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 October 26, 2009, the number of shares outstanding of the registrant’s Common Stock was 117,649,078.

 

 

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.

 

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 that sells to OEMs). In 2008, approximately 86% 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, 2008, filed with the Securities and Exchange Commission (“SEC”) on February 20, 2009, and the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2009.

 

Given the increasing importance and focus on the use of electronics in vehicle safety systems, in the first quarter of 2009, the Company began to manage and report on the Electronics business separately from its other operating segments. As such, the Company has made appropriate adjustments to its segment-related disclosures for 2009 as well as historical figures.

 

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 and nine months ended October 2, 2009 are not necessarily indicative of results that may be expected for the year ending December 31, 2009.

 

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.

 

In August 2009, the Company issued 16.1 million shares of its common stock in a public offering. These shares are included in the weighted average shares outstanding.

 

Actual weighted average shares outstanding used in calculating earnings (losses) per share were:

 

For the three months ended October 2, 2009, 6.3 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 nine months ended October 2, 2009, 9.3 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.

 

For the three months ended September 26, 2008, 8.7 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. For the nine months ended September 26, 2008, 1.9 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.

 

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 nine month periods ended October 2, 2009 and September 26, 2008.

 

 

Equity and Comprehensive Income.  The following tables present a rollforward of the changes in equity for the three and nine months ended October 2, 2009 and September 26, 2008, respectively, including changes in the components of comprehensive income (also referred to herein as “OCI”). In accordance with Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (formerly, Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”), amounts attributable to TRW Shareholders and to the noncontrolling interest are as follows:

 

 

Recently Adopted Accounting Pronouncements.  In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a Replacement of SFAS No. 162.” SFAS No. 168 introduces the ASC as the single source of authoritative GAAP, recognized by the FASB. Rules and interpretive releases of the SEC remain authoritative GAAP for SEC registrants. SFAS No. 168 was effective for the first interim or annual reporting period ending after September 15, 2009, and did not have a material impact on the Company’s consolidated financial statements.

 

In May 2009, the FASB issued ASC 855 (formerly SFAS No. 165, “Subsequent Events”). ASC 855 provides standards for accounting for events that occur after the balance sheet date, but prior to the issuance of financial statements. ASC 855 requires management to evaluate subsequent events from the balance sheet date to the date that the financial statements are available to be issued, which is the date that the financial statements are complete in a form and format that complies with GAAP, and all approvals necessary for issuance have been obtained. ASC 855 also requires the disclosure of the date through which the Company has evaluated subsequent events and whether that date represents the date the financial statements were issued or were available to be issued. ASC 855 was effective for interim and annual periods ending after June 15, 2009, and did not have a material impact on the Company’s consolidated financial statements.

 

In April 2009, the FASB issued three staff positions (“FSPs”) intended to provide additional guidance and enhanced disclosures for fair value measurements and impairment of debt securities. The first, which amended ASC 825 (formerly FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”), requires that publicly traded companies make the same disclosures about the fair value of financial instruments for interim reporting periods as are required in annual financial statements. The second, which amended ASC 320 (formerly FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”), provides guidance on how to determine whether an available-for-sale, or held-to-maturity, security is other-than-temporarily-impaired, and requires the impairment to be split between its credit loss (the difference between the

discounted cash flows to be collected and the amortized cost basis of the security), which is reported in earnings, and impairment from other factors, which is reported in other comprehensive income. The third, which amended ASC 820 (formerly FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”), provides guidance to help determine whether a market is inactive, and to determine whether transactions in that market are not orderly. These amendments were effective for interim and annual reporting periods ending after June 15, 2009. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.

