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ACW > SEC Filings for ACW > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for ACCURIDE CORP


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes matters we consider important to understanding the results of our operations for each of the three years in the period ended December 31, 2012, including the Predecessor Company and Successor Company results for 2010, and our capital resources and liquidity as of December 31, 2012 and 2011. References to "Successor Company" refer to the Company after February 26, 2010, after giving effect to the application of fresh-start reporting. References to "Predecessor Company" refer to the Company prior to February 26, 2010.

The following discussion should be read in conjunction with "Selected Consolidated Financial Data" and our Consolidated Financial Statements and the notes thereto, all included elsewhere in this report. The information set forth in this MD&A includes forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to differ from those contained in the forward-looking statements including, but not limited to, those discussed in Item 7A. "Quantitative and Qualitative Disclosure about Market Risk," Item 1A. "Risk Factors" and elsewhere in this report.

General Overview

We are one of the largest and most diversified manufacturers and suppliers of commercial vehicle components in North America. Our products include commercial vehicle wheels, wheel-end components and assemblies, truck body and chassis parts, and ductile and gray iron castings. We market our products under some of the most recognized brand names in the industry, including Accuride, Gunite, Imperial, and Brillion. We serve the leading OEMs and their related aftermarket channels in most major segments of the commercial vehicle market, including heavy- and medium-duty trucks, commercial trailers, light trucks, buses, as well as specialty and military vehicles.

Our primary product lines are standard equipment used by a majority of North American heavy- and medium-duty truck OEMs, which creates a significant barrier to entry. We believe that substantially all heavy-duty truck models manufactured in North America contain one or more Accuride components.

Our diversified customer base includes substantially all of the leading commercial vehicle OEMs, such as Daimler Truck North America, LLC, with its Freightliner and Western Star brand trucks, PACCAR, with its Peterbilt and Kenworth brand trucks, Navistar, with its International brand trucks, and Volvo/Mack, with its Volvo and Mack brand trucks. Our primary commercial trailer customers include leading commercial trailer OEMs, such as Great Dane Limited Partnership and Utility Trailer Manufacturing Company. Our major light truck customer is General Motors Corporation. Our product portfolio is supported by strong sales, marketing and design engineering capabilities and is manufactured in 14 strategically located, technologically-advanced facilities across the United States, Mexico and Canada.

Key economic factors on our cost structure are raw material costs and production levels. Higher production levels enable us to spread costs that are more fixed in nature over a greater number of commercial vehicle products. We use the commercial vehicle production levels forecasted by industry experts to help us predict our production levels along with other assumptions for aftermarket demand. Raw material costs represent the most significant component of our product cost and are driven by a combination of purchase contracts and spot market purchases as discussed in Item 1. "Raw Materials and Suppliers" and elsewhere in this report.

Business Outlook

Global market and economic conditions have been challenging with slow economic growth in most major economies expected to continue into 2013. As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers. These factors have lead to a decrease in spending by businesses and consumers alike. Continued turbulence in the U.S. and international markets and economies and prolonged declines in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to refinance maturing liabilities and access the capital markets to meet liquidity needs.


Table of Contents

The heavy- and medium-duty truck and commercial trailer markets and the related aftermarket are the primary drivers of our sales. These markets are, in turn, directly influenced by conditions in the North American truck industry and generally by conditions in other industries which indirectly impact the truck industry, such as the home-building industry, and by overall economic growth and consumer spending. Industry forecasts predicted similar commercial vehicle production in 2012 as compared to 2011. However, the actual rate of production for the first half of 2012 was significantly greater than production in the final half of 2012. This decrease in production in the second half of 2012 was due to continued softness in orders for Class 8 commercial vehicles. As a result of this softness, OEMs began to reduce build rates in the third and fourth quarters, often with very short notice to us, creating manufacturing inefficiencies. Furthermore, our Gunite business experienced a loss of OEM market share, which impacted our operating results in the second half of 2012. In addition, broader economic weaknesses in industrial manufacturing impacted our Brillion business through reduced customer orders. Based upon the overall commercial vehicle industry production rates for the fourth quarter and the loss of market share at Gunite, our results from continuing operations in 2012 were unfavorable compared to 2011. In response to these conditions, we lowered our cost structure by reducing our corporate salaried staff, eliminating production shifts, and resizing the workforce at our business units. Additionally, we accelerated the consolidation of Gunite's Elkhart, Indiana and Brillion, Wisconsin machining operations into our Rockford, Illinois facility. Commercial vehicle equipment orders are expected to remain subdued into the first half of 2013 followed by improving industry conditions in the second half of 2013 as forecasted by industry experts. We cannot accurately predict the commercial vehicle or broader economic cycle, and any deterioration of the economic recovery may lead to further reduced spending and deterioration in the markets we serve for the foreseeable future.

