From Bloomberg via MEMA Industry News
TROY, MI — Delphi Corp., the world’s largest auto-parts supplier, had its credit rating reduced to below investment grade by Standard & Poor’s because of automaker production cuts and costs for steel and labor.
The credit-rating firm cut its corporate rating one notch to BB+ from BBB-. Troy, Mich.-based Delphi has $3.9 billion in debt, S&P said in a statement Tuesday. Earlier this month, S&P said it might cut the rating to junk status, which can increase borrowing costs.
“Delphi’s earnings outlook will remain weak for the next few years because of challenging conditions in the automotive industry,” S&P analyst Martin King said in the statement. He also cited underfunded pension and retirement liabilities that he said are expected to exceed $13 billion by the end of this year and slow attrition of high-wage workers.
Last week, the parts supplier forecast a 2005 net loss of as much as $350 million and said it would cut 8,500 more jobs, with 3,000 coming from the United States and 5,500 from overseas, primarily western Europe. Delphi, which gets about half its revenue from former owner General Motors Corp., blamed North American auto production cuts and higher costs for raw materials such as steel.
The company this month also forecast a loss for this year of as much as $72 million. Two months ago, Delphi projected a profit for 2004.
“Lower production volumes, high raw material costs, slower attrition and increasing health-care and pension costs will result in weak operating results at least for the next year,” King said. “But over time, Delphi’s restructuring activities are expected to result in a more competitive cost structure.”
King said on a conference call he expects Delphi to eliminate more jobs next year if Delphi has the money to cover related costs after making the cuts announced last week. Trimming employment, especially the 32,600 higher-wage workers in the United States, must continue for Delphi to stay competitive, he said.
“It is in the U.S. where there is a very large disparity in labor costs between Delphi and most of their competitors,” King said. Delphi’s U.S. hourly workforce has declined by 8,000 people, or 18 percent, during the past two years. The company is expected to have 180,500 employees worldwide by the end of 2004.
Delphi is taking aggressive action to reduce expenses and is working with suppliers and customers to find ways to take more costs out of the production process, said company spokesman David Bodkin.
“Although pension funding requirements will demand a portion of our operating cash flow over the next several years, we believe Delphi’s pension and health care liabilities in our current environment are manageable,” he said. “Delphi currently has sufficient liquidity to manage our ongoing business.”
Delphi shares rose 3 cents to close at $8.47 on the New York Stock Exchange. The stock has fallen 17 percent this year.
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