UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

Commission File No. 001-31970

 

TRW Automotive Holdings Corp.

(Exact name of registrant as specified in its charter)

 

 

12001 Tech Center Drive

Livonia, Michigan 48150

(Address of principal executive offices)

 

(734) 855-2600
(Registrant’s telephone number, including area code)

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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 April 30, 2010, the number of shares outstanding of the registrant’s Common Stock was 119,298,243.

 

 

TRW Automotive Holdings Corp.
Index

 

 

 

TRW Automotive Holdings Corp.

 

Consolidated Statements of Operations

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

TRW Automotive Holdings Corp.

 

Condensed Consolidated Balance Sheets

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

TRW Automotive Holdings Corp.

 

Condensed Consolidated Statements of Cash Flows

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements

 

 

TRW Automotive Holdings Corp. (also referred to herein as the “Company”) is among the world’s largest and most diversified suppliers of automotive systems, modules and components to global automotive original equipment manufacturers (“OEMs”) and related aftermarkets. The Company conducts substantially all of its operations through subsidiaries. These operations primarily encompass the design, manufacture and sale of active and passive safety related products. Active safety related products principally refer to vehicle dynamic controls (primarily braking and steering), and passive safety related products principally refer to occupant restraints (primarily airbags and seat belts) and safety electronics (electronic control units and crash and occupant weight sensors). The Company is primarily a “Tier 1” supplier (a supplier which sells to OEMs). In 2009, approximately 85% of the Company’s end-customer sales were to major OEMs.

 

 

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 25, 2010.

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. These financial statements include all adjustments (consisting primarily of normal, recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company. Operating results for the three months ended April 2, 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2010.

 

The Company follows a fiscal calendar that ends on December 31. However, each fiscal quarter has three periods consisting of one five week period and two four week periods. Each quarterly period ends on a Friday, with the possible exception of the final quarter of the year, which always ends on December 31.

 

Earnings (Losses) 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, including stock options, restricted stock units and stock-settled stock appreciation rights. Further, if the inclusion of shares potentially issuable for the 3.50% exchangeable senior unsecured notes is more dilutive than the inclusion of the interest expense for those exchangeable notes, the Company utilizes the “if-converted” method to calculate diluted earnings (losses) per share. Under the if-converted method, the Company adjusts net earnings (losses) to add back interest expense and amortization of the discount recognized on the exchangeable notes and includes the number of shares potentially issuable related to the exchangeable notes in the weighted average shares outstanding.

 

If the average market price of the Company’s common stock exceeds the exercise price of outstanding stock options, the treasury stock method is used to determine the incremental number of shares to be included in the diluted earnings (losses) per share computation.

 

Net earnings (losses) attributable to TRW and the weighted average shares outstanding used in calculating basic and diluted earnings (losses) per share were:

 

 

 

 

For the three months ended April 2, 2010, 3.8 million securities were excluded from the calculation of diluted earnings per share because the inclusion of such securities in the calculation would have been anti-dilutive. For the three months ended April 3, 2009, 9.4 million securities were excluded from the calculation of diluted loss per share because the inclusion of such securities in the calculation would have been anti-dilutive due to the net loss.

 

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

 

The following table presents the movement in the product warranty liability for the periods indicated.

 

 

Equity and Comprehensive Income.  The following table presents a rollforward of the changes in equity, including changes in the components of comprehensive earnings (losses) (also referred to herein as “OCI”), attributable to TRW shareholders and to the noncontrolling interest.

 

 

Recently Adopted Accounting Pronouncements.  In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” which amends Accounting Standards Codification (“ASC”) 855. ASU No. 2010-09 conforms the guidance in ASC 855 for SEC filers to match subsequent event guidance issued by the SEC. The adoption of ASU No. 2010-09 did not have a material impact on the Company’s consolidated financial statements.

 

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820),” which amends ASC 820. ASU No. 2010-06 requires disclosures of significant transfers between Level 1 and Level 2 of the fair value hierarchy beginning on January 1, 2010. ASU No. 2010-06 further requires entities to report, on a gross basis, activity in the Level 3 fair value measurement reconciliation beginning on January 1, 2011. The adoption of ASU No. 2010-06 did not have a material impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation 46(R) (FIN 46(R)),” which has been codified as ASU No. 2009-17. ASU 2009-17 requires that the assessment of whether an entity has a controlling financial interest in a variable interest entity (“VIE”) must be performed on an ongoing basis. ASU 2009-17 also requires that the assessment to determine if an entity has a controlling financial interest in a VIE must be qualitative in nature, and eliminates the quantitative assessment required in ASC Topic 810. The adoption of ASU No. 2009-17 did not have a material impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an Amendment of SFAS No. 140,” which has been codified as ASU No. 2009-16. ASU 2009-16 eliminates the concept of a qualified special-purpose entity from GAAP. ASU 2009-16 also clarifies the language surrounding when a transferor of financial assets has surrendered control over the transferred financial assets. ASU 2009-16 establishes additional guidelines for the recognition of a sale related to the transfer of a portion of a financial asset, and requires that all transfers be measured at fair value. The adoption of ASU 2009-16 did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements.  In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force,” which amends ASC 605. ASU No. 2009-13 establishes a selling price hierarchy of vendor-specific objective evidence (“VSOE”), followed by third party evidence, followed by estimated selling price for the good or service, in that order. ASU No. 2009-13 is effective, on a prospective basis, for revenue arrangements entered into for fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of ASU No. 2009-13 is not expected to have a material impact on the Company’s consolidated financial statements.

