Quarterly Report

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549-1004

 

 

 

 

Form 10-Q

 

 

 

12001 Tech Center Drive

Livonia, Michigan 48150

(Address, Including Zip Code, of Registrant’s 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

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

 

As of October 23, 2007, the number of shares outstanding of the registrant’s Common Stock was 100,614,451.

 

TRW Automotive Holdings Corp.

 

Index

 

 

PART I — FINANCIAL INFORMATION

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

See accompanying notes to unaudited condensed consolidated financial statements.

TRW Automotive Holdings Corp.

 

 

 

Comprehensive Earnings.   The components of comprehensive earnings, net of related tax, are as follows:

 

 

Recent Accounting Pronouncements.   In February 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on the items for which the fair value option has been elected in earnings. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company has not completed its analysis of the potential impact of the adoption of SFAS No. 159 on the Company’s financial position, results of operations, or cash flows.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106, and 132(R)” (“SFAS No. 158”), which requires employers to recognize the overfunded or underfunded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. The Company adopted the recognition provisions of SFAS No. 158 as of December 31, 2006, resulting in the recognition of the Company’s overfunded and underfunded defined benefit pension and other postretirement plans as assets and liabilities, respectively, with corresponding offsets, net of tax, to accumulated other comprehensive earnings. Such adoption had no impact on the Company’s results of operations or cash flows. In addition, SFAS No. 158 requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. This requirement is effective for fiscal years ending after December 15, 2008. The Company has

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

not completed its analysis of the potential impact of the adoption of the measurement date principles of SFAS No. 158 on the Company’s financial position, results of operations, or cash flows.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not completed its analysis of the potential impact of the adoption of SFAS No. 157 on the Company’s financial position, results of operations, or cash flows.

 

In June 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement disclosures of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires an entity to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires an entity to recognize in the financial statements each tax position that meets the more likely than not criteria, measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 as of January 1, 2007, and recognized no material adjustment to the opening balance of retained earnings as a cumulative effect of change in accounting principle. See Note 8 for more information regarding the impact of adopting FIN 48.

 

 

Restructuring charges and asset impairments include the following:

 

 

 

For the three and nine months ended September 28, 2007, the Company incurred charges of $9 million and $17 million, respectively, related to severance, retention and outplacement services at various production facilities in its Chassis Systems segment. For the three and nine months ended September 29, 2006, the Company incurred charges of $7 million and $17 million, respectively, related to severance, retention and outplacement services at various facilities.

 

For the three and nine months ended September 29, 2006, the Company recorded net asset impairments related to restructuring activities of approximately $2 million to write down certain machinery and equipment to fair value based on estimated future cash flows.

 

For the three and nine months ended September 29, 2006, the Company recorded curtailment gains of approximately $10 million related to a reduction of retiree medical benefit obligations for certain employees at a closed facility.

 

For the nine months ended September 28, 2007, the Company recorded other asset impairments of $3 million to write down certain buildings to fair value based on current real estate market conditions, and $3 million for the nine months ended September 29, 2006 to write down certain machinery and equipment to fair value based on estimated future cash flows.

 

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

During the three months ended September 28, 2007, the Company incurred charges of $1 million related to severance, retention and outplacement services at various production facilities in its Occupant Safety Systems segment. During the nine months ended September 28, 2007, the Company incurred charges of $2 million related to severance, retention and outplacement services at various production facilities, which were offset by a $2 million reversal of reserves for severance and other charges associated with the closing of a facility as the related activities were completed at a lower cost than previously estimated.

 

The Company incurred approximately $1 million and $4 million during the three and nine months ended September 29, 2006, respectively, for charges primarily related to severance, retention and outplacement services at a closed facility.

 

For the nine months ended September 28, 2007, the Company recorded net asset impairments related to restructuring activities of $3 million to write-down certain machinery and equipment to fair value based on estimated future cash flows, and $1 million for the nine months ended September 29, 2006 to write down certain buildings to fair value based on current real estate market conditions.

 

For the three and nine months ended September 29, 2006, the Company recorded other asset impairments of approximately $1 million and $2 million, respectively, to write down certain property, plant and equipment to fair value based on estimated future cash flows.

 

 

For the three and nine months ended September 28, 2007, the Company incurred charges of $3 million and $8 million, respectively, related to severance, retention and outplacement services at various production facilities in its Automotive Components segment.

