UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

                      For the quarterly period ended September 24, 2004

OR

                      For the transition period from                      to                         .

Commission File No. 001-31970

TRW Automotive Holdings Corp.

(Exact name of registrant as specified in its charter)

12025 Tech Center Drive
Livonia, Michigan 48150
(734) 855-2600

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No x

As of October 27, 2004, the number of shares outstanding of the registrant’s Common Stock was 98,936,697 shares.

TRW Automotive Holdings Corp.
Index

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

TRW Automotive Holdings Corp.

See accompanying notes to consolidated and combined financial statements.

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TRW Automotive Holdings Corp.

See accompanying notes to consolidated and combined financial statements.

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TRW Automotive Holdings Corp.

See accompanying notes to consolidated and combined financial statements.

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TRW Automotive Holdings Corp.

See accompanying notes to consolidated and combined financial statements.

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TRW Automotive Holdings Corp.

1. Description of Business and Change in Ownership

Description of Business

TRW Automotive Holdings Corp. (also referred to herein as the “Company” or the “Successor”) is among the world’s largest and most diversified suppliers of automotive systems, modules and components to global automotive vehicle manufacturers (“VMs”) and related aftermarkets. The Company conducts substantially all of its operations through subsidiaries. These operations primarily encompass the design, manufacture and sale of active and passive safety related products. Active safety related products principally refer to vehicle dynamic controls (primarily braking and steering), and passive safety related products principally refer to occupant restraints (primarily air bags and seat belts) and crash sensors. The Company is primarily a “Tier-1” supplier (a supplier which sells directly to VMs), with over 85% of its sales in 2003 made directly to VMs.

Change in Ownership

TRW Automotive Inc. (which the Company did not acquire and was renamed Richmond TAI Corp.) (“Automotive”) was incorporated in Delaware on June 3, 2002 as a wholly owned subsidiary of TRW Inc. (“Old TRW”) in contemplation of the spin-off announced by the Old TRW Board of Directors in March 2002. Automotive, together with Old TRW’s other subsidiaries engaged in the automotive business, comprised Old TRW’s automotive business. This automotive business is referred to herein as the Company’s predecessor and financial information related to this automotive business is included in the predecessor financial statements included herein.

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

Additionally, on November 18, 2002, an entity controlled by affiliates of The Blackstone Group, L.P. (“Blackstone”), entered into a master purchase agreement, as amended, (the “Master Purchase Agreement”) pursuant to which the Company, a newly-formed entity, would cause its indirect wholly-owned subsidiary, TRW Automotive Acquisition Corp., to purchase the shares of the subsidiaries of Old TRW engaged in the automotive business from Northrop (“the Acquisition”). The predecessor’s 51% interest in the joint venture, TRW Koyo Steering Systems Company (“TKS”), was not transferred to the Company as part of the Acquisition.

The Acquisition was completed on February 28, 2003. Subsequent to the Acquisition, TRW Automotive Acquisition Corp. changed its name to TRW Automotive Inc. (referred to herein as “TRW Automotive”). Upon completion of the Acquisition, a subsidiary of Northrop retained a 19.6% interest in the Company.

The Company was capitalized by cash equity contributions totaling $698 million (further described below) and contributed the $698 million in cash plus newly issued shares of its common stock having an implied value of $170 million to TRW Automotive Intermediate Holdings Corp. (“Intermediate”), which is the direct parent of TRW Automotive. Intermediate issued a $600 million face amount subordinated 8% pay-in-kind note due 2018 (the “Seller Note”) to an affiliate of Northrop to acquire a portion of the stock of certain Old TRW automotive subsidiaries. The Seller Note had an estimated fair value of $348 million (excluding related deferred tax) as of the Acquisition date. Intermediate contributed such stock together with cash equity contributions of $698 million and the $170 million of the Company’s common stock to TRW Automotive for

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100% of TRW Automotive’s stock. Intermediate has no independent operations or investments other than its investment in TRW Automotive. The Company reached an agreement with Northrop on October 10, 2004 to purchase the Seller Note, subject to financing, and to settle various contractual issues stemming from the Acquisition. See Note 3.

