ArvinMeritor Offloads Wheels

In the third quarter of fiscal 2009, ended Jun 30, the company entered a purchase and sale agreement to divest the business to Iochpe-Maxion – a Sao Paulo, Brazil-based manufacturer of wheels and frames for commercial vehicles, railway freight cars and castings.

ArvinMeritor intends to use the net proceeds of $169 million from the sale to reduce outstanding balances on its revolving credit facility in advance of its fiscal fourth-quarter end. The company reiterated that it expects to remain in compliance with its financial covenant in the fourth quarter.

As of the fiscal third quarter, ArvinMeritor has a $700 million revolving credit facility, which matures in June 2011. The company's usage of the revolving credit facility under its senior secured credit facility increased significantly throughout the first nine months of fiscal 2009 to meet working capital and other operational needs. At Jun 28, the company had an undrawn amount of $456 million under the revolving credit facility.

However, ArvinMeritor was in compliance with the covenants in its revolving credit facility as of Jun 28. Stronger cash flow and improved regional cash efficiencies in the third quarter allowed the company to reduce usage of the revolver in the quarter by $145 million.

ArvinMeritor has been distancing itself from the LVS business (comprising Body Systems and Chassis Systems businesses), which is exposed to the cyclical aberrations of the auto industry. The company has largely divested the Chassis Systems business by the sale of a 51% stake in the joint venture – Gabriel de Venezuela, Gabriel Ride Control Products business in North America; and entered agreements to sell its stake in U.K.-based joint venture, Meritor Suspension Systems, apart from the entire Wheels business. The company intends to pursue a sale of the Body Systems business separately when market conditions support such actions.

We continue to recommend the shares of ArvinMeritor as Neutral.