 

 

The major classes of inventory are as follows:

 

 

 

Goodwill

 

The changes in goodwill for the period are as follows:

 

 

Intangible assets

 

The following table reflects intangible assets and related accumulated amortization:

 

 

During the first quarter of 2009, the Company identified an indicator of impairment related to one of its trademarks as a result of the continuing declines in sales of the Company’s products. Accordingly, the Company

 

performed an impairment test and determined that one of its trademark intangible assets was impaired by $30 million.

 

The Company expects that ongoing amortization expense will approximate the following:

 

 

 

The following table provides details of other (income) expense — net:

 

 

 

In March 2009, the Company, through one of its European subsidiaries, entered into a receivables factoring arrangement in Italy. This €40 million program is renewable annually, if not terminated. As of April 2, 2010, the Company did not have any factored receivables under the program and €36 million remained available for funding.

 

The Company had certain other receivables programs in place during the first quarter of 2009 and 2010, all of which were terminated prior to April 2, 2010. During the three months ended April 3, 2009, the Company recorded $1 million of expense related to its accounts receivable facilities.

 

 

The Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year, or an actual year-to-date loss, where no tax benefit can be recognized, are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon mix and timing of actual earnings versus annual projections.

 

Income tax expense for the three months ended April 2, 2010 was $50 million on pre-tax earnings of $263 million. Income tax benefit for the three months ended April 3, 2009 was $5 million on pre-tax losses of $134 million and is net of $13 million of tax expense that was recorded in establishing a valuation allowance against the net deferred tax assets of certain subsidiaries. As of April 2, 2010, the income tax rate varies from the United States statutory income tax rate due primarily to results in the United States and certain foreign jurisdictions that are currently in a valuation allowance position for which pre-tax earnings or losses do not result in the recognition of a corresponding income tax expense or benefit, as well as favorable foreign tax rates, holidays, and credits.

 

The Company reviews the likelihood that it will realize the benefit of its deferred tax assets and therefore the need for valuation allowances on a quarterly basis, or whenever events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with all other available positive and negative evidence. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. The Company continues to maintain a valuation allowance related to the net deferred tax assets in the United States and various foreign jurisdictions.

 

There is no income tax benefit recognized with respect to losses incurred and no income tax expense recognized with respect to earnings generated in jurisdictions with a valuation allowance. This causes variability in our effective tax rate. The Company intends to maintain the valuation allowances until it is more likely than not that the net deferred tax assets will be realized. If operating results improve or deteriorate on a sustained basis, our conclusions regarding the need for a valuation allowance could change, resulting in either the reversal or initial recognition of a valuation allowance in the future, which could have a significant impact on income tax expense in the period recognized and subsequent periods.

 

The Company operates in multiple jurisdictions throughout the world and the income tax returns of several subsidiaries in various tax jurisdictions are currently under examination. Although it is not possible to predict the timing of the conclusions of all ongoing tax audits with accuracy, it is possible that some or all of these examinations will conclude within the next 12 months. It is also reasonably possible that certain statute of limitations may expire relating to various foreign jurisdictions within the next 12 months. As such, it is possible that a reduction in the gross unrecognized tax benefits may occur, however, it is not possible to reasonably estimate the effect this may have upon the gross unrecognized tax benefits.

 

On March 23, 2010, the Patient Protection and Affordable Care Act was signed into law and on March 30, 2010, a companion bill, the Health Care and Education Reconciliation Act of 2010 was also signed into law in the United States. These bills will reduce the tax deduction available to the Company to the extent it receives the Medicare Part D subsidy. Although this legislation does not take effect until 2012, the Company is required to recognize the impact in the financial statements in the period in which it is signed. Due to the valuation allowance recorded against net deferred tax assets in the United States this will not impact the Company’s 2010 effective tax rate.

 

 

Pension Plans

 

The following table provides the components of net pension (income) cost for the Company’s defined benefit pension plans:

 

 

Postretirement Benefits Other Than Pensions (“OPEB”)

 

The following table provides the components of net OPEB (income) cost for the Company’s plans:

 

 

During the three months ended April 2, 2010, the Company recorded settlement gains of $2 million related to retiree medical buyouts.

 

 

The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. This hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs, as follows:

 

Level 1.  The Company utilizes the market approach to determine the fair value of its assets and liabilities under Level 1 of the fair value hierarchy. The market approach pertains to transactions in active markets involving identical or comparable assets or liabilities.

 

Level 2.  The fair values determined through Level 2 of the fair value hierarchy are derived principally from or corroborated by observable market data under the market approach. Inputs include quoted prices for similar assets, liabilities (risk adjusted) and market-corroborated inputs, such as market comparables, interest rates, yield curves and other items that allow value to be determined.

