(The following statement was released by the rating agency)
NEW YORK, Feb 17 - Moody's Investors Service has lowered the long-term debt ratings of ArvinMeritor, Inc. (ARM) to Ba1 from Baa3 and moved the outlook to stable. As a result of the action, Moody's also established a senior implied rating of Ba1 and a long-term issuer rating of Ba1.
The rating downgrade reflects ARM's relatively poor performance in its 2003 fiscal year and the first quarter of 2004, driven by slightly weaker light vehicle production volumes, slow-growing class 8 truck demand and flat light vehicle aftermarket volumes. Profitability measures have been weak as the overall cost structure remains high in light of weak end-market demand and ongoing pricing pressure that OEMs are placing on suppliers. Although Moody's expects a stronger financial performance from ARM in 2004, driven primarily by an improving heavy truck industry, the improved credit metrics will remain inconsistent with an investment grade credit rating.
The stable rating outlook reflects the anticipation that free cash flow generation should improve in fiscal 2004, driven by stronger heavy duty truck demand and the continued realization of savings from cost-cutting initiatives. Challenges to improved free cash flow generation and credit metrics more indicative of the Ba1 rating include higher raw material costs, namely steel, rising pension/OPEB outlays and flat-to-down global light vehicle production schedules. Moody's notes that protracted improvement in credit measures as a result of a delayed rebound in heavy truck and/or weaker than expected light vehicle build rates over the intermediate term could create pressure on the Ba1 rating. The rating agency noted that the departure of the president and chief operating officer could delay management transition that could have strategic implications in the intermediate-term. To this point, Moody's believes that asbestos litigation should not materially affect ARM's performance, however, the development of potential claims and payments will continue to be closely monitored.
The commercial vehicle systems division, approximately 31% of 2003 revenues, is showing signs of a rebound from its three plus year downturn, however, a material uptick isn't expected until the middle of 2004. ARM's remaining two operating divisions are expected to show only modest year-over-year growth for its current fiscal year. Despite leading market positions in most of its product sectors, ARM's operating margins remain stagnant as a still-inefficient cost structure, intense competition and ongoing pricing pressures continue to constrict margin enhancement.
Fiscal 2003 metrics include negative free cash flow (excluding the impact of the accounts receivable securitization program) of $59 million, an EBIT margin that has fallen to 4.3% from 5.0%, balance sheet debt-to-EBITDA worsening to 2.78x from 2.69x and adjusted debt excluding pension-to-EBITDAR increasing to 3.54x from 3.23x. Furthermore, the financial performance through the first quarter of fiscal 2004 has yet to show signs of the anticipated rebound in heavy truck production, placing added pressure on the remainder of the year to meet financial targets and strengthen credit metrics. Free cash flow generation remained negative while the operating margin and EBIT margin fell to 3.0% and 3.3%, respectively.
ArvinMeritor has solid alternate liquidity. The company has two bank revolving facilities that total $1.15 billion with final maturities of June 27, 2005. Approximately $81 million was drawn at December 31,2003. ARM was in compliance with its debt covenants as of September 30, 2003. Moody's noted, however, the company's apparent willingness to add substantial debt to its already levered capital structure for the right acquisition suggests a more liberal financing philosophy going forward.
Ratings lowered include:
ArvinMeritor, Inc. - Senior unsecured debentures, notes, MTNs and bank revolving credit facilities to Ba1 from Baa3.
Arvin Capital I - Preferred stock to Ba2 from Ba1.
Ratings assigned:
ArvinMeritor, Inc. - Senior implied rating at Ba1 and long-term issuer rating of Ba1.
ArvinMeritor, Inc., based in Troy, Michigan, is a global supplier of integrated systems, modules and components primarily serving light vehicle and commercial truck manufacturers, and related aftermarkets.