NEW YORK — Moody's Investors Service Inc. has issued a report on American Tire Distributors Inc. questioning whether ATD has sufficient cash reserves to cover certain projected interest payments and maintenance costs in the near future.
In order to counter the projected revenue and earnings declines related to the loss of business from Goodyear and Bridgestone Americas Inc., Moody's said ATD must cut costs quickly in order to meet its obligations.
Moody's is forecasting ATD's revenue will decline 23 percent and its earnings before interest, taxes, depreciation and amortization (EBITDA) will fall 38 percent for the year ended March 31, leaving the company with insufficient funds to cover projected annual interest payments and maintenance investments of $243 million.
ATD, North America's largest tire distributor, issued a statement in response to the report, saying it has liquidity of $300 million.
According to Moody's, if ATD cuts 40 percent of its selling, general and administrative costs (SG&A), and if it could replace 40 percent of the revenue lost by the departure of Goodyear and Bridgestone products from its portfolio, it could cover its fixed charges of $243 million.
Moody's predicts ATD needs $64 million in cash over the next eight quarters to cover its cash flow requirements.
"Based on our revised revenue and earnings projections, we believe (ATD) is at high risk of not being able to cover its projected interest payments and maintenance capital expenditure needs," Moody's said.
In response, ATD said it "continues to generate substantial cash flows and as of May 31, 2018, had approximately $300 million of liquidity. We have a loyal base of customers and manufacturer partners with whom we are continuing to work as we always do."
"The magnitude and timing of earnings and cash flow erosion following the loss of two prominent suppliers will be more severe and immediate than previously envisioned," Inna Bodeck, Moody's lead analyst covering ATD, said.
In the latest report, Moody's said ATD's "transformation initiatives" that already are under way will help cut costs, but those alone will not be sufficient enough to reverse the fallout from losing Goodyear and Bridgestone.
Moody's said that last year, ATD spent about $50 million on those initiatives, including improved category management to ensure a wide assortment of tires; improved communication between its sales force and customers; enhanced product segmentation; and improved working capital management.
These initiatives helped ATD generate positive free cash flow in 2017, the first time since 2013, Moody's said.
That revolving credit facility will provide liquidity, although the loss of Bridgestone and Goodyear will reduce the company's $1.2 billion revolving facility commitment, according to Moody's.