Auto safety systems manufacturer TRW Automotive (click ticker for report: ) reported solid third quarter earnings Tuesday morning, echoing what we’ve heard from Ford (click ticker for report: ). Revenue increased 1% (9% ex-currency/divestitures) to $4 billion, a bit stronger than consensus estimates. Net earnings decreased 9% year-over-year to $1.24 per share, which was still slightly better than consensus expectations.
Gross margins increased about 70 basis points year-over-year to 10.4% as OEMs continue increased investment in safety devices. SG&A also declined about 20 basis points year-over-year to 3.7%, though the figure was roughly flat on an absolute basis. As a result, operating margins increased 50 basis points to 6.6%.
Free cash flow remained solid, as the firm generated $31 million during the third quarter, a 35% year-over-year increase. The company continues to focus on lowering financial leverage, as it retired $48 million of face value senior notes and repurchased 2.3 million shares during the quarter to cancel out dilution. Total debt sits at an all-time low of $1.5 billion, down $68 million from the previous quarter. Due to the timing of its $1 billion buyback announcement, the firm was unable to begin its share repurchase program during the third quarter, though we expect to see buying in the coming periods.
Going forward, the firm expects the US “Big Three” production to increase 7% during the fourth quarter, with full-year production volumes totaling 15.2 million units. Europe looks substantially weaker, as the firm forecasts production volumes to tumble 16% during the fourth quarter. As a result, the company believes full-year revenue will be $16.2 billion to $16.3 billion, reducing the high-end of its guidance range by $100 million. We expect TRW to benefit greatly from increased safety regulations in the US and abroad, as well as increasing demand for its products in emerging markets such as China and Brazil, where it expects solid fourth quarter results.
Though Europe will be weak, TRW’s largest auto OEM in the region is Volkswagen, which is performing well globally. We like the firm’s commitment to reducing its leverage and returning cash to shareholders, but shares are fairly valued at current levels. We’d wait for a slightly better valuation before adding them to the portfolio of our Best Ideas Newsletter.