(The following statement was released by the rating agency)
NEW YORK, March 20 - Standard & Poor's Ratings Services said today it placed its ratings on ArvinMeritor Inc. , including the 'BBB-' corporate credit rating, on CreditWatch with negative implications. The CreditWatch reflects the company's relatively weak credit protection measures and concerns over its intermediate-term prospects for improvement as a result of lackluster end markets.
"The CreditWatch listing follows Standard & Poor's determination that ArvinMeritor's largest business segment-light-vehicle sales to the original equipment market-will likely face continuing difficult conditions in 2003, including soft demand, higher costs, and pricing pressures," said Standard & Poor's credit analyst Nancy C. Messer. These business conditions may offset management's ongoing cost-control initiatives and focus on debt reduction, thus preventing achievement of improved credit measures in the intermediate term.
End-market deterioration has adversely affected ArvinMeritor's financial results since 2000, despite the company's restructuring efforts and efficiency improvements. Negative factors that may depress fiscal 2003 financial results include a possible year-over-year decline in heavy-truck demand, higher steel costs, restructuring costs, lower margins for the Zeuna Starker acquisition that is expected to close in the second quarter of 2003, and weak aftermarket demand. Although a light-vehicle segment backlog totaling $710 million supports modest internal sales growth through 2005, reported sales are subject to production variations, which have been negative year-to-date in 2003.
The ratings on ArvinMeritor Inc. reflect the company's exposure to cyclical end markets, strong market positions, and reasonable diversity in customer base. The benefits of the slightly above average business position are mitigated by the company's relatively aggressive leverage. Troy, Mich.-based ArvinMeritor is a supplier of systems, modules, and components to the motor vehicle industry. The company had $1.6 billion in adjusted total debt outstanding at Dec. 31, 2002.
ArvinMeritor operates in cyclical, highly competitive markets, but the company holds a number-one or number-two share in virtually all of its North American markets and 75% of its European markets. For the OE light-vehicle market (53% of fiscal 2002 sales), ArvinMeritor supplies exhaust systems, ride- and motion-control products, filters, door and roof systems, and undercarriage components. Since the exhaust segment is in a gradual long-term decline due to improved product life, ArvinMeritor is increasing its interest in undercarriage components, which represent a faster-growing, more profitable product offering. The company also manufactures axles, brake systems, air-suspension systems, and drivelines, sold primarily to the OE heavy-duty truck market (33% of sales). Transmissions and clutches are sold to the heavy-vehicle market through its ZF Meritor joint venture. ArvinMeritor also sells products in the aftermarket, including exhaust systems, ride- and motion-control products, and various heavy-duty truck replacement parts.
For the first fiscal quarter of 2003 (ended Dec. 31, 2002) ArvinMeritor's operating income rose 16% on a 9% sales increase, year-over-year, but additional restructuring and capacity reduction actions were announced, including a workforce reduction and facility closure as a result of continuing weak end-market conditions. While the latest quarter's sales improvement reflects new business awards, favorable currency translations, and strong heavy-duty truck production, profitability was mixed. Light-vehicle segment operating margin declined 4.7%, from 5.2%, year-over-year, because of higher steel-related costs, while the commercial vehicle segment operating margin improved to 4.2%, from 2.3% year-over-year, because of cost control efforts and cost absorption from higher sales. Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www2.standardandpoors.com; under Fixed Income in the left navigation bar, select Credit Ratings Actions.