On March 30, 2011, we, along with one other United States domestic commercial vehicle steel wheel supplier, filed antidumping and countervailing duty petitions with the United States International Trade Commission and the United States Department of Commerce alleging that manufacturers of certain steel wheels in China are dumping their products in the United States and that these manufacturers have been subsidized by their government in violation of United States trade laws. In May 2011, the International Trade Commission issued a preliminary determination that there was a reasonable indication that the U.S. steel wheel industry is materially injured or threatened with material injury by reason of imports from China of certain steel wheels, and began the final phase of its investigation. In August 2011, the U.S. Department of Commerce issued a preliminary determination of countervailing duties on steel wheels imported from China ranging from 26.2 percent to 46.6 percent ad valorem, and in October 2011, the U.S. Department of Commerce issued a preliminary determination of antidumping duty margins ranging from 110.6 percent to 243.9 percent ad valorem. On March 19, 2012, the Department of Commerce made final determinations of dumping and subsidy margins which cumulatively were approximately 70 percent to 228 percent ad valorem. However, on April 17, 2012, the International Trade Commission determined that the domestic industry has not been injured and was not presently threatened with injury from subject imports, and consequently withdrew all import duties on the subject imports. Subsequent to the International Trade Commission's decision, we have seen a resurgence of steel wheel imports from China in the aftermarkets we serve, creating a challenging competitive environment.

As of November 30, 2012, the Company considered the impact of business developments in its Gunite reporting unit including a loss of customer market share and evidence of declining aftermarket sales due to increased competition in the marketplace. The Gunite reporting unit had goodwill of $62.8 million and other intangible assets of $36.8 million at November 30, 2012. In addition to the recent concerns with our Gunite business, the Company has also experienced a recent decline in our stock price to an amount below current book value as of November 30, 2012. As part of the Company's annual impairment review, the Gunite reporting segment failed the step one goodwill impairment test, meaning that the estimate of fair value of the segment was below book value. The Company estimated the fair value utilizing a discounted cash flow model, as the Company believes it is the most reliable indicator of fair value. Therefore, the second step of the analysis was performed and resulted in recognizing goodwill and other intangible asset impairment charges of $62.8 million and $36.8 million, respectively. The impairment charges are the result of lower volume demands due to lost market share at Gunite, overall reduced production levels of the commercial vehicle market and its aftermarket segments in North America, operating losses for the past 3 years and other factors.


Table of Contents

Results of Operations

Certain operating results from prior periods, including the predecessor periods, have been reclassified to discontinued operations to conform to the current year presentation.

Comparison of Fiscal Years 2012 and 2011

                                                               Successor Company
                                                            Year Ended December 31,
(In thousands)                                                2012             2011
Net sales                                                 $     929,771      $ 936,095
Cost of goods sold                                              882,882        855,284
Gross profit                                                     46,889         80,811
Operating expenses                                               56,448         56,899
Goodwill and other intangible asset impairment expenses          99,606              -
Property, plant, and equipment Impairment expense                34,126              -
Income (loss) from operations                                  (143,291 )       23,912
Interest (expense), net                                         (34,938 )      (34,097 )
Other income, net                                                  (864 )        3,596
Income tax provision (benefit)                                   (1,657 )        7,761
Loss from continuing operations                                (177,436 )      (14,350 )
Discontinued operations, net of tax                                (571 )       (2,681 )
Net loss                                                  $    (178,007 )    $ (17,031 )

Net Sales

                      Successor Company
                   Year Ended December 31,
(In thousands)       2012             2011
Wheels           $    414,340       $ 406,587
Gunite                221,974         251,113
Brillion              158,320         146,837
Imperial              135,137         131,558
Total            $    929,771       $ 936,095

Our net sales for 2012 of $929.8 million were 0.7 percent below our net sales for 2011 of $936.1 million. Net sales declined by approximately $31.3 million due to the impact of offshore competition and the loss of standard position in our Gunite business at certain OEM customers. The reduction in demand was partially offset by $25.0 million in increased pricing, which primarily represented a pass-through of increased raw material and commodity costs.

Net sales for our Wheels segment increased 1.9 percent during 2012 primarily due to increased volume for all three major OEM segments (see OEM production builds in the table below). Net sales for our Gunite segment declined by 11.6 percent due to a reduction in units sold of $44.8 million, partially offset by $15.8 in increased pricing related to a pass-through of raw material costs. Our Gunite products have a higher concentration of aftermarket demand due to the brake drum products, which are replaced more frequently than our other products. Our Brillion segment's net sales increased by 7.8 percent during 2012 due to increased pricing of $11.3 million related to raw material costs. Net sales for our Imperial segment increased by 2.7 percent due to increased volume in Class 8 OEM production.

