Collins & Aikman touts 2Q fall in leverage ratio to 4.3 times EBITDA

By Paul Deckelman

New York, July 8 - Collins & Aikman Corp. said Thursday that the company was making "continued financial progress," including a reduction in its ratio of debt to EBITDA - which chairman and chief executive officer David Stockman called "the Number-1 financial health metric we live by."

On a mid-morning conference call specifically aimed at the company's bond investors, as well as other institutional investors and securities analysts, Stockman touted the fact that even though the Troy, Mich.-based automotive components company's overall net debt level for the second quarter ended June 30 was essentially flat from the quarter before at $1.439 billion, its net leverage ratio declined to 4.3 times the company's last 12 months EBITDA from about 4.5 times in the previous quarter. This was chiefly due to what the company called a "strong" and "significant" rebound in the earnings measure over the past year.

"We are strongly on the comeback trail" after some hard times, Stockman declared on the conference call, adding, however that "we are not here to crow. We [still] have a lot of wood to chop, a lot of challenges to meet."

Basic EBITDA increased to $100 million in the second quarter from $79.4 million in the first quarter and from $83.9 million in the year-ago second-quarter, a 19% gain. It was the fourth consecutive quarter in which EBITDA had increased, and the 9.7% EBITDA margin - a 180 basis point improvement over year-earlier levels - was the best in the last eight quarters.

Collins & Aikman also showed considerable improvement using the measure of last 12 months (LTM) EBITDA, considered to be a better measure of longer-term trends than simple quarterly EBITDA changes. LTM EBITDA bottomed out in the year-ago second quarter, when it fell to $293 million from $318 million the quarter before - leading to a management shake-up last Aug. 11 that saw the resignation of then-president and CEO Jerry Mosingo and his replacement in the latter position by Stockman, who was already chairman.

Since that purge, LTM EBITDA has been going steadily upward, improving to $303 million in the 2003 third quarter, then $311 million in the fourth, $320 million in the 2004 first quarter and $336 in the recently concluded second quarter, according to preliminary second-quarter numbers that the company released in conjunction with its conference call. The latest quarter number represents a 15% improvement from the year-earlier level. Those LTM EBITDA figures, as well as the basic quarterly numbers, do not include the impact of restructuring and impairment charges.

Net debt grows steadily

The company's net debt has meanwhile grown moderately but steadily during that time, from the low of $1.251 billion in the 2003 second quarter to above $1.3 billion in the third and fourth quarters, and pushed above $1.4 billion this year, as the company closed on a $285 million credit facility due 2005 in mid-February via J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. In May the company shelved plans to amend and restate the facility to get more favorable terms, and concurrently shelved a planned $500 million two-part bond offering, citing unfavorable market conditions. In the latest quarter, net debt had grown to $1.439 billion from $1.432 billion the quarter before.

However, the growth in the debt load was less steep than the growth in earnings, bringing the debt-to-LTM EBITDA ratio down. From a recent low of 4.1 times, in the first quarter of 2003, the widely followed financial measure had ballooned up to 4.5 times in this year's first quarter. But Stockman noted that it had come back down again in the second quarter, to a more moderate 4.3 times as earnings jumped while debt was essentially steady.

Stockman said that "we believe that [our debt] has now stabilized and with our EBITDA coming up and our debt stabilized and hopefully in the future moving in a downward direction, our leverage ratios are moving in the direction in which they need to."

In the quarter, the CEO added, "solid cash-generating projects, plus operating cash flow offset" $60 million of cash interest payment on its debt, including its 10¾% senior notes due 2011 and its 11½% senior subordinated notes due 2006, both of which had coupons which came due during the quarter.

Call follows contract news

The investor conference call followed by just a day the company's announcement that it had been awarded several potentially very lucrative long-term contracts to build the front and rear painted assemblies of a future, high-volume vehicle platform for auto giant DaimlerChrysler. Terms of the multi-year award were not disclosed.

Collins & Aikman also said on Wednesday that additional DaimlerChrysler business awarded during the most recent quarter included several multi-million dollar contracts to supply various exterior and interior trim components for future truck and sport utility vehicles. Terms of those awards were not disclosed either.

Much of Thursday's conference call was taken up by Stockman outlining the work that his company has been doing on an extensive variety of projects for each one of Detroit's Big Three, as well as for many major foreign carmakers and their U.S. "transplant" operations.

Getting new business from Chrysler is doubtless an especially sweet victory for Collins & Aikman, whose debt and equity investors alike were thrown into a funk last fall after a Detroit newspaper reported that Chrysler was dissatisfied with the company's work and might look to rebid $1.2 billion of contracts held by Collins & Aikman, one of the Number-3 U.S. carmaker's biggest suppliers. The senior bonds cascaded down to levels as low as the 70s, while the subordinated notes eroded down to the 60s, before managing to finally brake the slide and start traveling in the other direction.

The bonds were up about three points on Wednesday on the DaimlerChrysler news and were firm again Thursday. A trader quoted the 103/4s up another point to 103 bid, 104 offered, while the 111/2s were seen half a point better at 99.75.

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