UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

 

Form 10-K

 

 

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
(734) 855-2600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

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

 

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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):

 

 

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

 

As of July 3, 2009, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s Common Stock, $0.01 par value per share, held by non-affiliates of the registrant was approximately $630,484,727 based on the closing sale price of the registrant’s Common Stock as reported on the New York Stock Exchange on that date. As of February 17, 2010, the number of shares outstanding of the registrant’s Common Stock was 117,899,661.

 

Documents Incorporated by Reference

 

Certain portions, as expressly described in this report, of the Registrant’s Proxy Statement for the 2010 Annual Meeting of the Stockholders, to be filed within 120 days of December 31, 2009, are incorporated by reference into Part III, Items 10-14.

 

 

TRW Automotive Holdings Corp.

 

Index

 

 

 

The Company

 

TRW Automotive Holdings Corp. (together with its subsidiaries, “we,” “our,” “us,” “TRW Automotive” or 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. We conduct substantially all of our operations through subsidiaries. These operations primarily encompass the design, manufacture and sale of active and passive safety related products. Active safety related products principally refer to vehicle dynamic controls (primarily braking and steering), and passive safety related products principally refer to occupant restraints (primarily airbags and seat belts) and safety electronics (electronic control units and crash and occupant weight sensors). We operate our business along four segments: Chassis Systems, Occupant Safety Systems, Electronics and Automotive Components. We are primarily a “Tier 1” original equipment supplier, with approximately 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.

 

History.  The Company is a Delaware corporation formed in 2002; however, its business history stretches back to the turn of the twentieth century to a company that eventually became Thompson Products, Inc. which invented the two piece engine valve. In 1958, the Ramo-Wooldridge Corporation merged into Thompson Products, Inc. and after a period of time, the Company’s name was shortened to TRW Inc. In 1999, TRW Inc. completed its acquisition of LucasVarity plc that significantly expanded its automotive product offerings and positioned the company as a major supplier of both active and passive safety systems products. In 2002, TRW Inc. was acquired by Northrop Grumman Corporation (“Northrop”). Pursuant to a purchase agreement between Northrop and an affiliate of The Blackstone Group L.P. (“Blackstone”) in February 2003, Northrop sold the former TRW Inc.’s automotive operations to an indirect wholly-owned subsidiary of the Company (the transaction between Northrop and Blackstone is referred to herein as the “Acquisition”). In 2004, TRW Automotive completed an initial public offering and its common stock is traded on the New York Stock Exchange under the ticker symbol TRW.

 

Business Developments and Industry Trends

 

References in this Annual Report on Form 10-K (this “Report”) to our being a leading supplier or the world’s leading supplier, and other similar statements as to our relative market position are based principally on calculations we have made. These calculations are based on information we have collected, including company and industry sales data obtained from internal and available external sources, as well as our estimates. In addition to such quantitative data, our statements are based on other competitive factors such as our technological capabilities, the breadth of our product offerings, our research and development efforts and innovations and the quality of our products and services, in each case relative to that of our competitors in the markets we address.

 

The statements regarding industry outlook, trends, the future development of certain automotive systems and other non-historical statements contained in this section are forward-looking statements as that term is defined by the federal securities laws.

 

Business Development and Strategy.  We have become a leader in the global automotive parts industry by capitalizing on the strength of our products, technological capabilities and systems integration skills. Notwithstanding the economic downturn experienced in 2008 and 2009, over the last decade, we have experienced sales growth in many of our product lines due to an increasing focus by both governments and consumers on safety and fuel efficiency. We believe that such focus is continuing as evidenced by ongoing regulatory activities and uncertainty over fluctuating fuel costs. This will enable us to experience growth in the most recent generation of advanced safety and fuel efficient products. Such advanced products include vehicle stability control systems, brake controls for regenerative brake systems, curtain and side airbags, occupant sensing systems, front and side crash sensors, vehicle rollover sensors, electrically assisted power steering systems, electric park brake and tire pressure monitoring systems, active cruise control systems and lane keeping/lane departure warning systems.

Throughout our long history as a leading supplier to major OEMs, we have focused on products in which we have a technological advantage. We have extensive technical experience in a focused range of safety-related product lines and strong systems integration skills. These traits enable us to provide comprehensive, systems-based solutions for our OEM customers. We have a broad and established global presence and sell to major OEMs across the world’s major vehicle producing regions, including the expanding Chinese and Indian markets. We believe our business diversification mitigates our exposure to the risks of any one geographic economy, product line or major customer concentration. It also enables us to extend our portfolio of products and new technologies across our customer base and geographic regions, and provides us the necessary scale to optimize our cost structure.

 

The Automotive Industry Climate.  After several years of relative stability, a global economic downturn that began in the second half of 2008 had a significantly negative impact on the automotive industry. After reaching a trough in the first quarter of 2009, the automotive industry began to show signs of a slow recovery during the remainder of the year. However, despite increasingly positive developments, overall industry conditions were considerably distressed when compared to recent historical averages. The primary trends and conditions impacting our business in 2009, many of which we expect to continue in the near term, included:

 

General Industry Conditions:

 

 

Production Levels and Product Mix:

 

 

OEM and Supplier Restructuring Actions:

 

 

Inflation and Pricing Pressure:

 

 

Foreign Currencies:

 

 

These developments and trends are discussed in more detail in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

In addition, the following are significant characteristics of the automotive and automotive supply industries.

 

OEM Infrastructure:

 

 

Consumer and Regulatory Focus on Safety:

 

 

Consumer and Regulatory Focus on Fuel Efficiency and Greenhouse Gas Emissions:

 

 

 

Globalization of Suppliers:

 

 

Increased Electronic Content and Electronics Integration:

 

 

Emphasis on Speed to Market:

 

 

Competition

 

The automotive supply industry is extremely competitive. OEMs rigorously evaluate us and other suppliers based on many criteria such as quality, price/cost competitiveness, system and product performance, reliability and timeliness of delivery, new product and technology development capability, excellence and flexibility in operations, degree of global and local presence, effectiveness of customer service and overall management capability. We believe we compete effectively with leading automotive suppliers on all of these criteria. For example, we follow manufacturing practices designed to improve efficiency and quality, including but not limited to, one-piece-flow

machining and assembly, and just-in-time scheduling of our manufacturing plants, all of which enable us to manage inventory so that we can deliver quality components and systems to our customers in the quantities and at the times ordered. Our resulting quality and delivery performance, as measured by our customers, generally meets or exceeds their expectations.

 

Additionally, due to the current negative economic environment, OEMs have been, and we expect will continue to be, increasingly focused on the financial strength and viability of their supply base. We believe that such scrutiny of suppliers will result in a general contraction in the supply base and may force combinations of some suppliers. We feel that this will provide us with the opportunity to win additional business.

 

Within each of our product segments, we face significant competition. Our principal competitors include Advics, Bosch, Continental-Teves, JTEKT and ZF in the Chassis Systems segment; Autoliv, Key Safety and Takata in the Occupant Safety Systems segment; Autoliv, Bosch, Continental-Teves, Autoliv, Nippondenso and Schrader in the Electronics segment; and Delphi, Eaton, ITW, Kostal, Nifco, Raymond, Tokai Rika and Valeo in the Automotive Components segment.

 

Sales and Products by Segment

 

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

 

 

See “Results of Operations — Segment Results of Operations” under “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 21 to our consolidated financial statements included under “Item 8 — Financial Statements and Supplementary Data” for further information on our segments.

Products.  The following tables describe the principal product lines by segment, in order of 2009 sales levels:

 

Chassis Systems

 

 

Occupant Safety Systems

 

 

Electronics

 

Automotive Components

 

 

Chassis Systems.  Our Chassis Systems segment focuses on the design, manufacture and sale of product lines relating to steering, foundation brakes, modules, brake control, and linkage and suspension. We sell our Chassis Systems products primarily to OEMs and other Tier 1 suppliers. We also sell these products to OEM service organizations and in the independent aftermarket, through a licensee in North America, and to independent distributors in the rest of the world. We believe our Chassis Systems segment is well-positioned to capitalize on growth trends toward (1) increasing active safety systems, particularly in the areas of electric steering, electronic vehicle stability control and other advanced braking systems and integrated vehicle control systems; (2) increasing electronic content per vehicle; and (3) integration of active and passive safety systems.

 

Occupant Safety Systems.  Our Occupant Safety Systems segment focuses on the design, manufacture and sale of airbags, seat belts, steering wheels and occupant restraint systems. We sell our Occupant Safety Systems products primarily to OEMs and other Tier 1 suppliers. We also sell these products to OEM service organizations. We believe our Occupant Safety Systems segment is well-positioned to capitalize on growth trends toward (1) increasing passive safety systems, particularly in the areas of side, curtain and knee airbag systems, and active seat belt pretensioning and retractor systems; (2) increasing electronic content per vehicle; and (3) integration of active and passive safety systems.

 

Electronics.  Our Electronics segment focuses on the design, manufacture and sale of electronics components and systems in the areas of safety, Radio Frequency (“RF”), chassis, driver assistance and powertrain. We sell our Electronics products primarily to OEMs and to TRW Chassis Systems (braking and steering applications). We also sell these products to OEM service organizations. We believe our Electronics segment is well-positioned to capitalize on growth trends toward (1) increasing electronic content per vehicle, (2) increasing active safety systems, particularly in the areas of electric steering, electronic vehicle stability control and integrated vehicle control systems; (3) increasing passive safety systems, particularly in the areas of side, curtain and knee airbag systems and active seat belt pretensioning and retractor systems; (4) integration of active and passive safety systems; and (5) improving fuel economy and reducing CO₂ emissions.

 

Automotive Components.  Our Automotive Components segment focuses on the design, manufacture and sale of engine valves, body controls, and engineered fasteners and components. We sell our Automotive Components products primarily to OEMs and other Tier 1 suppliers. We also sell these products to OEM service organizations. In addition, we sell some engine valve and body control products to independent distributors for the automotive aftermarket. We believe our Automotive Components segment is well-positioned to capitalize on growth trends toward (1) multi-valve and more fuel-efficient engines and (2) increasing electronic content per vehicle.

Sales by Product Line.  Our 2009 sales by product line are as follows:

 

 

Sales by Geography.  Our 2009 sales by geographic region are as follows:

 

 

See Note 21 to our consolidated financial statements under “Item 8 — Financial Statements and Supplementary Data” below for additional product sector and geographical information.

 

Customers

 

We sell to all the major OEM customers across the world’s major vehicle producing regions. Our long-standing relationships with our customers have enabled us to understand global customers’ needs and business opportunities. We believe that we will continue to be able to compete effectively for our customers’ business because of the high quality of our products, our ongoing cost reduction efforts, our strong global presence and our product and technology innovations. Although business with any given customer is typically split among numerous contracts, the loss of or a significant reduction in purchases by one or more of those major customers could materially and adversely affect our business, results of operations and financial condition.

 

Significant declines in economic and industry conditions since the middle of 2008, including the impact of rising unemployment and restrictions on liquidity available to consumers, caused demand for automobiles to decrease considerably. This decrease in demand, together with relatively inflexible cost structures, dramatically impacted the financial health and solvency of our customers. During 2009, Chrysler LLC and General Motors Corporation entered, reorganized under and, through asset sales to newly-formed entities, emerged from bankruptcy, and also received loans/equity investments from the U.S. government due to the significant financial challenges they face. The newly-formed companies, Chrysler Group LLC and General Motors Company, are now controlled by Fiat and the U.S. government, respectively. Also, several of our European customers have obtained loans from their home governments.

Primary end-customer sales (by OEM group) for the years ended December 31, were:

 

 

We also sell products to the global aftermarket as replacement parts for current production and older vehicles. For the years ended December 31, 2009 and 2008, our sales to the aftermarket represented approximately 10% and 8% of our total sales, respectively. We sell these products through both OEM service organizations and independent distribution networks.