2. Basis of Presentation

These consolidated and combined financial statements should be read in conjunction with the consolidated and combined financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission (“SEC”). Certain prior period amounts have been reclassified to conform to current year presentation.

As a result of the Acquisition on February 28, 2003, the consolidated financial statements of the Company reflect the Acquisition under the purchase method of accounting, in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”). For periods following the Acquisition, the consolidated financial statements of the Company are presented as “Successor.” For periods preceding the Acquisition, the combined financial statements are presented as “Predecessor.”

The accompanying unaudited consolidated financial statements of the Successor and the unaudited combined financial statements of the Predecessor have been prepared pursuant to the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. These financial statements include all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations of the Company. Operating results for the nine months ended September 24, 2004 are not necessarily indicative of results that may be expected for the year ending December 31, 2004.

Earnings per share. Basic earnings (losses) per share are calculated by dividing net earnings (losses) by the weighted average shares outstanding during the period. Diluted earnings (losses) per share reflect the weighted average impact of all potentially dilutive securities from the date of issuance. Actual weighted average shares outstanding used in calculating earnings per share were:

Basic and diluted losses per share for the three and seven months ended September 26, 2003 have been retroactively adjusted to reflect the 100 for one stock split effected on January 27, 2004.

Earnings per share are not calculated for the Predecessor period as there were no shares outstanding during the period.

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Warranties. Product warranty liabilities are recorded based upon management estimates including such factors as written agreements with customers, the length of the warranty periods, the historical performance of the products and likely changes in performance of newer products and the mix and volume of products sold. The liabilities are reviewed on a regular basis and adjusted to reflect actual experience.

The following table presents the movement in the product warranty liabilities for the three and nine months ended September 24, 2004, the three and seven months ended September 26, 2003, and the two months ended February 28, 2003:

Stock-based compensation. Stock options under employee compensation plans are accounted for using the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations. Pursuant to APB 25, no stock-based employee compensation expense is reflected in net earnings (losses) if options granted have exercise prices greater than or equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net earnings (losses) as if the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” had been applied to stock-based employee compensation:

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Recent accounting pronouncements. In January 2004, the FASB issued FASB Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“FSP 106-1”). FSP 106-1 permitted a sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MPD Act”).

In May 2004, the FASB issued FASB Staff Position No. FAS 106-2 (“FSP 106-2”), which superseded FSP 106-1. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy provided by the MPD Act and specifies the disclosure requirements for employers who have adopted FSP 106-2. The Centers for Medicare and Medicaid Services (“CMS”), the administrative body for implementation and maintenance of the prescription drug benefit portion of the MPD Act, have issued preliminary regulatory guidance on calculation of the federal subsidy. In accordance with such guidance from the CMS and the guidance provided by the FASB, the Company has adopted the provisions of FSP 106-2 in the third quarter of 2004 and has elected to recognize the effect of the subsidy retroactively. See Note 11.

3. Subsequent Event

On October 10, 2004, the Company entered into a note purchase and settlement agreement (the “Note Purchase and Settlement Agreement”) with Northrop, a subsidiary of Northrop, Intermediate and Automotive Investors L.L.C. (“AI LLC”), an affiliate of Blackstone. The Note Purchase and Settlement Agreement provides for (i) mutual releases by Northrop and the Company from certain potential indemnification claims under certain agreements entered into in connection with the Acquisition (the “Released Claims”) and (ii) Intermediate to make a net cash payment of approximately $494 million to Northrop in respect of the purchase of the Seller Note. The cash payment of approximately $494 million for the Seller Note is net of a credit of approximately $41 million ascribed to the Released Claims. On November 2, 2004, the Company amended and restated its existing credit agreement in order to add a six-year tranche E term loan, which was issued in the amount of $300 million and bears interest at variable interest rates. The proceeds from the new term loan, together with available cash on hand and, to the extent needed, funds obtained under existing liquidity arrangements, will be used by Intermediate to purchase the Seller Note pursuant to the Note Purchase and Settlement Agreement on or prior to November 22, 2004.