 

In April 2009, the FASB issued amendments to ASC 805 (formerly FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arises from Contingencies”). The amendments to ASC 805 provide guidance for determining the acquisition-date fair value of assets acquired and liabilities assumed in a business combination that arise from contingencies, and provides guidance on how to account for these assets and liabilities subsequent to the completion of a business combination. The amendments to ASC 805 were effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The amendments to ASC 805 did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements.  In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 09-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force”, which amends ASC 605. ASU No. 09-13 establishes a selling price hierarchy, whereby vendor-specific objective evidence (“VSOE”), if available, should be utilized. If VSOE is not available, then third party evidence should be utilized; if third party evidence is not available, then an entity should use the estimated selling price for the good or service. ASU No. 09-13 eliminates the residual method and requires allocation at the inception of the contractual arrangement. ASU No. 09-13 also requires additional disclosures surrounding multiple-deliverable revenue arrangements. ASU No. 09-13 is effective, on a prospective basis, for revenue arrangements entered into after June 15, 2010, with early adoption permitted. The Company is currently assessing the effects of ASU No. 09-13, and has not yet determined the associated impact on the Company’s consolidated financial statements.

 

In September 2009, the FASB issued ASU No. 09-12, “Measuring the Fair Value of Alternative Investments Using Net Asset Value”, which amends ASC 820. ASU No. 09-12 provides additional guidance on how companies should estimate the fair value of certain alternative investments. ASU No. 09-12 permits the valuation of alternative investments at their Net Asset Value (“NAV”) as a practical expedient, unless it is probable the investment will be sold at something other than NAV. ASU No. 09-12 also requires additional disclosures about the valuation of investments within the scope of the ASU, regardless of whether the practical expedient is used. ASU No. 09-12 is effective for the first annual or interim reporting period ending after December 15, 2009. The Company is currently assessing the effects of ASU No. 09-12, and has not yet determined the associated impact on the Company’s consolidated financial statements.

 

In August 2009, the FASB issued ASU No. 09-5, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value,” which amends ASC 820. ASU No. 09-5 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value utilizing one or more of the following techniques: (1) a valuation technique that uses quoted prices for identical or similar liabilities when traded as assets; or (2) another valuation technique that is consistent with the principles of ASC 820, such as a present value technique or market approach. ASU No. 09-5 is effective for the first reporting period, including interim periods, beginning after issuance. The Company is currently assessing the effects of ASU No. 09-5, and has not yet determined the associated impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation 46(R)” (“FIN 46(R)”). SFAS No. 167 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. SFAS No. 167 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 FIN 46(R). SFAS No. 167 is effective for the first annual reporting period

beginning after November 15, 2009. The Company is currently assessing the effects of SFAS No. 167, and has not yet determined the associated 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.” SFAS No. 166 eliminates the concept of a qualified special-purpose entity from GAAP. SFAS No. 166 also clarifies the language surrounding when a transferor of financial assets has surrendered control over the transferred financial assets. SFAS No. 166 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. SFAS No. 166 is effective for the first annual reporting period beginning after November 15, 2009. The Company is currently assessing the effects of SFAS No. 166, and has not yet determined the associated impact on the Company’s consolidated financial statements.

 

Subsequent Events.  ASC 855 provides standards for accounting for events that occur after the balance sheet date, but prior to the issuance of financial statements. In accordance with ASC 855, the Company has evaluated and, as necessary, made changes to these unaudited condensed consolidated financial statements, for subsequent events through November 4, 2009, the date that the financial statements were issued. All subsequent events that provided additional evidence about conditions existing at the date of the statement of financial position were incorporated into the unaudited condensed consolidated financial statements.

 

 

The major classes of inventory are as follows:

 

 

 

Goodwill

 

In the first quarter of 2009, the Electronics segment was broken out separately, derived from the Chassis Systems and Occupant Safety Systems segments. As part of the Company’s change in its segment reporting structure, goodwill was reallocated using a relative fair value allocation approach, consistent with the guidance under ASC 350, “Intangibles — Goodwill” (formerly, SFAS No. 142).

 

The changes in goodwill for the period are as follows:

 

Intangible assets

 

The following table reflects intangible assets and related accumulated amortization:

 

 

In accordance with ASC 350, the Company identified an indicator of impairment related to its trademarks during the first quarter of 2009 as a result of the continuing declines in sales of the Company’s products. Accordingly, the Company performed an impairment test in the first quarter in accordance with ASC 350, 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 over the next five years:

 

 

For intangible assets that are eligible for renewal or extension, the Company expenses all costs associated with obtaining the renewal or extension.

