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ACW > SEC Filings for ACW > Form 10-K on 6-Mar-2014All Recent SEC Filings

Show all filings for ACCURIDE CORP

Form 10-K for ACCURIDE CORP


6-Mar-2014

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, 2013, and our capital resources and liquidity as of December 31, 2013 and 2012.

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, and ductile and gray iron castings. We market our products under some of the most recognized brand names in the industry, including Accuride, Gunite, 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 many North American heavy- and medium-duty truck OEMs. We believe that substantially all heavy-duty truck models manufactured in North America contain one or more Accuride or Gunite 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, Wabash National, Inc. Utility Trailer Manufacturing Company, and Wabash National, Inc. 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 eight 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 in our wheel and wheel-end businesses 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

Recent global market and economic conditions have been challenging with slow economic growth in most major economies expected to continue into 2014. These factors have led to continued softness in spending by businesses and consumers alike. Continued slow economic growth in the U.S. and international markets and economies coupled with relative flatness in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers.

The heavy- and medium-duty truck and commercial trailer markets, the related aftermarket, and the global industrial, construction, and mining, markets are the primary drivers of our sales. The commercial vehicle manufacturing and replacement part 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. The global industrial, construction, and mining markets are driven by more macro- and global economic conditions, such as coal, oil and gas exploration, demand for mined products that are converted into industrial raw materials such as steel, iron and copper, and global construction trends. Industry forecasts predict marginal growth in class 5-8 commercial vehicle builds in 2014 compared to 2013 as the industry starts to show signs of improving with customers focused on replacement of older active commercial vehicles on the road. With regards to trailer production, industry experts expect year over year sales in 2014 to be flat versus 2013. With our core aftermarket business, industry experts predict year over year sales that show flat to marginal growth. Our Gunite business experienced a loss of

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OEM market share during 2012, which continued to impact our operating results in 2013. Our Brillion castings business, driven more by global industrial, construction, and mining markets expects flat to slightly marginal year over year growth, as customers continue to manage their inventory levels in the down market.

Our markets and those of our customers are becoming increasingly competitive as the global and North American economic recoveries remain sluggish. In the North American commercial vehicle market, OEMs are competing to maintain or increase market share in the face of evolving emissions regulations, increasing customer emphasis on light weight and fuel efficient platforms and a tepid economic recovery that is holding new equipment purchases at replacement (rather than expansionary) levels. Shifts in the market share held by each of our OEM customers impact our business to varying degrees depending on whether our products are designated as standard or optional equipment on the various platforms at each OEM. Recently, a number of platforms on which our products are standard equipment have lost market share, which has impacted our business. We are also continuing to see the impacts of low cost country sourced products in our markets, which has particularly impacted the aftermarket for steel wheels and brake drums and has further impacted our Gunite business through the loss of primary position with two of our OEM customers in 2012. Further, broader economic weaknesses in industrial manufacturing impacted our Brillion business through reduced customer orders during 2013. We expect this weakness and lower demand in Brillion's markets to continue into 2014. Approximately 75 percent of our Gunite business is tied to the North American Aftermarket, with the remaining 25 percent tied to the North American Class 8 segment.

In response to these conditions, we are working to increase our market share and to control costs while positioning our businesses to compete at current demand levels and still maintain capacity to meet the recoveries in our markets as they occur, which history has shown can be swift and steep. For example, we have implemented lean manufacturing practices across our facilities, which have resulted in reduced working capital levels that free up cash for other priorities. We have also completed most of our previously disclosed capital investment projects that have selectively increased our manufacturing capacity on core products, reduced labor and manufacturing costs and improved product quality. Additionally, we have introduced and will continue to develop and roll-out new products and technologies that we believe offer better value to customers. Further, we have been pursuing new business opportunities at OEM customers and working to increase our market share at OEMs by developing our relationships with large fleets in order to "pull through" our products when they order new equipment. We continue to monitor competition from products manufactured in low cost countries and will take steps to combat unfair trade practices, such as filing anti-dumping petitions with the United States government, as warranted.

The "fix" portion of the Accuride "fix and grow" strategy is substantially complete, and we stand ready to service the industry as it recovers. The consolidation of machining assets from our Elkhart, Indiana and Brillion, Wisconsin facilities to our Gunite Rockford, Illinois facility has been completed. Installation of new machining assets has also been completed at our Gunite Rockford, Illinois facility. The relative weakness in the markets in 2013 allowed Accuride to focus its efforts on finalizing the "fix" portion of our strategy while also allowing us to revisit our cost structure more closely. In combination with our lean manufacturing efforts, overall operational costs have been reduced so that Accuride has greater flexibility to adjust with fluctuations in customer volume in the future. With the sale of our Imperial business in 2013, we have and continue to look at further fixed cost administration actions that will help equate spending relative to the change in our base sales of continuing operation. Note that we cannot accurately predict the commercial vehicle or broader economic cycle, and any deterioration of the current economic recovery may lead to further reduced spending and deterioration in the markets we serve.