 

The Company incurred approximately $2 million and $3 million during the three and nine months ended September 29, 2006, respectively, for charges related to lease termination costs, severance and headcount reductions at certain production facilities.

 

For the nine months ended September 28, 2007, the Company recorded net asset impairments related to restructuring activities of $1 million to write down certain machinery and equipment to fair value based on estimated future cash flows.

 

 

Of the $39 million restructuring reserves accrued as of September 28, 2007, approximately $14 million is expected to be paid in 2007. The remainder is expected to be paid in 2008 through 2011, and is comprised mainly of recently announced restructuring actions, as well as involuntary employee termination arrangements outside the United States.

 

During the nine months ended September 28, 2007, the Company recorded net adjustments of approximately $1 million to purchase price allocations related to acquisitions in accordance with the provisions of EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” For the three and nine months ended September 29, 2006, such adjustments to the purchase price allocation totaled $12 million and $7 million, respectively.

 

 

The major classes of inventory are as follows:

 

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

 

 

During the nine months ended September 28, 2007, the Company completed an acquisition in its Chassis Systems segment which was not material to the Company’s financial position. In conjunction with this acquisition, the Company recorded goodwill of approximately $5 million, which is subject to adjustment while the Company finalizes its purchase price allocation. The Company also reduced goodwill in its Occupant Safety Systems segment by $3 million during the nine months ended September 28, 2007 in conjunction with the purchase price finalization for an earlier acquisition.

 

Intangible assets

 

The following table reflects intangible assets and related amortization:

 

 

In conjunction with the acquisition in its Chassis Systems segment, the Company recorded customer relationships of approximately $4 million during the nine months ended September 28, 2007.

 

The weighted average amortization periods for intangible assets subject to amortization are as follows:

 

 

 

 

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

 

 

During the three and nine month periods ended September 28, 2007, the Company recognized gains on asset sales of $7 million and $19 million, respectively, primarily related to sales of various buildings and real estate. The Company received $18 million and $35 million, respectively, from those sales during the three and nine months ended September 28, 2007.

 

 

United States Facility.   The United States receivables facility, as amended (the “Receivables Facility”), extends until December 2009 and provides up to $209 million in funding from commercial paper conduits sponsored by commercial lenders, based on availability of eligible receivables and other customary factors. On January 19, 2007, the Company reduced the committed amount of the facility from $250 million to $209 million and amended certain terms of the Receivables Facility to increase availability of funding under the facility.

 

Under the Receivables Facility, certain subsidiaries of the Company (the “Sellers”) sell trade accounts receivable (the “Receivables”) originated by them and certain of their subsidiaries as sellers in the United States through the Receivables Facility. Receivables are sold to TRW Automotive Receivables LLC (the “Transferor”) at a discount. The Transferor is a bankruptcy remote special purpose limited liability company that is a wholly-owned subsidiary of the Company. The Transferor’s purchase of Receivables is financed through a transfer agreement with TRW Automotive Global Receivables LLC (the “Borrower”). Under the terms of the transfer agreement, the Borrower purchases all Receivables sold to the Transferor. The Borrower is a bankruptcy remote special purpose limited liability company that is wholly-owned by the Transferor and is not consolidated when certain requirements are met.

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

Generally, multi-seller commercial paper conduits supported by committed liquidity facilities are available to provide cash funding for the Borrowers’ purchase of Receivables through secured loans/tranches to the extent desired and permitted under the receivables loan agreement. The Transferor records a receivable from the Borrower for the difference between Receivables purchased and cash borrowed through the Receivables Facility. The Company does not own any variable interests, as that term is defined in FASB Interpretation 46(R) “Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51,” in the multi-seller commercial paper conduits.

 

The Sellers act as servicing agents per the servicing agreement, and continue to service the Receivables for which they receive a monthly servicing fee at a rate of 1% per annum of the average daily outstanding balance of Receivables. The usage fee under the Receivables Facility is 0.85% of outstanding borrowings. In addition, the Company is required to pay a fee of 0.40% on the unused portion of the Receivables Facility. Both the usage fee and the fee on the unused portion of the Receivables Facility are subject to a leverage-based grid. These rates are per annum and payments of these fees are made to the lenders monthly.