 

Sales and Marketing

 

We have a sales and marketing organization of dedicated customer teams that provide a consistent interface with our key customers. These teams are located in all major vehicle-producing regions to best represent their respective customers’ interests within our organization, to promote customer programs and to coordinate global customer strategies with the goal of enhancing overall customer service, satisfaction and TRW Automotive growth. Our ability to support our customers globally is further enhanced by our broad global presence in terms of sales offices, manufacturing facilities, engineering/technical centers, joint ventures and licensees.

 

Our sales and marketing organization and activities are designed to create overall awareness and consideration of, and to increase purchases of, our systems, modules and components. To further this objective, we participate in an international trade show in Frankfurt, Germany. We also provide on-site technology demonstrations at our major OEM customers on a regular basis.

 

Customer Support

 

Our engineering, sales and production facilities are located in 26 countries. With the appropriate level of dedicated sales/customer development employees, we provide effective customer solutions, products and service in every region in which these facilities operate or manufacture.

 

Joint Ventures

 

Joint ventures represent an important part of our business, both operationally and strategically. We have used joint ventures to enter into new geographic markets, such as China and India, to gain new customers, strengthen positions with existing customers, and develop new technologies.

 

In the case of entering new geographic markets where we have not previously established substantial local experience and infrastructure, teaming with a local partner can reduce capital investment by leveraging pre-existing infrastructure. In addition, local partners in these markets can provide knowledge and insight into local customs and practices and access to local suppliers of raw materials and components. All of these advantages can reduce the risk, and thereby enhance the prospects for the success, of an entry into a new geographic market.

 

Joint ventures can also be an effective means to acquire new customers. Joint venture arrangements can allow partners access to technology they would otherwise have to develop independently, thereby reducing the time and cost of development. More importantly, they can provide the opportunity to create synergies and applications of the technology that would not otherwise be possible.

The following table shows our significant unconsolidated joint ventures in which we have a 49% or greater interest that are accounted for under the equity method:

 

 

Intellectual Property

 

We own a significant quantity of intellectual property, including a large number of patents, trademarks, copyrights and trade secrets, and are involved in numerous licensing arrangements. Although our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve, no single patent, copyright, trade secret or license, or group of related patents, copyrights, trade secrets or licenses, is, in our opinion, of such value to us that our business would be materially affected by the expiration or termination thereof. However, we view the name TRW Automotive and primary mark “TRW” as material to our business as a whole. Our general policy is to apply for patents on an ongoing basis in the United States, Germany and, as appropriate, other countries to protect our patentable developments.

 

Our portfolio of patents and pending patent applications reflects our commitment to invest in technology and covers many aspects of our products and the processes for making those products. In addition, we have developed a substantial body of manufacturing know-how that we believe provides a significant competitive advantage in the marketplace.

 

We have entered into numerous technology license agreements that either strategically capitalize on our intellectual property rights or provide a conduit for us into third party intellectual property rights useful in our businesses. In many of these agreements, we license technology to our suppliers, joint venture companies and other local manufacturers in support of product production for our customers and us. In other agreements, we license the technology to other companies to obtain royalty income.

 

We own a number of secondary trade names and trademarks applicable to certain of our businesses and products that we view as important to such businesses and products as well.

 

Seasonality

 

Our business is moderately seasonal because our largest North American customers typically halt operations for approximately two weeks in July and one week in December. Additionally, customers in Europe historically shut down vehicle production during portions of August and one week in December. As new models are typically introduced during the third quarter, automotive production traditionally is lower during that period. Accordingly, our third and fourth quarter results may reflect these trends.

The normal seasonality of the automotive industry, as described above, was not experienced in 2008 and 2009 due to the reaction of our customers to the economic conditions during those years and the timing of government stimulus programs implemented in Europe and North America in 2009. Considering the improvement in economic conditions and vehicle production during the second half of 2009, relative to the low points registered in the first and second quarters of 2009, the normal seasonality of the automotive industry is more likely to be experienced in 2010.

 

Research, Development and Engineering

 

We operate a global network of technical centers worldwide where we employ several thousand engineers, researchers, designers, technicians and their supporting functions. This global network allows us to develop active and passive automotive safety technologies while improving existing products and systems. We utilize sophisticated testing and computer simulation equipment, including computer-aided engineering, noise-vibration-harshness, crash sled, math modeling and vehicle simulations. We have advanced engineering and research and development programs for next-generation products in our Chassis Systems, Occupant Safety Systems, Electronics, and Automotive Component segments. We are disciplined and innovative in our approach to research and development, employing various tools to improve efficiency and reduce cost, such as Six Sigma, “follow-the-sun” (a 24-hour a day engineering program that utilizes our global network) and other e-Engineering programs, and by outsourcing non-core activities.

 

We believe that continued research, development and engineering activities are critical to maintaining our leadership position in the industry and will provide us with a competitive advantage as we seek additional business with new and existing customers. Company-funded research, development and engineering costs were approximately 6% of sales for each of the years ended December 31, 2009, 2008, and 2007. Certain vehicle manufacturers have continued their shift away from funding development contracts for new technology.

 

For research and development expenditures in each of the years ended December 31, 2009, 2008 and 2007, see “— Research and Development” in Note 2 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data”.

 

Supply Base — Manufactured Components and Raw Materials

 

We purchase various manufactured components and raw materials for use in our manufacturing processes. The principal components and raw materials we purchase include castings, electronic parts, molded plastic parts, finished subcomponents, fabricated metal, aluminum, steel, resins, textiles, leather and wood. All of these components and raw materials are available from numerous sources. Despite certain declines experienced in 2009, we see a continued rise in inflationary pressures impacting certain commodities, such as petroleum-based products, resins, yarns, ferrous metals, base metals, and certain chemicals. Additionally, because we purchase various types of equipment, raw materials and component parts from our suppliers, we may be adversely affected by their failure to perform as expected or their inability to adequately mitigate inflationary, industry, or economic pressures. These pressures have proven to be insurmountable to some of our suppliers and we have seen the number of bankruptcies and insolvencies increase. The unstable condition of some of our suppliers or their failure to perform caused us to incur additional costs which negatively impacted certain of our businesses in 2009. The overall condition of our supply base may possibly lead to delivery delays, production issues or delivery of non-conforming products by our suppliers in the future. As such, we continue to monitor our vendor base for the best source of supply and work with those vendors and customers to attempt to mitigate the impact of the pressures mentioned above.

 

Although we have not, in recent years, experienced any significant shortages of manufactured components or raw materials, we normally do not carry inventories of these items in excess of those reasonably required to meet our production and shipping schedule. The possibility of shortages exists, especially in light of the weakened state of the supply base described above and the potential increase in working capital demands as production levels increase.

 

Employees

 

As of December 31, 2009, we had approximately 57,500 full-time employees and approximately 6,100 temporary/contract employees (excluding employees who were on approved forms of leave).

As of December 31, 2008, we had approximately 62,200 full-time employees and approximately 3,000 temporary/contract employees (excluding employees who were on approved forms of leave).

 

Environmental Matters

 

Governmental requirements relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had, and will continue to have, an effect on our operations and us. We have made, and continue to make, expenditures for projects relating to the environment, including pollution control devices for new and existing facilities. We are conducting a number of environmental investigations and remedial actions at current and former locations to comply with applicable requirements and, along with other companies, have been named a potentially responsible party for certain waste management sites. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably to us. Further information regarding environmental matters, including the related reserves, is contained in Note 20 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data,” and is incorporated herein by reference.

 

We do not believe that compliance with environmental protection laws and regulations will have a material effect upon our capital expenditures, cash flows, results of operations or competitive position. Our capital expenditures pertaining to environmental control during 2010 are not expected to be material to us.

 

International Operations

 

We have significant manufacturing operations outside the United States and, in 2009, approximately 80% of our sales originated outside the United States. See Note 21 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” for financial information by geographic area. Also, see “Item 1A — Risk Factors” for a description of risks inherent in such international operations.

 

Available Company Information

 

TRW Automotive Holdings Corp.’s Internet website is www.trw.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. Our Audit Committee Charter, Compensation Committee Charter, Corporate Governance and Nominating Committee Charter, Corporate Governance Guidelines and Standards of Conduct (our code of business conduct and ethics) are also available on our website.

 

 

Our business is subject to a number of risks, including those described below and elsewhere in this Report. The occurrence of any of these risks could materially adversely affect our results of operations, financial condition and/or cash flow, and the impact could be compounded if multiple risks were to occur.

 

The financial condition of our customers may adversely affect our results and financial condition and the viability of our supply base.

 

Significantly lower global production levels, tightened liquidity and increased costs of capital have combined to cause severe financial distress among many of our customers and have forced those companies to implement various forms of restructuring actions. In some cases these actions have involved significant capacity reductions, the discontinuation of entire vehicle brands or even reorganization under bankruptcy laws. Discontinuation of a brand can result in not only a loss of sales associated with any systems or components we supplied but also customer disputes regarding capital we expended to support production of such systems or components for the discontinued brand, and such disputes could potentially be resolved adversely to us.

 

In North America, Chrysler (defined as Chrysler LLC combined with Chrysler Group LLC), Ford Motor Company (“Ford”) and GM (defined as General Motors Corporation combined with General Motors Company) are

in the midst of unprecedented restructuring which included, in the case of Chrysler and GM, reorganization under bankruptcy laws and subsequent asset sales. While portions of Chrysler and GM have successfully emerged from bankruptcy proceedings in the United States, it is still uncertain what portion of their respective sales will return and whether they can be viable at a lower level of sales.

 

Since many of our suppliers also supply product directly to our customers, they may face liquidity issues due to actions taken by our customers. As a result, the financial condition of our customers may adversely affect our financial condition and that of our suppliers.

 

Disruptions in the financial markets are adversely impacting the availability and cost of credit which could negatively affect our business.

 

Disruptions in the financial markets, including the bankruptcy, insolvency or restructuring of certain financial institutions, and the general lack of liquidity continue to adversely impact the availability and cost of incremental credit for many companies, including us, and may adversely affect the availability of credit already arranged including, in our case, credit already arranged under our revolving credit facility. These disruptions are also adversely affecting the U.S. and world economy, further negatively impacting consumer spending patterns in the automotive industry. In addition, as our customers and suppliers respond to rapidly changing consumer preferences, they may require access to additional capital. If required capital is not obtained or its cost is prohibitively high, their business would be negatively impacted which could result in further restructuring or even reorganization under bankruptcy laws. Any such negative impact, in turn, could negatively affect our business, either through loss of sales to any of our customers so affected or through inability to meet our commitments (or inability to meet them without excess expense) because of our suppliers’ inability to perform.

 

We could be adversely affected by any shortage of supplies.

 

In the event of a rapid increase in production demands, either we or our customers or other suppliers may experience supply shortages of raw materials or components. This could be caused by a number of factors, including a lack of production line capacity or manpower or working capital constraints. In order to manage and reduce the cost of purchased goods and services, we and others within our industry have been rationalizing and consolidating our supply base. In addition, due to the turbulence in the automotive industry, several suppliers have initiated bankruptcy proceedings or ceased operations. As a result, there is greater dependence on fewer sources of supply for certain components and materials, which could increase the possibility of a supply shortage of any particular component. If any of our customers experience a material supply shortage, either directly or as a result of a supply shortage at another supplier, that customer may halt or limit the purchase of our products. Similarly, if we or one of our own suppliers experience a supply shortage we may become unable to produce the affected products if we cannot procure the components from another source. Such production interruptions could impede a ramp-up in vehicle production and could have a material adverse effect on our business, results of operations and financial condition.

 

We consider the production capacities and financial condition of suppliers in our selection process, and expect that they will meet our delivery requirements. However, there can be no assurance that strong demand, capacity limitations, shortages of raw materials or other problems will not result in any shortages or delays in the supply of components to us.

 

A further material contraction in automotive sales and production could have a material adverse effect on our results of operations and liquidity as well as on the viability of our supply base.

