Collins & Aikman touts Q2 leverage progress but says big cut in debt still "several years" away

By Paul Deckelman

New York, Aug. 2 - Collins & Aikman Corp. said Monday that it posted strong gains in EBITDA and EBITDA margins during the second quarter, helping to push its net leverage ratio of debt versus EBITDA down to 4.28 times in the quarter from 4.5 times in the quarter before. But while the Troy, Mich.-based auto components maker continued to move towards positive free cash flow status, its chief executive officer acknowledged that it would be "several years" before there was any meaningful debt reduction.

The company reported that as of the end of the second quarter on June 30, net debt stood at $1.439 billion - essentially flat from where it was at the end of the first quarter on March 31, but somewhat increased from the $1.251 billion the company carried a year earlier.

However, despite the $188 million increase, the ratio of net debt to last-12-month EBITDA before restructuring and impairment charges - which CEO David Stockman called "the number 1 financial health metric we live by" - was essentially unchanged in the second quarter from the year-earlier 4.3 times - and was considerably better than the 4.5 times ratio the company had shown in the first quarter.

The $1.439 billion quarter-end net debt figure included $550 million of senior secured debt, including accounts receivable; $500 million of senior notes and $400 million of senior subordinated notes, offset by $11 million of cash on hand.

The company had total unused commitments under its credit facilities and receivables securitization of about $200 million, plus the $11 million in cash

The figures released Monday were for the most part the same as those the company put out in a July 8 preview of its second-quarter results, and much of Stockman's conference call presentation following the release of the earnings data was similarly reprised.

Collins & Aikman finished the quarter with a net loss of $29.7 million (35 cents a share), a deterioration from its year-earlier profit of $10.7 million (13 cents a share). It also lowered full-year 2004 earnings per-share guidance to a likely loss of between 20 and 30 cents per share, versus previous projections of about break-even, due to anticipated higher foreign exchange losses, increased interest and depreciation and amortization expenses, as well as lower tax benefits.

Big 3 slowdown hurts C&A

Among the negatives impacting the company's bottom line was a slowdown in production during the quarter by Detroit's Big 3, who collectively account for over 75% of Collins & Aikman's business. That held sales essentially stagnant versus year-ago levels, at about $1.04 billion

Also harming the bottom line in the latest period was the lingering effects of price increases in raw materials it uses, including resins and other oil-based plastics. The company said that it was able to recover a portion of these costs from its customers amid a highly competitive market, and ended up eating a net of about $34 million of such costs.

Collins & Aikman also had heavy startup costs on several new plants that it has recently opened, including new carpet and acoustics plants in Britain and Turkey, and plastics plants in the U.K., Mexico and Canada.

It also incurred considerable costs in the conversion of several existing U.S. factories to handle making components for Chrysler's new next-generation LX vehicle series, as well as costs connected to several other production launches for other manufacturers, which are causing losses prior to reaching full production volume.

Relations with Chrysler "normalized:

But on the upside, Collins & Aikman generated some $450 million of new business during the quarter, bringing to $1.5 billion the amount of new contracts brought in since early 2003. Stockman declared that after having worked out some issues with Daimler-Chrysler, its single largest customer, "we are now on a normalized relationship" with the German-American auto giant- a far cry from the situation a year ago when a Detroit-area newspaper reported that some anonymously quoted Chrysler executives were dissatisfied with the company's performance and expected Chrysler to re-bid Collins & Aikman's $1.2 billion of lucrative contracts, which did not occur.

But with whatever Chrysler problems it was having apparently now receding in the company's rear-view mirror and other things looking up, Collins & Aikman was able to put together its fourth consecutive quarter of what Stockman, who also serves as the company's chairman, called "very strong" EBITDA gains, in line with the assessments the company released on July 8. Second-quarter EBITDA totaled $100.4 million before restructuring and impairment charges, in line with company projections - a 20% gain over year ago levels, "so we are making demonstrable progress," the CEO declared.

"Since August 2003, when we made a change in our top management [then president/CEO Jerry Mosingo was pushed aside LAST Aug. 11 amid deteriorating company performance, with Stockman, then chairman, also becoming CEO], we have accelerated the pace and the intensity of our consolidation, cost-cutting and platform growth strategy," Stockman asserted, and the company has been able to overcome such adverse forces as upward pressure on commodities the company buys and downward pressure on the prices it can charge its automotive customers.

EBITDA margin rises

EBITDA margin was up 180 basis points from year-earlier levels, to 9.7% of net sales- the best margin seen in eight quarters, and almost at the 10% margin goal the company has set for itself. Coming despite essentially flat sales, "I think it's a pretty good indicator that we are inching our way forward in terms of achieving our mid-term financial goals," Stockman said.

The "measurable" improvement in the company's net debt/LTM EBITDA ratio to just below the 4.3% mark from 4.5% the quarter before, "begins to move us in the right direction, which is to steadily reduce our debt leverage ratio as we go forward," Stockman said, also pointing out that the improvements came despite Collins & Aikman having to spend $60 million during the quarter for cash interest payment on its 10¾% senior notes due 2011 and its 11½% senior subordinated notes due 2006, both of which had interest payments which came due during the quarter. It was able to offset that expense, he said, "with good operating results and some cash-generation projects that were implemented during the quarter."

Sees positive free cash flow in sight

In answer to an analyst's question as to when Collins & Aikman would again be free cash flow-positive, Stockman declared "I think we're rounding the bend on that right now."

He said that on an operating cash performance basis, "we were nearly at break-even, but we had a lot of one-time adjustments, both on our balance sheet and in our cash sources and uses."

In March, Collins & Aikman projected 2004 EBITDA before restructuring and impairment at levels between $355 and $370 million. During the first half, the company recorded EBITDA of about $180 million, or about 50% of its annual target. During the second half, C&A expects "comparable results" and figures to achieve the lower end of its projected EBITDA range for 2004.

Stockman said that looking forward to the next year, "EBITDA will continue to rise, our [capital expenditures] will begin to abate - it won't happen overnight, but each quarter, it should begin to soften." Those two factors, combined with a stabilization of the company's use of working capital, relative to sales "should begin to push us in the direction of positive operating cash flow."

Stockman cautioned however that in his opinion, "it's going to take several quarters for that to become a firm trend, and it will take several years before we begin to make a meaningful reduction in our current debt balance."

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