 

Level 3.  The Company utilizes the income approach or cost approach, as appropriate, to determine the fair value of its assets and liabilities under Level 3 of the fair value hierarchy. The fair value is derived principally from unobservable inputs from the Company’s own assumptions about market risk, developed based on the best information available, subject to cost-benefit analysis, and may include the Company’s own data. When there are no observable comparables, inputs used to determine value are derived from Company-specific inputs, such as projected financial data and the Company’s own views about the assumptions that market participants would use.

 

Items Measured at Fair Value on a Recurring Basis

 

The fair value measurements for assets and liabilities recognized in the Company’s condensed consolidated balance sheet are as follows:

 

 

The carrying value of fixed rate short-term debt approximates fair value because of the short term nature of these instruments, and the carrying value of the Company’s floating rate short-term debt instruments approximates fair value because of the variable interest rates pertaining to those instruments.

 

The fair value of long-term debt was determined primarily from quoted market prices, as provided by participants in the secondary marketplace. For long-term debt without a quoted market price the Company computed the fair value using a discounted cash flow analysis based on the Company’s current borrowing rates for similar types of borrowing arrangements.

 

The Company calculates the fair value of its foreign currency forward contracts, commodity contracts, and interest rate swap contracts using quoted currency forward rates, quoted commodity forward rates, and quoted interest rate curves, respectively, to calculate forward values, and then discounts the forward values.

 

The discount rates for all derivative contracts are based on quoted bank deposit or swap interest rates. For contracts which, when aggregated by counterparty, are in a liability position, the rates are adjusted by the credit spread which market participants would apply if buying these contracts from the Company’s counterparties.

 

There were no changes in the Company’s valuation techniques during the three months ended April 2, 2010.

 

The Company enters into forward contracts to hedge portions of its foreign currency denominated forecasted revenues, purchases and the subsequent cash flows after maximizing natural offsets within the consolidated group. These forward contracts mature at various dates through September 2012.

 

Items Measured at Fair Value on a Nonrecurring Basis

 

In addition to items that are measured at fair value on a recurring basis, the Company also has assets and liabilities in its balance sheet that are measured at fair value on a nonrecurring basis. As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets and liabilities that are measured at fair value on a nonrecurring basis include long-lived assets, including investments in affiliates, which are written down to fair value as a result of impairment (see Note 4 for impairments of intangible assets and Note 12 for impairments of long-lived assets), asset retirement obligations, and restructuring liabilities (see Note 12).

 

The Company has determined that the fair value measurements included in each of these assets and liabilities rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlement of liabilities, as observable inputs are not available. As such, the Company has determined that each of these fair value measurements reside within Level 3 of the fair value hierarchy. To determine the fair value of long-

 

lived assets, the Company utilizes the projected cash flows expected to be generated by the long-lived assets, then discounts the future cash flows over the expected life of the long-lived assets. For asset retirement obligations, the Company determines the fair value of the expected expense to be incurred at the time the asset retirement obligation is settled, then determines the present value of the expense using a risk-adjusted rate for the Company. For restructuring obligations, the amount recorded represents the fair value of the payments expected to be made, and are discounted if the payments are expected to extend beyond one year.

 

As of April 2, 2010, the Company had $18 million and $11 million of restructuring accruals and asset retirement obligations, respectively, which were measured at fair value upon initial recognition of the associated liability. For the three month period ended April 2, 2010, the Company recorded asset impairments of $1 million associated with its determination of the fair value of its long-lived assets that exhibited indicators of impairment.

 

 

The Company is exposed to certain risks related to its ongoing business operations. The primary risks managed through derivative financial instruments and hedging activities are foreign currency exchange rate risk, interest rate risk and commodity price risk. Derivative financial instruments and hedging activities are utilized to protect the Company’s cash flow from adverse movements in foreign currency exchange rates and commodity prices as well as to manage interest costs. Foreign currency exposures are reviewed monthly and any natural offsets are considered prior to entering into a derivative financial instrument. The Company’s exposure to interest rate risk arises primarily from changes in London Inter-Bank Offered Rates (“LIBOR”). Although the Company is exposed to credit loss in the event of nonperformance by the counterparty to the derivative financial instruments, the Company attempts to limit this exposure by entering into agreements directly with a number of major financial institutions that meet the Company’s credit standards and that are expected to fully satisfy their obligations under the contracts.

 

As of April 2, 2010, the Company had a notional value of $968 million in foreign exchange contracts outstanding and $425 million in interest rate swap agreements outstanding. Due to industry conditions and TRW’s credit ratings, the Company’s ability to increase the notional amount of its hedge portfolio may be limited.

 

Cash Flow Hedges.  For any derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of OCI, and is subsequently reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. Approximately $13 million of gains, net of tax, which are included in OCI are expected to be reclassified into earnings in the next twelve months.

 

Fair Value Hedges.  For any derivative instrument that is designated and qualifies as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the underlying hedged item is recognized in current earnings.

 

Derivative Instruments.  The fair value of the Company’s derivative instruments is as follows:

 

 

The Company utilizes a central treasury center (“treasury group”) to hedge its foreign currency exposure. The members of the consolidated group enter into intercompany derivative hedging instruments (“intercompany derivatives”) with the treasury group. To qualify the intercompany derivative instruments for hedge accounting, the treasury group offsets the exposure arising from these intercompany derivative contracts on a net basis for each foreign currency through derivative contracts entered into with unrelated third parties.