 

Automotive sales and production are highly cyclical and depend, among other things, on general economic conditions and consumer spending and preferences (which can be affected by a number of issues, including fuel costs, employment levels and the availability of consumer financing). As the volume of automotive production fluctuates, the demand for our products also fluctuates. Declines in automotive sales and production in the second half of 2008 and into 2009 lead to our focused efforts, which are ongoing, to restructure our business and take other actions in order to reduce costs. There is no assurance that our actions to date will be sustainable over the long term or will be sufficient if there is further decline. In addition, if lower levels of sales and production are forecasted, non-

cash impairment charges could result as the value of certain long-lived assets is reduced. As a result, our financial condition and results of operations could be adversely affected by further declines in vehicle production. Production levels in Europe and North America most notably affect us given our concentration of sales in those regions, which accounted for 58% and 25%, respectively, of our 2009 sales.

 

Our liquidity could be adversely impacted if our suppliers were to reduce normal trade credit terms as the result of any decline in our financial condition. Likewise, our liquidity could also be adversely impacted if our customers were to extend their normal payment terms, whether or not permitted under our contracts. If either of these situations occurs, we may need to rely on other sources of funding to bridge the additional gap between the time we pay our suppliers and the time we receive corresponding payments from our customers.

 

As a result of the above factors, further material contraction in automotive sales and production could have a material adverse effect on our results of operations and liquidity. In addition, our suppliers would also be subject to many of the same consequences which could adversely impact their results of operations and liquidity. If a supplier’s viability was challenged, it could impact the supplier’s ability to perform as we expect and consequently our ability to meet our own commitments.

 

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

 

Pricing pressure in the automotive supply industry has been substantial and is likely to continue. Virtually all vehicle manufacturers seek price reductions in both the initial bidding process and during the term of the contract. Price reductions have impacted our sales and profit margins and are expected to do so in the future. If we are not able to offset continued price reductions through improved operating efficiencies and reduced expenditures, those price reductions may have a material adverse effect on our results of operations.

 

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

 

Although commodity pressures abated somewhat during 2009, the cost of most of the commodities we use in our business, such as ferrous metals, base metals, resins, yarns, energy costs and other petroleum-based products, has generally increased over the past few years. Further, as production increases, commodity inflationary pressures may increase, both in the automotive industry and in the broader economy. These pressures put significant operational and financial burdens on us and our suppliers. It is usually difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases and, even if passed through to some extent, the recovery is typically on a delayed basis. Furthermore, our suppliers may not be able to handle the commodity cost increases and continue to perform as we expect. The unstable condition of some of our suppliers or their failure to perform has caused us to incur additional costs which negatively impacted certain of our businesses in 2009. The continuation or worsening of these industry conditions, together with the overall condition of our supply base, may lead to further delivery delays, additional costs, production issues or delivery of non-conforming products by our suppliers in the future, which may have a negative impact on our results of operations and financial condition.

 

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

 

For the year ended December 31, 2009, sales to our three largest customers on a worldwide basis were approximately 46% of our total sales. Although business with each customer is typically split among numerous contracts, if we lost a major customer or that customer significantly reduced its purchases of our products, there could be a material adverse affect on our business, results of operations and financial condition.

 

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

 

In our business, we are exposed to product liability and warranty claims. In addition, we may be required to participate in a recall of a product. Vehicle manufacturers are increasingly looking to their suppliers for contribution when faced with product liability, warranty and recall claims and we have been subject to continuing efforts by our customers to change contract terms and conditions concerning warranty and recall participation. We may see an

increase in the number of product liability cases brought against us, as well as an increase in our costs to defend product liability cases, due to the bankruptcies of Chrysler and GM. In addition, vehicle manufacturers have experienced increasing recall campaigns in recent years. Product liability, warranty and recall costs may have a material adverse effect on our financial condition, results of operations and cash flows.

 

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

 

Laws and regulations governing environmental and occupational safety and health are complicated, change frequently and have tended to become stricter over time. As a manufacturing company, we and our operations are subject to these laws and regulations both inside and outside the United States. We may not be in complete compliance with such laws and regulations at all times, and violations of these requirements could result in fines or sanctions, obligations to investigate or remediate contamination, third party property damage or personal injury claims, or modification or revocation of our operating permits. As an owner and operator, we could also be responsible under some laws for responding to contamination detected at any of our operating sites or at third party sites to which our wastes were sent for disposal, regardless of whether we caused the contamination, or the legality of the original activity. Our costs or liabilities relating to these matters may be more than the amount we have reserved and the difference may be material. Regarding Superfund sites, where we and either Chrysler or GM are both potentially responsible parties, our costs or liabilities may increase because of the discharge of certain claims in the Chapter 11 bankruptcy proceedings of Chrysler and GM. We have spent (and in the future will spend) money to comply with environmental requirements, which expenditures could be significant in order to comply with evolving environmental, health and safety laws that may be adopted in the future. In addition, certain of our subsidiaries are subject to pending litigation raising various environmental and health and safety claims, including certain asbestos-related claims. While our annual costs to defend and settle these claims in the past have not been material, we cannot provide assurance that this will remain so in the future.

 

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

 

We are a non-investment grade company with a significant level of debt. This amount of debt may limit our ability to obtain additional financing for our business. In addition, we need to devote substantial cash to the payment of interest on our debt, which means that cash may not be used for our other business needs. We may be more vulnerable to economic or industry downturns and to rising interest rates than a company with less debt.

 

Strengthening of the U.S. dollar and other foreign currency exchange rate fluctuations could materially impact our results of operations.

 

In 2009, approximately 80% of our sales originated outside the United States. We translate sales and other results denominated in foreign currencies into U.S. dollars for our consolidated financial statements. This translation is based on average exchange rates during a reporting period. During times of a strengthening U.S. dollar, our reported international sales and earnings could be reduced because foreign currencies may translate into fewer U.S. dollars.

 

Separately, while we generally produce in the same geographic markets as our products are sold, our sales are more concentrated in U.S. dollars and in euros than our expenses, and therefore our profit margins and earnings could be reduced due to fluctuations or adverse trends in foreign currency exchange rates. While we employ financial instruments to hedge certain of these exposures, this does not insulate us completely from currency effects.

 

Our pension and other postretirement benefits expense and the funding requirements of our pension plans could materially increase.

 

A significant number of our employees participate in defined benefit pension plans or retirement/termination indemnity plans. We also sponsor other postretirement employee benefit (“OPEB”) in the United States, Canada and the United Kingdom. The obligations and expense recognized in our financial statements for these plans is actuarially determined based on certain assumptions which are driven by market conditions. Additionally, these market conditions impact the underlying value of the assets held by the plans for settlement of these obligations.

The deterioration in the global financial markets has negatively affected our pension liabilities and related investments as of December 31, 2009. Further declines in interest rates or the market values of the securities held by the plans, or certain other changes, could materially affect the funded status of these plans and the level and timing of required contributions in 2010 and beyond. Additionally, a further deterioration in the funded status of the plans could significantly increase our pension expense and reduce our profitability.

 

We fund our OPEB costs on a pay-as-you-go basis; accordingly, the related plans have no assets. We are subject to increased OPEB cash outlays and costs due to increasing health care costs, among other factors. Increases in the expected costs of health care in excess of current assumptions could increase our actuarially determined obligations and our related OPEB expense along with future cash outlays.

 

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

 

We have recorded a significant amount of goodwill, which represents the excess of cost over the fair value of the net assets of the business acquired, and other identifiable intangible assets, including trademarks, developed technologies, and customer relationships. Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products sold by our business, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge that is included in operating income. As the result of our annual impairment analysis, in connection with our fiscal year ended December 31, 2008, we recorded an impairment charge related to goodwill and customer relationships of $787 million. In the first quarter of 2009, we recorded an impairment charge related to our trademark intangible asset of $30 million. As of December 31, 2009, goodwill and other identifiable intangible assets totaled $2,092 million, or 24% of our total assets. We remain subject to future financial statement risk in the event that goodwill or other identifiable intangible assets become further impaired.

 

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

 

We have significant manufacturing operations outside the United States, including joint ventures and other alliances. Operations outside of the United States, particularly operations in emerging markets, are subject to various risks which may not be present or as significant for operations within U.S. markets. Economic uncertainty in some geographic regions in which we operate, including certain emerging markets, could result in the disruption of markets and negatively affect cash flows from our operations in those areas.

 

Risks inherent in our international operations include: social plans that prohibit or increase the cost of certain restructuring actions; exchange controls; foreign currency exchange rate fluctuations including devaluations; the potential for changes in local economic conditions; restrictive governmental actions such as restrictions on transfer or repatriation of funds and trade protection matters, including antidumping duties, tariffs, embargoes and prohibitions or restrictions on acquisitions or joint ventures; changes in laws and regulations, including the laws and policies of the United States affecting trade and foreign investment; the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems; variations in protection of intellectual property and other legal rights; more expansive legal rights of foreign labor unions; the potential for nationalization of enterprises; and unsettled political conditions and possible terrorist attacks against United States’ or other interests. In addition, there are potential tax inefficiencies in repatriating funds from non-U.S. subsidiaries.

 

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

 

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

 

Due to normal and ordinary labor negotiations or as a result of a specific labor dispute, a work stoppage may occur in our facilities or those of our customers or other suppliers. The turbulence in the automotive industry and actions being taken to address negative industry trends may have the side effect of exacerbating labor relations problems which could increase the possibility of such a work stoppage. If any of our customers experience a

material work stoppage, either directly or as a result of a work stoppage at another supplier, that customer may halt or limit the purchase of our products. Similarly, a work stoppage at our facilities or one of our own suppliers could limit or stop our production of the affected products. Such interruptions in our production could have a material adverse effect on our business, results of operations and financial condition.

 

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

 

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

 

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

 

We own significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets, and are involved in numerous licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve. Developments or assertions by or against us relating to intellectual property rights could materially impact our business.

 

Because Blackstone owns a substantial percentage of our stock, the influence of our public shareholders over significant corporate actions will be limited, and conflicts of interest between Blackstone and us or our public shareholders could arise in the future.

 

Currently an affiliate of Blackstone beneficially owns approximately 39% of our outstanding shares of common stock. As a result, Blackstone has a significant voting block with respect to all matters submitted to our stockholders, including the election of our directors and our decisions to enter into any corporate transaction, and its vote may be difficult to overcome on any transaction that requires the approval of stockholders.

 

 

None.

 

 

Our principal executive offices are located in Livonia, Michigan. Our operations include numerous research and development, manufacturing, warehousing facilities and offices. We own or lease principal facilities located in 12 states in the United States and in 25 other countries as follows: Austria, Brazil, Canada, China, the Czech Republic, France, Germany, Italy, Japan, Malaysia, Mexico, Poland, Portugal, Romania, Singapore, Slovakia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Tunisia, Turkey, and the United Kingdom. Approximately 53% of our principal facilities are used by the Chassis Systems segment, 21% are used by the Occupant Safety Systems segment, 4% are used by the Electronics segment and 22% are used by the Automotive Components segment. Our corporate headquarters are contained within the Chassis Systems segment numbers below. The Company considers its facilities to be adequate for their current uses.

 

Of the total number of principal facilities operated by us, approximately 61% of such facilities are owned and 39% are leased.

A summary of our principal facilities, by segment, type of facility and geographic region, as of January 31, 2010 is set forth in the following tables. Additionally, where more than one segment utilizes a single facility, that facility is categorized by the purposes for which it is primarily used.

 

Chassis Systems

 

 

Occupant Safety Systems

 

 

Electronics

 

 

Automotive Components

 

 

 

 

 

The information concerning various claims, lawsuits and administrative proceedings contained in Note 20 of our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” is incorporated herein by reference.

 

 

During the fourth quarter of 2009, no matters were submitted to a vote of security holders.

 

 

Our common stock is listed on the New York Stock Exchange under the symbol “TRW”. As of February 17, 2010, we had 117,899,661 shares of common stock, $0.01 par value, outstanding (117,904,329 shares issued less 4,668 shares held as treasury stock) and 117 holders of record of such common stock. The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

 

The tables below show the high and low sales prices for our common stock as reported by the New York Stock Exchange for each of our fiscal quarters in 2009 and 2008.