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 for the foreseeable future. We will continue to evaluate the trade practice related to these and other imports impacting our markets as well as the merits of filing a new petition with the International Trade Commission.

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In addition to improving our operations, we have taken steps to improve our liquidity to ensure access to the funds required to finance our business throughout the cycle and to focus our efforts on our core markets. On July 11, 2013, we entered into a new senior secured asset-based lending facility (the "New ABL Facility") and used borrowing under that facility and cash on hand to repay all amounts outstanding under the Prior ABL Facility, and to pay related fees and expenses. For additional information on our New ABL Facility, see "Capital Resources and Liquidity-Bank Borrowing. Further, on August 1, 2013, the Company announced that it completed the sale of substantially all of the assets of its non-core Imperial Group business to Imperial Group Manufacturing, Inc., a new company formed and capitalized by Wynnchurch Capital for total cash consideration of $30.0 million at closing, plus a contingent earn-out totaling up to $2.25 million. Pursuant to the provisions of the purchase agreement, subject to certain limited exceptions, the purchaser purchased from Imperial all equipment, inventories, accounts receivable, deposits, prepaid expenses, intellectual property, contracts, real property interests, transferable permits and other intangibles related to the business and assumed Imperial's trade and vendor accounts payable and performance obligations under those contracts included in the purchased assets. The real property interests acquired by the purchaser include ownership of three plants located in Decatur, Texas, Dublin, Virginia and Chehalis, Washington and a leasehold interest in a plant located in Denton, Texas. Imperial retained ownership of a plant property located in Portland, Tennessee and recorded a $2.5 million impairment charge related to that facility. The Company leased the Portland, Tennessee facility to the purchaser under a two-year lease with the option of the Purchaser to renew the lease for one additional year. A portion of the proceeds from the sale were used to repay outstanding indebtedness under our New ABL Facility.

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, the Company had also experienced a recent decline in its stock price to an amount below the existing 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 believed it was 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 were 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.

In addition to improving our operations, we have taken steps to improve our liquidity to ensure access to the funds required to finance our business throughout the cycle and to focus our efforts on our core markets. On July 11, 2013, we entered into a new senior secured asset-based lending facility (the "New ABL Facility") and used borrowing under that facility and cash on hand to repay all amounts outstanding under the Prior ABL Facility, and to pay related fees and expenses. For additional information on our New ABL Facility, see "Capital Resources and Liquidity-Bank Borrowing. Further, on August 1, 2013, the Company announced that it completed the sale of substantially all of the assets of its non-core Imperial Group business to Imperial Group Manufacturing, Inc., a new company formed and capitalized by Wynnchurch Capital for total cash consideration of $30.0 million at closing, plus a contingent earn-out totaling up to $2.25 million. Pursuant to the provisions of the purchase agreement, subject to certain limited exceptions, the purchaser purchased from Imperial all equipment, inventories, accounts receivable, deposits, prepaid expenses, intellectual property, contracts, real property interests, transferable permits and other intangibles related to the business and assumed Imperial's trade and vendor accounts payable and performance obligations under those contracts included in the purchased assets. The real property interests acquired by the purchaser include ownership of three plants located in Decatur, Texas, Dublin, Virginia and Chehalis, Washington and a leasehold interest in a plant located in Denton, Texas. Imperial retained ownership of a plant property located in Portland, Tennessee and included a $2.5 million impairment charge in the loss. The Company leased such property to the purchaser under a two-year lease with the option of the Purchaser to renew the lease for one additional year. A portion of the proceeds from the sale were used to repay outstanding indebtedness under our New ABL Facility.

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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 2013 and 2012

                                                                 Year Ended December 31,
(In thousands)                                                     2013             2012
Net sales                                                      $    642,883      $  794,634
Cost of goods sold                                                  598,927         743,633
Gross profit                                                         43,956          51,001
Operating expenses                                                   45,188          56,499
Goodwill and other intangible asset impairment expenses                   -          99,606
Property, plant, and equipment impairment expense                         -          34,126
Income (loss) from operations                                        (1,232 )      (139,230 )
Interest (expense), net                                             (35,027 )       (34,938 )
Other income, net                                                      (320 )          (864 )
Income tax provision (benefit)                                      (10,244 )        (1,657 )
Loss from continuing operations                                     (26,335 )      (173,375 )
Discontinued operations, net of tax                                 (11,978 )        (4,632 )
Net loss                                                       $    (38,313 )    $ (178,007 )

Net Sales

                   Year Ended December 31,
(In thousands)       2013             2012
Wheels           $    364,614       $ 414,340
Gunite                168,988         221,974
Brillion              109,281         158,320
Total            $    642,883       $ 794,634

Our net sales for 2013 of $642.9 million were $151.7 million, or 19.1 percent, below our net sales for 2012 of $794.6 million. Net sales declined by approximately $144.2 million primarily due to lower volume demand resulting from decreased production levels of the commercial vehicle OEM market, loss of OEM and aftermarket business, reduced sales by our Gunite business unit due to the loss of OEM business in the second half of 2012 and a continued downturn in the global industrial, construction, and mining markets that Brillion serves. Also, adding to the reduced sales was $7.5 million in decreased pricing, which primarily represented a pass-through of decreased raw material and commodity costs.