As of September 24, 2004, the Company’s third quarter close date, the book value of the Seller Note, including accrued interest, was $417 million. Additionally, as of September 24, 2004, the Seller Note had a face value, including accrued interest, of $678 million. The Company expects to record a fourth quarter pre-tax charge of approximately $115 million for loss on retirement of debt resulting primarily from the difference between the purchase price ascribed to the Seller Note and the book value of the Seller Note on the Company’s balance sheet. This loss is U.S. based and therefore carries zero tax benefit due to the Company’s tax loss position in this jurisdiction.

In addition, Northrop agreed to pay directly to AI LLC (for the benefit of AI LLC and certain other stockholders) an aggregate of approximately $53 million in respect of a contractual indemnification obligation relating to the settlement of certain cash OPEB payments. Under the terms of the Master Purchase Agreement, Northrop was required to make such payments, following the Company’s initial public offering, to the Company’s non-employee stockholders as of the date of the closing of the Acquisition who remain stockholders as of the date of such payment, in proportion to their beneficial ownership of the Company’s voting securities as of such date of payment. AI LLC in turn had agreed to share such payments with certain other pre-initial public offering stockholders. Of the $53 million payment from Northrop to AI LLC, an aggregate of approximately $1 million is to be paid by AI LLC to certain pre-initial public offering stockholders (including employees and executive officers) in proportion to their share ownership as a return of their initial capital investment.

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

The Note Purchase and Settlement Agreement also clarifies certain ongoing indemnification matters under the Master Purchase Agreement entered into in connection with the Acquisition, amends certain terms under the related employee matters agreement to clarify the intent of the parties and settles certain matters relating to such agreement. The settlement of the matters relating to the employee matters agreement resulted in the reduction in short-term debt as of September 24, 2004 referenced below.

The Company reduced goodwill by $128 million as of September 24, 2004 related to settlement of the foregoing matters. The $128 million consisted of $34 million reduction in short-term debt for settlement of certain matters relating to the employee matters agreement, net of other receivables for contractual matters recorded at the Acquisition, $41 million ascribed to the Released Claims and $53 million for the cash OPEB payments. See Note 7.

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

4. Divestitures and Asset Sales

During the three months ended March 26, 2004, the Company completed two sale-leaseback transactions involving certain land and buildings used for corporate and engineering activities in Shirley, England and Livonia, Michigan. The Company received cash on the disposals of approximately $90 million (including unremitted VAT of approximately $14 million) and $7 million, respectively. The Shirley transaction included a capital lease component of $21 million due to the retention of interest by the Company in certain buildings.

On January 9, 2004, the Company completed the disposal of its North American Independent Aftermarket business, (“Autospecialty”) which had sales of approximately $55 million in 2003. Proceeds from the sale were approximately $10 million, net of cash retained in the business. Through the sale date, Autospecialty’s financial position and results of operations were included in the Company’s consolidated and combined financial statements.

5. Restructuring

For the three months ended September 24, 2004, Chassis Systems, Occupant Safety Systems and Automotive Components recorded charges of $1 million, $2 million and $2 million, respectively, for severance and costs related to the consolidation of certain facilities.

For the nine months ended September 24, 2004, Chassis Systems, Occupant Safety Systems and Automotive Components recorded charges of $11 million, $3 million, and $4 million, respectively, for severance and costs related to the consolidation of certain facilities.

For the three and seven months ended September 26, 2003, Chassis Systems recorded charges totaling $13 million and $16 million, respectively, for severance costs related to the consolidation of certain entities. For the two months ended February 28, 2003, Chassis Systems and Occupant Safety Systems recorded charges of $2 million and $1 million, respectively, for severance and costs related to the consolidation of certain facilities.

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The following table illustrates the movement of the restructuring reserves:

Of the $46 million restructuring reserve accrued at September 24, 2004, approximately $15 million is expected to be paid through the remainder of 2004, and approximately $15 million relates to involuntary employee termination arrangements outside the United States to be paid over the next several years in accordance with local law.