 

The Receivables Facility can be treated as a general financing agreement or as an off-balance sheet financing arrangement. Whether the funding and Receivables are shown as liabilities and assets, respectively, on the Company’s consolidated balance sheet, or, conversely, are removed from the consolidated balance sheet depends on the level of fair value of the multi-seller conduits’ loans to the Borrower. When such level is at least 10% of the fair value of all of the Borrower’s assets (consisting principally of Receivables sold by the Sellers), the Borrower is considered a qualifying special purpose entity under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities;” and its financial statements are not included in the Company’s consolidated financial statements. Costs associated with the Receivables Facility are recorded as accounts receivable securitization costs in the Company’s consolidated statement of earnings. The proceeds received net of repayments disbursed are included in cash flows from operating activities in the consolidated statement of cash flows. Repayments disbursed less proceeds received from the Receivables Facility in the three month period ended September 28, 2007 were $127 million. Proceeds received less repayments disbursed on the Receivables Facility were zero in the nine month period ended September 28, 2007.

 

At such time as the fair value of the multi-seller commercial paper conduits’ loans are less than 10% of the fair value of all of the Borrower’s assets, the Company is required to include the financial statements of the Borrower in the Company’s consolidated financial statements. The Company had no outstanding borrowings under the Receivables Facility as of September 28, 2007 and December 31, 2006. As such, the fair value of the multi-seller conduits’ loans was less than 10% of the fair value of all of the Borrower’s assets and, therefore, the financial statements of the Borrower were included in the Company’s condensed consolidated financial statements as of September 28, 2007 and December 31, 2006.

 

Availability of funding under the Receivables Facility depends primarily upon the outstanding trade accounts receivable balance, and is determined by reducing the receivables balance by outstanding borrowings under the program, the historical rate of collection on those receivables and other characteristics of those receivables that affect their eligibility (such as bankruptcy or downgrading below investment grade of the obligor, delinquency and excessive concentration). As of September 28, 2007, based on the terms of the Receivables Facility and the criteria described above, approximately $242 million of the Company’s reported accounts receivable were considered eligible to support borrowings under the Receivables Facility, of which approximately $178 million was available for funding.

 

Other Receivables Facilities.   In addition to the Receivables Facility described above, certain of the Company’s European subsidiaries have entered into receivables financing arrangements. The Company has up to €75 million available until January 2008 through an arrangement involving a wholly-owned special purpose vehicle, which purchases trade receivables from its German affiliates and sells those trade receivables to a German bank. Additionally, the Company has a receivables financing arrangement of up to £25 million available until November 2008 through an arrangement involving a wholly-owned special purpose vehicle, which purchases trade

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

receivables from its United Kingdom affiliates and sells those trade receivables to a United Kingdom bank. The Company has a factoring arrangement in France which provides for availability of up to €80 million until July 2008. This arrangement involves a wholly-owned special purpose vehicle, which purchases trade receivables from its French affiliates and sells those trade receivables to a French bank. All European arrangements are renewable for one year at the end of their respective terms, if not terminated. As of September 28, 2007, approximately €128 million and £25 million were available for funding under the Company’s European accounts receivable facilities. There were no outstanding borrowings under any of these facilities as of September 28, 2007 or December 31, 2006.

 

 

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 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 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 September 28, 2007 was $18 million on pre-tax earnings of $41 million, while income tax expense for the nine months ended September 28, 2007 was $116 million on pre-tax earnings of $150 million and does not include a tax benefit related to the $155 million loss on retirement of debt. See Note 10. Income tax expense for the three and nine months ended September 29, 2006 was $18 million on pre-tax income of $23 million and $134 million on pre-tax income of $277 million, respectively. Income tax expense for the nine months ended September 29, 2006, does not include a tax benefit related to the $57 million loss on retirement of debt. See Note 10. The income tax rate varies from the United States statutory income tax rate due primarily to losses in the United States and certain foreign jurisdictions, including the losses on retirement of debt noted above, without the recognition of a corresponding income tax benefit, partially offset by favorable foreign tax rates, holidays, and credits.

 

For the three months ended September 28, 2007, income tax expense includes a net benefit of $5 million as the result of tax law changes enacted in Germany and the United Kingdom. Among other changes, the tax legislation in both jurisdictions includes reductions in the corporate tax rates for 2008 forward. While the reduced tax rates are not effective until 2008, the deferred tax assets and liabilities in these jurisdictions have been revalued during the three months ended September 28, 2007 to reflect the new rates.