 

Members of the consolidated group initially designate intercompany derivatives as cash flow hedges. The treasury group, who is the counterparty to the intercompany derivatives, does not designate the instruments as hedging instruments. The fair value of these intercompany derivatives is not included in the table above as they are eliminated in consolidation. A net intercompany asset of $10 million related to contracts designated as hedging instruments by members of the consolidated group was eliminated against a net intercompany liability of $10 million related to these same contracts not designated as hedging instruments by the Company’s treasury group. The contracts that are entered into with the unrelated third parties are included in the table above as derivatives not designated as hedging instruments.

 

The impact of derivative instruments on the condensed consolidated financial statements is as follows:

 

Fair Value Hedges:

 

 

Cash Flow Hedges:

 

 

For the three months ended April 2, 2010, the amount of gain or loss recognized in income related to hedge ineffectiveness was de minimis. For the three months ended April 3, 2009, the amount of loss recognized in income and the amount excluded from the assessment of hedge effectiveness were $1 million and a de minimis amount, respectively.

 

Undesignated Derivatives:

 

 

Credit-Risk-Related Contingent Features

 

The Company has entered into International Swaps and Derivatives Association (“ISDA”) agreements with each of its significant derivative counterparties. These agreements provide bilateral netting and offsetting of accounts that are in a liability position with those that are in an asset position. These agreements do not require the Company to maintain a minimum credit rating in order to be in compliance and do not contain margin call provisions or collateral requirements that could be triggered by derivative instruments in a net liability position.

 

 

Total outstanding debt of the Company consisted of the following:

 

 

Senior Notes

 

8.875% Senior Notes.  In November 2009, the Company issued $250 million in aggregate principal amount of 8.875% senior unsecured notes due 2017 (the “8.875% Senior Notes”) in a private placement. Interest is payable semi-annually on June 1 and December 1 of each year, beginning on June 1, 2010.

 

2007 Senior Notes.  In March 2007, the Company issued 7% senior unsecured notes and 63/8% senior unsecured notes, each due 2014, in principal amounts of $500 million and €275 million, respectively, and 71/4% senior unsecured notes due 2017 in the principal amount of $600 million (collectively, the “2007 Senior Notes”) in a private placement. Interest is payable semi-annually on March 15 and September 15 of each year.

 

During the three months ended April 3, 2009, the Company entered into transactions to repurchase portions of its senior unsecured notes, totaling $47 million in principal amount and recorded a gain on retirement of debt of $34 million, including the write-off of a portion of debt issuance costs and premiums. The repurchased notes were retired upon settlement. As market conditions warrant, the Company may from time to time repurchase debt securities issued by the Company or its subsidiaries, in privately negotiated or open market transactions, by tender offer, exchange offer, or by other means.

 

Exchangeable Senior Notes

 

Exchangeable Senior Notes.  In November 2009, the Company issued approximately $259 million in aggregate principal amount of 3.50% exchangeable senior unsecured notes due 2015 (the “Exchangeable Senior Notes”) in a private placement. Prior to September 1, 2015, the notes are exchangeable only upon specified events and, thereafter, at any time based upon an initial exchange rate of 33.8392 shares of the Company’s common stock per $1,000 principal amount of notes (equivalent to approximately $29.55 per share of common stock), subject to adjustment. Upon exchange, the Company’s exchange obligation may be settled, at its option, in shares of its stock, cash or a combination of cash and shares of its stock. Interest is payable on June 1 and December 1 of each year, beginning on June 1, 2010. The Exchangeable Senior Notes will mature on December 1, 2015, unless earlier exchanged, repurchased by the Company at the holder’s option upon a fundamental change, or redeemed by the Company after December 6, 2013, at the Company’s option if certain conditions are met.

 

The Exchangeable Senior Notes were recorded with a debt discount which decreased debt and increased paid-in-capital in order to separate the liability and embedded equity components. The debt component will accrete up to the principal amount to effectively yield 9.0% over the term of the debt. The debt discount as of April 2, 2010

 

and December 31, 2009 was $62 million and $64 million, respectively. The total interest expense recognized for the three months ended April 2, 2010 was approximately $4 million, including $2 million relating to the stated coupon rate.

 

Senior Secured Credit Facilities

 

In December 2009, the Company entered into its Seventh Amended and Restated Credit Agreement, dated as of December 21, 2009 (the “Seventh Credit Agreement”), with the lenders party thereto. The Seventh Credit Agreement amended certain provisions of the Company’s previous credit agreement, including the interest coverage ratio covenant, applicable margins, as well as certain other covenants applicable to the Company. The Seventh Credit Agreement provides for senior secured credit facilities consisting of (i) a revolving credit facility in the amount of $1,256 million, of which $411 million matures May 9, 2012 (the “2012 Portion of the Revolving Credit Facility”) and $845 million matures November 30, 2014, subject to certain conditions described below (the “2014 Portion of the Revolving Credit Facility” and, together with the 2012 Portion of the Revolving Credit Facility, the “Revolving Credit Facility”), (ii) a $225 million Tranche A-2 Term Loan Facility (the “Term Loan A-2”), and (iii) a $175 million Tranche B-3 Term Loan Facility (the “Term Loan B-3” and, together with the Revolving Credit Facility and the Term Loan A-2, the “Senior Secured Credit Facilities”).