 

 

 

Issuer Purchases of Equity Securities

 

The independent trustee of our 401(k) plans and similar plans purchases shares in the open market to fund (i) investments by employees in our common stock, one of the investment options available under such plans, and (ii) matching contributions in Company stock we provided under certain of such plans. In addition, our stock incentive plan permits payment of an option exercise price by means of cashless exercise through a broker and permits the satisfaction of the minimum statutory tax obligations upon exercise of options through stock withholding. Further, while our stock incentive plan also permits the satisfaction of the minimum statutory tax obligations upon the vesting of restricted stock through stock withholding, the shares withheld for such purpose are issued directly to us and are then immediately retired and returned to our authorized but unissued reserve. The Company does not believe that the foregoing purchases or transactions are issuer repurchases for the purposes of Item 5 of this Report on Form 10-K.

 

Dividend Policy

 

We do not currently pay any cash dividends on our common stock, and instead intend to retain any earnings for debt repayment, future operations and expansion. The amounts available to us to pay cash dividends are restricted by our debt agreements. Under TRW Automotive’s senior credit facilities, we have a limited ability to pay dividends on our common stock pursuant to a formula based on our consolidated net income after July 4, 2009 and our leverage ratio as specified in our amended and restated credit agreement. Certain of the indentures governing our outstanding notes also limit our ability to pay dividends. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

Equity Compensation Plan Information

 

The following table provides information about our equity compensation plans as of December 31, 2009.

 

 

 

Stock Performance Graph

 

The graph below provides an indicator of our cumulative total stockholder return as compared with Standard & Poor’s 500 Stock Index and the Standard & Poor’s Supercomposite Auto Parts & Equipment Index based on currently available data. The graph assumes an initial investment of $100 on December 31, 2004 and reflects the cumulative total return on that investment, including the reinvestment of all dividends where applicable, through December 31, 2009.

 

Comparison of 5 Year Cumulative Total Return

 

 

 

 

 

The following tables should be read in conjunction with “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included under “Item 8 — Financial Statements and Supplementary Data” below.

 

 

 

 

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. During the first quarter of 2009, due to the increasing importance and focus on the use of electronics in vehicle safety systems, we began to manage and report on our Electronics business separately from our other reporting segments. Accordingly, we now 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 year ended December 31, 2009:

 

 

Recent Trends and Market Conditions

 

After reaching a trough in the first quarter, the automotive industry began to show signs of a slow recovery during the remainder of 2009. However, despite increasingly positive developments during the course of the year, overall industry conditions in our primary markets continue to be distressed when compared to conditions that existed prior to the start of the economic downturn in the second half of 2008. The primary trends and conditions impacting our business in 2009 include:

 

General Industry Conditions:

 

During 2009, overall negative economic conditions, including the fallout from the global financial markets, the continuing high level of unemployment, low consumer confidence and low demand for durable goods, continued to adversely impact the automotive industry. In light of these conditions, governments around the world provided support to the automotive industry through direct aid to vehicle manufacturers and by implementing stimulus programs targeted at the consumer. The positive effects of these programs on vehicle demand began to emerge in the second quarter and continued through the remainder of the year. However, the extent to which the increased demand for automobiles was a pull-forward of future sales remains uncertain. Further, despite the recent positive trends, the industry remains susceptible to ongoing negative global economic conditions, especially as the government programs expire.

 

Production Levels and Product Mix:

 

Production levels were at, or near, 30 year lows during the first quarter of 2009, but began to increase during the remainder of the year, to levels where profitability for automotive suppliers is more achievable. While the recent improvement in production levels is encouraging, it is unclear how long this trend will continue. Also, despite this positive trend, we do not expect that production levels in the near term will return to the levels experienced prior to the start of the economic downturn in the second half of 2008.

 

In Europe, where approximately 58% of our sales originated in 2009, vehicle production continued to decline sharply during the first quarter of 2009, but rebounded to more stable levels during the last three quarters of 2009, primarily as a result of stimulus programs implemented by several European governments (such as scrappage

programs, tax incentives and direct financial aid to OEMs). The demand spurred by the various scrappage programs has generally favored smaller, more fuel efficient vehicles, which tend to be less profitable for OEMs and suppliers. Although the overall trends at the end of 2009 were positive, the automotive industry in Europe continues to face difficult challenges as production remains far below recent historical levels. Additionally, as consumer demand in Europe appears to be largely tied to the government stimulus programs, it is anticipated that the recent increase in demand may diminish as the government stimulus programs expire (most notably in Germany, whose scrappage program expired late in 2009).

 

In North America, where approximately 25% of our sales originated in 2009, the automobile markets also experienced significantly lower demand and production levels compared to the prior year. In response to the negative market conditions, governments in North America also implemented programs to support the automotive industry. These programs were directed toward stimulating consumer demand for automobiles, as well as providing direct financial aid to OEMs and suppliers. The success of these programs became evident in the third quarter of 2009 through the increase in automobile sales and production. In North America, OEMs face additional challenges of matching supply with demand as they are operating with reduced inventory levels and try to react to consumer vehicle preferences. Such preferences tend to be correlated to short-term fluctuations in the price of gasoline, thereby causing production to fluctuate between sport utility vehicles/light trucks and more fuel efficient passenger cars.

 

OEM and Supplier Restructuring Actions:

 

Significantly lower global production volumes, tightened liquidity and increased costs of capital have combined to cause severe financial distress among many companies within the automotive industry (including both OEMs and suppliers) and have forced those companies to implement various forms of restructuring actions. During the first half of 2009, several large automotive manufacturers and Tier 1 suppliers utilized the bankruptcy process to restructure their organizations and improve their financial stability and position. It is unclear how the involvement of the U.S. government, which is a significant stakeholder in both Chrysler’s and GM’s newly-formed companies operating outside of bankruptcy, will impact the industry going forward. Also during the second and third quarters, several Tier 1 automotive suppliers filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. These bankruptcies have not had and are not expected to have a significant impact on us. However, since we have many of the same customers, any impact of these bankruptcies on our customers could, in turn, affect us.

 

In addition, despite recent improvements in industry conditions, concern remains regarding the financial stability of the Tier 2 and Tier 3 supply base due to lingering effects of the downturn in the economy as well as the impact of increasing working capital requirements associated with recent increases in production. 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 disruption caused by a supplier.

 

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 the Company. Further, as production increases, 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 commodity costs; however, it is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases.

 

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 2009, we experienced a negative impact on our reported earnings in U.S. dollars compared to 2008, resulting from the translation of results denominated in other currencies, mainly the euro. 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, we cannot ensure that these hedging actions will insulate us from currency effects or that they will always be available to us at economically reasonable costs.

 

Strategic Initiatives in Response to Industry Trends

 

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 since the middle of 2008 (such as significantly reduced 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 to accommodate lower expected production levels going forward.

 

Since the beginning of the economic downturn that began in 2008, we have undertaken a number of operational and financial restructuring and cost reduction initiatives to partially mitigate the impact of the industry downturn and higher cost of debt. Such initiatives were focused on (1) reducing costs, which were achieved through a series of headcount reductions (totaling over 11,500 employees worldwide since the beginning of 2008), as well as significant reductions of capital expenditures and other discretionary spending; and (2) improving our capital structure, which was achieved through a combination of cash flows generated from operations, a public equity offering and a series of debt transactions. As a result of these transactions, we were able to reduce our overall debt level, extend maturities in our debt structure, secure significant liquidity through the extension of a portion of our undrawn revolving credit facility and decrease the level of our senior secured debt.

 

Despite a difficult year, the actions we have taken helped us become profitable and generate positive cash flows at lower levels of production than we have previously experienced. 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

 

During 2009 we completed a series of transactions focused on improving the strength and flexibility of our capital structure. As a result of these transactions, we reduced our debt and extended maturities in our debt structure.

 

 

In June 2009, we had entered into our Sixth Amended and Restated Credit Agreement (the “Sixth Credit Agreement”), which amended certain provisions of the Fifth Amended and Restated Credit Agreement (the “Prior Agreement”), including the financial covenants, applicable interest rates and commitment fee rates as well as certain other covenants applicable to the Company.

 

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 otherwise.

 

See “LIQUIDITY AND CAPITAL RESOURCES” below and Note 14 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” for further information.

 

Restructuring Charges and Fixed Asset Impairments

 

During 2009, we recorded restructuring charges and fixed asset impairments of $100 million, of which approximately $26 million related to the closure or planned closure of various facilities, approximately $61 million primarily related to the global workforce reduction initiative that began in 2008 and approximately $13 million related to other fixed asset impairments.

 

Goodwill and Intangible Assets

 

We perform annual impairment tests of our goodwill and indefinite-lived intangible assets during the fourth quarter. Based on the analysis performed during the 2009 annual impairment tests, we concluded that neither goodwill nor intangible assets were impaired. The tests performed in 2008, however, resulted in impairments of goodwill of $458 million and intangible assets of $329 million.

 

During the first quarter of 2009, we identified an indicator of impairment related to one of our trademarks and accordingly performed an impairment test. We determined that one of our trademarks was impaired and recognized a $30 million impairment loss. As stated above, we performed our annual impairment analysis in the fourth quarter of 2009 and concluded that no further impairment of our trademarks existed as of the testing date.

 

Critical Accounting Estimates

 

The critical accounting estimates that affect our financial statements and that use judgments and assumptions are listed below. In addition, the likelihood that materially different amounts could be reported under varied conditions and assumptions is noted.

 

Goodwill.  Goodwill, which represents the excess of cost over the fair value of the net assets of the businesses acquired, was approximately $1,768 million as of December 31, 2009, or 20.2% of our total assets.

 

In accordance with Accounting Standards Codification (“ASC”) 350, “Intangibles — Goodwill and Other” (formerly, SFAS No. 142), we perform annual impairment testing at a reporting unit level. To test goodwill for impairment, we estimate the fair value of each reporting unit and compare the fair value to the carrying value. If the carrying value exceeds the fair value, then a possible impairment of goodwill exists and requires further evaluation. Fair values are based on the cash flows projected in the reporting units’ strategic plans and long-range planning forecasts, discounted at a risk-adjusted rate of return. Revenue growth rates included in the plans are based on industry specific data. We use external vehicle build assumptions published by widely used external sources and market share data by customer based on known and targeted awards over a five-year period. The projected profit margin assumptions included in the plans are based on the current cost structure, anticipated price givebacks and cost reductions/increases. If different assumptions were used in these plans, the related cash flows used in measuring impairment could be different and impairment of goodwill might be required to be recorded.

 

See Note 6 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” for further information on our annual impairment analysis of goodwill.

 

Impairment of Long-Lived Assets and Intangibles.  We evaluate long-lived assets and definite-lived intangible assets for impairment when events and circumstances indicate that the assets may be impaired and the

undiscounted cash flows to be generated by those assets are less than their carrying value. If the undiscounted cash flows are less than the carrying value of the assets, the assets are written down to their fair value.

 

We test indefinite-lived intangible assets, other than goodwill, for impairment on at least an annual basis, or when events and circumstances indicate that the indefinite-lived intangible assets may be impaired, by comparing the fair values to the carrying values. If the carrying value exceeds the fair value, the asset is written down to its fair value. Fair value is determined utilizing the relief from royalty method, which is based on projected cash flows, discounted at a risk-adjusted rate of return.

 

See Notes 6 and 15 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” for further information on our annual impairment analysis of intangibles and our evaluation of long-lived assets for impairment, respectively.

 

Product Recalls.  We are at risk for product recall costs. Recall costs are costs incurred when the customer or we decide to recall a product through a formal campaign, soliciting the return of specific products due to a known or suspected safety concern. In addition, NHTSA has the authority, under certain circumstances, to require recalls to remedy safety concerns. Product recall costs typically include the cost of the product being replaced, customer cost of the recall and labor to remove and replace the defective part.

 

Recall costs are recorded based on management estimates developed utilizing actuarially established loss projections based on historical claims data. Based on this actuarial estimation methodology, we accrue for expected but unannounced recalls when revenues are recognized upon shipment of product. In addition, as recalls are announced, we review the actuarial estimation methodology and make appropriate adjustments to the accrual, if necessary.