6. Inventories

7. Goodwill and Intangible Assets

Goodwill

The changes in goodwill for the period are as follows:

The Company reduced goodwill by $128 million as of September 24, 2004 related to settlement of the matters in the Note Purchase and Settlement Agreement. The $128 million consisted of $34 million reduction in short-term debt for settlement of certain matters relating to the employee matters agreement, net of other receivables for contractual matters recorded at the Acquisition, $41 million ascribed to the Released Claims and $53 million for the cash OPEB payments. See Note 3.

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Intangible Assets

The following table reflects intangible assets and related amortization information:

The estimated annual amortization expense for 2004 through 2008 is $33 million.

8. Other (Income) Expense — Net

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9. Operating Segments

10. Income Taxes

Under Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The provision for income taxes for the three months ended September 24, 2004, was $22 million on pre-tax income of $35 million as compared to income tax benefit of $9 million on pre-tax loss of $43 million in the same period a year ago. For the nine months ended September 24, 2004, the Company recorded income tax expense of $128 million on pre-tax income of $219 million as compared to income tax expense of $41 million on a pre-tax loss of $59 million for the seven months ended September 26, 2003 and income tax expense of $19 million on pre-tax income of $50 million for the two months ended February 28, 2003. The income tax rate varies from the United States statutory income tax rate due primarily to losses in the United States without recognition of a corresponding income tax benefit and higher than United States statutory effective income tax rates in certain foreign jurisdictions. Included in the tax provision calculation for the nine months ended September 24, 2004, are charges of $48 million related to debt prepayment and debt refinancing and $12 million in other charges on which no corresponding tax benefit was recorded due to the valuation allowance in the United States. Excluding these items, the Company's estimated annual effective tax rate will be approximately 46%.

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Income tax expense for the seven month period ended September 26, 2003, resulted primarily from not providing a tax benefit for the losses in the United States and certain foreign countries. For the two months ended February 28, 2003, the combined statements of operations include an allocation to the Predecessor of Northrop’s income taxes, in amounts generally equivalent to the provisions that would have resulted had these entities filed separate income tax returns for the period presented.

11. Pension Plans and Post-Retirement Benefits Other Than Pensions (“OPEB”)

The following table provides the components of net pension cost (income) for the Company’s defined benefit pension plans for the three and nine months ended September 24, 2004, the three and seven months ended September 26, 2003, and the two months ended February 28, 2003:

The following table provides the components of net post-retirement benefit cost for the plans for the three and nine months ended September 24, 2004, the three and seven months ended September 26, 2003, and the two months ended February 28, 2003. The net post-retirement benefit cost for the nine months ended September 24, 2004 includes the retroactive recognition of the prescription drug subsidy provided for in the MPD Act as discussed below:

The MPD Act, which was signed into law on December 8, 2003, expanded Medicare to include, for the first time, coverage for prescription drugs. The Company sponsors retiree welfare programs and has determined that this legislation reduces the Company’s costs for some of these programs. In accordance with guidance from the CMS and the FASB, the Company has adopted the provisions of FSP 106-2 in the third quarter of 2004 and has elected to recognize the effect of the subsidy retroactively.

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Retroactive recognition of the subsidy reduced expense by $1 million in the first six months of 2004, which has been reflected in the accompanying consolidated statement of operations for the nine months ended September 24, 2004. Additionally, recognition of the subsidy reduced expense for the third quarter of 2004 by $1 million, and has been reflected in the accompanying consolidated statement of operations for the three and nine months ended September 24, 2004. The impact on net post-retirement benefit cost for the fourth quarter of 2004 is expected to be an additional $1 million.

The reductions in expense are applicable to service cost, interest cost and amortization of a portion of the reduction in obligations. The total impact of the MPD Act on the Company’s actuarial liability is expected to be $53 million, and is being accounted for as an actuarial gain in accordance with guidance from the FASB. As a result, the gain will be aggregated with other unrecognized gains and losses, with the portion of such net amount in excess of 10% of the underlying obligations being amortized over various periods relating to the expected lifetimes or expected future working lifetimes of the related participants, depending on the plan. Future authoritative regulations issued by the CMS, including further guidance on determining eligibility for the subsidy, could require the Company to re-determine the impact of this legislation. See Note 2 for further discussion.