 

The Seventh Credit Agreement provides for the Term Loan A-2 and the Term Loan B-3 to amortize 1% per annum in equal quarterly installments which began March 31, 2010 with the remaining balance due at maturity on May 30, 2015 and 2016, respectively, subject to earlier maturity on December 13, 2013, if (i) the Company has not refinanced its senior unsecured notes due 2014 with debt maturing after August 31, 2016 or (ii) the Company does not then have liquidity available to repay the senior unsecured notes due 2014 plus at least $500 million of additional liquidity. The 2014 Portion of the Revolving Credit Facility is also subject to earlier maturity on December 13, 2013 under the same circumstances. During the first quarter of 2010, the Company optionally repaid $100 million of its outstanding Term Loan B-3 with cash on hand. Subsequent to the first quarter, on April 30, 2010, the Company optionally repaid the remaining Term Loan B-3 balance outstanding of $75 million with cash on hand.

 

The applicable margin in effect as of April 2, 2010 for the Senior Secured Credit Facilities was 3.75% with respect to base rate borrowings and 4.75% with respect to eurocurrency borrowings. The commitment fee on the undrawn amounts under the Revolving Credit Facility was 0.50%. The commitment fee and the applicable margin for borrowing on the Senior Secured Credit Facilities are subject to leverage-based grids. After the filing of financial statements for the fiscal quarter ending April 2, 2010, the Seventh Credit Agreement provides for two lower leverage-based grids for borrowings on the 2014 Portion of the Revolving Credit Facility and on the Term Loan A-2.

 

The Senior Secured Credit Facilities are secured by a perfected first priority security interest in, and mortgages on, substantially all tangible and intangible assets of TRW Automotive Inc. (“TAI”), an indirect wholly owned subsidiary of TRW Automotive Holdings Corp., and substantially all of its domestic subsidiaries, including a pledge of 100% of the stock of TAI and substantially all of its domestic subsidiaries and 65% of the stock of foreign subsidiaries owned directly by domestic entities. In addition, foreign borrowings under the Senior Secured Credit Facilities will be secured by assets of the foreign borrowers.

 

Lehman Commercial Paper Inc. (“LCP”) has a $48 million unfunded commitment under the 2012 Portion of the Revolving Credit Facility. The Company has excluded LCP’s commitment from the description of the Revolving Credit Facility and all references to availability contained in this Report.

 

Other Borrowings

 

The Company has borrowings under uncommitted credit agreements in many of the countries in which it operates. The borrowings are from various domestic and international banks at quoted market interest rates.

 

In 2008, the Company entered into interest rate swap agreements with a total notional value of $75 million to hedge the variability of payments associated with its variable term debt, effectively changing a floating rate debt obligation into a fixed rate obligation. As of April 2, 2010, the Company recorded an obligation of approximately $2 million along with a corresponding reduction in OCI related to these interest rate swap agreements.

 

Ineffectiveness from the interest rate swaps recorded to other income in the consolidated statement of operations was insignificant for the three months ended April 2, 2010 and April 3, 2009, respectively.

 

In January and February 2010, the Company entered into interest rate swap agreements with a total notional value of $350 million to effectively change a fixed rate debt obligation into a floating rate obligation. The total notional amounts of these agreements are equal to the designated face value of the debt instrument. The swap agreements are expected to settle in March 2017, the maturity date of the corresponding debt instrument. Since the 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 April 2, 2010, the Company recorded an obligation of $6 million relating to these interest rate swaps, resulting from increases in forward rates, along with a corresponding reduction in debt.

 

 

Restructuring charges and asset impairments include the following:

 

 

Restructuring charges and asset impairments by segment are as follows:

 

Chassis Systems

 

For the three months ended April 2, 2010, this segment recorded $1 million of income from severance-related postemployment benefits due to a change in estimates. For the three months ended April 3, 2009, this segment incurred charges of approximately $8 million primarily related to severance, retention and outplacement services at various production facilities, $1 million for severance-related postemployment benefits, and $2 million related to other fixed asset impairments to write down certain machinery and equipment to fair value based on estimated future cash flows.

 

Occupant Safety Systems

 

For the three months ended April 2, 2010, this segment incurred charges of approximately $1 million primarily related to severance, retention and outplacement services at various production facilities. For the three months ended April 2, 2010 and April 3, 2009, this segment recorded $7 million and $4 million, respectively, of severance-related postemployment benefit expense. Also during the first quarter of 2010, this segment recorded other fixed asset impairments of $1 million to write down certain machinery and equipment to fair value based on estimated future cash flows.

 

Electronics

 

For the three months ended April 2, 2010, this segment recorded $1 million of income related to severance, retention and outplacement services at various production facilities due to a change in estimates. For the three months ended April 3, 2009, this segment incurred charges of approximately $1 million primarily related to severance, retention and outplacement services at various production facilities.

 

Automotive Components

 

For the three months ended April 3, 2009, this segment incurred charges of approximately $3 million primarily related to severance, retention and outplacement services at various production facilities. Also during the three months ended April 3, 2009, this segment recorded $2 million of severance-related postemployment benefit expense and $2 million of other fixed asset impairments to write down certain machinery and equipment to fair value based on estimated future cash flows.