 

Valuation Allowances on Deferred Income Tax Assets.  In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. We determined that we could not conclude that it was more likely than not that the benefits of certain deferred income tax assets would be realized. As such, the valuation allowance we recorded reduced the net carrying value of deferred tax assets to the amount that is more likely than not to be realized. We expect the deferred tax assets, net of the valuation allowance, to be realized as a result of the reversal of existing taxable temporary differences in the United States and as a result of projected future taxable income and the reversal of existing taxable temporary differences in certain foreign jurisdictions.

 

Environmental.  Governmental regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had, and will continue to have, an effect on our operations. We have made and continue to make expenditures for projects relating to the environment, including pollution control devices for new and existing facilities. We are conducting a number of environmental investigations and remedial actions at current and former locations to comply with applicable requirements and, along with other companies, have been named a potentially responsible party for certain waste management sites.

 

A reserve estimate for each matter is established using standard engineering cost estimating techniques on an undiscounted basis. In the determination of such costs, consideration is given to the professional judgment of our environmental engineers, in consultation with outside environmental specialists, when necessary. At multi-party sites, the reserve estimate also reflects the expected allocation of total project costs among the various potentially responsible parties. Each of the environmental matters is subject to various uncertainties, and some of these matters may be resolved unfavorably to us. We believe that any liability, in excess of amounts accrued in our consolidated financial statements, that may result from the resolution of these matters for which sufficient information is available to support cost estimates, will not have a material adverse affect on our financial position, results of operations or cash flows. However, we cannot predict the effect on our financial position, results of operations or cash flows for aspects of certain matters for which there is insufficient information. In addition, we cannot predict the effect of compliance with environmental laws and regulations with respect to unknown environmental matters.

 

Pensions.  We account for our defined benefit pension plans in accordance with ASC 715 “Compensation — Retirement Benefits” (formerly, SFAS No. 87), which requires that amounts recognized in financial statements be determined on an actuarial basis. This determination involves the selection of various assumptions, including an expected rate of return on plan assets and a discount rate.

A key assumption in determining our net pension expense in accordance with ASC 715 is the expected long-term rate of return on plan assets. The expected return on plan assets that is included in pension expense is determined by applying the expected long-term rate of return on assets to a calculated market-related value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. Asset gains and losses will be amortized over five years in determining the market-related value of assets used to calculate the expected return component of pension income. We review our long-term rate of return assumptions annually through comparison of our historical actual rates of return with our expectations, and consultation with our actuaries and investment advisors regarding their expectations for future returns. While we believe our assumptions of future returns are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligations and our future pension expense. The weighted average expected long-term rate of return on assets used to determine net periodic benefit cost was 6.97% for each of the years 2009 and 2008 as compared to 6.96% for 2007.

 

Another key assumption in determining our net pension expense is the assumed discount rate to be used to discount plan liabilities. The discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we look to rates of return on high quality, fixed-income investments that receive one of the highest ratings given by a recognized ratings agency, and that have cash flows similar to those of the underlying benefit obligation. The weighted average discount rate used to calculate the benefit obligations as of December 31, 2009 was 5.73% as compared to 6.42% as of December 31, 2008. The weighted average discount rate used to determine net periodic benefit cost for 2009 was 6.42% as compared to 5.74% for 2008 and 5.08% for 2007.

 

The Company adopted the measurement date provisions of ASC 715 (formerly, SFAS No. 158), effective January 1, 2008 using the one-measurement approach. As a result, the Company changed the measurement date for its pension and other postretirement plans from October 31 to its year end date of December 31. Under the one-measurement approach, net periodic benefit cost of the Company for the period between October 31, 2007 and December 31, 2008 was allocated proportionately between amounts recognized as an adjustment of retained earnings at January 1, 2008, and net periodic benefit cost for the year ended December 31, 2008. The Company recorded an adjustment, which increased retained earnings by approximately $3 million, net of tax, in relation to this allocation.

 

Based on our assumptions as of December 31, 2009, the measurement date, a change in these assumptions, holding all other assumptions constant, would have the following effect on our pension costs and obligations on an annual basis:

 

 

 

ASC 715 and the policies we have used (most notably the use of a calculated value of plan assets for pensions as described above) generally reduce the volatility of pension expense that would otherwise result from changes in the value of the pension plan assets and pension liability discount rates. A substantial portion of our pension benefits relate to our plans in the United States and the United Kingdom.

 

Our 2010 pension income is estimated to be approximately $13 million in the U.S. and $79 million in the U.K., while our pension expense is estimated to be approximately $41 million for the rest of the world (based on December 31, 2009 exchange rates). During 2009, certain amendments reducing future benefits for nonunion

employees were adopted that will reduce future service costs. During 2010, we expect to contribute approximately $28 million to our U.S. pension plans, approximately $24 million to the U.K. pension plan and approximately $39 million to pension plans in the rest of the world.

 

The U.K. pension plan undergoes triennial actuarial funding valuations. The plan was in a surplus position for funding purposes as of the date of the last triennial valuation. The next actuarial funding valuation is currently in process and due to be finalized by the middle of 2010. Given the recent declines in global financial markets, the funding valuation is likely to result in an overall deficit as of that date. This may result in the need for the Company to enter into discussions on a deficit recovery plan with the plan fiduciaries/trustees, with the potential for the Company to be required to commence contributions to the plan. Such discussions, including the finalization of a deficit recovery plan would need to be concluded no later than June 30, 2010. In the finalization process, allowances could be made for any changes or recoveries in asset values over the 15-month period following March 31, 2009, as well as future expected investment returns over the full length of the agreed upon recovery plan. Should Company contributions be required, the fiduciaries/trustees would likely consider the affordability of such contributions to the U.K. business and could make appropriate allowances for this in the formal deficit recovery plan. The Company has provisionally agreed with the trustees to contribute $24 million to the U.K. pension plan in 2010; however, the ultimate amount of such contribution is dependant upon the finalization of the aforementioned recovery plan.

 

Other Postretirement Benefits.  We account for our OPEB in accordance with ASC 715 (formerly, SFAS No. 106) which requires that amounts recognized in financial statements be determined on an actuarial basis. This determination involves the selection of various assumptions, including a discount rate and health care cost trend rates used to value benefit obligations. The discount rate reflects the current rate at which the OPEB liabilities could be effectively settled at the end of the year. In estimating this rate, we look to rates of return on high quality, fixed-income investments that receive one of the highest ratings given by a recognized ratings agency and that have cash flows similar to those of the underlying benefit obligation. We develop our estimate of the health care cost trend rates used to value the benefit obligation through review of our recent health care cost trend experience and through discussions with our actuary regarding the experience of similar companies. Changes in the assumed discount rate or health care cost trend rate can have a significant impact on our actuarially determined liability and related OPEB expense.

 

The following are the significant assumptions used in the measurement of the accumulated projected benefit obligation (“APBO”) as of the measurement date for each year:

 

 

Based on our assumptions as of December 31, 2009, the measurement date, a change in these assumptions, holding all other assumptions constant, would have the following effect on our OPEB expense and obligation on an annual basis:

 

 

 

Our 2010 OPEB expense is estimated to be approximately $6 million (based on December 31, 2009 exchange rates), and includes the effects of the adoption of certain 2009, 2008 and 2007 amendments which reduce future benefits for participants. We fund our OPEB obligation on a pay-as-you-go basis. In 2010, we expect to contribute approximately $44 million to our OPEB plans.

 

RESULTS OF OPERATIONS

 

The following consolidated statements of operations compare the results of operations for the years ended December 31, 2009, 2008 and 2007.

 

TOTAL COMPANY RESULTS OF OPERATIONS

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

 

Sales for the year ended December 31, 2009 decreased by $3,381 million as compared to the year ended December 31, 2008. The decrease in sales was driven primarily by lower volume and, to a much lesser degree, price reductions provided to customers, which combined totaled $2,511 million. The lower volume was attributed to a

decline in light vehicle production volumes in all major geographic regions. Foreign currency exchange also had a net unfavorable impact on sales of $870 million due to the relative strength of the dollar against other currencies (most notably the euro).

 

Gross profit for the year ended December 31, 2009 decreased by $112 million as compared to the year ended December 31, 2008. The decrease in gross profit was driven primarily by lower volume and adverse mix, together which totaled $698 million, and the net unfavorable impact of foreign currency exchange of $110 million. Also contributing to the decrease in gross profit were higher warranty expense of $29 million and the non-recurrence of net insurance recoveries of $17 million related to a business disruption at our brake line production facility in South America in the prior year. These unfavorable variances were partially offset by cost reductions (in excess of inflation and price reductions provided to customers) of $626 million, which includes the benefit of recently enacted restructuring and downturn management actions. Also offsetting the decrease in gross profit was lower pension and postretirement benefit expense of $82 million which includes an increase of $11 million of net settlement and buyout gains. Further mitigating the decrease in gross profit were the favorable impact of certain customer related settlements of $17 million, contractual settlements related to a recent acquisition of $8 million and the reversal of accruals related to certain benefit programs at several of our European facilities of $6 million. Gross profit as a percentage of sales for the year ended December 31, 2009 was 7.8% compared to 6.8% for the year ended December 31, 2008.

 

Administrative and selling expenses for the year ended December 31, 2009 decreased by $39 million as compared to the year ended December 31, 2008. The decrease was driven primarily by cost reductions in excess of inflation and other costs, which in total net to $26 million, and the favorable impact of foreign currency exchange of $19 million. These items were partially offset by an increase in pension and postretirement benefit expense of $7 million primarily driven by lower net settlement and buyout gains of $4 million. Administrative and selling expenses as a percentage of sales for the year ended December 31, 2009 were 4.2% as compared to 3.5% for the year ended December 31, 2008.

 

Restructuring charges and fixed asset impairments decreased by $45 million for the year ended December 31, 2009 compared to the year ended December 31, 2008. Net fixed asset impairments decreased by $70 million, as general economic and industry conditions improved in 2009 compared to 2008. This decrease was offset by an increase in severance and other charges of $23 million and decrease in net curtailment gains of $2 million.

 

Goodwill impairments were $458 million for the year ended December 31, 2008. On October 31, 2008, the Company recognized full impairment of goodwill in the three reporting units within its Automotive Components segment. No similar charges were required in 2009.

 

Intangible asset impairments decreased by $299 million for the year ended December 31, 2009 compared to the year ended December 31, 2008. During the first quarter of 2009, the Company recorded an impairment loss on its trademark of $30 million. During the fourth quarter of 2008, the Company recorded impairment charges of $329 million as a result of testing the recoverability of our customer relationships.

 

Other income — net improved by $18 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. This was primarily due to a reduction in foreign currency exchange losses of $26 million and an increase in royalty and grant income of $5 million. These positive variances were partially offset by a decrease in miscellaneous other income of $9 million, an unfavorable change in net provision for bad debts of $3 million, and a decrease in net gain on sales of assets of $1 million.

 

Interest expense — net increased by $4 million for the year ended December 31, 2009 compared to the year ended December 31, 2008, primarily as the result of lower interest income and higher borrowing margins under the Sixth Credit Agreement, which became effective on June 24, 2009, largely offset by lower interest rates on the Company’s variable rate debt.

 

Gain on retirement of debt was $26 million for the year ended December 31, 2009. We repurchased $57 million in principal amount of our senior unsecured notes issued in 2007 and recorded a gain on retirement of debt of $41 million, offset by $6 million of debt issuance costs written off relating to entering into the Company’s Sixth Credit Agreement. In addition, as a result of the full repayment of the term loan A-1 and term loan B-1, the

Company recorded a loss on retirement of debt of approximately $9 million relating to the write-off of debt issuance costs.