The assumptions used in the measurement of the post-retirement benefit obligation as of the measurement date of October 31, 2003 were:

For the ten months ended December 31, 2003, the following assumptions were used to determine net post-retirement benefit cost:

The assumed healthcare cost trend rates as of the measurement date of October 31, 2003 were:

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

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12. Debt and Capital Stock

Total outstanding debt of the Company as of September 24, 2004, and December 31, 2003, consisted of the following:

On January 9, 2004, the Company refinanced all of the borrowings under its then-existing term loan facilities with the proceeds of new term loan facilities, together with approximately $213 million of available cash on hand. Deferred debt issuance costs associated with the then-existing term loan facilities of $11 million were expensed in the first quarter of 2004. The new term loan facilities consist of tranche A-1 term loan issued in a face amount of $350 million maturing February 2009 and tranche D term loans issued in face amounts of $800 million and €93 million maturing February 2011.

On April 19, 2004, the Company paid down approximately $51 million equivalent principal amount under its senior secured credit facilities on the euro-denominated term loan D-2 with available cash on hand. The outstanding principal balance after this payment is €50 million. Deferred debt issuance costs of $1 million were expensed in the second quarter of 2004.

See Note 3 for a discussion of the settlement agreement reached with Northrop that reduced short-term debt and provides for the expected purchase of the Seller Note by Intermediate. Also, see Note 3 for a discussion of the new $300 million tranche E term loan that was entered into in connection with the expected purchase of the Seller Note.

In January 2004, the Company entered into a series of interest rate swap agreements with a total notional value of $500 million to effectively change a fixed rate debt obligation into a floating rate obligation. The total notional amount of these agreements is equal to the face value of the designated debt instrument. The swap agreements are expected to settle in February 2013, the maturity date of the corresponding debt instrument. As of September 24, 2004, approximately $1 million was reduced from the Company’s debt reflecting the mark-to-market adjustment of the interest rate swap agreements.

On February 6, 2004, the Company completed an initial public offering of 24,137,931 shares of common stock. Net proceeds from the offering, after deducting underwriting discounts and offering expenses, were approximately $636 million. The Company used approximately $319 million of the net proceeds from the offering to repurchase 12,068,965 shares of common stock held by an affiliate of Blackstone and approximately $317 million of such proceeds to repay a portion of each of the dollar and euro Senior Notes

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and Senior Subordinated Notes, in each case including the payment of a related redemption premium thereon. The related redemption premiums totaling $30 million and deferred debt costs totaling $6 million were expensed in the first quarter of 2004.

As of September 24, 2004, TRW Automotive had approximately $54 million in outstanding letters of credit, none of which had been drawn against.

The Company’s authorized capital stock consists of (i) 500 million shares of common stock, par value $.01 per share, of which 98,934,897 shares are issued and outstanding as of September 24, 2004, and (ii) 250 million shares of preferred stock, par value $.01 per share, including 500,000 shares of Series A junior participating preferred stock of which no shares are currently issued or outstanding.

In the quarter ended September 24, 2004, paid-in capital was reduced by $53 million pursuant to the OPEB indemnity payments from Northrop. See Note 3.

13. Other Comprehensive Earnings (Losses)

The components of comprehensive earnings (losses), net of related tax, are as follows:

14. Related Party Transactions

As part of the Acquisition, the Company executed a Transaction and Monitoring Fee Agreement with Blackstone whereby Blackstone agreed to provide the Company monitoring, advisory and consulting services, including advice regarding (i) structure, terms and negotiation of debt and equity offerings; (ii) relationships with the Company’s and its subsidiaries’ lenders and bankers; (iii) corporate strategy; (iv) acquisitions or disposals and (v) other financial advisory services as more fully described in the agreement. Pursuant to this agreement, the Company paid Blackstone a transaction fee of $49 million at the time of the Acquisition. The Company has agreed to pay an annual monitoring fee of $5 million for these services, approximately $4 million of which is included in the unaudited consolidated statement of operations for the nine months ended September 24, 2004, and approximately $3 million of which is included for the seven months ended September 26, 2003.