North American commercial vehicle industry production builds per ACT (see Item
1) were, as follows:

                                                                 For the year ended December
                                                                             31,
                                                                    2012             2011
Class 8                                                             278,720          255,261
Classes 5-7                                                         188,449          166,798
Trailer                                                             240,015          209,005


Table of Contents

While we serve the commercial vehicle aftermarket segment, there is no industry data to compare our aftermarket sales to industry demand from period to period. However, we do expect to experience increased competition from low-cost country sourced products that compete with our Wheels and Gunite operating segments.

Cost of Goods Sold

The table below represents the significant components of our cost of goods sold.

                                                             Successor Company
                                                          Year Ended December 31,
(In thousands)                                              2012             2011
Raw materials                                           $    457,838       $ 442,084
Depreciation                                                  48,090          38,397
Labor and other overhead                                     376,954         374,803
Total                                                   $    882,882       $ 855,284

Raw materials costs increased by $15.8 million, or 3.6 percent, during the year ended December 31, 2012 due to increased pricing of approximately 3.7 percent, partially offset by reduced sales volume of approximately 0.3 percent. The price increases were primarily related to steel and aluminum, which represent nearly all of our material costs.

Depreciation increased by $9.7 million, or 25.2 percent during the year ended December 31, 2012 due to capital investments across our businesses.

Operating Expenses

                                                              Successor Company
                                                           Year Ended December 31,
(In thousands)                                              2012              2011
Selling, general, and
administration                                          $     38,851       $   40,673
Research and development                                       6,572            4,803
Depreciation and amortization                                 11,025           11,423
Total                                                   $     56,448       $   56,899

Selling, general, and administrative costs decreased by $1.8 million in 2012 compared to 2011 due to costs incurred during 2011 that were associated with Gunite's quality management issues. Research and development costs increased by $1.8 million primarily due to increases in staff and travel expenses. Not included in the table above were impairment charges for the Gunite reporting segment for the year ended December 31, 2012 of $99.6 million related to goodwill and other intangible assets and $34.1 million related to property, plant, and equipment.

Operating Income (Loss)

                                                      Successor Company
                                                   Year Ended December 31,
(In thousands)                                       2012             2011
Wheels                                           $      44,928      $  57,864
Gunite                                                (151,940 )       (1,785 )
Brillion                                                11,969          2,301
Imperial                                                (4,161 )        3,141
Corporate/Other                                        (44,087 )      (37,609 )
Total                                            $    (143,291 )    $  23,912

Operating income for the Wheels segment was 10.8 percent of its net sales for the year ended December 31, 2012 compared to 14.2 percent for the year ended December 31, 2011. The decline in operating income was primarily a result of weak industry conditions in the second half of 2012 which drove a significant change in our operations, inefficiencies incurred during the installation of new machinery, and accelerated depreciation of property, plant, and equipment of $4.7 million related to idled equipment.


Table of Contents

Operating loss for the Gunite segment was 68.4 percent of its net sales for the year ended December 31, 2012 compared to 0.7 percent of its net sales for the year ended December 31, 2011. The increase in operating loss was primarily attributable to the impact of increased competition, primarily from low cost countries and the loss of standard position for certain products at two OEM customers in conjunction with $3.0 million of restructuring charges related to closing the Elkhart, Indiana facility and $133.7 million in impairment charges (see footnotes 4 and 5 to consolidated financial statements in Part IV Item 15).

Operating income for the Brillion segment was 7.6 percent of its net sales for the year ended December 31, 2012 compared to 1.6 percent of its net sales for the year ended December 31, 2011. Sales volume for our Brillion segment increased during 2012, particularly during the first half as the industrial and agricultural markets remained strong before reversing course in the second half of the year. The overall increase in sales volume and improved operating productivity were the primary reasons for improved operating income for Brillion.

The operating loss for the Imperial segment was 3.1 percent of its net sales for the year ended December 31, 2012 compared to operating income of 2.4 percent of its net sales for the year ended December 31, 2011. The decline in operating income was due to the steep increase in demand experienced in the first half of the year which drive operating inefficiencies followed by a significant decrease in OEM demand in the second half of the year, which created a difficult operating environment with low production levels.

The operating losses for the Corporate segment were 4.7 percent of consolidated sales for the year ended December 31, 2012 and 4.0 percent of consolidated net sales for the year ended December 31, 2011. The increase was primarily related to severance and other costs.

