Financial Health of World's Largest Automotive Suppliers Stabilizes, According to Study by BBKPrivate Companies Are Most Vulnerable to Financial Distress
DETROIT, May 28 /PRNewswire/ -- The financial health of some of the world's largest global automotive suppliers improved slightly, according to an annual study by BBK, an international business advisory firm. In the midst of consolidations, globalization and commodity price volatility, the percentage of companies, in the study, potentially experiencing financial distress decreased from 22 percent in 2006 to 17 percent in 2007. BBK CEO William G. Diehl announced today the results of the study during a speech to the Automotive Press Association in Detroit. Diehl also revealed that privately-owned suppliers, primarily measured from aggregate North American data, remain highly vulnerable to industry changes with 50 percent of them showing potential for financial distress. Publicly-owned North American suppliers are also vulnerable with 26 percent of them potentially experiencing financial distress. "In today's automotive industry, OEMs and Tier 1 suppliers must take a comprehensive proactive approach to carefully monitor both the operational and financial health of their suppliers," added Diehl. "If these companies are not proactively monitoring the health of their suppliers, they risk suffering a significant and costly disruption to their supply chain. Tier 2s and Tier 3s can also benefit from the same risk monitoring as financial risk exists throughout the supply chain." Public Company Findings BBK conducted its study on 80 of the largest public global automotive suppliers based on revenue, using its proprietary BBK Ratings model, a tool that is used to evaluate both public company and private company financial data to determine the overall financial strength of a company. BBK Ratings assigns each company a grade from "A" to "F" indicating the level of potential distress that a company is presently experiencing. A company is considered potentially distressed if it earns a "C," "D" or "F" rating. The average rating for public suppliers remained level at "B+." "What we've seen from last year to this year is that several companies in last year's study that were experiencing distress have shed unprofitable operations, increased equity and reduced debt. Other poor performing companies were purchased and absorbed," said Diehl. "The data shows that the consolidation and restructuring that is continuing is clearly a reflection of Darwin's principle of 'only the strong will survive.'" Additional Public Company Findings Of the 42 North American suppliers in the study, 14 percent received an "F" rating. Asian suppliers were the healthiest with just one company with potential for distress ("C" rating) while 10 percent of European suppliers may experience distress. Asia was the only region of the three studied to experience a downturn from 2006, moving from zero companies with potential distress in 2006 to one company (6 percent) in 2007. North American and European suppliers improved from 33 percent potentially distressed to 26 percent and 14 percent to 10 percent, respectively. The average rating for Asian suppliers was "A," followed by European suppliers at "A-" and North American suppliers at "B." The study also revealed that North American suppliers have higher debt leverage when compared with their Asian and European counterparts, which makes them vulnerable to financial distress during adverse economic conditions. The average leverage ratio for North American suppliers was 2.66, which is nearly nine times higher than Asia's (0.25) and three times higher than Europe's (0.78). "While we have seen some improvement in 2007 relative to public companies globally, the year ahead will take its toll," added Diehl. "Higher commodity prices, lower production volumes and tighter credit markets will make another year of improvement difficult to achieve, and we may well see deterioration. "BBK Ratings provides our clients with a good snapshot of their suppliers' financial health. An auto manufacturer may be receiving quality components on time from a particular supplier, but that manufacturer may not be aware that the supplier is failing in other aspects of its business."
Ratings Comparison of Public Companies -- 2007 vs. 2006
Ratings 2007
Number of Percentage
Suppliers
A 58 73%
B 8 10%
C 5 6%
D 1 1%
F 8 10%
Total 80 100%*
Average B+
Ratings 2006
Number of Percentage
Suppliers
A 58 73%
B 5 6%
C 2 3%
D 1 1%
F 14 18%
Total 80 100%*
Average B+
*Totals may not equal 100% due to rounding
Average Metrics by Region - Public Companies
North America Europe Asia
Rating B A- A
2007 EBITDA/Sales 9.99% 11.21% 10.43%
Current Ratio 1.75 1.45 1.36
Long Term Debt/Equity 2.66 0.78 0.25
Rating B- B+ A
2006 EBITDA/Sales 10.56% 11.49% 11.37%
Current Ratio 1.74 1.41 1.53
Long Term Debt/Equity 3.46 0.6 0.32
Private Company Findings Through its proprietary tools and industry expertise, BBK is able to provide its customers with ratings data on private companies in addition to public companies. Private company financial data provided to BBK is held in the strictest of confidence, and only aggregate data is shown. In 2007, and the first quarter of 2008, BBK rated 1,147 private companies and found these key aggregate data:
-- Fifty percent (589) of the private companies showed the potential for
financial distress
-- The average rating for these companies was "C+"
-- Thirty-one percent received an "F" rating
"Our ratings of private companies shows this group is particularly vulnerable to financial distress," said Diehl. "It's especially important for OEMs and all suppliers to understand from a risk management standpoint, they must pay careful attention to the health of their supply chain because most supply chains are comprised of a 75 percent/25 percent split - private versus public companies."
Warning Signs of Financial Distress
A supplier may be experiencing financial distress if:
-- It is constantly using premium delivery services
-- It is late on product deliveries
-- It asks the customer for favorable non-contractual terms
-- It receives waivers from lenders regarding covenant violations
-- Its own suppliers stop deliveries due to non-payment
About the Study BBK Ratings was developed in conjunction with Northeastern University Finance Professors Harlan and Marjorie Platt, who are renowned for their expertise in developing analytical models that predict corporate distress. For 2007, ratings were performed on 80 of the top public global OEM automotive parts suppliers based on revenue. Ratings were performed on 79 of the top suppliers for the fiscal years 2003, 2004 and 2005. Of the 80 suppliers evaluated in 2006 and 2007, 42 are headquartered in North America, 21 in Europe and 17 in Asia. Together they represent 12 countries: Australia, Canada, France, Germany, Great Britain, Japan, Mexico, Norway, South Korea, Sweden, Switzerland and the United States. BBK, an international business advisory firm established in 1977, provides financial and operational services that enhance the growth, profits and stability of its clients. BBK has an extensive network of professionals throughout the United States, Europe and Asia, and has completed thousands of engagements for a variety of clients, including Fortune 500 corporations, mid-sized companies, financial institutions, law firms and private equity firms. For more information, visit http://www.e-bbk.com.
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