The combined statements of operations for the two months ended February 28, 2003, include $8 million of administrative and selling expenses and $48 million of interest expense allocated from Northrop.

The Company used approximately $319 million of the net proceeds from the Company’s initial public offering to repurchase 12,068,965 shares of the Company’s common stock held by Automotive Investors L.L.C., an affiliate of Blackstone, at a price per share equal to $26.46, which is the proceeds per share received by the Company less the underwriting discounts.

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As of September 24, 2004, the Company has recorded certain receivables from Northrop related to tax, environmental and other indemnities in the Master Purchase Agreement.

See Note 3 for discussion of an agreement reached with Northrop and certain payments to pre-initial public offering stockholders, including employees and executive officers, subsequent to September 24, 2004.

15. Contingencies

Various claims, lawsuits and administrative proceedings are pending or threatened against the Company or its subsidiaries, covering a wide range of matters that arise in the ordinary course of its business activities with respect to commercial, product liability and environmental matters. In addition, the Company and its subsidiaries are conducting a number of environmental investigations and remedial actions at current and former locations of certain of the Company’s subsidiaries. Along with other companies, certain subsidiaries of the Company have been named potentially responsible parties for certain waste management sites. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably with respect to the Company or the relevant subsidiary. A reserve estimate for each environmental matter is established using standard engineering cost estimating techniques on an undiscounted basis. In the determination of such costs, consideration is given to the professional judgment of Company environmental engineers, in consultation with outside environmental specialists, when necessary. At multi-party sites, the reserve estimate also reflects the expected allocation of total project costs among the various potentially responsible parties. At September 24, 2004, the Company had reserves for environmental matters of $85 million. In addition, the Company has established a receivable from Northrop for a portion of this environmental liability as a result of indemnification provided for in the Master Purchase Agreement. The Company believes any liability that may result from the resolution of environmental matters for which sufficient information is available to support these cost estimates will not have a material adverse effect on the Company’s financial position or results of operations. However, the Company cannot predict the effect on the Company’s financial position of expenditures for aspects of certain matters for which there is insufficient information. In addition, the Company cannot predict the effect of compliance with environmental laws and regulations with respect to unknown environmental matters on the Company’s financial position or results of operations or the possible effect of compliance with environmental requirements imposed in the future.

Further, product liability claims may be asserted in the future for events not currently known by management. Although the ultimate liability from these potential claims cannot be ascertained at September 24, 2004, management does not anticipate that any related liability, after consideration of insurance recovery, would have a material adverse effect on the Company’s financial condition or results of operations.

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

On May 6, 2002, ArvinMeritor Inc. filed suit against Old TRW in the United States District Court for the Eastern District of Michigan, claiming breach of contract and breach of warranty in connection with certain tie rod ends that Old TRW supplied to ArvinMeritor and the recall of some of these tie rod ends. ArvinMeritor subsequently recalled all of the tie rod ends, and claims that it is entitled to reimbursement from Old TRW for the costs associated with both the products recalled by Old TRW and those recalled by ArvinMeritor on its own. The parties are engaged in settlement discussions and the Company currently

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expects that a settlement of this matter will be achieved. The Company established a reserve for this matter in a prior quarter and believes this reserve is adequate.

While certain of the Company’s subsidiaries have been subject in recent years to asbestos-related claims, management believes that such claims will not have a material adverse effect on the Company’s financial condition or results of operations. In general, these claims seek damages for illnesses alleged to have resulted from exposure to asbestos used in certain components sold by the Company’s subsidiaries. Management believes that the majority of the claimants were assembly workers at the major U.S. automobile manufacturers.

The vast majority of these claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. Management believes that, to the extent any of the products sold by these subsidiaries and at issue in these cases contained asbestos, the asbestos was encapsulated. Based upon several years of experience with such claims, management believes that only a small proportion of the claimants has or will ever develop any asbestos-related impairment.