 

 

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

 

 

 

United States Facility.  On April 24, 2009, the Company terminated its United States receivables facility (the “Receivables Facility”) in order to participate in the Auto Supplier Support Program sponsored by the U.S. Treasury Department (“Auto Supplier Support Program”). The Company’s eligible receivables were accepted into each of the Chrysler LLC and General Motors Corporation Auto Supplier Support Programs. Subsequent to the separate filings by each of these companies for bankruptcy protection, the Company elected to opt out of the General Motors Corporation Auto Supplier Support Program and Chrysler LLC ceased submitting invoices owed to the Company for payment under the Chrysler LLC Auto Supplier Support Program. Accordingly, the Company no longer participates in the Auto Supplier Support Programs.

 

In addition, in April 2009 the Company acquired insurance coverage from Export Development Canada (“EDC”) on certain General Motors Corporation and Chrysler LLC receivables owed to the Company’s Canadian subsidiary. The Canadian subsidiary was charged 6% per annum of the amount made available to it under the program. In July 2009, the Company terminated the insurance coverage on its Chrysler LLC and General Motors Corporation receivables.

 

Other Receivables Facilities.  The Company, through one of its European subsidiaries, has a receivables financing 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. The arrangement by its terms automatically renewed until January 2010 and is renewable annually thereafter, if not previously terminated. In July 2009, this arrangement was reduced from €75 million to €37.5 million. As of October 2, 2009, €37.5 million was available for funding under this facility and there were no outstanding borrowings.

 

In March 2009, the Company entered into a receivables factoring arrangement in Italy. The €40 million program is renewable annually, if not previously terminated. As of October 2, 2009, €36 million was available for funding under the program and there were no outstanding borrowings.

 

During the first half of 2009, an €80 million receivables factoring arrangement in France and a £25 million receivables financing arrangement in the United Kingdom were terminated.

 

 

Under ASC 740, “Income Taxes” (formerly, APB Opinion No. 28), 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 October 2, 2009 was $28 million on pre-tax earnings of $90 million. Income tax expense for the nine months ended October 2, 2009 was $37 million on pre-tax losses of $36 million and includes $13 million of tax expense that was recorded in establishing a valuation allowance against the net deferred tax assets of certain subsidiaries. Income tax expense for the three months ended September 26, 2008 was $23 million on pre-tax losses of $29 million and income tax expense for the nine months ended September 26, 2008 was $126 million on pre-tax earnings of $305 million. As of October 2, 2009, 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 a corresponding income tax expense or benefit is not recognized, partially offset by favorable foreign tax rates, holidays, and credits.

 

The Company operates in multiple jurisdictions throughout the world. The income tax returns of several subsidiaries in various tax jurisdictions are currently under examination. It is possible that some or all of these examinations will conclude within the next 12 months. It is not possible at this point in time, however, to estimate whether the outcome of any examination will result in a significant change in the Company’s gross unrecognized tax benefits.

 

 

Pension Plans

 

The following table provides the components of net pension (income) cost for the Company’s defined benefit pension plans for the three and nine months ended October 2, 2009 and September 26, 2008:

 

 

 

During the three months ended October 2, 2009, the Company recorded a $2 million gain as a result of a plan termination due to local legislation changes.

 

Postretirement Benefits Other Than Pensions (“OPEB”)

 

The following table provides the components of net OPEB (income) cost for the Company’s plans for the three and nine months ended October 2, 2009 and September 26, 2008:

 

 

 

During the three and nine months ended October 2, 2009, the Company recorded settlement gains of $1 million and $3 million, respectively, related to retiree medical buyouts. The Company also recorded $3 million related to a plan termination which occurred during the first six months of 2009. During the nine months ended September 26, 2008, the Company recorded settlement gains of $3 million related to retiree medical buyouts.