Net sales for our Wheels segment decreased by $49.7 million, or 12.0 percent, during 2013 primarily due to decreased combined volume for the three major OEM segments (see OEM production builds in the table below) and loss of aftermarket business due to an unfavorable antidumping ruling in the first half of 2012. Net sales for our Gunite segment declined by $53.0 million, or 23.9 percent, due to a reduction of $55.0 million due to the previously disclosed loss of standard position at two of its major OEM customers, partially offset by $2.0 million in increased pricing related to a pass-through of raw material costs. Our Gunite products have a higher concentration of aftermarket demand due to its brake drum products, which are replaced more frequently than our other products. Our Brillion segment's net sales decreased by $49.0 million, or 31.0 percent during 2013 due to a continued downturn in the global industrial, construction, and mining markets that Brillion serves.

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

                                                                 For the year ended December
                                                                             31,
                                                                    2013             2012
Class 8                                                             245,496          277,490
Classes 5-7                                                         201,311          188,165
Trailer                                                             238,527          236,841

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

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sourced products that compete with our Wheels and Gunite operating segments. Approximately 70 percent of our Wheels business is tied to the OEM markets noted in the table above, with the remaining 30 percent tied to the aftermarket.

Cost of Goods Sold

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

                                                          Year Ended December 31,
(In thousands)                                              2013             2012
Raw materials                                           $    288,866       $ 369,563
Depreciation                                                  34,682          47,103
Labor and other overhead                                     275,379         326,967
Total                                                   $    598,927       $ 743,633

Raw materials costs decreased by $80.7 million, or 21.8 percent, during the year ended December 31, 2013 due to decreased pricing of approximately $6.1 million, or 1.7 percent, and reduced sales volume of approximately $74.6 million, or 20.1 percent. The price decreases were primarily related to steel and aluminum material mechanisms with customers, which represent nearly all of our material costs.

Depreciation decreased by $12.4 million, or 26.5 percent during the year ended December 31, 2013 due to the reduction in the capital basis of the three business units' fixed assets as of December 31, 2012, offset partially by capital investments across those same business units during 2013.

Operating Expenses

                                                                  Year Ended December 31,
(In thousands)                                                     2013              2012
Selling, general, and
administration                                                 $     30,735       $   38,851
Research and development                                              5,695            6,623
Depreciation and amortization                                         8,758           11,025
Total                                                          $     45,188       $   56,499

Selling, general, and administrative costs decreased by $9.0 million in 2013 compared to 2012 due to costs reductions in spending and staffing. 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)

                                                   Year Ended December 31,
(In thousands)                                       2013             2012
Wheels                                           $     30,883      $   44,928
Gunite                                                  2,599        (151,940 )
Brillion                                                1,027          11,969
Corporate/Other                                       (35,741 )       (44,187 )
Total                                            $     (1,232 )    $ (139,230 )

Operating income for the Wheels segment was 8.5 percent of its net sales for the year ended December 31, 2013 compared to 10.8 percent for the year ended December 31, 2012. The decline in operating income was primarily a result of weak Class 8 commercial vehicle industry conditions in 2013 coupled with reduced commercial vehicle market share held by one of our main OEM customers, which resulted in fewer vehicles sold by that OEM and correspondingly fewer wheels purchased from us. Accuride's market share this OEM customer remained steady, however, only that customer's share within their own industry deteriorated. Operating income for the Gunite segment was 1.5 percent of its net sales for the year ended December 31, 2013 compared to a loss of 68.4 percent of its net sales for the year ended December 31, 2012. The increase in operating income was primarily due to the non-recurrence of $133.7 million in impairment charges (see Footnotes 4 and 6 to the consolidated financial statements in Part IV, Item 15) and the impact of synergies gained from new equipment installed and the consolidation of Gunite's Elkhart and Brillion machining assets into its Rockford facility.

Operating income for the Brillion segment was 0.9 percent of its net sales for the year ended December 31, 2013 compared to 7.6 percent of its net sales for the year ended December 31, 2012. Sales volume for our Brillion segment reflected a decrease

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in the global industrial, construction, and mining markets they serve and key customers looked to significantly reduce their "on hand" inventory. The margins associated with the higher volume sales in 2012 decreased with the decrease in demand in 2013.

The operating loss for the Corporate segment was $35.7 million, or 6.0 percent of sales from continuing operations for the year ended December 31, 2013 compared to $44.2 million, or 5.9 percent of sales from continuing operations, for the year ended December 31, 2012. The decrease in overall spending was primarily related to cost reduction efforts by management in response to lower sales.

Impairment

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, the Company had also experienced a recent decline in its stock price to an amount below the existing book value as of November 30, 2012. As part of the Company's annual impairment review, the Gunite reporting segment failed the step one . . .

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