Neither settlement costs in connection with asbestos claims nor average annual legal fees to defend these claims have been material in the past. These claims are strongly disputed by the Company and its subsidiaries and it has been the policy to defend against them aggressively. Many of these cases have been dismissed without any payment whatsoever. Moreover, there is significant insurance coverage with solvent carriers with respect to these claims. However, while costs to defend and settle these claims in the past have not been material, there can be no assurances that this will remain so in the future.

Management believes that the ultimate resolution of the foregoing matters will not have a material adverse effect on the Company’s financial condition or results of operations.

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The following should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission on March 29, 2004, and the other information included herein.

Executive Overview

We achieved strong third quarter 2004 results, with net sales of approximately $2.7 billion, up $203 million or approximately 8% from third quarter 2003. The increase resulted primarily from a higher level of sales from new product areas and foreign currency translation, partially offset by pricing provided to customers and a reduction in sales due to a first quarter 2004 divestiture. Operating income for third quarter 2004 was $95 million, an increase of $23 million, compared to the prior year operating income. This increase resulted primarily from an increased level of sales, a higher level of cost savings and lower restructuring charges, partially offset by pricing provided to customers, inflation (primarily in the area of ferrous metals) and reserves for pending litigation among other matters.

We achieved our third quarter results despite a decrease in North American production of 1% (4% at the Big Three where we have higher sales volume) from the prior year quarter and the continued rapid rise in inflationary pressures impacting ferrous metals, and most recently, other commodities. In the third quarter, we continued to work with our suppliers and customers to mitigate the impact of increasing costs of ferrous metals and other commodities. However, these inflationary pressures have placed a significant operational and financial burden on the Company this year and are expected to continue for the remainder of the year and into 2005. Consequently, we cannot assure you that we will not experience increased costs or disruptions in supply over the remainder of the year or longer term, or that such increased costs will not adversely impact our future earnings.

On November 2, 2004, the Company amended and restated its existing credit agreement to provide for a new $300 million tranche E term loan, the proceeds of which, as previously announced, will be used along with a combination of available cash and, to the extent needed, funds obtained under existing liquidity arrangements to purchase its acquisition-related 8% pay-in-kind seller note (“Seller Note”) with a face value, including accrued interest, of $678 million, from a subsidiary of Northrop Grumman Corporation (“Northrop”).

Basis of Presentation

We did not historically operate as a stand-alone business, but as part of TRW Inc. (“Old TRW”), which became a subsidiary of Northrop on December 11, 2002. TRW Automotive Acquisition Corp. acquired the shares of the subsidiaries of TRW engaged in the automotive business upon consummation of the February 28, 2003 acquisition (the “Acquisition”). Subsequent to the Acquisition, TRW Automotive Acquisition Corp. changed its name to TRW Automotive Inc. (referred to herein as “TRW Automotive”). Our predecessor’s 51% interest in the joint venture, TRW Koyo Steering Systems Company (“TKS”), was not transferred to us as part of the Acquisition.

Due to the change in ownership, and the resultant application of purchase accounting, our predecessor’s pre-Acquisition and our post-Acquisition financial statements have been prepared on a different basis for the periods presented and are not comparable. For purposes of the periods presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the results of operations of our predecessor for the two months ended February 28, 2003, prior to the Acquisition, and our results of operations for the seven months ended September 26, 2003, have been combined for convenience of discussion and are collectively referred to as “nine months ended September 26, 2003.”

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Results of Operations

The following consolidated and combined statements of operations compare the results of operations for three and nine months ended September 24, 2004 and September 26, 2003.

The related variances include not only the effects of our operations, but also the estimated effect of the Transactions. Transactions means, collectively, the Acquisition, (including the issuance of the senior notes and senior secured notes, entering into the revolving credit and term loan facilities and the initiation of the trade accounts receivables securitization program) and the July 22, 2003, refinancing of our senior secured credit facilities as if they had occurred on January 1, 2003.

Total Company Results of Operations

CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)