Impairment

As of November 30, 2012, the Company experienced a decline in its stock price to an amount below current book value as well as the impact of recent business developments in its Gunite reporting unit including a loss of customer market share and evidence of declining aftermarket sales. The Gunite reporting unit recorded impairments for goodwill of $62.8 million, other intangible assets of $36.8 million, and property, plant and equipment of $34.1 million.

Interest Expense

Net interest expense increased $0.8 million to $34.9 million for the year ended December 31, 2012 from $34.1 million for the year ended December 31, 2011 due to the draw down on revolving credit facility for part of 2011 compared to the full year ended December 31, 2012.

Income tax provision

Our effective tax rate for 2012 and 2011 was 0.92 percent and 117.8 percent, respectively. Our tax rate is affected by recurring items, such as change in valuation allowance, tax rates in foreign jurisdictions and the relative amount of income we earn in jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to state income taxes, the following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 35 percent and our effective tax rate. In 2012, we experienced a $45.9 million increase, and a 27.59 percent decrease in rates resulting from a change in our valuation allowance against deferred tax assets in excess of deferred tax liabilities.

Discontinued Operations

Discontinued operations represent reclassification of operating results, including gain/loss on sale, for Fabco Automotive, Bostrom Seating and Brillion Farm, net of tax. The sales of Fabco and Bostrom were in 2011 and the Brillion Farm assets were sold during 2010. We have reclassified current and prior period operating results, including the gain/loss on the sale transactions, to discontinued operations.


Table of Contents

Comparison of Fiscal Years 2011 and 2010

As a result of the adoption of fresh-start reporting, our consolidated balance sheets and consolidated statements of operations and comprehensive income (loss) subsequent to February 26, 2010, will not be comparable in many respects to our consolidated balance sheets and consolidated statements of operations and comprehensive income (loss) prior to February 26, 2010, unless otherwise specified. References to "Successor Company" refer to the Company after February 26, 2010, after giving effect to the application of fresh-start reporting. References to "Predecessor Company" refer to the Company prior to February 26, 2010.

                                                                                           Predecessor
                                                            Successor Company                Company
                                                                        Period from        Period from
                                                                       February 26,        January 1,
                                                      Year ended          2010 to            2010 to
                                                     December 31,      December 31,       February 26,
(In thousands)                                           2011              2010               2010
Net sales                                            $    936,095     $       582,307     $      91,647
Cost of goods sold                                        855,284             541,859            89,397
Gross profit                                               80,811              40,448             2,250
Operating expenses                                         56,899              54,147             6,479
Income (loss) from operations                              23,912             (13,699 )          (4,229 )
Interest (expense), net                                   (34,097 )           (33,450 )          (7,496 )
Non-cash market valuation - convertible notes                   -              75,574                 -
Inducement (expense)                                            -            (166,691 )               -
Other income, net                                           3,596               2,575               566
Reorganization income                                           -                   -           (59,311 )
Income tax provision (benefit)                              7,761              (2,207 )          (1,931 )
Income (loss) from continuing operations                  (14,350 )          (133,484 )          50,083
Discontinued operations, net of tax                        (2,681 )             6,952               719
Net income (loss)                                    $    (17,031 )   $      (126,532 )   $      50,802



Net Sales

                                                                                            Predecessor
                                                            Successor Company                 Company
                                                                       Period from
                                                      Year ended      February 26 to        Period from
                                                     December 31,      December 31,         January 1 to
(In thousands)                                           2011              2010          February 26, 2010
Wheels                                               $    406,587     $      247,673     $           38,379
Gunite                                                    251,113            175,352                 29,804
Brillion                                                  146,837             90,492                 11,442
Imperial                                                  131,558             68,790                 12,022
Total                                                $    936,095     $      582,307     $           91,647

Fresh start accounting did not have an impact on the accounting for net sales during the year ended December 31, 2010. Therefore, net sales from the Successor Company are comparable to the net sales of the Predecessor Company. Our net sales for 2011 of $936.1 million were 38.9 percent above the combined net sales for 2010 of $674.0 million. Of the total increase, approximately $222.0 million was a result of higher volume demanded due to increased production levels of the commercial vehicle market and its aftermarket segments in North America. The increased production is a result of continued increased maintenance and replacement demand of commercial vehicles (see OEM production builds in the table below). The remaining $40.1 million increase of net sales recognized during 2011 was related to higher pricing, which mostly represented a pass-through of increased raw material and commodity costs.

Net sales for our Wheels segment increased nearly 42.1 percent during 2011 primarily due to increased volume for all three major OEM segments (see OEM production builds in the table below). Net sales for our Gunite segment rose by 22.4 percent due to industry demand and approximately $21.1 million in increased pricing related to raw material costs. Our Gunite products have a higher concentration of aftermarket demand due to being items that require replacement more often than our other products. Our Brillion segment's net sales increased . . .

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