 

Income tax expense for the year ended December 31, 2009 was $67 million on pre-tax earnings of $140 million as compared to income tax expense of $126 million on a pre-tax loss of $638 million for the year ended December 31, 2008. Income tax expense for the year ended December 31, 2009 includes a charge of $33 million resulting from changes in determinations relating to the potential realization of deferred tax assets in certain foreign subsidiaries. Income tax expense for the year ended December 31, 2008 includes a net charge of approximately $15 million resulting from changes in determinations relating to the potential realization of deferred tax assets in certain foreign subsidiaries. The income tax rate varies from the United States statutory income tax rate due primarily to the items noted above, and the impact of results in the United States and certain foreign jurisdictions, without recognition of a corresponding income tax benefit or expense, partially offset by favorable foreign tax rates, holidays, and credits.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

 

Sales for the year ended December 31, 2008 increased by $293 million as compared to the year ended December 31, 2007. Foreign currency exchange had a $730 million net favorable effect on sales due to the relative weakness of the dollar against other currencies (most notably the euro). This was partially offset by lower volume and price reductions provided to customers, together which totaled $437 million. Increased module sales in 2008 were more than offset by lower sales of core products in both North America and Europe resulting from reduced light vehicle production volumes.

Gross profit for the year ended December 31, 2008 decreased by $190 million as compared to the year ended December 31, 2007. The decrease was driven primarily by lower volume and adverse mix in excess of favorable supplier resolutions that occurred in the prior year, together which net to $281 million. Also contributing to the decline in gross profit were higher engineering expenses, coupled with lower recoveries, totaling $27 million and the net unfavorable impact of foreign currency exchange of $20 million. These unfavorable items were partially offset by cost reductions (in excess of inflation and price reductions provided to customers) and the non-recurrence of certain 2007 product-related settlements, together which totaled $82 million. Net insurance recoveries in 2008 of $17 million related to a business disruption at our brake line production facility in South America and the non-recurrence of associated costs (net of insurance recoveries) which negatively impacted 2007 by $6 million also offset the decrease in gross profit, as did a reduction in pension and postretirement benefit expense of $18 million and lower warranty costs of $14 million. Gross profit as a percentage of sales for the year ended December 31, 2008 was 6.8% compared to 8.2% for the year ended December 31, 2007.

 

Administrative and selling expenses for the year ended December 31, 2008 decreased by $14 million as compared to the year ended December 31, 2007. The decrease was driven primarily by cost reductions in excess of inflation and other costs which in total net to $24 million and merger and acquisition activity costs of $9 million in 2007 which did not recur in 2008. These items were partially offset by the unfavorable impact of foreign currency exchange of $19 million. Administrative and selling expenses as a percentage of sales for the year ended December 31, 2008 were 3.5% as compared to 3.7% for the year ended December 31, 2007.

 

Restructuring charges and fixed asset impairments increased by $94 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. The increase was driven primarily by an increased level of restructuring activities of $34 million for severance and other charges related to plant closures and the global workforce reduction, which was offset by net curtailment gains of $11 million as a result of the decrease in pension and retiree medical benefit obligations related to the headcount reductions. Additionally, fixed asset impairments increased by $71 million, primarily due to the impact of declines in general economic and industry conditions.

 

Goodwill impairments were $458 million for the year ended December 31, 2008. On October 31, 2008, the Company performed its annual impairment analysis of goodwill, which resulted in the full impairment of goodwill in the three reporting units within its Automotive Components segment.

 

Intangible asset impairments were $329 million for the year ended December 31, 2008. During the fourth quarter of 2008, due to the impact of significant declines in economic and industry conditions, impairment charges of $329 million were recorded as a result of testing the recoverability of our customer relationships.

 

Other income — net decreased by $40 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. This was primarily due to an unfavorable increase in foreign currency exchange losses of $20 million, a decrease in net gains on sales of assets of $15 million, a decrease in royalty and grant income of $5 million, and an unfavorable change to the net provision for bad debts of $8 million. This was offset by an increase in miscellaneous other income of $8 million.

 

Interest expense — net decreased by $46 million for the year ended December 31, 2008 compared to the year ended December 31, 2007, primarily as a result of lower interest rates on variable rate debt and lower interest rates on the senior unsecured notes issued in 2007 compared to the previously outstanding senior unsecured notes issued in 2003.

 

Loss on retirement of debt was $155 million for the year ended December 31, 2007. During the year ended December 31, 2007, the Company recognized a loss of $148 million in association with payments to note holders who tendered their senior unsecured notes issued in 2003. In addition, in conjunction with the May 9, 2007 refinancing, the Company recognized a loss of $7 million related to the write off of debt issuance costs associated with the former senior secured credit facilities.

 

Income tax expense for the year ended December 31, 2008 was $126 million on a pre-tax loss of $638 million as compared to income tax expense of $155 million on pre-tax earnings of $264 million for the year ended December 31, 2007. Income tax expense for the year ended December 31, 2008 includes a net one time charge of approximately $15 million resulting from changes in determinations relating to the potential realization of deferred tax assets in certain foreign subsidiaries. Income tax expense for the year ended December 31, 2007 includes no tax

benefit related to the $155 million loss on retirement of debt due to the Company’s valuation allowance position in the United States. The income tax rate varies from the United States statutory income tax rate due primarily to the items noted above, and the impact of losses in the United States and certain foreign jurisdictions, without recognition of a corresponding income tax benefit, partially offset by favorable foreign tax rates, holidays, and credits.

 

SEGMENT RESULTS OF OPERATIONS

 

The following tables reconcile segment sales and earnings before taxes to consolidated sales and earnings before taxes for 2009, 2008, and 2007. See Note 21 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” for a description of segment earnings before taxes for the periods presented.

 

Sales, Including Intersegment Sales

 

 

Earnings (Losses) Before Taxes

 

Restructuring Charges and Asset Impairments Included in Earnings (Losses) Before Taxes

 

 

CHASSIS SYSTEMS

 

For the year ended December 31, 2009 and December 31, 2008:

 

Sales, including intersegment sales decreased $1,689 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease in sales was driven primarily by lower volume and, to a much lesser degree, price reductions provided to customers, which combined totaled $1,246 million. The lower volume was attributed to a decline in light vehicle production volumes in all major geographic regions. Foreign currency exchange also had a net unfavorable impact on sales of $443 million.

 

Earnings (losses) before taxes increased by $67 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The increase in earnings was driven primarily by cost reductions (in excess of inflation and price reductions provided to customers) of $303 million, decreased restructuring and impairment costs of $30 million, lower pension and postretirement benefit expense of $16 million (which includes an increase of $9 million of net settlement and buyout gains) as well as the favorable impact of certain customer related settlements of $12 million and contractual settlements related to a recent acquisition of $8 million. Also contributing to the increase in earnings was a customer reimbursement of $5 million for costs incurred as a result of the premature closure of an operating facility. These items were partially offset by lower volume and adverse mix which totaled $240 million, the net unfavorable impact of foreign currency exchange of $27 million, increased warranty expense of $26 million and the non-recurrence of net insurance recoveries of $17 million related to a business disruption at our brake line production facility in South America in the prior period.

 

Restructuring charges and asset impairments decreased by $30 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease was driven primarily by a decrease in fixed asset impairments of $55 million. Of this amount, $16 million of fixed asset impairments related to restructuring were due to plant closures in this segment’s North American braking facilities and $39 million related to other fixed asset impairments of internally used software, certain machinery and equipment, and buildings and leasehold improvements. This decrease was offset by a net increase in severance, retention, outplacement services and net curtailment gains of $25 million related to the workforce reduction initiatives that began in the fourth quarter of 2008.

 

For the year ended December 31, 2008 and December 31, 2007:

 

Sales, including intersegment sales increased $742 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The increase was driven primarily by the favorable impact of foreign currency exchange of $431 million and increased volume (including net favorable price recoveries from customers) of $311 million. The higher volume is attributed primarily to increased module sales in North America and Asia.

 

Earnings (losses) before taxes decreased by $88 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The decrease was driven mainly by adverse mix in excess of favorable volume of $60 million, which is primarily related to the increase in sales of lower margin modules. Also contributing to the decrease in earnings are increased restructuring and impairment costs of $59 million, the net unfavorable impact of foreign currency exchange of $28 million and higher engineering expense of $6 million. These unfavorable items were partially offset by cost reductions and net price recoveries from our customers (in excess of inflation) of

$26 million and net insurance recoveries in the current period of $17 million related to a business disruption at our brake line production facility in South America and the non-recurrence of associated costs (net of insurance recoveries) which negatively impacted the prior period by $6 million. Other favorable drivers included lower warranty costs of $14 million and a reduction in pension and postretirement benefit expense of $2 million.

 

Restructuring charges and asset impairments increased by $59 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. For the year ended December 31, 2008, this segment recorded restructuring charges and asset impairments of $89 million in connection with severance, retention and outplacement services at various production facilities, net of curtailment gains, as well as net fixed asset impairment charges to write down certain machinery and equipment to fair value. For the year ended December 31, 2007, this segment recorded restructuring charges and asset impairments of $30 million in connection with severance and costs related to the consolidation of certain facilities, as well as net asset impairment charges to write down certain assets to fair value.

 

OCCUPANT SAFETY SYSTEMS

 

For the year ended December 31, 2009 and December 31, 2008:

 

Sales, including intersegment sales decreased $901 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease in sales was driven primarily by lower volume and, to a lesser degree, price reductions provided to customers, which combined totaled $661 million and the net unfavorable impact of foreign currency exchange of $240 million.

 

Earnings (losses) before taxes increased $180 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The increase in earnings was driven primarily by decreased restructuring and impairment costs of $198 million, and cost reductions (in excess of inflation and price reductions) of $177 million and the beneficial impact of certain customer related settlements and favorable patent dispute resolutions totaling $13 million. Also contributing to the increase in earnings were the reversal of accruals related to certain benefit programs at several of our European facilities which increased earnings by $5 million and lower warranty costs of $4 million. These items were partially offset by lower volume and adverse mix which totaled $203 million, and the net unfavorable impact of foreign currency exchange of $15 million.

 

Restructuring charges and asset impairments decreased by $198 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. During 2008, this segment recorded an impairment loss of $174 million related to customer relationships, the non-recurrence of which was the primary contributor to the decrease period over period. In addition, a decrease in fixed asset impairments of $16 million along with a net decrease in severance, retention, outplacement services and net curtailment gains of $8 million contributed to the significant overall decrease.

 

For the year ended December 31, 2008 and December 31, 2007:

 

Sales, including intersegment sales decreased $198 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The decrease was driven primarily by unfavorable volume and price reductions provided to customers of $400 million, partially offset by the favorable impact of foreign currency exchange of $202 million. The decrease in volume is attributed to lower sales in both North America and Europe resulting from reduced light vehicle production volumes.

 

Earnings (losses) before taxes decreased $371 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The decrease was driven primarily by increased restructuring and impairment costs of $213 million and adverse mix combined with lower volume of $98 million. Also contributing to the decrease in earnings were the net unfavorable impact of foreign currency exchange of $36 million, higher engineering expense coupled with lower recoveries totaling $10 million, price reductions and inflation in excess of cost reductions of $9 million and the non-recurrence of a $7 million gain on the sale of an idle facility that occurred in the prior period. These items were partially offset by reduced pension and other postretirement benefit expense of $2 million and lower warranty costs of $1 million.

Restructuring charges and asset impairments increased by $213 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. For the year ended December 31, 2008, this segment recorded restructuring charges and asset impairments of $217 million, primarily in connection with the impairment of customer relationship intangible assets of $174 million and severance and other costs of $17 million associated with the closure of a facility in Europe. Severance and other costs of $11 million, offset by net curtailment gains of $1 million, and an increase in fixed asset impairments of $12 million, also contributed to the $213 million increase in restructuring and impairment costs. For the year ended December 31, 2007, this segment recorded restructuring charges and asset impairments of $4 million in connection with the write down of certain machinery and equipment to fair value.

 

ELECTRONICS

 

For the year ended December 31, 2009 and December 31, 2008:

 

Sales, including intersegment sales decreased by $320 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease in sales was driven primarily by lower volume and, to a much lesser degree, price reductions provided to customers, which combined totaled $263 million, and the net unfavorable impact of foreign currency exchange of $57 million.