 

The Company adopted FIN 48 as of January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” As a result of the adoption of FIN 48, the Company recognized no material adjustment to retained earnings relating to unrecognized tax benefits. In addition, the Company recorded an increase in long-term income tax liabilities of $150 million, along with a corresponding decrease in current income tax liabilities in accordance with the provisions of FIN 48.

 

The gross unrecognized tax benefits as of January 1, 2007 were $356 million including interest and penalties of $46 million. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $100 million. The gross unrecognized tax benefits differ from the amount that would affect the effective tax rate due to the impact of valuation allowances, foreign country offsets relating to transfer pricing adjustments, and resolutions relating to purchase business combinations. The gross unrecognized tax benefits as of January 1, 2007 have decreased by approximately $25 million as the result of tax payments made during the nine months ended September 28, 2007, primarily relating to the examination of the Company’s German tax returns for tax years 1997 through 2000. The Company believes that it is reasonably possible that a reduction to the gross unrecognized tax

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

benefits, ranging from $60 to $80 million, may occur within the next twelve months. This potential reduction relates primarily to anticipated settlements with the German tax authorities pertaining to various transfer pricing matters for tax years 1997 through 2005 and certain temporary items for tax years 1997 through 2000. A significant portion of this potential settlement relates to periods in which the entities were members of the Company’s predecessor and the resolution of any issues relating to those periods are subject to the indemnification provisions of the master purchase agreement between the Company and Northrop Grumman Corporation (“Northrop”). Under the indemnification provisions, the Company will be reimbursed for these anticipated settlement payments and as such has recorded a receivable.

 

The Company, or one or more of its subsidiaries, files income tax returns in the United States federal jurisdiction, and various state and foreign jurisdictions. Various tax examinations are in process globally, including an examination by the United States Internal Revenue Service (“IRS”) of the Company’s U.S. income tax returns for the earliest open years, 2003 and 2004, and an examination by the German tax authorities of the Company’s German income tax returns for years 1997 through 2004. The Company anticipates closing the examination by the IRS within the next twelve months without a material change in financial position. The Company has tentatively reached agreement on substantially all issues raised by the German tax authorities for years 1997 through 2000 and as noted above, anticipates a potential reduction in gross unrecognized tax benefits in settlement of these matters.

 

The Company operates globally but considers its significant tax jurisdictions to include the United States, Germany, Czech Republic, Spain and the United Kingdom. Generally, the Company has years open to tax examination in significant tax jurisdictions from 2002 forward, with the exception of Germany which has open tax years from 1997 forward.

 

The Company classifies all interest and penalties as income tax expense. As of January 1, 2007, the Company had recorded approximately $46 million in liabilities for tax related interest and penalties on its consolidated balance sheet. For the three and nine months ended September 28, 2007, the Company has recorded approximately $1 million and $2 million, respectively, related to interest and penalties in the condensed consolidated statements of earnings.

 

 

 

 

 

Post-Retirement Benefits Other Than Pensions (“OPEB”)

 

The following table provides the components of net OPEB cost for the Company’s plans for the three and nine months ended September 28, 2007 and September 29, 2006:

 

 

 

During the three and nine months ended September 28, 2007, the Company recorded settlement gains of $1 million and $6 million, respectively, from retiree medical buyouts. During the three and nine months ended September 29, 2006, the Company recorded settlement gains of $3 million and $7 million, respectively, from retiree medical buyouts.

 

 

Senior Notes and Senior Subordinated Notes

 

On March 12, 2007, the Company commenced tender offers to repurchase TRW Automotive Inc.’s outstanding 9 3 / 8 % Senior Notes and 10 1 / 8 % Senior Notes in original principal amounts of $925 million and €200 million, respectively, each due 2013, and 11% Senior Subordinated Notes and 11 3 / 4 % Senior Subordinated Notes in original principal amounts of $300 million and €125 million, respectively, each due 2013 (collectively, the “Old Notes”). In conjunction with the tender offers, the Company also commenced consent solicitations to eliminate substantially all the covenants and certain events of default and to modify the provisions relating to the defeasance of the Old Notes in the governing indentures.

 

On March 26, 2007, the Company completed the issuance by TRW Automotive Inc. of 7% Senior Notes due 2014 and 6 3 / 8 % Senior Notes due 2014 in principal amounts of $500 million and €275 million, respectively, and 7 1 / 4 % Senior Notes due 2017 in the principal amount of $600 million (collectively, the “New Senior Notes”) in a private offering. Proceeds from the issuance totaled approximately $1,465 million. Interest is payable semi-annually on March 15 and September 15 of each year, beginning on September 15, 2007.

