In a report released July 9 by Moody’s Investor Service regarding American Tire Distributor’s financial metrics, analyst Inna Bodeck has essentially raised a red flag of concern about the solvency of ATD in the future.
The report, entitled “American Tire Distributors, Inc. Loss of key supplier relationships heightens urgency to right-size capital structure,” reads: “The sharp decline in revenue and earnings due to the loss of supply relationships with Goodyear and Bridgestone will accelerate the already steep erosion in American Tire Distributors Inc.’s credit metrics. Due to the combined loss of business from Goodyear and Bridgestone, our base case forecast for ATDI’s revenue calls for a decline of approximately 23% on a run-rate basis. ATDI’s EBITDA would drop by approximately 38% to $180 to $185 million from $293 million as of the 12 months ended March 31, 2018. This earnings level would likely be insufficient to cover the company’s annual projected interest payments and its maintenance investments needs ($243 million).”
Moody’s suggests that ATD will need to cut costs quickly to support its current business structure. Even so, cost cutting may not be enough to make up for its anticipated losses.
“Based on our revised revenue and earnings projections, we believe that ATDI is at high risk of not being able to cover its projected interest payments and maintenance capital expenditure needs of $243 million,” the report reads.
“Put simply, we assert that there now exists a sudden and irreconcilable mismatch between the company’s earnings and cash flow generating capability and its debt capitalization, with the latter needed to be right-sized to the former – likely sooner rather than later, perhaps over the next year or so as the company’s revolving facility comes due in April 2020.”
On a brighter note, the report did say that if ATD can replace 40% of the revenue lost from Goodyear and Bridgestone, it could cover its fixed charges of $243 million due soon. The report also said that the current transformation initiatives by the nation’s largest tire distributor should help with the reduction of some costs, and that its “revolving credit facility should be sufficient to provide liquidity.”
Article to be updated.