 

Corporate

 

For the three months ended April 3, 2009, corporate facilities incurred charges of approximately $1 million primarily related to severance, retention, and outplacement services at various facilities. Corporate also recorded intangible asset impairments of $30 million related to certain indefinite-lived intangible assets (see Note 4) during the first quarter of 2009.

 

Restructuring Reserves

 

The following table shows the movement of the restructuring reserves for severance and other charges but excludes reserves related to severance-related postemployment benefits:

 

 

Of the $18 million restructuring reserve as of April 2, 2010, approximately $12 million is expected to be paid in the remainder of 2010. The remaining balance is expected to be paid in 2011 and 2012 and is comprised primarily of involuntary employee termination arrangements in the United States and Europe.

 

 

The Company’s authorized capital stock consists of (i) 500 million shares of common stock, par value $.01 per share (the “Common Stock”), of which 119,246,564 shares were issued and outstanding as of April 2, 2010, net of 4,668 shares of treasury stock withheld at cost to satisfy tax obligations for a specific grant under the Company’s stock-based compensation plan; 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.

 

From time to time, capital stock is issued in conjunction with the exercise of stock options and the vesting of restricted stock units issued as part of the Company’s stock incentive plan.

 

 

Equity Awards

 

On March 3, 2010, the Company granted 535,300 stock-settled stock appreciation rights (“SSARs”) to employees and executive officers of the Company pursuant to the Amended & Restated TRW Automotive Holdings Corp. 2003 Incentive Plan (as amended, the “Plan”). Each SSAR entitles the grantee to receive the appreciation in value of one underlying share of the Company’s stock from the grant date fair market value of $26.91 to the fair market value on the exercise date, although the stock price at exercise is limited to a maximum value of $50.00.

 

On March 3, 2010, the Company also granted 632,100 restricted stock units to employees, executive officers and independent directors of the Company pursuant to the Plan.

 

As of April 2, 2010, the Company had 4,886,160 shares of Common Stock available for issuance under the Plan. In addition, 6,744,374 options, 535,300 SSARs and 1,197,698 nonvested restricted stock units were outstanding as of April 2, 2010. The SSARs and more than one-half of the stock options have an 8-year term and vest ratably over three years, whereas the remaining stock options have a 10-year term and vest ratably over five years. Substantially all of the restricted stock units also vest ratably over three years.

 

The total share-based compensation expense recognized for the Plan was as follows:

 

 

Cash Awards

 

For the three months ended April 2, 2010, the Company recognized compensation expense associated with its cash-settled share-based compensation and retention awards of approximately $5 million.

 

2009 Awards.  In February 2009, the Company issued cash incentive awards for named executives, vice presidents and independent directors and retention awards for executives and vice presidents of the Company (the “2009 Awards”). For compensation expense purposes, the fair value of the share-based portion of the 2009 Awards was determined based on a lattice model (the Monte Carlo simulation) and is re-measured quarterly. The pro-rata vested portion of the awards is recognized as a liability. The liability and fair value of the 2009 Awards as of April 2, 2010 were approximately $22 million and $50 million, respectively (with a maximum payout amount of approximately $51 million).

 

2010 Awards.  In March 2010, the Company issued cash incentive awards for named executive officers (the “2010 Awards”). Each award is divided into three tranches of equal value with a tranche vesting on each of the first, second and third anniversaries of the agreement date. The target aggregate value of the awards is approximately $2.6 million, but could range from a minimum value of zero to a maximum value of $3.4 million depending on movement of the Company’s stock price during certain determination periods. Compensation expense associated with the 2010 Awards was de minimis for the three months ended April 2, 2010 due to the timing of the award.

 

 

Blackstone.  In connection with the acquisition by an affiliate of The Blackstone Group L.P. (“Blackstone”) of the shares of the subsidiaries of TRW Inc. engaged in the automotive business from Northrop Grumman Corporation (“Northrop”) (the transaction between Blackstone and Northrop is referred to herein as 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 has agreed to pay an annual monitoring fee of $5 million for these services. Approximately $1 million is included in the consolidated statements of operations for each of the three month periods ended April 2, 2010 and April 3, 2009.

 

In March 2010, Automotive Investors LLC (“AI LLC”), an affiliate of Blackstone, and certain management stockholders sold 11,000,000 shares of the Company’s Common Stock in an underwritten registered public offering (the “Offering”) pursuant to the Company’s shelf registration statement on Form S-3 filed with the SEC on August 10, 2009. The Company did not receive any proceeds from the Offering, nor did its number of shares

 

outstanding materially change. As a result of the Offering, AI LLC’s ownership interest in the Company decreased from 39% to 30%.

 

Core Trust Purchasing Group.  In the first quarter of 2006, the Company entered into a five-year participation agreement (“participation agreement”) with Core Trust Purchasing Group, a division of HealthTrust Purchasing Corporation (“CPG”), designating CPG as its exclusive “group purchasing organization” for the purchase of certain products and services from third party vendors. CPG secures from vendors pricing terms for goods and services that are believed to be more favorable than participants in the group purchasing organization could obtain for themselves on an individual basis. Under the participation agreement, the Company must purchase 80% of the requirements of its participating locations for core categories of specified products and services, from vendors participating in the group purchasing arrangement with CPG. If the Company does not do so, the sole remedy of CPG is to terminate the agreement. The agreement does not obligate the Company to purchase any fixed or minimum quantities nor does it provide any mechanism for CPG to require the Company to purchase any particular quantity. In connection with purchases by its participants (including the Company), CPG receives a commission from the vendors in respect of such purchases.