 

On March 26, 2007, the Company paid cash consideration, including a consent payment, to holders who had tendered their Old Notes and delivered their consents on or before March 23, 2007 (the “Consent Date”) and amended the indentures. In conjunction with the repurchase of tendered Old Notes, the Company recorded a loss on retirement of debt of $147 million in the first quarter of 2007. This loss included $111 million for redemption premiums paid for the Old Notes tendered on or before the Consent Date, $20 million for the write-off of deferred debt issue costs, $11 million relating to the principal amount in excess of carrying value of the 9 3 / 8 % Senior Notes (see Other Borrowings), and $5 million of fees.

 

On April 4, 2007, the Company increased the cash consideration paid for Old Notes tendered after the Consent Date, but on or before April 18, 2007 (the “Tender Expiration Date”), to an amount equal to the cash consideration paid to holders that tendered prior to the Consent Date. In conjunction with the repurchase of the Old Notes tendered after the Consent Date, the Company recorded a loss on retirement of debt of $1 million for redemption premiums paid in the second quarter of 2007. As of the Tender Expiration Date, a total of 99% of the Old Notes had been

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

tendered. Accordingly, only $18 million of the principal amount of the Old Notes remain outstanding. Interest is payable semi-annually on February 15 and August 15 for the Old Notes that remain outstanding after the Tender Expiration Date. The Old Notes mature on February 15, 2013 and are callable at a specified premium beginning February 15, 2008.

 

The New Senior Notes and the outstanding 9 3 / 8 % Senior Notes and 10 1 / 8 % Senior Notes are unconditionally guaranteed on a senior unsecured basis, and the outstanding 11% Senior Subordinated Notes and 11 3 / 4 % Senior Subordinated Notes are guaranteed on a senior subordinated unsecured basis, in each case by substantially all existing and future wholly-owned domestic subsidiaries and by TRW Automotive Finance (Luxembourg), S.à.r.l., a Luxembourg subsidiary.

 

Credit Facilities

 

Senior Secured Credit Facilities.   On May 9, 2007, the Company entered into its Fifth Amended and Restated Credit Agreement with the lenders party thereto. The amended and restated credit agreement provides for $2.5 billion in senior secured credit facilities, consisting of (i) a 5-year $1.4 billion Revolving Credit Facility (the “Revolving Credit Facility”), (ii) a 6-year $600.0 million Term Loan A-1 Facility (the “Term Loan A-1”) and (iii) a 6.75-year $500.0 million Term Loan B-1 Facility (the “Term Loan B-1”; combined with the Revolving Credit Facility and Term Loan A-1, the “Senior Secured Credit Facilities”). On May 9, 2007, the entire principal on the Term Loan A-1 and the Term Loan B-1 were funded and the Company drew down $461 million of the Revolving Credit Facility. These proceeds, together with approximately $15.6 million of available cash on hand, were used to refinance $2.5 billion of existing senior secured credit facilities by repaying approximately $1,561 million of existing senior secured credit facilities (consisting of Term Loan A in the amount of approximately $385 million, Term Loan B in the amount of approximately $587 million, Term Loan B-2 in the amount of approximately $296 million and Term Loan E in the amount of approximately $293 million) and to pay interest along with certain fees and expenses related to the refinancing. In conjunction with the May 9, 2007 refinancing, the Company capitalized $6 million of deferred debt issue costs and recorded a loss on retirement of debt of $7 million related to the write-off of debt issue costs associated with the former revolving facility and the former syndicated term loans.

 

Borrowings under the Senior Secured Credit Facilities will bear interest at a rate equal to an applicable margin plus, at the Company’s option, either (a) a base rate determined by reference to the higher of (1) the administrative agent’s prime rate and (2) the federal funds rate plus 1/2 of 1% or (b) a London Inter-Bank Offered Rate (“LIBOR”) or a eurocurrency rate determined by reference to interest rates for deposits in the currency of such borrowing for the interest period relevant to such borrowing adjusted for certain additional costs. As of September 28, 2007, the applicable margin for the Term Loan A-1 and the Revolving Credit Facility was 0.125% with respect to base rate borrowings and 1.125% with respect to eurocurrency borrowings, and the applicable margin for the Term Loan B-1 was 0.50% with respect to base rate borrowings and 1.50% with respect to eurocurrency borrowings. The commitment fee on the undrawn amounts under the Revolving Credit Facility was 0.25%. The commitment fee and the applicable margin on the Revolving Credit Facility and the applicable margin on the Term Loan A-1 are subject to a leverage-based grid.

