TRW Automotive (TRW) has revealed a staggering rise in profits to $76 million or 68 cents per share in the third quarter ended Oct. 2, 2009, from a net loss of $22 million or 22 cents per share in the prior-year quarter.

The profit was also significantly higher than the Zacks Consensus Estimate of 14 cents per share. The Michigan-based manufacturer of advanced technology products and services for the automotive markets commended its restructuring and cost containment actions for its impressive rise in profit.

Operating income for the quarter went up to $165 million from $44 million in the prior-year period. Apart from restructuring and cost containment actions, this was driven by lower raw material prices and favorable non-recurring supplier and customer settlements.

During the quarter, TRW continued to reduce its salaried workforce by an additional 200 employees, which brings the total salaried reductions to about 3,000 since the commencement of programs last year.

However, sales of $3.1 billion, a decline of 13.5%, were adversely affected by lower sales in most geographic regions resulting from reduced vehicle production volumes. This apart, currency movements also had a negative impact on sales.

Financial Position

TRW had cash and cash equivalents of $474 million as of Oct. 2, 2009, a decline from $756 million a year ago. Long-term debt amounted to $2.5 billion as on that date. This reflected a long-term debt to capitalization ratio of 60%.

In the nine months ended Oct. 2, 2009, TRW had a net cash outflow of $57 million from operating activities compared to an inflow of $4 million in the year-ago period. The decline in cash position was attributed to lower operating income, partially offset by lower working capital requirements. Capital expenditures reduced to $121 million from $338 million in 2008. The company had free cash outflow of $178 million in the above period compared to $334 million in the prior-year period.

Road Ahead

TRW anticipates full-year production to gross 8.6 million units in North America and 16.3 million units in Europe. Based on these revisions and the expectations for foreign currency exchange rates, full-year sales are expected to be $11.4 billion, a bit higher than the Zacks Consensus Estimate of $11.1 billion.

We believe TRW’s innovative product portfolio is capable of generating top- and bottom-line growth. It has been successful in its restructuring and cost-containment actions to mitigate the impact of the industry-wide downturn as reflected in the better-than-expected third-quarter results. However, the company still needs to go through the long and gradual process of recovery in the industry. Due to these factors, we recommend the shares of the company as Neutral.
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