 

Although CPG is not affiliated with Blackstone, in consideration for Blackstone’s facilitating the Company’s participation in CPG and monitoring the services CPG provides to the Company, CPG remits a portion of the commissions received from vendors in respect of purchases by the Company under the participation agreement to an affiliate of Blackstone, with whom Messrs. Robert Friedman and Neil Simpkins, members of our Board, are affiliated and in which they may have an indirect pecuniary interest. For the three months ended April 2, 2010 and April 3, 2009, the affiliate of Blackstone received de minimis fees from CPG in respect of the Company’s purchases.

 

 

The following tables present certain financial information by segment:

 

 

See Note 12 for a summary of restructuring charges and asset impairments by segment.

 

 

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 the Company’s business activities with respect to commercial, patent, product liability, environmental and occupational safety and health law 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. For Superfund sites where the Company or its subsidiaries and either Chrysler Corporation (“Chrysler”) or General Motors Corporation (“GM”) are both potentially responsible parties, the Company’s costs or liabilities may increase because of the discharge of certain claims in the Chapter 11 bankruptcy proceedings of those companies. The Company is monitoring these situations and increasing reserves as appropriate.

 

As of April 2, 2010, the Company had reserves for environmental matters of $52 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 relating to the Acquisition under which Northrop has agreed to indemnify the Company for 50% of any environmental liabilities associated with the operation or ownership of the Company’s automotive business existing at or prior to the Acquisition, subject to certain exceptions. 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, results of operations or cash flows. However, the Company cannot predict the effect on the Company’s financial position, results of operations or cash flows 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, results of operations or cash flows or the possible effect of compliance with environmental requirements imposed in the future.

 

The Company faces an inherent business risk of exposure to product liability, recall and warranty claims in the event that its products actually or allegedly fail to perform as expected or the use of its products results, or is alleged to result, in bodily injury and/or property damage. Accordingly, the Company could experience material warranty, recall or product liability losses in the future.

 

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, results of operations or cash flows. 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 the Company’s 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 illness.

 

Neither settlement costs in connection with asbestos claims nor annual legal fees to defend these claims have been material in the past. These claims are strongly disputed by the Company and it has been its 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 effect on the Company’s financial condition, results of operations or cash flows.

 

The following should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the U.S. Securities and Exchange Commission on February 25, 2010, and the other information included herein. References in this quarterly report on Form 10-Q (this “Report”) to “we,” “our,” or the “Company” refer to TRW Automotive Holdings Corp., together with its subsidiaries.

 

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. Our operations primarily encompass the design, manufacture and sale of active and passive safety related products, which often includes the integration of electronics components and systems. We operate our business along four segments: Chassis Systems, Occupant Safety Systems, Electronics and Automotive Components.

 

We are primarily a “Tier 1” supplier, with over 85% of our end-customer sales in 2009 made to major OEMs. Of our 2009 sales, approximately 58% were in Europe, 25% were in North America, 12% were in Asia, and 5% were in the rest of the world.

 

Financial Results

 

For the three months ended April 2, 2010:

 

 

Recent Trends and Market Conditions

 

The automotive industry continued to show signs of a recovery during the first quarter of 2010. The primary trends and market conditions impacting our business in 2010 include:

 

General Economic Conditions:

 

During the first quarter of 2010, a general improvement in near-term economic conditions and increasing consumer demand for new car sales provided optimism for the industry, despite the continuing high level of unemployment. Even in light of the recent rebound, the industry remains susceptible to unbalanced geographic growth or setbacks resulting from fragile economies and the cessation of vehicle incentive programs, primarily in Europe.

Production Levels:

 

Production continued to increase sequentially during the first quarter of 2010 due to increased consumer demand, fulfillment of vehicle incentive program orders and inventory restocking. At the current levels of vehicle production, profitability for automotive suppliers is more achievable than it was at the depressed levels experienced in 2009.

 

In Europe, where approximately 58% of our sales originated in 2009, vehicle production was stronger than anticipated, primarily as a result of the various continuing European automobile scrappage programs, the replenishment of inventories and increased exports. Although the overall trends continue to be positive, and may continue in the near term, the recent increase in demand may diminish as those incentive programs expire.

 

In North America, where approximately 25% of our sales originated in 2009, the automobile market also experienced higher production levels in the first quarter of 2010. This improvement was primarily attributable to increased consumer demand resulting from improved consumer sentiment and pent-up demand for durable goods due to decreased spending over the preceding 18 months.

 

While the improvement in global production is encouraging, it is unclear whether this trend is sustainable beyond the near term.

