TRW Gets Rolling: After a massive IPO, Supplier Faces Hurdles

by Jocelyn Parker
Detroit Free Press Business Writer

LIVONIA, MI — John Plant, chief executive of newly independent TRW Automotive Holdings Corp., remembers when his company was a corporate stepchild. As the auto-parts unit of former industrial conglomerate TRW Inc., it didn’t get favorable treatment, even when it generated cash for the business.

“I sensed that the company was more interested in the expansion of the defense business than it was of the automotive sector, even though automotive was indeed two-thirds of the business,” Plant said. “The perception may have been that automotive was a tough place to be.”

Plant says those days are over. Having completed one of the biggest initial public offerings in Michigan since Delphi Corp. went public five years ago, TRW Automotive — the biggest supplier of vehicle safety systems — is ready to grow as an independent company.

TRW, based in Livonia, is the seventh-largest automotive supplier in North America, according to Automotive News. It employs about 61,000 people in 22 countries and makes parts such as antilock brakes, assisted steering devices and air bags.

The supplier, with annual sales of $11.3 billion, raised $676 million last month in an IPO of 24.14 million shares.

The company traces its roots back to TRW Inc., a defense and auto-parts business that was based in Cleveland. Defense contractor Northrup Grumman bought TRW Inc. in 2002 for $7.8 billion and later sold the auto-parts unit to Blackstone Group LP, a private investment firm, for $4.7 billion. Blackstone still owns 56 percent of TRW Automotive.

Now that TRW Automotive has split from its former parent, it can focus solely on the auto business, Plant says. He declined to give any specific sales or earnings targets for the next few years, but Plant said he sees big opportunities due to growing demand for safety-related automotive systems.

“The profitability we get and the cash flows we achieve are there to be reinvested,” Plant said. “Before that was not the case because there could have been cash flows that pertained to the automotive business that could have been reinvested in defense.”

Government regulation and voluntary moves by the car companies are expected to increase the popularity of such items as side-curtain air bags and tire-pressure monitors over the next few years, experts say. Some even predict that safety-component sales could grow faster than vehicle sales.

New business from the car companies will likely help TRW generate cash to pay down its $3.8-billion debt load and grow its earnings. Analysts expect the company to earn $1.69 a share this year.

Another advantage is its diverse customer base, analysts say. TRW does about 60 percent of its business with foreign car companies.

“A smaller-than-average reliance on the Big Three should make TRW less susceptible to market share losses by the domestic automakers and somewhat insulated from volatility in North American light-vehicle production schedules,” said Christopher Ceraso, an analyst with Credit Suisse First Boston in New York.

Analysts, nevertheless, don’t seem overly impressed. Of the four analysts who rate the company, only one says to buy it. The rest, including Ceraso, rate it a hold. The stock has dipped since its IPO on Feb. 3, falling from about $27 to about $22. Shares closed Friday at $21.48, down 47 cents on the New York Stock Exchange.

TRW’s biggest problem, analysts say, is its massive debt load, which stems largely from Blackstone’s leveraged buyout of the company from Northrop Grumman. It also inherited debt from TRW Inc. The concern is that TRW Automotive might not be able to pay its creditors and meet cash flow requirements if there’s a major downturn in auto sales.

“It’s clearly a risk,” said Jim Gillette, an analyst with auto forecasting firm CSM Worldwide. “It will hold down the stock until they pay some of it down.”

Then there are the problems that saddle most suppliers, such as rising steel prices and pricing pressures from the car companies.

One of TRW’s first orders of business might be dealing with the United Auto Workers.

The UAW, which is seeking to grow its membership by organizing suppliers, wants to continue organizing TRW plants without opposition from the company. Through such neutrality agreements, a company agrees to recognize a union if a simple majority of workers sign cards saying they want one.

Plant says TRW doesn’t plan to fight the union.

“If, in any particular plant, the majority of employees wanted to have representation, then of course we would want to recognize that,” Plant said. “We want our employees to have a vote and say in this, too.”

So far, TRW has had a good relationship with all its unions, including the UAW, Plant said. About half of the company’s workforce is unionized.

The drawback, however, is that more unionization at TRW could make it more difficult for the company to get business with the foreign automakers. Typically they are more cautious about doing business with unionized operations because there’s a chance for supply disruptions due to strikes, Gillette said.

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