The "falling dominos" theory applies to automakers and their major suppliers.
The Detroit Three automakers got a double dose of bitter medicine as two of the largest axle manufacturers in the world announced that they were teetering on the precipice of financial ruin.
American Axle recently got a “going concern” notice from its auditors that it revealed in a Securities & Exchange Commission filing. Separately, Dana Holding Corp. announced it was planning to cut 5,800 jobs by the end of the year, which is an 800-employee increase from previously announced plans of 5,000.
American Axle’s primary customers are General Motors and Chrysler, which comprise 88% of its business. Ford is Dana’s largest single customer. If auto sales continue to soften, each supplier could falter.
“We believe we are taking the difficult actions necessary to survive in the current environment and compete over the long term,” said Chairman and CEO John Devine during the company’s recent earnings call.
The actual market size is what counts.
The well respected former Ford and General Motors financial executive went on to say,” There can be no assurances, however, if the global economy deteriorates substantially beyond our planning assumptions.”
American Axle provided a more mixed message. The auditors’ warning portends a possible bankruptcy filing, but Axle’s executives remained committed to projections of a profit for this year, in spite of the warning.
“That’s interesting that they’re saying that while bankruptcy remains an option. They must know something,” said Erich Merle, an independent auto analyst from Grand Rapids, Mich.
While depressing and potentially alarming, the dire circumstances of the market’s two largest axle suppliers are expected to have little impact on the Detroit Three for now. Several sources noted that GM, Ford and Chrysler are not attempting to resource any of the contracts they have with either company.
“They’re really good at what they do, and who’s going to take it over?” Merkle noted.
Even if sales worsened and either of the companies was forced to file Chapter 11 – Dana just emerged from Chapter 11 on Feb. 1 – the companies would likely continue shipping parts. Ford has previously indicated in the case of Visteon that it would work with suppliers to ensure it continues to get the parts it needs. Presumably the same philosophy applies to Dana.
The impact automakers are hoping the revelations will have is to spur the federal government and the auto task force to expedite action on the $25 billion aid request from suppliers to ensure they remain viable. Stephen Rattner of the Auto Task Force at the Treasury has said the government is considering at least $18.5 in aid.
“I don’t know that GM’s in a position to go in and help Axle out, but they will go to the government and say ‘do something.’ And I think the government will,” said Aaron Bragman, analyst at HIS Global Insight in Troy, Mich.
On March 4 American Axle was warned by the New York Stock Exchange that it might be delisted, a factor it also cited as putting pressure on its ability to stay afloat. A $30 stock in mid-2007, American Axle traded at $1.29 per share mid-morning today.
At the end of last year, American Axle had cash and cash equivalents of $199 million, according to Standard & Poor’s, and its revolving credit facility had $129 million left to draw from. Axle reported a net loss of $1.2 billion in 2008, which included $1 billion in charges and costs, most related to new labor agreements, attrition, plant closings and other restructuring costs.
Dana results fared better in 2008, helped by the bankruptcy process. Dana posted a net loss of $11 million on revenue of $8.09 billion, compared with a net loss of $511 million on revenue of $8.72 billion in 2007. But the 2008 results include a one-time “fresh start” accounting gain of $1.01 billion. Dana closed four plants last year, and as many as 10 closings are planned through 2010. The company plans to combine its light-axle and driveshaft businesses into a single global driveline business.
Tags: American Axle, Dana, auto news, michael strong, suppliers, thedetroitbureau.com
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Suppliers are making some headway with creditors, who recognize that changing terms is better than letting them simply fold.
Consider this Lear announcement that was just made: On January 6, 2009, Lear said it was seeking an amendment and waiver under its primary credit facility in light of financial covenant defaults and adverse current and longer-term industry conditions. Since then, the Company has been in active discussions with lenders under its primary credit facility. Today’s agreement provides, through May 15, 2009, a waiver of Lear’s existing defaults under its primary credit facility and an amendment of the financial covenants and certain other provisions of the primary credit facility. The Company and its lenders remain in active discussions regarding further modifications to its primary credit facility in light of existing and projected industry conditions.
“Despite the challenging conditions we are facing, we continue to have a strong liquidity position and we remain focused on maintaining operational excellence globally,” said Bob Rossiter, Lear’s chairman, chief executive officer and president. “We appreciate the support and cooperation we have received from our supplier partners, our customers and our lenders as we work together through the industry downturn.”