 

Product Mix:

 

Product mix tends to be influenced by a variety of factors such as governmental scrappage programs and regulations as well as fluctuating gasoline prices. In Europe, for instance, the demand spurred by the various scrappage programs has generally tended to be toward smaller, more fuel efficient vehicles. In North America, product mix tends to be more correlated to short-term fluctuations in the price of gasoline, thereby causing production to swing between sport utility vehicles/light trucks and more fuel efficient passenger cars. In general, smaller, more fuel efficient vehicles tend to be less profitable for OEMs and suppliers.

 

Supplier Restructuring Actions:

 

Many automobile suppliers implemented various forms of operational restructuring actions during 2009 to better align their cost structure with production levels. With those operational actions firmly in place, many of those suppliers took advantage of equity and bond markets in late 2009 to strengthen their financial position. However, concerns continue to exist for suppliers who were not able to take such actions to strengthen their financial position; those companies tended to be smaller Tier 2 and Tier 3 suppliers. Despite recent improvements in industry conditions, the Tier 2 and Tier 3 supply base may still find it difficult to arrange working capital financing from traditional sources (e.g., commercial banks) as production levels increase. In some cases, financial instability of the Tier 2 and Tier 3 supply base poses a risk of supply disruption to us or may require intervention by us to provide financial support in order to avoid supply disruption. We have dedicated resources and systems to closely monitor the viability of our supply base and are constantly evaluating opportunities to mitigate the risk and/or effects of any supplier disruption.

 

Inflation and Pricing Pressure:

 

Overall commodity volatility (both inflationary and deflationary) is an ongoing concern for our business and has been a considerable operational and financial focus for us. During the first quarter of 2010, the cost of certain commodities essential to our business increased, the effect of which is expected to negatively impact our results in the second half of 2010. Further, as production levels rise, commodity inflationary pressures may increase, both in the automotive industry and in the broader economy. We continue to monitor commodity costs and work with our suppliers and customers to manage changes in such 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.

 

Additionally, pressure from our customers to reduce prices is characteristic of the automotive supply industry. Virtually all OEMs have policies of seeking price reductions each year. Historically, we have taken steps to reduce costs and minimize or resist price reductions. However, to the extent our cost reductions are not sufficient to support committed price reductions, our profit margins could be negatively affected.

Foreign Currencies:

 

During the first quarter of 2010, we experienced a positive impact on our reported earnings in U.S. dollars resulting from the translation of results denominated in other currencies, mainly the euro, as well as our hedging activities. Additionally, operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our operating companies. While we employ financial instruments to hedge certain exposures to fluctuations in foreign currency exchange rates, these hedging actions will not entirely insulate us from currency effects and such programs may not always be available to us at economically reasonable costs.

 

Strategic Initiatives

 

On an ongoing basis, we evaluate our competitive position in the global automotive supply industry and determine what actions are required to maintain and improve that position. The significant changes in the global automotive industry over the past two years (such as significant fluctuations in demand and production, unfavorable shifts in product mix and industry-wide financial distress) have caused us to reevaluate and reconfigure our business to establish a more appropriate cost and capital structure relative to anticipated production levels.

 

Throughout 2009 and into 2010, we have undertaken a number of operational and financial restructuring and cost reduction initiatives as we managed through the recent economic downturn and initial recovery. Our ongoing initiatives are focused on managing costs during periods of increasing production levels, maintaining discipline on capital expenditures and other discretionary spending and reducing debt.

 

Although we believe that we have established a firm foundation for continued profitability, we continue to evaluate our global footprint to ensure that the Company is properly configured and sized based on changing market conditions. As such, further plant rationalization and global workforce reduction efforts may be warranted.

 

Our Debt and Capital Structure

 

We continue to focus on improving the strength and flexibility of our capital structure. During the first quarter of 2010, we optionally repaid $100 million of our outstanding Term Loan B-3 with cash on hand. Subsequent to our first quarter, on April 30, 2010, we optionally repaid the remaining Term Loan B-3 balance outstanding of $75 million with cash on hand.

 

As market conditions warrant, we and our major equity holders, including The Blackstone Group L.P. and its affiliates, may from time to time repurchase debt securities issued by the Company or its subsidiaries, in privately negotiated or open market transactions, by tender offer, exchange offer, or by other means.

 

See “LIQUIDITY AND CAPITAL RESOURCES” below and Note 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Report for further information.

 

Income Tax Expense

 

The Company reviews the likelihood that it will realize the benefit of its deferred tax assets and therefore the need for valuation allowances on a quarterly basis, or whenever events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with all other available positive and negative evidence. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. The Company continues to maintain a valuation allowance related to the net deferred tax assets in the United States and various foreign jurisdictions.

 

There is no income tax benefit recognized with respect to losses incurred and no income tax expense recognized with respect to earnings generated in jurisdictions with a valuation allowance. This causes variability in our effective tax rate. The Company intends to maintain the valuation allowances until it is more likely than not that the net deferred tax assets will be realized. If operating results improve or deteriorate on a sustained basis, our conclusions regarding the need for a valuation allowance could change, resulting in either the reversal or initial recognition of a valuation allowance in the future, which could have a significant impact on income tax expense in the period recognized and subsequent periods.

RESULTS OF OPERATIONS

 

The following unaudited consolidated statements of operations compare the results of operations for the three months ended April 2, 2010 and April 3, 2009.

 

Total Company Results of Operations

 

Consolidated Statements of Operations
(Unaudited)