ANN ARBOR, Mich. -- Affinia Group recently reported that it closed its previously announced offering us $225 million aggregate principal amount of senior secured notes due 2016. In addition, the company also entered into a new $315 million asset-based revolving credit facility with Bank of America. The credit facility includes an option to increase available commitments to $160 million in the future. Having paid off debt and made arrangements for new financing, what does this mean for the company? What does Affinia have planned for the future?
Our new capital structure certainly enhances our liquidity ... liquidity that is necessary to fund our global growth plans. This new capital structure also provides for a borrowing capability that grows as our business grows. We are also now much better positioned to focus on our future plans rather than the quarter-to-quarter financial compliance we have previously been preoccupied with, given our prior credit agreement structure.
The financial community, during our banking meetings and subsequent Road Show favorably embraced all the moves we have been making, especially our transformation plan now coming to a very successful close. They see now that our plan completion, coupled with our new capital structure, is a cornerstone for Affinia’s future success. We are also proud of the rating agencies recognizing all our hard work with their upward positive ratings and S&P moving us to “stable.”
Our global manufacturing footprint really positions us to keep our North American customer base competitive with our own manufacturing of low-cost, top-quality product.
Equally as important to Affinia, is our new global manufacturing and distribution footprint in Asia, Eastern Europe and South America. This new footprint provides a real launching pad for our company.
You can see why growing our company around the world is our next big opportunity.
What do you think this says for the market overall? What do you think that Affinia represents to the market today?
Well, from a financial market perspective, I believe our refi demonstrates there is credit available on reasonable terms for companies with a solid history, credibility and bright future. We were well received in the financial investment community and gratified in the confidence shown toward our company. Hopefully our experience is a positive indicator that the overall economy is showing signs of getting back on track.
As for the markets we serve ... I believe we are now seen as a pure aftermarket company that is a safe harbor for our customers as well as suppliers. We are financially sound as I remarked in the answer to your first question and that is very important to both constituents. We continue to demonstrate every day our commitment to quality, product integrity and have taken our industry’s comments to heart as it relates to providing the aftermarket with OE fit, form and function. This we will continue regardless of the country we choose to manufacture our products.
Affinia is in a unique position these days, as many other aftermarket suppliers are restructuring or filing for bankruptcy. How has Affinia been able to maintain stability in these tough economic conditions?
Simply put, it was our decision in January of 2006 to transform Affinia from a North American company to a global diversified company and our people’s total commitment in delivering our plan. I gave a speech just a few years ago titled, “We Didn’t See It Coming.” I pointed to a significant cliff event in the aftermarket. That cliff event was the decision by the professional installer that “Made in America” just didn’t matter that much anymore. When that occurred, our North American high-cost, product-driven business model that had served us well for so many years was pronounced dead. We had two choices: go out of business or reconstruct Affinia.
Today, we are a globally diversified, market-driven, low-cost company that we believe can generally compete in any part of the world, provided the playing field is somewhat level. We will have spent $162 million to close 44 locations in about 44 months. We have reduced 2.6 million square feet. We have opened four new operations: one in Ukraine, two in Mexico and one in India. We have made acquisitions in China and acquired certain assets of Brake Pro. We also reduced our original equipment business to the point where we are 98 percent pure vehicular and industrial aftermarket company. We have made money during this unprecedented recession and our margins have dramatically improved each and every year. We have made a major commitment to product quality, integrity and OE fit, form and function. We have improved our service to all the customers we are privileged to serve and I simply can’t begin to tell you how very proud I am of all 10,500 Affinia people. We are positioned extremely well for when the economy turns around. As I mentioned before, implementing our new global growth strategy is now the next big thing for Affinia. We are going to transition our prior transformational inward focus to that of a customer driven, outward focus on growth.
For nearly a year now, Affinia has been very vocal over concerns about thin-walled rotors. It started with an open letter to the industry, then a sort of public service message to consumers, followed by a lawsuit against some of your competitors. Can you give us an update on what’s happening and how Affinia came to be aware of this issue?
Affinia has been doing everything in its power to call attention to this issue. This is first and foremost a safety issue for all motorists. Second, it’s about standards for “life and limb” products such that the motorist is assured they have been serviced with replacement products that meet or exceed original equipment performance.
A little more than a year ago, Affinia began seeing a new class of lighter, thinner and cheaper rotors appear in the market, apparently in response to the huge run-up in materials costs that had caused rotor prices to spike by more than one-third in recent years. We began examining the new products and discovered that there’s nothing magical about their design that allows them to achieve the low pricing: simply less material resulting in lower cost, and these rotors have significantly less material than the OE rotors they are meant to replace.
Despite what one competitor has said, the differences cannot be chalked up to “normal and natural variations” in the manufacturing process. We’re talking about some weight differences of more than 15 percent, and cheek-thickness differences of more than 25 percent. Make no mistake about it, this redesign change was deliberate. Ongoing testing by a respected independent lab has shown that the lightweight rotors are more prone than their OE counterparts to cracking and outright failure. The lab has done enough testing to satisfy the scientists that the results are statistically valid.
Our quarrel with some of the manufacturers and importers that sell these lightweight rotors is when they promote and advertise them as meeting or exceeding OE performance and specifications. That simply gives the independent aftermarket a bad name. That is how Dura International promoted the lightweight rotors that we cited in our lawsuit. The laboratory measurements and performance testing on those rotors showed they fell far short of the OE specs and performance. To us, that’s false advertising and unfair competition, so we went to court to stop it.
Here’s the main thing that should bother all distributors and installers; to our knowledge these importers and manufacturer’s made indiscriminate rotor design deviations without any engineering validation. And, they didn’t tell a soul. We’re telling the public what we have found in the marketplace and expressing our concerns about motor vehicle safety.
There’s been a lot of debate over whether “Cash for Clunkers” will have an impact on the independent aftermarket. What are your thoughts?
I was asked this question a lot while in New York and Boston during our financial Road Show.
First, you have to drain the emotion from this issue and look at the “clunker” program statistically. There are between 240 and 245 million registered light vehicles in the USA. I understand that at the end of the “clunker” program approximately 450,000 to 500,000 new vehicles will be sold. That is .002 percent of the total registrations. I would argue that a third of those new vehicles would have been sold anyway with year end model change out. Regardless, .002 is peanuts. Made no difference other than wasting $3 billion in taxpayer monies. That’s outrageous! And, the money went to the car companies, two of which are partially owned by the government. Simply a “feel-good” issue for our politicians without any environmental impact what-so-ever and the taxpayer is the one who pays the bill. They could have better spent the money to make the motorist understand how important it is to properly maintain their used vehicles.
Second, all used vehicles are sold to second-, third- and fourth-hand drivers, are second cars or for students in college, for lower income people, that sort of thing. Now, these 500,000 perfectly good used vehicles have been pulled from the free enterprise system and scrapped, impacting the free market and jobs in the automotive replacement parts sector. The government pulled capital right out of the stream of commerce. This aspect should bother people who believe in free market principles. Again, outrageous!
Finally, the government is having a very difficult time administering the program effectively. It is now being reported that many dealers are waiting to be paid their rebates. And, some are on their own discontinuing the program. Think about that. Gross mismanagement of the program – they can’t even give money away in an efficient manner. And now they want to control our health care?