 

Earnings (losses) before taxes decreased by $64 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease in earnings was driven primarily by lower volume and adverse mix which totaled $115 million, the net unfavorable impact of foreign currency exchange of $4 million and increased warranty costs of $4 million. These items were partially offset by cost reductions (in excess of inflation and price reductions) of $58 million.

 

Restructuring charges and asset impairments were $4 million for both of the years ended December 31, 2009 and 2008. The charges primarily related to severance and other charges and fixed asset impairments not related to restructuring.

 

For the year ended December 31, 2008 and December 31, 2007:

 

Sales, including intersegment sales decreased by $111 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The decrease was driven primarily by unfavorable volume and price reductions provided to customers of $130 million, partially offset by the favorable impact of foreign currency exchange of $19 million.

 

Earnings (losses) before taxes decreased by $57 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The decrease was driven primarily by lower volume and adverse mix combined with the non-recurrence of favorable supplier resolutions that occurred in the prior year, together which totaled $59 million. Also contributing to the decline in earnings were higher engineering expenses of $6 million, increased restructuring and impairment costs of $4 million and higher warranty costs of $1 million. These unfavorable items were partially offset by cost reductions (in excess of inflation and price reductions provided to customers) of $9 million and the net favorable impact of foreign currency exchange of $3 million.

 

Restructuring charges and asset impairments for the year ended December 31, 2008 were $4 million in connection with severance, retention and outplacement services at various production facilities, net of $1 million of curtailment gains. Other net fixed asset impairment charges of $1 million were recorded to write down certain machinery and equipment to fair value.

 

AUTOMOTIVE COMPONENTS

 

For the year ended December 31, 2009 and December 31, 2008:

 

Sales, including intersegment sales decreased by $548 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease in sales was driven primarily by lower volume and, to a much lesser degree, price reductions provided to customers, which combined totaled $405 million and the net unfavorable impact of foreign currency exchange of $143 million.

Earnings (losses) before taxes increased by $536 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The increase in earnings was driven primarily by decreased restructuring and impairment costs of $600 million and cost reductions (in excess of inflation and price reductions) of $104 million. These items were partially offset by lower volume and adverse mix which totaled $139 million and the net unfavorable impact of foreign currency exchange of $29 million.

 

Restructuring charges and asset impairments decreased by $600 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. During 2008, this segment recorded an impairment loss of $613 million related to goodwill and customer relationships, which primarily contributed to the decrease period over period. This was offset by net increases in severance, retention, outplacement services, and net curtailment gains of $11 million and fixed asset impairments not related to restructuring of $2 million.

 

For the year ended December 31, 2008 and December 31, 2007:

 

Sales, including intersegment sales decreased by $146 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The decrease was driven primarily by unfavorable volume and price reductions provided to customers of $230 million, partially offset by the favorable impact of foreign currency exchange of $84 million. The decrease in volume is attributed to lower sales of core products in both North America and Europe resulting from reduced light vehicle production volumes.

 

Earnings (losses) before taxes decreased by $674 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The decrease was driven primarily by increased restructuring and impairment costs of $604 million, lower volume and adverse mix which totaled $68 million and the non-recurrence of a $10 million gain on the sale of an Engine Components manufacturing facility which occurred in the prior period. These unfavorable items were partially offset by cost reductions (in excess of inflation and price reductions provided to customers) of $4 million and the net favorable impact of foreign currency exchange of $3 million.

 

Restructuring charges and asset impairments increased by $604 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. For the year ended December 31, 2008, this segment recorded restructuring charges and asset impairments of $621 million, primarily in connection with the impairment of goodwill of $458 million, customer relationship intangible assets of $155 million, and increased fixed asset impairments of $1 million. This charge was partially offset by a decrease in severance and other costs of $8 million and recording of net curtailment gains of $2 million. For the year ended December 31, 2007, this segment recorded restructuring charges of $17 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

While we still have significant leverage, we believe that funds generated from operations and available borrowing capacity will be adequate to fund our liquidity requirements. These requirements, which are significant, generally consist of working capital requirements, capital expenditures, company-sponsored research and development programs, and debt service requirements. In addition, our current financing plans are intended to provide flexibility in worldwide financing activities and permit us to respond to changing conditions in credit markets. However, our ability to continue to fund these items and to reduce debt may be affected by general economic, industry specific, financial market, competitive, legislative and regulatory factors.

 

On an annual basis, our primary source of liquidity remains cash flows generated from operations. At various points during the course of the year we may be in an operating cash usage position, which is not unusual given the seasonality of our business. We also have available liquidity under our revolving credit facility and the receivables facility described below, subject to certain conditions. We continuously focus on our working capital position and associated cash requirements and explore opportunities to more effectively manage our inventory and capital spending. Working capital is highly influenced by the timing of cash flows associated with sales and purchases, and therefore can be difficult to manage at times. Although we have historically been successful in managing the timing of our cash flows, future success will be dependent on the financial position of our customers and suppliers, and on industry conditions.

Cash Flows

 

Operating Activities.  Cash provided by operating activities for the year ended December 31, 2009, was $455 million, as compared to $773 million for the year ended December 31, 2008.

 

The decrease is primarily the result of an increase in working capital requirements of $445 million, from a cash inflow of $243 million for the year ended December 31, 2008 compared to a cash outflow of $202 million for the year ended December 31, 2009. The increased working capital requirement in 2009, as compared to 2008, was due to higher levels of automotive production in the fourth quarter of 2009, as compared to the fourth quarter of 2008 when many of our customers were shut down for extended periods. The shut downs at the end of 2008 resulted in significantly lower accounts receivable balances as collections occurred without the replenishment from production. Additionally, improvements in 2009 sales led to additional spending on inventories to support our production, which were partially offset by a corresponding increase in payables.

 

Other items that significantly affected cash flow from operations include:

 

 

Investing Activities.  Cash used in investing activities for the year ended December 31, 2009 was $197 million as compared to $507 million for the year ended December 31, 2008.

 

For the years ended December 31, 2009 and 2008, we spent $201 million and $482 million, respectively, in capital expenditures, primarily in connection with upgrading existing products, continuing new product launches in 2009 and 2008, and infrastructure and equipment at our facilities to support our manufacturing and cost reduction efforts. We expect to spend approximately $325 million for such capital expenditures during 2010.

 

During 2008, we spent approximately $41 million in conjunction with an acquisition in our Chassis Systems segment and approximately $6 million on a joint venture in India to facilitate access to the Indian market and support our global customers. We received proceeds from the sale of various assets of $4 million and $15 million for the years ended December 31, 2009 and 2008, respectively.

 

Financing Activities.  Cash used in financing activities was $250 million for the year ended December 31, 2009 as compared to $287 million used in financing activities for the year ended December 31, 2008. The usage of cash was primarily the result of the following events:

 

 

Other Sources of Liquidity

 

Liquidity Facilities.  We intend to draw down on, and use proceeds from, our revolving credit facility and our European accounts receivables facility (collectively, the “Liquidity Facilities”) to fund normal working capital

needs from month to month in conjunction with available cash on hand. As of December 31, 2009, we had approximately $1.2 billion of availability under our revolving credit facility, which reflects no outstanding borrowings and reduced availability as a result of $58 million in outstanding letters of credit and bank guarantees. Lehman Commercial Paper Inc. (“LCP”) has a $48 million unfunded commitment under the revolving credit facility. LCP filed for bankruptcy in October 2008 and has failed to fund their portion of borrowings under the revolving credit facility. The Company believes LCP will likely not perform in the future under the terms of the facility and, therefore, has excluded LCP’s commitment from the description of the revolving credit facility and all references to availability contained in this Report.

 

Our Seventh Credit Agreement contains certain covenants, including maximum leverage and minimum interest coverage ratios that would impact our ability to borrow on the facility if not met. As of December 31, 2009, the Company was in compliance with these financial covenants.

 

In March 2009, we, through one of our European subsidiaries, entered into a receivables factoring arrangement in Italy. This €40 million program is renewable annually, if not otherwise terminated. As of December 31, 2009, the Company had factored approximately €5 million of the €36 million available for funding under the program.

 

At December 31, 2009, we, through one of our European subsidiaries, had a €37.5 million receivables financing arrangement involving a wholly-owned special purpose vehicle which purchased trade receivables from our German affiliates and sold those trade receivables to a German bank. As of December 31, 2009, there were no outstanding borrowings under this facility. This arrangement was terminated on January 6, 2010.

 

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

 

On April 24, 2009, the Company terminated its United States receivables facility in order to participate in the Auto Supplier Support Program sponsored by the U.S. Treasury Department (“Auto Supplier Support Program”). Our eligible receivables were accepted into each of the Chrysler LLC and General Motors Corporation Auto Supplier Support Programs. Subsequent to the separate filings for bankruptcy protection by Chrysler LLC and General Motors Corporation, 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.

 

Under normal working capital utilization of liquidity, portions of the amounts drawn under the Liquidity Facilities typically will be paid back throughout the month as cash from customers is received. We would then draw upon such facilities again for working capital purposes in the same or succeeding months. However, during any given month, upon examination of economic and industry conditions, we may draw fully down on our Liquidity Facilities.

 

On December 31, 2009, our subsidiaries in the Asia Pacific region also had various uncommitted credit facilities totaling approximately $142 million, of which $126 million was available after borrowings of $16 million. We expect that these additional facilities will be drawn on from time to time for normal working capital purposes.

 

Senior Secured Credit Facilities.  In June 2009, we entered into our Sixth Credit Agreement with the lenders party thereto. The Sixth Credit Agreement amended certain provisions of the prior agreement, including the financial covenants, applicable margins and commitment fee rates as well as certain other covenants applicable to us. The other material terms of the Sixth Credit Agreement were the same as those in our prior agreement.

 

In December 2009, we entered into the Seventh Credit Agreement with the lenders party thereto. The Seventh Credit Agreement amended certain provisions of the Sixth 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 and $845 million matures November 30, 2014, subject to certain conditions described below, (ii) the $225 million Term Loan A-2, and (iii) the $175 million Term Loan B-3. Net proceeds from the Term Loan A-2 and Term Loan B-3, together with cash on hand were used to repay the remaining balance of the existing term loan A-1 and term loan B-1 and pay fees and expenses associated with the

Seventh Credit Agreement. See “— Senior Secured Credit Facilities” in Note 14 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” for a description of these facilities.

 

The Seventh Credit Agreement, like the Sixth Credit Agreement, contains a number of covenants that, among other things, restrict the payment of (i) cash dividends on the common stock of TRW Automotive Holdings Corp. (“TAHC”) pursuant to a formula based on our consolidated net income and leverage ratio, and (ii) dividends or other distributions by TRW Automotive Inc. (“TAI”), subject to specified exceptions. The exceptions include, among others, payments or distributions to enable the Company to enter into certain derivative transactions in relation to TAI’s exchangeable bonds, or in respect of expenses required for TAHC and its wholly-owned subsidiary, TRW Automotive Intermediate Holdings Corp., to maintain their corporate existence, general corporate overhead expenses, tax liabilities and legal and accounting fees. Since TAHC is a holding company without any independent operations, it does not have significant cash obligations and is able to meet its limited cash obligations with payments or distributions from TAI under the exceptions to our debt covenants. See “— Debt Covenants” in Note 14 to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for further information on additional debt covenants.

 

Other Capital Transactions

 

Senior Note Debt Issuances.  In November 2009, we issued $250 million of 8.875% senior unsecured notes. Net proceeds from the offering were approximately $242 million after deducting debt issuance costs and estimated offering expenses, of which approximately $138 million was used to prepay borrowings under the term loan A-1 and term loan B-1 facilities.

 

Also in November 2009, we issued $259 million of exchangeable senior unsecured notes. Net proceeds from the offering were approximately $251 million after deducting debt issuance costs and estimated offering expenses, of which approximately $112 million was used to repay borrowings under the term loan A-1 and term loan B-1 facilities.