 

The Term Loan A-1 will amortize in quarterly installments, beginning with $30 million in 2009, $75 million in 2010, $120 million in 2011, $225 million in 2012 and $150 million in 2013. The Term Loan B-1 will amortize in equal quarterly installments, beginning September 30, 2007, in an amount equal to 1% per annum during the first 6 years and six months and in one final installment on the maturity date.

 

The Senior Secured Credit Facilities, like the previously existing senior credit facilities, are unconditionally guaranteed by the Company and substantially all existing and subsequently acquired wholly-owned domestic subsidiaries. Obligations of the foreign subsidiary borrowers are unconditionally guaranteed by the Company, TRW Automotive Inc. and certain foreign subsidiaries of TRW Automotive Inc. The Senior Secured Credit Facilities, like the previously existing senior 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. and substantially all of its

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

domestic subsidiaries, including a pledge of 100% of the stock of TRW Automotive Inc. and substantially all of its domestic subsidiaries and 65% of the stock of foreign subsidiaries owned by domestic entities. In addition, foreign borrowings under the Senior Secured Credit Facilities will be secured by assets of the foreign borrowers.

 

Debt Covenants

 

New Senior Notes.   The indentures governing the New Senior Notes contain covenants that impose significant restrictions on the Company’s business. The covenants, among other things, restrict, subject to a number of qualifications and limitations, the ability of TRW Automotive Inc. and its subsidiaries, to pay certain dividends and distributions or repurchase the Company’s capital stock, incur liens, engage in mergers or consolidations, and enter into sale and leaseback transactions.

 

Senior Secured Credit Facilities.   The Senior Secured Credit Facilities, like the previously existing senior credit facilities, contain a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of TRW Automotive Inc. and its subsidiaries, to incur additional indebtedness or issue preferred stock, repay other indebtedness (including the New Senior Notes), pay certain dividends and distributions or repurchase capital stock, create liens on assets, make investments, loans or advances, make certain acquisitions, engage in mergers or consolidations, enter into sale and leaseback transactions, engage in certain transactions with affiliates, amend certain material agreements governing TRW Automotive Inc.’s indebtedness, including the New Senior Notes and the Receivables Facility, and change the business conducted by the Company. In addition, the Senior Secured Credit Facilities, like the previously existing senior credit facilities, contain financial covenants relating to a maximum total leverage ratio and a minimum interest coverage ratio and require certain prepayments from excess cash flows, as defined, in connection with certain asset sales and the incurrence of debt not permitted under the Senior Secured Credit Facilities. The Senior Secured Credit Facilities also include customary events of default.

 

As of September 28, 2007, TRW Automotive Inc. was in compliance with all of its financial covenants.

 

The Old Notes.   In connection with the tender offers for the Old Notes, the Company also received consents to amend the indentures governing the Old Notes. The amendments eliminated substantially all of the restrictive covenants and certain events of default and modified the provisions relating to the defeasance of the remaining Old Notes.

 

Other Borrowings

 

The Company has borrowings under uncommitted credit agreements in many of the countries in which it operates. These borrowings are denominated primarily in the local foreign currency of the country or region where the Company’s operations are located. The borrowings are from various domestic and international banks at quoted market interest rates.

 

On February 2, 2006, the Company repurchased its subsidiary Lucas Industries Limited’s £94.6 million 10 7 / 8 % bonds due 2020 for £137 million, or approximately $243 million. This repurchase resulted in a loss on retirement of debt of £32 million, or approximately $57 million, which was recognized in the first quarter 2006 results. The Company funded the repurchase from cash on hand.

 

In November 2005, the Company entered into a series of interest rate swap agreements with a total notional value of $250 million to hedge the variability of interest payments associated with its variable-rate term debt. Since the interest rate swaps hedged the variability of interest payments on variable rate debt with the same terms, they qualified for cash flow hedge accounting treatment. In October and November 2006, the Company unwound these interest rate swaps.

