TRW touts debt reduction, says $1.03 billion net debt, 0.6x leverage at 'historic' lows

By Paul Deckelman

New York, Jan. 12 - TRW Automotive Holdings Corp. has brought its net debt and leverage down to what company executives call "historic" low levels, utilizing the Livonia, Mich.-based vehicle systems company's continued strong cash flows. They said TRW opens the new year with no significant debt maturities on the horizon until 2014.

Speaking to investors at the Deutsche Bank Securities Inc. Global Auto Industry Conference on Wednesday in Detroit, TRW's chief financial officer and executive vice president, Joseph S. Cantie, noted the strong downward slope in the company's overall debt and net debt levels since fiscal 2002, when the company - then a part of aerospace, automotive and credit reporting conglomerate TRW Inc. - was sold to Blackstone Group LP after its parent was acquired by aerospace rival Northrop Grumman Corp.

Debt levels decline

Blackstone funded the buyout by using TRW to issue over $3 billion of debt in early 2003, including a $1.81 billion credit facility consisting of two term loan tranches and a revolving credit line and $1.575 billion of dollar- and euro-denominated junk bonds brought to market in a four-tranche deal.

Total debt was $3.912 billion when the fiscal year ended in early 2003, and, deducting available cash, net debt stood at $3.437 billion. By the end of fiscal 2008, total debt had fallen to $2.922 billion and net debt to $2.156 billion, and by the end of the 2009 fiscal year a year ago, those measures had come down to $2.371 billion and $1.583 billion, respectively. At that time, the ratio of net debt to adjusted EBITDA for the preceding 12 months stood at 1.7 times.

Since then, Cantie said, the company's "record margins, record earnings, right through to the bottom line" in the first nine months of the current 2010 fiscal year drove "just great cash flow for us." Over those first nine months, TRW generated $522 million of free cash flow, and the CFO said that it would show cash-flow generation in the fiscal fourth quarter ended Jan. 1 as well - the numbers will be released on Feb. 17 - "so it's obviously going to be a record year for us on that level."

That cash-flow generation, in turn, has led to what Cantie called "a much-improved step-change to our capital structure," with the debt measures reduced to "all-time low levels" for TRW's tenure as a stand-alone company. As of the end of the 2010 fiscal third quarter on Oct. 1, total debt stood at $2.119 billion, net debt at $1.03 billion and the leverage ratio had dropped to 0.6x, which Cantie termed "obviously the best that we've ever had." Net debt was more than cut in half over the last four quarters, declining by $1.043 billion in that time.

He also noted that the company's net interest expense "is coming down because of the deleveraging of the company by the use of cash flow." At the end of the fiscal third quarter, and on a last 12-months basis, it was on track to decline to $176 million from the $190 million seen in fiscal 2009.

He attributed the substantial improvements in the cash flow and through them, the debt measures - not just over the last nine months but the several years before that - to TRW's having been able to "really work the cost side, the fixed-cost structure," particularly during the automotive industry's downturn in 2008 and 2009. At the same time, he said it was "investing in its technologies" so that when the industry began to turn back upward in 2010, it was in a position to increase its sales of auto brake, steering, safety and electronic products, particularly in expanding overseas markets like China and Brazil, now TRW's fastest-growth areas.

No looming maturities

TRW repaid the remaining $149 million of its A-2 term loan debt on Nov. 4. Consequently, Cantie said that the company's capital structure contains no bank debt or bond maturities before 2014, when $345 million of 6 3/8% euro-denominated notes and $461 million of 7% dollar-denominated notes come due on March 15.

He also pointed out that a $411 million revolving credit line that the company has not drawn on is slated to expire next year, "so we've got some work to do in that area - but basically, the maturity level is very good, and gives us a lot of flexibility to deal with that over the coming years."

Cantie said TRW had generated over $2 billion of free cash flow since its separation from the old TRW Inc. in 2003 - even generating $545 million in 2008-2009, when the industry's fortunes and TRW's sales were at their lowest - and "that's how we delevered the company." He said TRW is in a good position to continue to generate cash.

As for the use of that future cash, he declared that "we will first look to what the appropriate liquidity level of the company needs to be."

"We're going to look at investing for the future, either through organic growth or whatever opportunities might come in the [mergers and acquisition] world, and obviously, we'll take a view of that over time," he said, adding that "at some point, we have to consider returning money to shareholders."

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