 

Equity Transaction.  In August 2009, we issued 16.1 million shares of our common stock in a public offering at $17.50 per share. Net cash proceeds from this issuance, after commissions and related expenses, were approximately $269 million. Of this amount, approximately $87 million was used to prepay a portion of the term loan A-1 and term loan B-1. The remaining proceeds were used to reduce borrowings under the revolving credit facility.

 

Senior Note Debt Repurchases.  In March and April 2009, we entered into transactions to repurchase senior unsecured notes issued in 2007 totaling $57 million in principal amount. As a result of these transactions, we recorded a gain on retirement of debt of $41 million, including the write-off of a portion of debt issuance costs and premiums. These repurchases were funded from cash on hand.

Contractual Obligations and Commitments

 

The following table reflects our significant contractual obligations as of December 31, 2009:

 

 

 

 

We have unrecognized tax benefits amounting to $166 million. However, due to a high degree of uncertainty regarding the timing of such future cash outflows, reasonable estimates cannot be made regarding the period of cash settlement with the applicable taxing authority.

 

In addition to the obligations discussed above, we sponsor defined benefit pension plans that cover a significant portion of our U.S. employees and certain non-U.S. employees. Prior to 2008, our funding practice provided that annual contributions to the pension plans in the U.S. would be equal to the minimum amounts required by the Employee Retirement Income Security Act (“ERISA”). Commencing in 2008, the Company’s pension plans in the U.S. are funded in conformity with the Pension Protection Act of 2006. Funding for our pension plans in other countries is based upon actuarial recommendations or statutory requirements. In 2010, we expect to contribute approximately $28 million to our U.S. pension plans, approximately $24 million to the U.K. pension plan and approximately $39 million to pension plans in the rest of the world.

 

The U.K. pension plan undergoes triennial actuarial funding valuations. The plan was in a surplus position for funding purposes as of the date of the last triennial valuation. The next actuarial funding valuation is currently in process and due to be finalized by mid-year 2010. Given the declines in global financial markets preceding that valuation date, the funding valuation is likely to result in an overall deficit as of that date. This may result in the need for the Company to enter into discussions on a deficit recovery plan with the plan fiduciaries/trustees, with the potential for the Company to be required to commence contributions to the plan. Such discussions, including the finalization of a deficit recovery plan would need to be concluded no later than June 30, 2010. In the finalization process, allowances could be made for any changes or recoveries in asset values over the 15-month period following March 31, 2009, as well as future expected investment returns over the full length of the agreed upon recovery plan.

Should Company contributions be required, the fiduciaries/trustees would likely consider the affordability of such contributions to the U.K. business and could make appropriate allowances for this in the formal deficit recovery plan. The Company has provisionally agreed with the trustees to contribute $24 million to the U.K. pension plan in 2010, however, the ultimate amount of such contribution is dependent upon the finalization of the aforementioned recovery plan.

 

We sponsor OPEB plans that cover the majority of our U.S. and certain non-U.S. retirees and provide for benefits to eligible employees and dependents upon retirement. We are subject to increased OPEB cash costs due to, among other factors, rising health care costs. We fund our OPEB obligations on a pay-as-you-go basis. In 2010, we expect to contribute approximately $44 million to our OPEB plans.

 

We also have liabilities recorded for various environmental matters. As of December 31, 2009, we had reserves for environmental matters of $52 million. We expect to pay approximately $11 million in 2010 in relation to these matters.

 

In addition to the contractual obligations and commitments noted above, we have contingent obligations in the form of severance and bonus payments for our executive officers. We have no unconditional purchase obligations other than those related to inventory, services, tooling and property, plant and equipment in the ordinary course of business.

 

Other Commitments.  Escalating pressure from customers to reduce prices is characteristic of the automotive parts industry. Historically, we have taken steps to reduce costs and minimize and/or resist price reductions; however, to the extent we are unsuccessful at resisting price reductions, or are not able to offset price reductions through improved operating efficiencies and reduced expenditures, such price reductions may have a material adverse effect on our financial condition, results of operations and cash flows.

 

In addition to pricing concerns, customers continue to seek changes in terms and conditions in our contracts concerning warranty and recall participation and payment terms on product shipped. We believe that the likely resolution of these proposed modifications will not have a material adverse effect on our financial condition, results of operations or cash flows.

 

Off-Balance Sheet Arrangements

 

We do not have guarantees related to unconsolidated entities, which have, or are reasonably likely to have, a material current or future effect on our financial position, results of operations or cash flows.

 

See Note 8 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” for a discussion of our receivables facilities.

 

Environmental Matters

 

Governmental requirements relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had, and will continue to have, an effect on our operations and us. We have made and continue to make expenditures for projects relating to the environment, including pollution control devices for new and existing facilities. We are also conducting a number of environmental investigations and remedial actions at current and former locations to comply with applicable requirements and, along with other companies, have been named a potentially responsible party for certain waste management sites. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably to us. Further information regarding environmental matters, including the related reserves, contained in Note 20 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data,” is incorporated herein by reference.

 

We do not believe that compliance with environmental protection laws and regulations will have a material effect upon our capital expenditures, results of operations or competitive position. Our capital expenditures for environmental control activities during 2010 are not expected to be material to us.

Contingencies

 

The information concerning various claims, lawsuits and administrative proceedings contained in Note 20 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” is incorporated herein by reference.

 

Recently Issued Accounting Pronouncements

 

See Note 2 to our consolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data” for a discussion of recently issued accounting pronouncements.

 

Other

 

On November 20, 2009, the applicable subsidiaries of the Company entered into a sixth amendment to the employment agreement with John C. Plant in order to document their mutual understanding of the impact on Mr. Plant’s employment agreement of his election to retire under the terms of the TRW Pension Scheme (U.K.) effective as of April 6, 2009. This technical amendment clarified that Mr. Plant, who had been dually employed by both a U.K. and a U.S. subsidiary of the Company, would no longer be employed by the U.K. subsidiary and deleted references to the U.K. Pension Scheme in the employment agreement. This description of the amendment is qualified in its entirety by reference to the full text of the amendment which is attached hereto as Exhibit 10.15(g).

 

Outlook

 

The automotive industry remains in the midst of extraordinary challenges resulting from the global economic crisis and significantly reduced automotive production levels. However, based upon recent vehicle production forecasts, we believe that the low point of the trough in vehicle production is behind us and expect that North America will experience moderately higher vehicle production levels, and that Europe will experience relatively flat or slightly lower production levels in 2010.

 

We expect full year 2010 sales to be in the range of $12.3 billion to $12.9 billion, including first quarter sales of approximately $3.4 billion. These sales figures are based on expected 2010 production levels of 10.8 million units in North America and 16.0 million units in Europe, and take into consideration our expectation of foreign currency exchange rates.

 

Although it appears the financial crisis is abating, we expect full recovery of the automotive industry to be a long and gradual process. We believe that our liquidity position, in addition to our restructuring and improved cost and capital structure, positions us well for continued success as a leading automotive supplier. Our technology portfolio, product and geographic diversification and improved cost structure will allow us to take advantage of an expected industry rebound.

 

Although immediate concerns have somewhat abated, we remain concerned about the long-term financial health and solvency of certain of our major customers as they respond to negative economic and industry conditions through various restructuring activities. We also remain concerned about the viability of the Tier 2 and Tier 3 supply base as they face financial difficulties in the current environment due to decreased automobile production, pricing pressures, and the impact that their customers’ restructuring actions and bankruptcy proceedings may have on them. Increased working capital requirements resulting from increased production levels may also put financial strain on suppliers with limited liquidity. The inability of any major supplier to meet its commitments could negatively impact us either directly or by negatively affecting our customers. While we continue our efforts to mitigate the impact of our own suppliers’ financial distress on our financial results, our efforts may be insufficient and the pressures may worsen, thereby potentially having a negative impact on our future results.

 

Given the nature of our global operations, we maintain an inherent exposure to fluctuations in foreign currency exchange rates. A strengthening of the U.S. dollar against other currencies would have a negative currency translation impact on our results of operations due to our proportional concentration of sales volumes in countries outside the United States. A weakening of mainly the U.S. dollar against the Mexican peso, the Canadian dollar, the Chinese renminbi or the Brazilian real, or a weakening of the euro against the British pound, the Polish zloty, or the Czech koruna would, even after hedging, have a negative impact on gross profit and earnings. In addition, while we

generally benefit through translation from the weakening of the dollar, over the long term such weakening may have a material adverse affect on the competitiveness of our manufacturing facilities located in countries whose currencies are appreciating against the dollar.

 

Forward-Looking Statements

 

This Report includes “forward-looking statements,” as that term is defined by the federal securities laws. Forward-looking statements include statements concerning our plans, intentions, objectives, goals, strategies, forecasts, future events, future revenue or performance, capital expenditures, financing needs, business trends and other information that is not historical information. When used in this Report, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” and future or conditional verbs, such as “will,” “should,” “could” or “may,” as well as variations of such words or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements are so designated. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data, are based upon our current expectations and various assumptions, and apply only as of the date of this Report. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will be achieved.

 

There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from those suggested by our forward-looking statements, including those set forth in “Item 1A. Risk Factors” in this Report and in our other filings with the Securities and Exchange Commission. All forward-looking statements are expressly qualified in their entirety by such cautionary statements. We undertake no obligation to update or revise forward-looking statements which have been made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

 

 

Our primary market risk arises from fluctuations in foreign currency exchange rates, interest rates and commodity prices. We manage foreign currency exchange rate risk, interest rate risk, and to a lesser extent commodity price risk, by utilizing various derivative instruments and limit the use of such instruments to hedging activities. We do not use such instruments for speculative or trading purposes. If we did not use derivative instruments, our exposure to such risks would be higher. We are exposed to credit loss in the event of nonperformance by the counterparty to the derivative financial instruments. We attempt to manage this exposure by entering into agreements directly with a number of major financial institutions that meet our credit standards and that are expected to fully satisfy their obligations under the contracts. However, given recent disruptions in the financial markets, including the bankruptcy, insolvency or restructuring of certain financial institutions, there is no guarantee that the financial institutions with whom we contract will be able to fully satisfy their contractual obligations.

 

Foreign Currency Exchange Rate Risk.  We utilize derivative financial instruments to manage foreign currency exchange rate risks. Forward contracts, and to a lesser extent options, are utilized to protect our cash flow from adverse movements in exchange rates. Foreign currency exposures are reviewed monthly and any natural offsets are considered prior to entering into a derivative financial instrument. As of December 31, 2009, approximately 19% of our total debt was in foreign currencies, as compared to 17% as of December 31, 2008.

 

Interest Rate Risk.  We are subject to interest rate risk in connection with the issuance of variable- and fixed-rate debt. In order to manage interest costs, we may occasionally utilize interest rate swap agreements to exchange fixed- and variable-rate interest payment obligations over the life of the agreements. Our exposure to interest rate risk arises primarily from changes in LIBOR. As of December 31, 2009, approximately 18% of our total debt was at variable interest rates (or 5% when considering the effect of the interest rate swaps), as compared to 46% (or 36% when considering the effect of the interest rate swaps) as of December 31, 2008. In January 2010, $250 million notional of pay fixed/receive variable interest rate swaps matured, and we entered into $350 million notional swaps in January and February 2010 to effectively change a fixed rate obligation into a floating rate obligation.

Commodity Price Risk.  We utilize derivative financial instruments to manage select commodity price risks. Forward purchase agreements generally meet the criteria to be accounted for as normal purchases. Forward purchase agreements which do not or no longer meet these criteria are classified and accounted for as derivatives.

 

Sensitivity Analysis.  We utilize a sensitivity analysis model to calculate the fair value, cash flows or statement of operations impact that a hypothetical 10% change in market rates would have on our debt and derivative instruments. For derivative instruments, we utilized applicable forward rates in effect as of December 31, 2009 to calculate the fair value or cash flow impact resulting from this hypothetical change in market rates. The analyses also do not factor in a potential change in the level of variable rate borrowings or derivative instruments outstanding that could take place if these hypothetical conditions prevailed. The results of the sensitivity model calculations follow: