TRW Beats but Profits Fall

TRW Automotive Holdings Corp. (TRW - Analyst Report) reported adjusted earnings per share of $1.24 in the third quarter of 2012 (excluding special items), down 9.5% from $1.37 in the year-ago quarter. Net income declined 11.3% to $157.0 million from $177.0 million in the third quarter of 2011. The year-over-year decline in earnings was due to higher effective tax rate. However, profits in the quarter surpassed the Zacks Consensus Estimate by 8 cents per share.

Revenues in the quarter edged up 1.3% to $3.96 billion, beating the Zacks Consensus Estimate of $3.90 billion. Excluding the adverse impacts of currency translation and divestitures, revenues improved 9%. The increase in revenues was driven by rising demand for the company’s active and passive safety products, higher vehicle production in North America and improved global sales. This was partially offset by lower vehicle production in Europe and adverse effects of currency translations.

Adjusted operating profits in the quarter went up 10.4% to $265.0 million from $240.0 million in the prior year. The increase was driven by improved sales volume and lower legal expense, partially offset by increase in costs to support future growth and adverse impacts of currency translation.

Financial Position

TRW had cash and cash equivalents of $973.0 million as of September 28, 2012 compared with $1.24 billion as of December 31, 2011. Total debt was $1.46 billion as of September 28, 2012 versus $1.53 billion at the end of 2011. Debt-to-capitalization ratio improved to 29.1% as of September 28, 2012 from 34.1% as of December 31, 2011.

Cash flow from operating activities declined to $245.0 million in the first nine months of 2012 from $512.0 million in the same period of 2011. Capital expenditures increased to $325.0 million from $304.0 million in the first nine months of 2011. Consequently, free cash flow deteriorated to the use of $80.0 million from an inflow of $280.0 million a year ago due to increased payments for benefit plans, higher taxes and lower earnings.

Guidance

For full year 2012, TRW anticipates production of 15.2 million units in North America and 18.7 million units in Europe. The company is optimistic that China and Rest of World will also register growth in production volume. Based on these production levels and expected foreign currency exchange rates, sales are expected between $16.2 billion and $16.3 billion for the year.

Our Take

TRW Automotive is a leading manufacturer of advanced technology products and services for the automotive markets. Headquartered in Michigan, U.S., the company operates in 26 countries through its subsidiaries.

Together with continuous research and development, the company is well positioned to benefit from the changing demands of both established and emerging markets for advanced and affordable safety solutions. Its major customers include Ford Motor Co. (F - Analyst Report), General Motors Company (GM - Analyst Report) and Volkswagen AG (VLKAY). The three customers account for nearly 50% of sales.

Currently, the company retains a Zacks #3 Rank on its stock, which translates to a Hold rating for the short term (1 to 3 months), and we have reiterated our Neutral recommendation on its shares for the long term (more than 6 months).