 

In January 2004, the Company entered into a series of interest rate swap agreements with a total notional value of $500 million to effectively change a fixed rate debt obligation into a floating rate obligation. The total notional amount of these agreements was equal to the face value of the designated debt instrument. The swap agreements

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

were expected to settle in February 2013, the maturity date of the corresponding debt instrument. Since these interest rate swaps hedged the designated debt balance and qualified for fair value hedge accounting, changes in the fair value of the swaps also resulted in a corresponding adjustment to the value of the debt. In February 2007, the Company unwound these interest rate swaps and paid approximately $12 million. In conjunction with the repurchase of the Old Notes, an $11 million adjustment to the value of the corresponding debt was immediately written off to loss on retirement of debt, as previously discussed.

 

 

On May 29, 2007, the Company, Automotive Investors LLC (“AI LLC”), an affiliate of The Blackstone Group L.P. (“Blackstone”), and certain management stockholders entered into an underwriting agreement with Banc of America Securities LLC (the “Underwriter”) pursuant to which AI LLC and certain executive officers of the Company agreed to sell to the Underwriter 11,000,000 shares of the Company’s common stock in a registered public secondary offering (the “Offering”) pursuant to the Company’s shelf registration statement on Form S-3 filed with the SEC on November 6, 2006. The Company did not receive any proceeds related to the Offering, nor did its total number of shares of common stock outstanding change as a result of the Offering. Immediately following the Offering, the percentage of shares of the Company’s common stock held by AI LLC decreased from 56.4% to 46.4%. See Note 13.

 

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

 

 

Effective in February 2003, the Company established the TRW Automotive Holdings Corp. 2003 Stock Incentive Plan (as amended, the “Plan”), which permits the grant of up to 18,500,000 non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and other stock-based awards to the employees, directors or consultants of the Company or its affiliates.

 

On February 27, 2007, the Company granted 917,700 stock options and 449,300 restricted stock units to employees, executive officers and directors of the Company pursuant to the Plan. The options have an 8-year life, and both the options and restricted stock units vest ratably over three years. The options have an exercise price equal to the fair value of the stock on the grant date, which was $30.54.

 

On February 27, 2006, the Company granted 905,450 stock options and 439,400 restricted stock units to employees, executive officers and directors of the Company pursuant to the Plan. The options have an 8-year life, and both the options and restricted stock units vest ratably over three years. The options have an exercise price equal to the fair value of the stock on the grant date, which was $26.61.

 

As of September 28, 2007, the Company had approximately 3,804,000 shares of Common Stock available for issuance under the Plan. Approximately 7,199,000 stock options and 893,000 nonvested restricted stock units were outstanding as of the same date. The majority of the options have a 10-year term and vest ratably over five years.

 

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

 

 

TRW Automotive Holdings Corp.

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

 

In connection with the acquisition by affiliates of Blackstone of the shares of the subsidiaries of TRW Inc. engaged in the automotive business (the “Acquisition”) from Northrop Grumman Corporation (“Northop”), 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 $2 and $4 million, respectively, are included in the condensed consolidated statements of earnings for the three and nine month periods ended September 28, 2007 and September 29, 2006.

 

On May 29, 2007, the Company entered into a Third Amended and Restated Stockholders Agreement (the “Third Restated Agreement”) with AI LLC, which restated AI LLC’s registration rights as set forth in the Second Amended and Restated Stockholders Agreement dated as of January 28, 2004 among the Company, AI LLC and an affiliate of Northop (the “Second Restated Agreement”). The Third Restated Agreement deleted provisions in the Second Restated Agreement that were no longer relevant.

 

Prior to the Offering referenced in Note 11, the Company was considered a “controlled company” within the meaning of the New York Stock Exchange corporate governance rules due to the majority voting control held by AI LLC. As a result of the Offering and the decrease in AI LLC’s holdings in Company common stock to below 50%, the Company has ceased to be a “controlled company,” and therefore is required to comply with certain corporate governance requirements, which the Company is permitted to phase-in over a 12 month period ending in June 2008.

 

In the first quarter of 2006, the Company entered into a five-year participation agreement (“participation agreement”) with Core Trust Purchasing Group, formerly named Cornerstone Purchasing Group LLC (“CPG”) designating CPG as exclusive agent for the purchase of certain indirect products and services. CPG is a group purchasing organization which secures from vendors pricing terms for goods and services that are believed to be more favorable than participants 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 the specified products and services through CPG. In connection with purchases by its participants (including the Company), CPG receives a commission from the vendor in respect of 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. For the three and nine months ended September 28, 2007, the affiliate of Blackstone received de minimis fees from CPG.