-

Ba3

BB-

Senior Subordinated Note Rating

BB-

B+

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, 2005, the term loan facilities, with maturities ranging from 2010 to 2012, consisted of an aggregate of $1.6 billion dollar-denominated term loans and the revolving credit facility provided for borrowing of up to $900 million.

The term loan A in the amount of $400 million will amortize in equal quarterly amounts, totaling $60 million in 2007, $160 million in 2008, and $135 million in 2009 with one final installment of $45 million on January 10, 2010, the maturity date. The term loan B in the amount of $600 million will amortize in equal quarterly installments in an amount equal to 1% per annum during the first seven years and three months of its term and in one final installment on its maturity date, June 30, 2012. The term loan B-2 in the amount of $300 million will amortize in equal quarterly installments in an amount equal to 1% per annum during the first six years and three months of its term and in one final installment on its maturity date, June 30, 2012. The term loan E facility in the amount of $300 million will amortize in equal quarterly installments in an amount equal to 1% per annum during the first five years and nine months of its term and in one final installment on its maturity date, October 31, 2010.

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 and by TRW Automotive Finance (Luxembourg), S.a.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) the administrative agent’s prime rate and (2) the federal funds rate plus ¹/2 of 1% or (b) 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, 2005, the applicable margin for the term loan A and the revolving credit facility was 0.375% with respect to base rate borrowings and 1.375% with respect to Eurocurrency borrowings, and the applicable margin for the term loan B, term loan B-2 and term loan E was 0.50% with respect to the base rate borrowings and 1.5% with respect to Eurocurrency borrowings. The commitment fee on the undrawn amounts under the revolving credit facility was 0.35%. The commitment fee on the revolving credit facility and the applicable margin on the senior credit facilities are subject to a leverage-based grid. Variable rate debt exposes us to the risk of rising interest rates. If interest rates increase, our debt service obligation on variable rate debt would increase, even though principal 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 our wholly-owned subsidiary, TRW Automotive Intermediate Holdings Corp., 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 November 2005, the Company entered into a series of interest rate swap agreements with a total notional value of $250 million to hedge the variability of interest payments associated with its variable-rate term debt. The swap agreements are expected to settle in January 2008. Since the interest rate swaps hedge the variability of interest payments on variable rate debt with the same terms, they qualify for cash flow hedge accounting treatment. As of December 31, 2005, the Company recorded an obligation of approximately $1 million related to these interest rate swaps.

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. Since these interest rate swaps hedge the designated debt balance and qualify for fair value hedge accounting,

changes in the fair value of the swaps also result in a corresponding adjustment to the value of the debt. As of December 31, 2005, the Company recorded a $14 million obligation related to these interest rate swaps, resulting from an increase in forward rates, along with a reduction of debt.

Contractual Obligations and Commitments

The following table reflects our significant contractual obligations as of December 31, 2005:


		Less Than		One to		Three to		More Than
		One Year		Three Years		Five Years		Five Years		Total

		(Dollars in millions)
Short-term borrowings		$	98	$	—	$	—	$	—	$	98
Long-term debt obligations(1)			30		264		508		2,108		2,910
Capital lease obligations			7		13		13		14		47
Operating lease obligations			58		87		69		56		270

	Total	$	193	$	364	$	590	$	2,178	$	3,325


(1)	Long-term debt obligations give effect to the repurchase of all £94.6 million of the Lucas Industries Limited 10⁷/8% bonds as completed on February 2, 2006.

On October 27, 2005, we completed the purchase of a 68.4% stake in Dalphimetal for approximately €117 million, subject to post-closing adjustment, plus the assumption of debt of approximately €75 million. Such borrowings are reflected in the table above.

In addition to the obligations discussed 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 $108 million to our U.S. pension plans and approximately $42 million to our non-U.S. pension plans in 2006.

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 $54 million on a pay-as-you-go basis in 2006.

We also have liabilities recorded for various environmental matters. As of December 31, 2005, we had reserves for environmental matters of $64 million. Of this amount, we expect to pay approximately $6 million in 2006.

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. During 2005, we made tax payments of approximately $25 million under this indemnification. Our remaining obligation under this indemnity is $12 million, which is expected to be paid during 2006.

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.

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, we entered into a receivables facility, which, as amended, extends to December 2009 and 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. Due to decreased availability under the facility as a result of certain customer credit rating downgrades below investment grade, the Company reduced the committed amount of the facility from $400 million to $250 million on January 24, 2006. This reduction lowers future fees on the unused portion of the facility.

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 for the receivables purchased and cash 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, 2005.

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 accounts receivable securitization costs 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 accounts receivable securitization costs. As there were no borrowings outstanding under the receivables facility on December 31, 2005, 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, 2005.

Other Receivables Facilities

In addition to the receivables facilities 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 £30 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 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, 2005, we had reserves for environmental matters of $64 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 2005, we received approximately $4 million under such environmental indemnification from Northrop.

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.

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 def


		decline in their market share for vehicle sales in North America and Europe, with Asian OEMs increasing their share in such markets. Although we do have business with the Asian OEMs, our customer base is more heavily weighted toward the Big Three.

	•	Inflationary Pressures and Supply Base. Our industry continues to experience increases in costs of resins, yarns and other petroleum-based products, as well as higher energy costs. Costs of other commodities such as ferrous metals also remain a worry despite declines in costs from recent highs. Therefore, overall commodity inflation pressures remain a significant concern for our industry and business and have placed a considerable operational and financial burden on us and the industry. We expect such inflationary pressures to continue.


		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.