TRW says "safety sells;" continues to put the brakes on debt

By Paul Deckelman

New York, March 21 - It's a tough time for the U.S. auto industry, and for the automotive supply sector that provides parts to the Big Three and its "transplant" rivals. But while several large industry players have recently lowered previously announced guidance - led by the granddaddy of them all, General Motors Corp., which put out lowered first quarter and full-year 2005 guidance last week - TRW Automotive Holdings Corp. continues to stick to its previously disclosed projections.

The Livonia, Mich.-based manufacturer of steering wheels, braking systems and airbag systems on Monday reiterated its previously announced full-year 2005 guidance, which calls for revenue in the range of $12.3 to $12.7 billion and earnings per diluted share in the range of $1.50 to $1.75, based on current industry conditions. The company had originally announced those expectations on Feb. 17, when it released its 2004 fourth-quarter and full-year results.

At Morgan Stanley's Global Automotive Conference on Monday, the company's president and chief executive officer, John C. Plant, and its chief financial officer, Joseph S. Cantie, emphasized that TRW would continue to be profitable, even in the face of challenging automotive industry conditions, because "safety sells."

Some 80% of its sales to original equipment manufacturers are concentrated in the safety systems area. TRW is either the top manufacturer or a close Number 2 in the sales of such integral safety devices as anti-lock braking systems, foundation brakes, steering gears and systems, steering wheels, seatbelts, air bags, engine valves and engineered plastic fasteners.

Between a continuing government regulatory emphasis on safety, with new safety features constantly being required by the National Highway Traffic Safety Administration, a continued consumer focus on safety, with the authoritative J.D. Power survey finding that safety is the top feature car-buyers are now looking for, and manufacturers' attempts to cater to this new safety consciousness by emphasizing features such as side airbags and anti-rollover systems, a company whose stock in trade is safety systems would appear to be well positioned.

On top of that, the executives noted their geographic diversification - only 37% of their sales last year involved the sagging U.S.-based auto industry, with fully 55% centered in Europe - their cost-cutting efforts and, along with that, their debt-cutting efforts as well.

Cutting $1 billion of debt

TRW is "an extraordinary de-leveraging story," Plant declared during the presentation, having gone from net debt of over $3.4 billion to less than $2.4 billion in just under two years, from March 31, 2003 to Dec. 31, 2004.

As of the latter date, the company had net debt of $2.372 billion, consisting of $3.181 billion of total short- and long-term debt, partly offset by $809 million of cash and marketable securities. Some $40 million of the debt load was short-term and the rest was long-term, consisting of $1.512 billion of term-loan debt, $1.063 billion of senior notes, $306 million of senior subordinated notes, plus another $260 million of other borrowings.

Since TRW Automotive was split off from the old TRW conglomerate - which also included aerospace and financial services - when the latter was bought in December 2002 by Northrop Grumman Corp., the auto company, acquired by Blackstone Group LP in the February 2003 split, has had "several refinancings - I think the number is up to four or five," said Cantie, "where we have improved our covenants, improved our liquidity and our financial flexibility."

The most recent of these was in December, when the company lined up new $1.9 billion credit facility consisting of a $600 million term loan B component, a $400 million term loan A and a $900 million revolving credit facility. It used the proceeds to refinance $1.7 billion of an existing $2 billion credit facility.

In October, the company had taken out a new $300 million six-year term loan E, using the loan proceeds plus about $200 million of cash on hand to repurchase a $417 million subordinated 8% pay-in-kind seller note from Northrop Grumman which had been issued in connection with Blackstone's acquisition of the automotive business.

Also last year, the company completed an initial public offering and used 50% of the proceeds, or about $280 million, to retire some of its public debt.

2.2x debt to EBITDA

Cantie said that having reduced net debt by $1.065 billion since the start of the LBO in 2003, "that's put us in a wonderful position" of having a ratio of net debt to EBITDA of 2.2 times, down from around 3.4 to 3.5 times. "We're especially proud of that and hopefully, we can continue to do that."

TRW has, he said, "de-levered more than anyone expected us to."

He noted that among the challenges TRW faces, in addition to higher raw materials costs for steel and, lately, petroleum based plastic resins, and constrained orders from customers, particularly the Big Three, is an environment of rising interest rates. About 65% of the company's debt is floating rate, "so our best answer to that is pay the debt down as quickly as possible."

The CFO added that "we continue to expect to get that debt down, including the terms, where the capital markets will allow us in an opportunistic way to continue to improve the types of debt we have, not only the debt in total, in trying to get that down."

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