 

 

ASC 820, “Fair Value Measurements and Disclosures” (formerly, SFAS No. 157), prioritizes the inputs to valuation techniques used to measure fair value 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. 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 fair values determined through Level 3 of the fair value hierarchy are 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 at October 2, 2009, in accordance with ASC 825, “Financial Instruments” (formerly, FSP FAS 107-1 and APB 28-1), are as follows:

 

 

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and fixed rate short-term debt approximates fair value because of the short term nature of these instruments. 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 then-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.

 

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.

At October 2, 2009, the Company had $19 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 and nine month periods ended October 2, 2009, the Company recorded asset impairments of $2 million and $8 million, respectively, associated with its determination of the fair value of its long-lived assets that exhibited indicators of impairment. In addition, for the nine month period ended October 2, 2009, the Company recorded an impairment of $30 million on one of its intangible assets, which 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.

 

For the three and nine months ended October 2, 2009, the Company classified certain forward electricity purchase agreements as derivative instruments and recognized losses of $1 million and $13 million, respectively.

 

As of October 2, 2009, the Company had a notional value of $1.1 billion in foreign currency forward contracts outstanding and $325 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 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 $24 million of losses, 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. As of October 2, 2009, the Company had no fair value hedges outstanding.

Derivative Instruments.  The fair value of the Company’s derivative instruments as of October 2, 2009 is as follows:

 

 

The Company utilizes a central treasury center (“treasury group”) to hedge its foreign currency exposure. The treasury group enters into intercompany derivative hedging instruments (intercompany derivatives) with members of the consolidated group. To qualify for hedge accounting, the treasury group offsets the exposure arising from these internal 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 liability of $29 million, related to contracts designated as hedging instruments by members of the consolidated group, was eliminated against a net intercompany asset of $29 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 consolidated statements of operations and OCI for the three and nine months ended October 2, 2009 is as follows:

 

Cash Flow Hedges:

 

 

 

 

Undesignated Derivates:

 

 

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 any margin call provisions or collateral requirements that could be triggered by derivative instruments in a net liability position. As of October 2, 2009, the Company had not posted any collateral to support its derivatives in a liability position.

 

 

Total outstanding debt of the Company as of October 2, 2009 and December 31, 2008 consisted of the following:

 

 

Senior Notes

 

In March 2007, the Company issued 7% Senior Notes and 63/8% Senior Notes, each due 2014, in principal amounts of $500 million and €275 million, respectively, and 71/4% Senior Notes due 2017 in the principal amount of $600 million (collectively, the “New Senior Notes”) in a private offering. Interest is payable semi-annually on March 15 and September 15 of each year. The New Senior Notes are unconditionally guaranteed on a senior unsecured basis by substantially all existing and future wholly-owned domestic subsidiaries and by TRW Automotive Finance (Luxembourg), S.à.r.l., a Luxembourg subsidiary.

 

During the first nine months of 2009, the Company entered into transactions to repurchase $38 million in principal amount of the 71/4% Senior Notes, €10 million in principal amount of the 63/8% Senior Notes and $6 million in principal amount of the 7% Senior Notes, totaling $57 million in principal amount. As a result of these transactions, the Company recorded a gain on retirement of debt of $41 million, including the write-off of a portion of deferred financing fees and premiums. The repurchased notes were retired upon settlement.

 

Senior Secured Credit Facilities

 

In August 2009, the Company issued 16.1 million shares of its common stock resulting in net proceeds of approximately $269 million to the Company. Of this amount, approximately $51 million was used to permanently prepay a portion of the 6-year $600 million Term Loan A-1 Facility that matures in May 2013 (the “Term Loan A-1”), approximately $36 million was used to permanently prepay a portion of the 6.75-year $500 million Term Loan B-1 Facility that matures in February 2014 (the “Term Loan B-1”) and the remainder was used to reduce borrowings under the 5-year $1.4 billion Revolving Credit Facility that matures in May 2012 (the “Revolving Credit Facility”; combined with the Term Loan A-1 and Term Loan B-1, the “Senior Secured Credit Facilities”).

 

The Company recorded a $1 million loss on retirement of debt in the third quarter of 2009 as a result of the write-off of a portion of Term Loan A-1 and Term Loan B-1 deferred financing fees.